Blog Planview

Votre parcours vers l’agilité métier

Gestion du portefeuille de produits, Gestion de portefeuille de projets, Planification stratégique

Pharmaceutical and Biotech Portfolio Management: How Easy is it to Spend 10 or 20 Billion? – Enrich Consulting

Publié le par Richard Sonnenblick

What is an R&D-driven company with $10-50 billion of cash in the bank to do?

In the last twelve months, Merck, Pfizer, HP, AstraZeneca, and Bristol-Myers Squibb have announced stock buybacks totaling over $25 billion, and layoffs of over 30,000 employees. So apparently, for many firms, the best use of their cash hoard is a stock buyback, or to stand pat, secure in the notion that they can defend against a hostile take-over. This trumps increased R&D spending as well as retaining current sales staff.

Last week, venture capitalist Peter Thiel posed a related question, of sorts, to Eric Schmidt of Google during the Fortune Brainstorm Summit in Aspen, CO:

Google also has 30, 40, 50 billion in cash.  It has no idea how to invest that money in technology effectively.  So, it prefers getting zero percent interest from Mr. Bernanke, effectively the cash sort of gets burned away over time through inflation, because there are no ideas that Google has how to spend money.

To say that Google has no ideas on how to spend that money is unfair, since Google does reinvest a sizable percentage of its profits into R&D, into outside start-ups through Google Ventures, as well as into Google-X, where more revolutionary ideas are nurtured.  Effectively investing funds on the order of tens of billions, however, is quite challenging. Eric Schmidt’s response reflected those realities:

What you discover in running these companies is that there are limits that are not cash.  There are limits of recruiting, limits of real estate, regulatory limits as Peter points out.  There are many, many such limits.  And anything that we can do to reduce those limits is a good idea.

[…] Chrome is now the number one browser in the world.  The platform for enterprise innovation on top of Google is I think phenomenal.  The rate at which people are using Google to redo the way their businesses work, there are many, many examples of business innovation that Peter is not choosing to see.

So, who is aggressively investing in innovation, especially outside their ‘core’, and how are they doing it?

Philanthropists and Foundations (see the top 100 here)

The Bill and Melinda Gates Foundation is the heavy-hitter in this category, with the largest endowment by a factor of three. The Gates Foundation disburses grants to the tune of $2-3B annually. Proposals are both solicited and invited. The largest funding categories are Global Health, Global Development, and U.S. Education.

This looks unparalleled, until you realize that the U.S. National Institutes of Health (NIH) have an annual research budget of about $31B. These are widely distributed funds, across thousands of internal and external scientists. History includes some large R&D projects, but they are born of extraordinary circumstances:

  • Manhattan Project: $21 billion (in 1996 dollars) to develop and use nuclear weapons in World War II
  • Apollo Program: $170 billion (in 2005 dollars) to successfully land and return a manned capsule to the moon.

So, the stars need to align perfectly to create the need, the resources, and the core technology for a successful large-scale project. Most innovation, whether public or privately funded, starts small and scales up as hurdle after hurdle is surmounted.


Elon Musk wasn’t content to co-found Paypal and receive a $170 million payout. He went on to found (and substantially fund) Tesla, SpaceX, and SolarCity. What is impressive here is that these three companies are dramatically different from the web/banking world of PayPal, and they are almost as different from each other (electric cars, space courier service, solar panel installers). It is still too early to call SpaceX and Tesla successful at scale, but huge milestones, and innovations, have been made by both companies.

Jeff Bezos has personally been involved in some pretty offbeat ventures, including a clock designed to keep perfect time for 10,000 years, a spaceship company named Blue Origins, and an airbag patent for cell phones.

Nathan Myhrvold of Microsoft fame has spearheaded development of a new nuclear reactor design, written a giant book on high-tech methods for food preparation (Modernist Cuisine) and has been an outspoken advocate (and patent holder) for geoengineering methods to mitigate the effects of climate change.

So, there is a mold of a peripatetic, inquisitive mind who somehow has the focus and determination to push the envelope of the possible wherever their curiosity takes them. Richard Feynman could be in this club as well, at least from an academic perspective, as a Nobel prize winning physicist who made significant advances in biology, and crystallized the concept of nanotechnology.

Amazon: Understanding the Customer

Amazon comes to mind as an example of a company able to innovate both within and outside their core. Currently Amazon invests $1B/year in R&D, a ten-fold increase since 2005. Beginning with a new inventory and supply chain model for books, they expanded with innovations including:

  • Online sales of almost every retail category
  • Recommendation engines
  • Commission sales for used books
  • Shipping as a loss leader
  • Electronic books and e-readers
  • Cloud computing

The common thread in all of these innovations has been Amazon’s careful attention to customer needs. To quote Jeff Bezos:

“If you want to continuously revitalize the service that you offer to your customers, you cannot stop at what you are good at, you have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things.”

There is a simple, but often ignored, key to innovation in this quote: There is no distinction between core and disruptive investments when you are focused on the needs of the customer. Furthermore, this customer-focused view is keeping Amazon searching for innovation in the customer problem-space, rather than the companies’ solution-space. Kodak, Motorola, General Motors, and many other large companies have suffered defeat by focusing on their existing solution-space and making incremental improvements therein.

