Spanning from the treatment of pneumonia and arthritis to the treatment of infection and cancer, pharmaceutical Research and Development (R&D) has led to incredible medical advancements which immensely improved quality of life and survival rates for those diagnosed with serious medical conditions. As lifespans grow, medical costs continue to rise, with spending on drugs in the US alone expected to reach $590 billion by 2020.(1) However, given the difficulties of maintaining the pace of medical advancements, especially given that “only one of ten compounds that enter human trials ever results in an FDA approval”(2), R&D costs represent a significant investment for pharmaceutical companies seeking to innovate through the creation of new and improved drugs in a competitive and at times saturated market. As recently as 2017, it is estimated that “the top 20 pharmaceutical companies invested 20.9% of top line revenues into R&D”(3). In fact, while gross revenue growth may be increasing, industry experts wonder whether the proverbial well might be running dry, arguing that R&D productivity is on the decline (4) (see Image 1, below). Specifically, comparing data from data engineering firm, EvaluatePharma, with reports published by both Deloitte and BCG, it appears that the Internal Rate of Return for pharma R&D is indeed declining, is “already below the cost of capital, and projected to hit zero within just 2 or 3 years (5). This trend has captured the attention of pharmaceutical companies, which are actively seeking ways to constrain expenses and increase returns.
Image 1: Pharma R&D ROI (6)
As a result, Lilly has launched The Lilly Open Innovation Drug Discovery (OIDD) Program, which links research institutions, academics, and Lilly scientists on a common collaborative platform (7). In addition to mitigating the costs of R&D through distributed innovation, the OIDD program is designed to speed progress in the competitive and rapidly changing biomedical field (8). Currently, Lilly is highlighting the positive impact the collaboration will have, hoping to capitalize on researchers’ inclination and desire to contribute positively to the world. Regarding benefits to researchers, Lilly promises to provide access to their ever expanding databases, tools, and expertise. Specifically, Lilly has developed private libraries of chemically diverse compounds and introduced design tools to create new molecules with groundbreaking properties (9). This partnership takes commitment of resources on Lilly’s part, but offers tremendous upside. Their plan capitalizes on the notion that most biotech and science problems are “potentially amenable to multiple approaches and diverse solutions”, recognizing the potential value in “applying a physics solution to a chemistry problem” (10). In the short and medium term, Lilly sees immense potential in harnessing the power of collaboration of industry with the fields of science and the world of academia.
From a researcher’s perspective, the idea of partnering with a multinational pharmaceutical company like Lilly has both its benefits and drawbacks. In the near term, Lilly needs to address fears the community may have with protecting and preserving their Intellectual Property. In addition, to get this program off the ground, Lilly will need to build momentum by creating some small “victories” and highlighting those to the community, demonstrating the viability of this concept. Cash prizes are certainly a viable option for generating interest in collaboration, but may not necessarily attract those with a similar goal of positive global impact. However, for more sustainable generation of participation in the program, particularly if the platform is not succeeding initially, Lilly must assess both the intrinsic and extrinsic reasons for participation. Specifically, the extrinsic factors including “job market signaling and skill and reputation building” will play a critical role in garnering sustained interest and participation (11). This seems particularly true given their target audience includes both academics and scientists, who will value their ability to experiment and write research on their findings. In the medium-term, Lilly should look to develop a virtuous cycle where the cross-side network effects allow the benefits of participation to drive the benefits to Lilly, which can better fund and incentivize further participation (and so on).
Despite the promise that open innovation holds to speed progress and reign in increasingly costly (and decreasingly effective) R&D, we must realize that Lilly’s OIDD program may prove ineffective, particularly because the start-up costs are relatively high and the benefits may not be realized for decades. At some point, Lilly may decide that the technological, legal, and IP costs associated with starting such a program may outweigh the future benefits. However, given the scale of the potential benefits, is there a role for government intervention in the R&D process, whether in the form of subsidies, tax advantages, sponsorships, or centralization of R&D funding?
(1) Philipiddas, Alex. “The Top 15 Best-Selling Drugs of 2017.” Genetic Engineering and Biotechnology News. March 12, 2018. https://www.genengnews.com/lists/the-top-15-best-selling-drugs-of-2017/ (accessed November 13, 2018).
(2) LaMattina, John. “Pharma R&D Investments Moderating, But Still High.” Forbes. June 12, 2018. https://www.forbes.com/sites/johnlamattina/2018/06/12/pharma-rd-investments-moderating-but-still-high/#410518f76bc2 (accessed November 13, 2018).
(3) LaMattina, John. “Pharma R&D Investments Moderating, But Still High.”
(4) Stott, Kelvin. “Pharma’s broken business model: An industry on the brink of terminal decline.” Endpoints News. November 28, 2017. https://endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/ Accessed November 13, 2014.
(5) Stott, Kelvin. “Pharma’s broken business model: An industry on the brink of terminal decline.”
(6) Stott, Kelvin. “Pharma’s broken business model: An industry on the brink of terminal decline.”
(7) Lilly. “Open Innovation Drug Discovery” https://openinnovation.lilly.com/dd/index.html Accessed November 13, 2018.
(8) Lilly. “OIDD in Action.” https://openinnovation.lilly.com/dd/oidd-in-action/ Accessed November 13, 2018.
(9) Lilly. “What we Offer.” https://openinnovation.lilly.com/dd/what-we-offer/ Accessed November 13, 2018.
(10) Lakhani and J. Panetta. The principles of distributed innovation. Innovations: Technology, Governance, Globalization 2, no. 3 (Summer 2007): Page 102.
(11) Lakhani and J. Panetta. The principles of distributed innovation. Page 103.