9
Perspectives on Industrial R&D Management

GERALD D. LAUBACH

The case study approach to the examination of any issue always presents difficulties of extrapolation to the general from the particular. This is especially so as regards the inferences that might be drawn from the cases presented in this book that describe industrial research and development (R&D) directed to medical technology. There are two principal difficulties: first, the immense diversity of the industries that generate medical technology and, second, the drastic changes that are occurring in those industries as a consequence of the ongoing restructuring of American health care itself.

The principal industrial segments that develop and supply medical technology include large, generally multinational, pharmaceutical firms; the more than 1,000, mostly very small, venture-type firms that make up the biotechnology industry; both large and small firms that provide diagnostic tests and reagents; medical instrument divisions of large, diversified manufacturing firms; and the many, mostly smaller, specialized medical device firms. As will become apparent later in this chapter, two additional industries have become increasingly prominent influences upon medical technology—the large for-profit and not-for-profit "managed care" enterprises that now deliver more than half of the health care that Americans receive, and the host of systems-based firms that have sprung up to provide services of all kinds to the health care industry.

The firms encompassed in these diverse segments obviously differ greatly in sheer size and complexity, as well as in financial strength and stability. They vary also in the degree to which research and innovation is important to the overall success of the enterprise. One would surmise that an R&D project might be managed with more intensity, and more corporate oversight, in a biotechnology



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Sources of Medical Technology: Universities and Industry 9 Perspectives on Industrial R&D Management GERALD D. LAUBACH The case study approach to the examination of any issue always presents difficulties of extrapolation to the general from the particular. This is especially so as regards the inferences that might be drawn from the cases presented in this book that describe industrial research and development (R&D) directed to medical technology. There are two principal difficulties: first, the immense diversity of the industries that generate medical technology and, second, the drastic changes that are occurring in those industries as a consequence of the ongoing restructuring of American health care itself. The principal industrial segments that develop and supply medical technology include large, generally multinational, pharmaceutical firms; the more than 1,000, mostly very small, venture-type firms that make up the biotechnology industry; both large and small firms that provide diagnostic tests and reagents; medical instrument divisions of large, diversified manufacturing firms; and the many, mostly smaller, specialized medical device firms. As will become apparent later in this chapter, two additional industries have become increasingly prominent influences upon medical technology—the large for-profit and not-for-profit "managed care" enterprises that now deliver more than half of the health care that Americans receive, and the host of systems-based firms that have sprung up to provide services of all kinds to the health care industry. The firms encompassed in these diverse segments obviously differ greatly in sheer size and complexity, as well as in financial strength and stability. They vary also in the degree to which research and innovation is important to the overall success of the enterprise. One would surmise that an R&D project might be managed with more intensity, and more corporate oversight, in a biotechnology

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Sources of Medical Technology: Universities and Industry venture whose very survival depends on research success, than would be the case for that same project embedded in a multibillion dollar corporation! One might also surmise that R&D projects with long time horizons, or much technical uncertainty, or foreseeable complexities in clinical or regulatory assessment, would be judged less feasible by a small, thinly financed firm than by a firm with ample resources. Industrial R&D management—its strategies, emphasis, direction—is influenced by the circumstances in which the firm finds itself—or perhaps more aptly, perceives itself—and all the forces at play may not be apparent to the author of a case study. But the dramatic, recent changes in the structure of American health care represent one highly visible, and very potent, force that is impacting R&D in every sector of the health care technology industry. The earlier volumes of the Medical Innovation at the Crossroads series, beginning with the first in 1990, have documented, and in several cases anticipated, the effects of the changing health care market upon technology suppliers. What are those changes? At considerable risk of oversimplification, of reiteration of the now obvious, and of gross disservice to the systematic analyses provided in chapters from earlier volumes of this series (for example, Soper and Ferris, 1992), I offer the following brief sketch: Health care in America used to be a cottage industry. The adoption and use of health care technology were substantially under the control of several hundred thousand practicing physicians and surgeons. Those physicians and surgeons had strong professional motivations to adopt new technology; they also often had economic incentives to utilize technology. The health care system that is emerging today has many of the characteristics of a true industrial enterprise. Acquisition of technology is controlled on the basis of its cost and value to the health care delivery firm. There is reluctance to accept technology that is new, or technology whose value has not been compellingly demonstrated. Large purchasers use their buying power to negotiate price. They require suppliers of similar technologies to bid against each other. They may exclude costly technologies altogether. They monitor, and attempt to control, the use of technology by the physicians and surgeons who are part of the enterprise. THE CHANGING RESEARCH ENVIRONMENT These changes in the market for health care technology are impacting industrial R&D in three principal ways: (1) they threaten established industry structure, modi operandi, and the financial resources of the technology suppliers; (2) they redefine the criteria for acceptability of new medical technologies; and (3) they impact the processes through which some technologies have historically been developed. The symptoms of structural and financial stress in the industries that supply

