The average cost of developing an approved therapy is around $4.3 billion dollars for companies with three or more approved therapies, according to an analysis completed by Forbes. Imagine, then, our surprise when we discovered a biotechnology company, Regeneron, that had developed three approved therapies for an average cost of $0.7 billion dollars – less than 20 percent of the industry average.
How did Regeneron do it? And are they alone or are other companies achieving similar results?
To answer these questions, we need to take a step back and talk about uncertainty. We all recognize that uncertainty has increased in the world around us, but few people realize just how impactful this influx has been. Consider that in 1937, during the height of the Great Depression, the average life expectancy of an Standard & Poor’s 500 firm was estimated at 75 years. Today, in much less trying economic circumstances, this life expectancy has fallen to only 18 years. Why? Quite simply, technology, demand and business uncertainty have increased around us at an unprecedented rate as new innovations and new entrepreneurs flood the market. The challenge has become so sharp that Scott Cook, the founder and chairman of the Executive Committee at Intuit, argued, “As a successful scaled company, you cannot run the ship the way you used to. You’ll get run over by a swarm of startups.”
So how should you manage in a world of increased uncertainty? Probably not the way you were taught in business school. Management, as taught in business schools for the last hundred years, was developed for a very specific problem: execution. If you take a brief look back at history, you will find that before the Industrial Revolution, all businesses were small business, but during the Industrial Revolution, technology transformed these small businesses into gargantuan firms focused on producing goods like steel, textiles, oil and automobiles. These large firms required a whole new profession to operate them efficiently: managers. Furthermore, they didn’t need managers to discover new business opportunities or to innovate, they needed managers to execute. They needed managers to coordinate operations, to optimize activities and to squeeze profits from relatively certain opportunities.
Managing the uncertainty of innovation wasn’t a topic in business schools until recently. However, in modern times, as uncertainty has increased, a number of perspectives have sprung up as alternative tools to manage the uncertainty of innovation. Effectively, each major discipline has developed a perspective on how to manage this innovation. In engineering, we call it design thinking; in entrepreneurship, we call it lean startup; in computer science we call it agile software; and so forth for almost each major discipline.
Through what we call the innovator’s method, we try to synthesize these tools, creating an end-to-end process that describes how innovators reduce the risk of bringing new ideas to market. The process appears simple on the surface, but most innovators fall into the trap of skipping stages of the process or applying the wrong tools to each stage (see Figure 1).
Figure 1: The Innovator’s Method
In brief, the innovator’s method begins with the observation of a symptom or clue about a problem that needs to be solved, what we call a surprise. But while most failed innovators leap to developing solutions based on their initial insight, more successful innovators stop to deeply understand the problem before using a series of radical, rapid prototypes to test the solution and lastly iterate to discover the right business model.
Although you might be tempted to dismiss such a model as relevant only in the world of software, you might be surprised how many examples we found in the pharmaceutical industry. For example, consider the case of Merrimack Pharmaceuticals that was attempting to develop a new cancer therapeutic. Many previous companies had attempted to develop therapeutics that more effectively block HER2 receptors. When Merrimack had the insight to tackle the HER3 receptor (insight stage) it would have been the simplest logical leap in the world to the solution stage: trying to block the HER3 receptor. But instead, Merrimack employed systems dynamics analysis tools to address the problem stage by mapping out the entire process by which a therapy enters the human body, travels through the bloodstream, enters the tumor and then blocks the HER3 receptor. Much to their surprise, they discovered that the vast majority of the action was not in blocking the HER3 receptor, but in simply getting the therapy inside the tumor in the first place. Using this insight into the problem, they were able to develop a much more effective therapy than if they had leapt directly to the solution. Today, Merrimack Pharmaceutical is one of the most promising companies in the space because they apply a different process to innovate: the innovator’s method, adapted for the pharmaceutical industry.
In a similar way, the aforementioned Regeneron Pharmaceuticals has also applied the innovator’s method principles to create different innovation processes. In its case, it realized that the cost of experimenting to test assumptions in the pharmaceutical industry had become far too high and too lengthy. So it decided to attach the very process of innovation itself with a focus on lowering the time and cost of experiments. To do this, the company developed its now-famous mouse with Velocimouse, which allows it to more rapidly replace genes in mice for testing, and its Velocigene, which is a mouse with a humanized genome. Together these technologies allow Regeneron to prototype and test solutions at lower cost, more quickly and more accurately than competitors, leading to a decrease of 82 percent in their cost of approved therapy development.
The innovator’s method describes a process to discover more insights and then turn them into commercialized innovations more effectively, at lower cost, and less risk, by using the emerging tools that are designed for problems of relative uncertainty. By using these tools, it is our hope that the pharma industry can more effectively bring solutions to the real needs we all face.
Nathan Furr and Jeff Dyer are co-authors of “The Innovator’s Method: Bringing the Lean Startup into Your Organization.” For more tools and resources, visit www.theinnovatorsmethod.com.