The New Era of The Long Tail of the Pharmaceutical Industry?

I came across a good article on the New York Times this morning, The Dangers of Swinging for the Fences by Joe Nocera. Reading this article, I could not help but think whether the pharmaceutical industry had entered a new era where addressing the long tail of drugs production would be the next evolution for that industry.

Joe Nocera makes the point in his article that the pharmaceutical business is changing. This is particularly well illustrated by the tough times at Pfizer. The modern Pfizer was built on Blockbusters, which is what the industry calls medicines that generate $1 billion or more in annual revenue.

At Pfizer for instance, the top 4 drugs account for 35% of revenue. Lipitor alone with $12.9 billion in annual revenue accounts for 27% of Pfizer's revenue. And with Lipitor coming off patent in 2010, Pfizer needs to worry on how to make up for that blockbuster's revenue.

The blockbuster business model is falling apart - and not only in the pharmaceutical industry by the way. First, big bets like the Lipitor one, require a significant time period to recover the investments to produce such blockbuster and drug patents expire after 17 years. Second, expensive go to market strategies with direct advertising to consumer and doctors are experiencing a backlash.

New business models in the pharmaceutical industry are starting to favor the long tail of drugs where new discoveries tend to be very much targeted and according to Harvard economist David Cutler:

Drugs are eventually going to be customized for individuals.

Jeffrey Kindler, CEO of Pfizer is betting on it and wants Pfizer to become as good at developing $500 million drugs as in coming up with new blockbusters. Well, that's a big bet for Pfizer and let's hope with Pfizer can pull it off.

It will make for a much healthier industry and could be the start of a new area of the long tail of the pharmaceutical industry. It will be interesting to watch closely how successful Pfizer is at revolutionizing its industry.

The Value of Co-Creation

I have been reading Wikinomics by Don Tapscott and Anthony Williams. Overall, it is a good book. One of the arguments the authors make is that corporations need highly permeable boundaries to foster innovation in their organizations and be successful. In the software industry, we have seen how IBM and others have leveraged the open source movement to co-create and drive innovation in the industry. IBM for instance estimates that it saves in R&D around $1 billion a year by investing in the Linux community. And in its hardware business alone, IBM sold $2 billion worth of Linux based hardware in 2006. Those make strong arguments for the value of co-creation, right? Well, wait to hear how P&G leverages co-creation. In the late 1990's, P&G realized that out of a $1.5 billion R&D budget, generating a lot of patents, less than 10% of the produced patents resulted in products. So P&G's CEO, A. G. Lafley, set out a pretty aggressive goal: that 50% of P&G new products and service ideas come from outside the company by 2010. We aren't talking about outsourcing here, but true co-creation. Identify most promising ideas out there that help P&G innovate and incorporate them into P&G R&D.

The result is big time dividend as mentioned in P&G's New Innovation Model in March 2006, by Larry Huston and Nabil Sakkab on HBS Working Knowledge.

More than 35 percent of our new products in market have elements that originated from outside P&G, up from about 15 percent in 2000. And 45 percent of the initiatives in our product development portfolio have key elements that were discovered externally. Through connect and develop—along with improvements in other aspects of innovation related to product cost, design, and marketing—our R&D productivity has increased by nearly 60 percent. Our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a percentage of sales is down from 4.8 percent in 2000 to 3.4 percent today. And, in the last two years, we've launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company's stock collapse in 2000, we have doubled our share price and have a portfolio of twenty-two billion-dollar brands.

That's pretty amazing and should be a call for action for any executive out there. Co-creation works in a big way!

Who Likes Peanut Butter Anyway?

I never liked peanut butter, so that may be the reason why Brad Garlinghouse's memo resonnated with me. His Peanut Butter Manifesto gives us a lesson in leadership. It is the responsibility of senior management to lead the march for change and to clearly articulate why it is happening. I found Brad's manifesto effective at doing so. Ironically enough, it would probably resonnate true with quite a few organizations were you to replace the product names. Organizations often tend to spread peanut butter when they are reluctant to refocus their business and align it with clearly articulated strategic direction. To be successuful, every organization should have:

• A focused, cohesive vision
• Clarity of ownership and accountability
• Decisiveness

The drama of working out internal company issues in public is unusual but quite entertaining. I am not sure what are the benefits for a Yahoo! executive to do so. But, his call for change should be applauded. Too many executives often do so too late. Knowing when is the right time to call for change is hard, looks like that time has come at Yahoo!. Now, let's see how successfully, Yahoo! can refocus its business. Will Brad lead the charge?

Why Kodak’s Strategy Will Work…

The November 27th issue of Business week had a very interesting article about Kodak and some of the tough choices and strategy shifts it had to undertake over the past 10 years. Over the past ten years, Kodak had to re-invent itself from a film company to a print company to a digital technology provider illustrated by its recent deal with Motorola. So what's behind Kodak's transformation? First, despite the resistance to change that any strategy shift entails, is the recognition of a true identity and business purpose. Kodak is an image company and as such, it is able to adjust, though painfully, through the value chain of the image business.

In a sense, this is a classical illustration of Clayton Christensen's "Law of Conservation of Attractive Profits". The law of conservation of attractive profits states that in the value chain there is a requisite juxtaposition of modular and interdependent commoditization, that exists in order to optimize the performance of what is not good enough. When modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage (quote from The Innovator's Solution). This happened to the computer industry (see Intel) and is happening to the image industry. Kodak's bet that the growth of digital photography will happen in mobile phone and that profits margins for sensor chips will be twice those of the digital camera business aligns with the above law. Kodak is identifying new revenue opportunity in the image value chain and aggressively pursuing the shift in the value chain. That's true leadership and it will pay off. Good luck Mr Perez.

It isn't about Free Software

I have been involved in the open source community for a little while as a volunteer contributor and can relate to some of the dynamics that Marc Fleury describes in his post... However, as I develop a better understanding of the OS community dynamics and of how the community operates I can't help but think, why isn't everyone jumping on the bandwagon?

Have you ever worked with a closed product that needed to be extended to address your business needs? Let's put it this way, I have never worked with one that did not need to... but very often given the closed nature of most software products, extending a product behavior results in numerous headaches for development groups. Most people tend to think about open source as Free Software. What a terrible misunderstanding of the promises of the OS movement! I have become convinced that the strength of open source isn't the source (code), it is the community. I hope that's what Johnathan Schwartz meant in his post on Free Software Has No Pirates. Opening a product source code provides many advantages and extends the boundaries of the virtual organization:

- It encourages the development of a strong community.
- It makes products more easily extensible for customers.
- It fosters innovation on top of companies' product offering.
- It provides a virtual engineering team much larger than any organization may ever dream of.
- It is closely aligned with the market, its trends and evolution.

So why are companies so reluctant to open their code up? I strongly feel that the value of most products is not in the hidden "secrets" kept behind their closed source. It is in the integration with other enterprise solutions, in the flexibility that it provides to their customers to address their business needs today and not in the next release... It is in engaging, trusting and leveraging the community to provide users with solutions that meet their needs.

Marc is right Open Source != Free Software, open source = community; its true value is in the community that it nurtures and empowering its user base...