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Sources of Medical Technology: Universities and Industry TABLE 9-1 Major Acquisitions and Mergers of U.S. Pharmaceutical and Biotechnology Companies Pharmaceutical Companies   Biotechnology Companies   American Cyanamid and Immunex 1993 American Cyanamid and Immunex 1993 Procordia and Erbamont 1993 American Home and Genetics Institute 1991 Hoechst-Celanese (Hoechst) and Copley 1993 Boehringer Mannheim and Microgenics 1991 Marion Merrell Dow and generics operation of Rugby Darby 1993 Sandoz and SyStemix 1991 Beecham and SmithKline 1991 Abbot and Damon Biotech 1990 Boots and Flint 1990 Baxter and Bioresponce 1990 American Home and A. H. Robins 1989 Schering AG and Codon 1990 Bristol-Myers and Squibb 1989 Roche and Genentech 1990 Dow and Marion 1989 American Cyanamid and Praxis 1989 Merck and DuPont 1989 Chugay and GenProbe 1989 Merck and Johnson & Johnson 1989 Fujisawa and Lyphomed 1989 Kodak and Sterling 1988 Eli Lilly and Hybritech 1986 Schering-Plough and Key 1986 Bristol-Myers and Genetic Systems 1985 Monsanto and Searle 1986     Rorer and USV/Armour 1986     Rhône-Poulenc and Rorer 1983     NOTE: The acquiror is noted first, and may be either a U.S. or a foreign company. The acquired company is noted second and is a U.S. company. SOURCE: Adapted from the Boston Consulting Group, 1993, p. 42. health care technology are now ubiquitous. Notable examples include the dramatic consolidation under way in the multinational pharmaceutical industry (a few of the major mergers and acquisitions are summarized in Table 9-1); the diversification of major pharmaceutical manufacturers into health care delivery, through acquisition of, or partnering with, firms that manage pharmacy benefits; consolidation (Table 9-1) and extensive partnering (Read and Lee, 1994) in the biotechnology industry; sharply depressed stock prices of pharmaceutical, biotechnology, and medical device firms for the past two years (Read and Lee, 1994); the reduced flow of new equity capital into the biotechnology and medical device industries (Littell, 1994; Read and Lee, 1994); and personnel cutbacks and downsizing reported by numerous firms in the health care technology industries. Most of the changes related above are too recent to have had an observable effect on the level of R&D activity in the affected industries. Nonetheless, it seems unlikely that the consolidation of duplicate functions that normally accompanies the merger of similar firms will fail to impact research departments. Nor is it likely that firms in financial stress will neglect to scrutinize R&D budgets. Since virtually all of the capital raised by the smaller biotechnology and device

