September 1, 2015 (Vol. 35, No. 15)
J. Leslie Glick Ph.D. Independent Corporate Management Advisor
Celgene, Genzyme, and Monsanto Show How Innovation Strategies Can Pay Off
In the June 2015 issue of Harvard Business Review, Gary P. Pisano, Ph.D., the Harry E. Figgie Professor of Business Administration at Harvard Business School, provided a compelling argument as to why companies need to create innovation strategies, without which innovation initiatives are likely to fail. Moreover, if a company is to remain competitive, its innovation strategy must constantly evolve. The purpose of this article is to demonstrate the role of appropriate innovation strategies in contributing to the successes of biotech companies.
As described by Dr. Pisano, there are four innovation strategy types.
- Routine innovation—builds on a firm’s existing business model as well as its technological competence.
- Disruptive innovation—builds on a firm’s existing technological competence but incorporates a new business model.
- Radical innovation—builds on a firm’s existing business model but requires new technological competence.
- Architectural innovation—requires both a new business model and new technological competence.
It should be emphasized that the concept of innovation as used here applies solely to the company and not to its industry, unless the company is among the first in its industry to introduce the particular innovation.
The Biotech Context
The four innovation strategies—routine, disruptive, radical, and architectural—are readily adapted to the biotech context. Consider the following examples.
A biopharmaceutical company has developed and commercialized an oncology product line. Now the company has decided to develop and commercialize another potential anticancer drug. (This change calls for routine innovation.)
A biotech company focused on developing therapeutics has, in accordance with its business model, always licensed its products out to established pharmaceutical companies. Now the company has decided to become directly responsible for the marketing and sales of its products. (This change calls for disruptive innovation.)
A company supplying the bioresearch market with polyclonal antibodies has decided to replace its line of polyclonal antibodies, obtained from immunized animals, with monoclonal antibodies produced in cell lines. (This change calls for radical innovation.)
A development-stage biopharmaceutical firm has decided to transition to becoming a company focused on development and commercialization of personalized diagnostics. (This change calls for architectural innovation.)
Now for some real-life examples—Celgene, Genzyme, and Monsanto—all prominent biotech companies whose successes were due to strategy changes resulting in architectural innovation. However, initiation of the new strategies began at an early stage for both Celanese and Genzyme, but at a very late stage in the case of Monsanto.
Extensive details on the transformation of these companies can be gleaned from fundinguniverse.com, as well as from 10-K filings with the SEC, and for Genzyme, in particular, by accessing the Life Sciences Foundation oral history of Genzyme’s former CEO, Henri Termeer.
Originally part of Celanese, Celgene was spun off from its parent in 1986. The newly independent firm went public in 1987. Initially focusing its R&D efforts on bioremediation and biocatalysis, Celanese reported revenues of $2.3 million in 1992.
However, that same year, Celgene began the transition to becoming a biopharmaceutical company. Stimulated by the out-of-the-box thinking of its scientific leader, Sol J. Barer, Ph.D., Celgene acquired the rights to thalidomide, the drug that had once been marketed for treating morning sickness and subsequently banned in the 1960s due to its role in causing birth defects.
Based on the research findings of others, Dr. Barer was interested in commercializing thalidomide for different therapeutic applications, and in 1998, Celgene obtained FDA approval for the use of thalidomide for the treatment of leprosy. That year Celgene reported thalidomide sales of $3.3 million. Two years later, such sales had grown to $62 million. Fast forward to 2014, when as the fourth largest U.S. biopharmaceutical company, with a product line devoted to the treatment of cancer and inflammatory diseases, Celgene reported total revenues of $7.7 billion and net income of $2 billion.
Formed in 1981, Genzyme started by implementing a plan to produce enzyme-based products. Sticking to this plan eventually resulted in a $100 million diagnostics enzyme business. However, when Henri Termeer joined Genzyme in 1983 as its president, he set out to re-examine Genzyme’s mission.
What eventually became the company’s most important product line began with an NIH contract in 1983 and 1984 for supplying a chemically modified version of the enzyme glucocerebrosidase. The idea was to evaluate the Genzyme product as a potential treatment for Gaucher disease. The clinical trial failed, but as was subsequently determined, the dose was not high enough.
In 1985, Termeer consulted with his scientific advisers, who concluded that Genzyme should not pursue enzyme therapy. Contrary to their advice, Termeer decided that this was a field in which Genzyme should focus. That same year Termeer became CEO of Genzyme, and in 1986, he took the company public.
Even though Genzyme’s diagnostic enzyme business had sales of about $9 million in 1985, Genzyme escalated R&D on enzyme therapy, and in 1991, the company received FDA approval for the modified glucocerebrosidase. Genzyme subsequently developed and commercialized other therapies for genetic diseases and metabolic disorders, all of which involved recombinant human enzymes.
Fast forward to 2010, the year before Genzyme was acquired by Sanofi-Aventis, when Genzyme’s total revenues exceeded $4 billion and its net income exceeded $400 million. Genzyme’s innovation strategy had continued to evolve, as there were now five principal business units, of which the largest was the Personalized Genetic Health unit, which was responsible for the enzyme therapies and accounted for over 40% of total revenues. At the time, Genzyme was the fourth largest U.S. biopharmaceutical company.
Since it was founded as a chemical company in 1901, Monsanto has commercialized a diverse group of products, including industrial chemicals, synthetic fibers, building materials, agricultural chemicals, food additives, and pharmaceuticals. By the end of the 1980s, Monsanto’s sales had reached $8.7 billion.
Also in the 1980s, after Richard Mahoney became the CEO in 1983, Monsanto became increasingly involved in agricultural biotechnology R&D. Moreover, after Robert Shapiro became CEO in 1995, agbio R&D accelerated, agbio acquisitions increasingly played an important role in the overall strategy, and the company divested itself of product lines unrelated to agriculture.
In 1997, the chemical operations were spun off into Solutia, a newly formed public company. In 1999, Monsanto sold off NutraSweet, formerly part of G.D. Searle, the pharmaceutical company that Monsanto had acquired in 1985. NutraSweet was the maker of aspartame, the artificial sweetener. Then Monsanto merged with another pharmaceutical company, Pharmacia & Upjohn. In 2000, Monsanto was spun out as an independent company minus the G.D. Searle operations, which remained with Pharmacia.
Monsanto was now a totally different company from the old chemical company. In 1996, the agricultural product line had accounted for only $2.9 billion of Monsanto’s total sales of $9.3 billion. In fiscal 2014, Monsanto reported revenues of $15.9 billion, all of it devoted to agricultural products, split into two groups—the Seeds and Genomics Segment, and the Agricultural Productivity Segment.
The Mother of Innovation
As Professor Pisano pointed out, creating an innovation strategy is a necessity. Such necessity is, in fact, the mother of innovation. In the biotech context, this idea is exemplified by the success of Celgene, Genzyme, and Monsanto.
J. Leslie Glick, Ph.D. ([email protected]), is an independent corporate management advisor.