Other companies, such as Proctor and Gamble, take great pains to insert the customer problem-space front-and-center in the new product development process. Products including Mr. Clean MagicReach, Swiffer CarpetFlick, and Febreeze all originated or were honed in response to customer observation and related ethnographic studies.

This is contrast to Google, who excels as a technology-driven company. In many cases at Google the customer willingness to pay is not even considered, let alone the customer need.

Google: A Thousand Flowers, No Business Model Required

Getting back to Google, they have been successful in building an R&D machine based on their advertising business profits. There are innovations within their core such as ranking algorithms, parallel computing architectures, and advertising. But we also see extensive investments outside their core, including:

  • Mail and office applications
  • Maps, Navigation, StreetView
  • Android
  • Google+
  • Autonomous vehicles
  • Augmented reality hardware

None of these other products substantial generate revenue just yet. It is now commonplace for Internet start-ups not to let the lack of a pricing model get in the way of development and investment. Internet Juggernauts like Facebook, Yahoo, and Google can play this game too. Is this possible outside the domain of the Internet? Here are some of Google’s methods for feeding the R&D pipeline:

Incubator for non-core and disruptive initiatives: At a lab apart from the current campus, Google X was created to foster ideas on the more radical side. From space elevators to self-driving cars, it will be interesting to see how many ideas grown at Google X make it into the market.
20% Time: Google employees have 20% of their time they can devote to fostering projects of their own choosing. Google News, Google Suggest and AdSense were conceptualized during employees’  20% time.
Pledge to invest outside the core: In the past (2006-7), Google management ascribed to a 70-20-10 investment strategy, with 70% of investment within the core, 20% in adjacent areas, and 10% entirely outside the core. It’s not clear if this is still the case.

It is worth noting that even in some of the areas where Google is perceived as an innovator, they are standing on the shoulders of others. Before Google built their current server infrastructure, companies like Inktomi build medium-scale farms for caching activities. In the late 90’s, before Inktomi, Alta Vista used mainframes to solve similar problems on a smaller scale, for a smaller Internet. We don’t know the next step in this random walk today, any more than we could have predicted today’s massively parallel designs back in the 90’s. That is the way innovation works.

Innie or Outie?

So, should your innovation initiatives be driven purely by the customers and customer observation, or by technology, pushing the envelope on what is possible? I think it is simplistic to consider either extreme a solution. Focusing on customers and their problem-spaces can be fruitful, but consider all the inventions that reached ubiquity without customer-driven research:

  • Cell phones
  • SMS
  • Radio
  • Television
  • Telegraph
  • Microcomputer

There is justification for both solution-focused and problem-focused orientations to feed the R&D pipeline. I think a portfolio of methods works best here: Employ a mix of methods, understanding that each may gestate some really great ideas.

Laying the Groundwork for Growth

It is time to get back to the question posed at the beginning of the post: Are life sciences and technology firms failing to strive, funding fewer ideas than they should to stoke their innovation engines?

I am sympathetic to the challenges of ramping up R&D spending quickly. Big things start with small things, and the key is to foster enough small things, and to foster some outside your core/comfort zone, so that you find some interesting ideas. I am not creative enough to explain how Google could go from a few billion in annual R&D spend to ten, much less 30 or 40 billion as Peter Thiel challenges. So, I can’t fault Google or Apple for keeping much of their cash in a rainy day fund.

Life sciences firms invest more in R&D as a percentage of revenues than any other industry, at least for now: R&D spending is declining for some of the largest firms, at the same time their pipelines are yielding to blockbuster drug patent expirations. It truly does suggest that we are out of traditional ideas for feeding the drug pipeline, at least until the next set of scientific and engineering breakthroughs, such as the prices of whole-genome sequencing falling to levels that allow a majority of the population to be sequenced.

I would love to see traditional life sciences firms focus additional attention in their customers’ problem space. Some of the most vexing problems in health care involve compliance with drug regimens (both simple and complex), mastering the growing sea of medical bills, insurance and reimbursement forms faced by aging boomers, and making lifestyle changes stick. It may be too far away from their current core products, but these are critical, health-related problems for their customer base. Perhaps including these non-traditional areas in pharmaceutical and biotech portfolio management processes is the next frontier.

Articles similaires

Rédaction du contenu Dr. Richard Sonnenblick Chief Data Scientist

Chief Data Scientist de Planview, Richard Sonnenblick possède une solide expérience acquise auprès d'organisations majeures des secteurs pharmaceutiques et des sciences de la vie. Fort de son expertise, il a développé d'excellents processus de priorisation et de revue de portefeuilles, systèmes de scoring, et méthodes d'évaluation et de prévision financières pour améliorer à la fois les pronostics produits et l'analyse de portefeuilles. Richard Sonnenblick est titulaire d'un doctorat et d'un master en ingénierie et politiques publiques de l'université Carnegie Mellon, et d'une licence en physique de l'université de Californie à Santa Cruz.