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Sources of Medical Technology: Universities and Industry firms is expended on R&D, the continued confidence of investors has a direct linkage to continuing research in those industries. The criteria that the new health care marketplace establishes for acceptance of technology will define the targets for research in the health care technology firm. Since the market prizes cost-saving technology, R&D will seek to reduce the cost of existing technologies; will seek to replace costly technologies with more economical alternatives; and will carry out cost-effectiveness studies to make the economic case for the acceptance of their technologies. All of these phenomena are already evident (Gelijns and Rosenberg, 1994; Marshall, 1994; Telling, 1992). Since the market enforces price competition among similar technologies, research will target prospective new technologies that are meaningfully differentiated, that is, truly something new. Some existing technologies may enjoy longer lives than was typical heretofore, if the probability of finding substantially superior alternatives is judged to be low. The great attractiveness of highly differentiated—truly new—technologies will cause major emphasis to be given to applied research at the frontiers of basic science, with implications for the university-industry interface that are discussed further below. Finally, some of the changes in the health care system interact with the R&D process itself. Here, unfortunately, the outlook is especially worrisome. The reasons are apparent in every one of the medical device and instrumentation cases detailed in earlier chapters. Those cases demonstrate lucidly two important characteristics of much medical innovation: first, that many truly revolutionary medical technologies are the end product of a long series of incremental refinements, sometimes beginning with a progenitor technology of marginal medical significance; second, that the actual process of innovation may involve a great deal of ''tinkering at the bedside"—the process of developing the requisite skills, and learning the true potential of a new technology, through experience in actual clinical use. These historically important modes of innovation are clearly threatened by policies that raise barriers to the diffusion of modest, incremental technological change, and by policies that seek to standardize medical practice. To paraphrase a prescient observation made at one of our earlier workshops, the biggest danger we may be facing is that of freezing in place the status quo (Neumann and Weinstein, 1991, p. 31). At greatest risk from such policies are innovation in surgical procedures and in medical devices and instrumentation. However, even pharmaceuticals, products though they are of extensive and elaborate R&D programs, have found important new uses as a result of applications discovered after the product entered widespread use (Gelijns and Rosenberg, 1994; Laubach et al., 1992). The emergence of these new constraints in the health care marketplace constitutes a central challenge to R&D management in the medical device and instrumentation industries. They underscore the importance of collaboration at the interface for these technologies—not only the interface between engineers in

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Sources of Medical Technology: Universities and Industry industry and research-minded physicians in universities, but the further interface with actively practicing physicians and surgeons. Although not explicitly discussed in this workshop, the management of medical device R&D is also being confronted by significantly increased Food and Drug Administration (FDA) regulatory requirements for medical devices (Merrill, 1994). Because the device industry comprises many smaller firms, the resiliency of the industry to respond effectively to the uncertainties of its new environment is a concern. The sixth workshop of the Committee on Technological Innovation in Medicine, carried out in collaboration with a committee of the National Academy of Engineering, explored these issues and others in depth (Gelijns et al., forthcoming). THE EVOLVING SCIENCE BASE The cases presented in earlier chapters illustrate that the science base underlying medical devices and instrumentation substantially resides in science-based industries outside of the medical field. The rate and direction of technological innovation in these "donor" industries must therefore influence technological innovation in the derived medical technologies. The great growth in information processing technologies, and the cutback in development of military hardware, are changes of the sort that are likely to impact future medical innovation. What then can be said about the prospects for research and innovation in those industry segments—pharmaceuticals, vaccines, biotechnology, diagnostic tests and reagents—whose most important science base is modern biology? The economic constraints upon R&D, coupled with much more stringent criteria for innovative success, very likely will prove to be the most severe challenges these industries have ever faced. Research and development in these industries, if it is to be successful in the future, must devise richer sources of truly differentiated new technologies and must become more efficient in discovering, developing, and proving their value. The single most important countervailing resource these industries bring to the search for differentiated products is the power of the new biology. In arguing thus, it is important to be clear about what is meant by the term "new biology." Because "biotechnology" and "the biotechnology industry'' have become such prominent and well-known features of the popular culture, there is an understandable tendency to equate all of the new biology with recombinant DNA protein synthesis. Indeed, two of the cases in this book (Chapters 7 and 8) focus on that particular technology, undoubtedly because some of the earliest and most important medical products to emerge from the biotechnology industry were products of work with recombinant DNA. That this view of the scope and power of the new biology is too narrow is well illustrated by an examination of the research objectives of the biotechnology industry today, as described in the prospectuses of the publicly owned firms. Even a cursory review reveals that research based on recombinant protein synthesis

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Sources of Medical Technology: Universities and Industry has been augmented by many other approaches. Today's more typical biotechnology project is predicated on the hypothesis that the function or dysfunction of one or another fundamental biomechanism may be of medical importance, then seeks ways to manipulate that mechanism to achieve medical benefits. Biotechnology projects, in the mode just described, have in fact joined the mainstream of modern, rational pharmaceutical research. Perhaps the landmark case of this genre was the work of George Hitchings, Gertrude Elion, and their colleagues, who tenaciously pursued the idea that by systematically interfering with the then newly elucidated biochemical steps involved in nucleic acid biosynthesis, useful therapeutic agents could be found. Their faith was richly rewarded by the discovery of several new medicines—including the anticancer drug 6-mercaptopurine, the immune suppressant azathioprine, and the antibacterial trimethoprim, each the first of its kind—and by the Nobel Prize for Physiology or Medicine in 1988 (Elion, 1988; Hitchings, 1988; Melmon and Flowers, 1993). Sir James Black was awarded his Nobel Prize for research that resulted in the discovery of the ß-adrenergic blocking drugs (a landmark advance in the therapy of cardiovascular disease) and the histamine H2 antagonists (the first truly effective drugs for gastric and duodenal ulcer). In both cases, the research strategy exploited newly identified bioreceptors, whose selective inhibition proved to be a successful pathway to a new class of medicines (Black, 1988). In fact, a large proportion of the most significant pharmaceuticals introduced in recent years are products of research that took its departure from one or another fundamental insight into the intimate nature of a biological process (Laubach, 1983, 1994). Such is also the case for most of the newer chemical and immunological diagnostic tests. The implications for the future of applied medical research are clear. The molecular workings of important biological processes are being elucidated at an astonishing rate. Literally dozens of genes, receptors, and mediators that play roles in controlling biological function have been discovered. In many cases, their significance, in normal function and in disease, is yet to be fully explored. This vast and rapidly expanding science base will undoubtedly be the launching pad for much applied medical research for years to come. However, this richness of opportunity is two-edged. It will demand great discrimination on the part of the R&D manager in selecting which biological pathway to pursue, and decisiveness in abandoning approaches that peter out. The critical importance of the university-industry interface in R&D of this kind should also be clear. The patterns of interaction will doubtless continue to involve formal partnering arrangements mediated through biotechnology firms, as detailed in chapter 8 of this volume by Arora and Gambardella. At the other pole, they will merely involve the interplay of applied and basic research mediated through the scientific literature, the kind of open process well illustrated by

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Sources of Medical Technology: Universities and Industry the work of Hitchings, Elion and Black and, indeed, by most of the modern therapeutic agents that have clearly discernible roots in basic science. But whatever the pattern of interaction at the interface, bridging the culture gap between academic and industrial science will doubtless remain a nontrivial challenge for R&D management. Techniques and methodologies emerging from the new biology are also germane to the pressing need to increase the efficiency of the discovery process. A number of firms in the pharmaceutical and biotechnology industries have focused on the development of technologies that allow the rapid, automated synthesis of thousands, or even millions, of experimental substances for preliminary screening ("combinatorial chemistry"). Counterpart technologies have been developed that allow massive, "parallel processing" exposure of such chemical libraries to biological test systems (receptor molecules in vitro, for example) to expedite the first steps in selecting prospective therapeutic leads (for example, see Gallop et al., 1994; Gordon et al., 1994). A variety of other prospectively powerful research approaches are being explored—gene therapy is one—that, if successful, promise virtually direct translation of basic research findings into therapeutic applications (Schwartz, 1994). CLINICAL EVALUATION OF NEW TECHNOLOGIES The efficiency of the development process for therapeutic technologies based on biology represents a separate and significant issue in R&D management. The lion's share of the money and time required by the R&D process leading to a new pharmaceutical is dedicated to clinical trials to demonstrate safety and efficacy. The new kinds of therapeutic modalities likely to emerge from research of the sorts just described may well pose challenging new problems in clinical evaluation. Market demands for the demonstration of cost-effectiveness, impact on patient quality of life, and relative value versus other therapeutic modalities can only increase the complexity and cost of clinical trials. Clearly, a major challenge to R&D management lies at the interface with the evaluative clinical sciences. The very first workshop of the Medical Innovation at the Crossroads series was devoted to an exploration of newer methods of clinical evaluation, including an examination of their potential for facilitating the evaluation of medical technologies of all kinds (Institute of Medicine, 1990). Many of these methodologies are being put to good use. But the most intriguing opportunity may prove to lie in a reexamination of how we define the interface between experimental and established medical technology. This is currently an unsettled matter, involving substantial dissatisfaction and no little confusion. Witness, for example, the controversies surrounding the so-called "early release" of AIDS drugs by the FDA, or the controversies and litigation over reimbursement of experimental cancer therapies (see, for instance,

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Sources of Medical Technology: Universities and Industry Institute of Medicine, 1994, for discussion of the latter). The path to resolution of the question is not clear, although both public and private providers of health care are exploring options (Reiser, 1994). In principle at least, one particularly provocative option is suggested by the quasi-industrial structure that is emerging in American health care delivery. Other technology-dependent industries commonly do substantial in-house research, including collaboration with their technology suppliers in the evaluation and in-transfer of new technologies. Such activities offer economic benefits, by providing more timely and efficient adaptation of a new technology to the specific needs of the user firm. They also can constitute an effective mode of interfirm competition. Large health care delivery firms, with their vast data bases and captive patient populations, are excellently positioned to undertake evaluative research on medical technologies, and some of them are increasingly doing so. Since much present-day medical technology is both costly and limited in its effectiveness, health care providers in today's competitive environment should be strongly motivated to be leaders in seeking out, and adopting, superior technologies. As such practices mature, they may well modulate the notion that there is, and should be, a single, one-size-fits-all transition between the experimental and the established medical technology. CONCLUDING OBSERVATIONS The interaction between industrial suppliers of health care technology and the industrial providers of health care services is clearly an important feature in the changing landscape of American medicine. These changes are impacting the resources available for research toward new medical technology, its direction, and even the ways it is carried out. The traditionally important interface between industrial R&D and universities will remain, and even grow in importance. But the interface between industrial R&D and the industrial providers of health care may well prove to be the most critical interface of all for the industrial R&D managers of tomorrow. REFERENCES Black, J. 1988. Drugs from emasculated hormones: The principles of syntopic antagonism. In J. Hindsten, ed. 1993. Nobel Lectures, Physiology or Medicine 1981–1990. World Scientific Press: River Edge, N.J., pp. 418–440. Boston Consulting Group. 1993. The Changing Environment for U.S. Pharmaceuticals: The Role of Pharmaceutical Companies in a Systems Approach to Health Care. Boston Consulting Group: Boston, Mass. Elion, G. B. 1988. The purine path to chemotherapy. In J. Hindsten, ed. 1993. Nobel

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Sources of Medical Technology: Universities and Industry Lectures, Physiology or Medicine 1981–1990. World Scientific Press: River Edge, N.J., pp. 447–468. Gallop, M. A., Barrett, R. W., Dower, W. J., et al. 1994. Applications of combinatorial technologies to drug discovery. 1. Background and peptide combinatorial libraries. Journal of Medical Chemistry 37:1233–1251. Gelijins, A. C. and Rosenberg, N. 1994. The dynamics of technological change in medicine. Health Affairs 13(3):28–46. Gordon, E. M., Barrett, R. W., Dower, W. J., et al. 1994. Applications of combinatorial technologies to drug discovery. 2. Combinational organic synthesis, library screening strategies, and future directions. Journal of Medical Chemistry 37:1385–1401. Hitchings, G. 1988. Selective inhibitors of dehydrofolate reductase. In J. Hindsten, ed. 1993. Nobel Lectures, Physiology or Medicine 1981–1990. World Scientific Press: River Edge, N.J., pp. 476–493. Institute of Medicine. 1990. Medical Innovation at the Crossroads, vol. 1. Modern Methods of Clinical Investigation. A. C. Gelijins, ed. Washington, D.C.: National Academy Press. Institute of Medicine. 1994. Medical Innovation at the Crossroads, vol. 4. Adopting New Medical Technology. A. C. Gelijns and H. V. Dawkins, eds. Washington, D.C.: National Academy Press. Laubach, G. D. 1983. The chemical basis for modern therapeutics. The Chemist 60(1):6,18–19. Laubach, G. D. 1994. Perspective. Growing pains: A more optimistic view. Health Affairs 13(3):194–196. Laubach, G. D., Wennberg, J. E., and Gelijns, A. C.1992. In: Institute of Medicine. Medical Innovation at the Crossroads, vol. 3. Technology and Health Care in an Era of Limits. A. C. Gelijns, ed. Washington, D.C.:National Academy Press, pp. 3–8. Littell, C. L. 1994. Datawatch. Innovation in medical technology: Reading the indicators. Health Affairs 13(3):226–235. Marshall, A. K. M. 1994. Manufacturers' responses to the increased demand for outcomes research. In: Institute of Medicine. Medical Innovation at the Crossroads, vol. 3. Technology and Health Care in an Era of Limits. A. C. Gelijns and H. V. Dawkins, eds. Washington, D.C.: National Academy Press, pp. 152–171. Melmon, K., and Flowers, C. 1993. Purine metabolism and the development of chemotherapeutic agents. Unpublished paper, Stanford University. Merrill, R. A. 1994. Regulation of drugs and devices: An evolution. Health Affairs 13(3):47–69. Neumann, P. J., and Weinstein, M. C. 1991. The diffusion of new technology: Costs and benefits to health care. In: Institute of Medicine. Medical Innovation at the Crossroads, vol. 2. The Changing Economics of Medical Technology. A. C. Gelijns and E. A. Halm, eds. Washington, D.C.: National Academy Press, pp. 21–34. Read, J. L., and Lee, K. B., Jr. 1994. Datawatch. Health care innovation: Progress report and focus on biotechnology. Health Affairs 13(3):215–225. Reiser, S. J. 1994. Criteria for standard versus experimental therapy. Health Affairs 13(3):127–136. Schwartz, W. B. 1994. In the pipeline: A wave of valuable medical technology. Health Affairs 13(3):70–79.

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Sources of Medical Technology: Universities and Industry Soper, M., and Ferris, D. 1992. The growth of managed care in the private sector. In: Institute of Medicine. Medical Innovation at the Crossroads, vol. 3. Technology and Health Care in an Era of Limits . A. C. Gelijns, ed. Washington, D.C.: National Academy Press, pp. 37–50. Telling, F. V. 1992. Managed care and pharmaceutical innovation. In: Institute of Medicine. Medical Innovation at the Crossroads, vol. 3. Technology and Health Care in an Era of Limits. A. C. Gelijns, ed. Washington, D.C.: National Academy Press, pp. 201–218.