Issue:June 2013

MANAGEMENT INSIGHT – Digital Soup


In 2010, I had a carotid dissection. It’s a rare thing – the innermost wall of my left carotid artery came loose and for a 3-inch section it was flapping sporadically through the currents of my blood, occasionally blocking the flow completely. I went to the ER with stroke-like symptoms, and it took 3 days to diagnose me. The condition is so uncommon that 75% of the time it is diagnosed in autopsy.

As I recovered, I visited numerous highly qualified specialists. None had seen more than a couple of carotid dissections. They couldn’t tell me what caused it. They couldn’t tell me how long I could expect my recovery to take. They couldn’t estimate what the chances of reoccurrence were.

Then, 2 years ago, I came across a forum just for people who had been diagnosed with this uncommon condition. In the space of 2 hours, I compared notes with hundreds of patients and learned that the condition almost always comes from intense exertion during exercise. I learned that recovery took most people between 6 months and 2 years. Mine was 6 months. I learned that once the artery healed, the chance of recurrence is essentially non-existent.

What I had stumbled on, of course, was a mini, self-generating clinical study specific to my condition that no pharma company would ever economically conduct. Of course, I realize there was no blinding, and the responders were self-selecting, but the information was still valid for my purposes. Think about this for a moment. What do you think it means for the future of medical care? For research?

The Digital Revolution is upon us. If this is a brave new world, then we are in the primordial soup. The quality and quantity of information that has become available at little or no cost to anyone anywhere just in the past 5 years – it’s massive. It’s unprecedented. Change is everywhere. Our nice tidy ways of innovating are being swept up into a massive digital soup. Opportunity is everywhere, for those who can grasp not just the new technologies, but more importantly, the new mindset.

This is the core message of James McQuivey’s new book, Digita Disruption. In the past, innovation occurred through physical things, McQuivey explains, like an assembly line. An innovation was a commercial jetliner, a heart transplant, or a flat panel LCD screen. Because innovations involved physical things, the disruptions they caused were few and far between. A new innovation necessitated massive inflows of capital to build factories and to achieve the scale of production necessary to make them affordable. All this took time, and oodles of cash.

Not so in the digital soup. Innovation is cheap. Travis Kalanick turned the taxi business upside down overnight with a mobile app that brought drivers and passengers together more quickly than ever, saving time, trouble, and fuel. Mr. Kalanick told The Wall Street Journal that users of his Uber service take in $10,000 more than those who don’t.

Similarly, Kevin Moller single handedly created fuel price competition at major airports around the world with an app called FuelerLinx. In the olden days (about 5 years ago) pilots just fueled up wherever they landed, regardless of cost. Prices for fuel were variable from place to place and hard to predict. Today, FeulerLinx collects data from airports around the world and suggests where the best prices are. Mr. Moller founded the app by entering 1,800 locations into a huge Excel spreadsheet every Wednesday morning. Now, the data is generated automatically and accessed by pilots everywhere.

“Five years ago, the processors and Internet speeds and tools weren’t there. Now all of it has come together,” Mr. Moller told The Journal.

These innovations are popping up everywhere, from the “Lose It” app that has upended the weight loss market, to high-frequency trading, which has made the stock market a very different place for small investors.

DIGITAL INNOVATION IN BIOTECH

Let’s say a promising young scientist named Random Researcher has a great idea for a new mechanism of action. A few years ago, Random would’ve needed a large company to vet the idea, finessing it through the appropriate corner offices until a staff and a budget was assigned to develop it. Months to years would pass in the process. Not so in the Digital Soup. Now Random can line up a couple of investors, and for maybe $500,000, he can hire companies to develop a prototype. Once the prototype shows promise, investors should line up and Random’s idea will be on the market faster and more cheaply than was ever possible before. With a process this easy and cheap, biotech innovation is poised to explode; anyone anywhere can access knowledge and share ideas to develop a concept.

How much innovation will this unleash? “I’ll make it as simple as possible,” McQuivey writes in Digital Disruption. “Imagine that with all the free tools and platforms available… we get 10 times as many people bringing innovative ideas to market – a highly conservative estimate. Then assume that the average cost to develop and test those ideas falls to one-tenth as much per idea as in the past (also conservative). The result would be 100 times the innovation power.”

FERROKIN

FerroKin is a young start-up that develops molecules with just 11 researchers working from their homes and outsourcing lab work. Because of their small scale and infinitesimal overhead, they can focus on molecules with smaller paybacks that big pharma couldn’t even consider because of their massive infrastructures.

Models like this have huge appeal to investors. Today’s investors are getting more and more frustrated with the return on investment (ROI) offered by large pharma. Large pharma investors supply massive injections of cash for results that are becoming renowned for mediocrity. Some $135 billion is spent annually in R&D and all that money turns out only about 30 drugs a year. Then investors must sit idly by and watch as Pfizer crushes a 750,000-sq-ft facility in Groton, CT, seemingly throwing money into the wind, and Astro Zeneca closes an R&D lab in Atterly Park, then opens a half-billion dollar facility in Cambridge, MA.

What returns investors do eek out of large pharma are largely gained by increasing the cost of treatments. There is a ceiling, however, to what can be charged per treatment. At some point, people just won’t/can’t pay it. It’s like a roulette table. Gamblers who lose at the roulette table try to double down on their next bet in an effort to earn their money back. When they lose the second bet, they’ll double again on the next bet. This is called the Martingale Gambler’s Ruin. Every casino sets a house limit on each table. Such a limit protects the house against bankruptcy. Society, similarly, will come to protect itself from healthcare bankruptcy. What is that house limit? 40% of GDP? 60% of GDP?

If the proof of FerroKin’s virtual strategy lies in its sale price, then the evidence is convincing. Shire bought this little company a few months ago for $100 million upfront with promises of as much as $225 million more coming for reaching certain milestones.

RISING TO THE TOP IN THE DIGITAL SOUP

If there was a clear way to grow some legs or fins and rise up out of the soup, I’d be too busy making millions of dollars to write this article. But McQuivey does offer some pointers that seem like reasonable starting points.

Becoming a digital disrupter is all about mindset. It’s not about individual technologies so much as the way that people who truly operate in the digital world think. In the digital environment, tools are free and ideas are openly exchanged, explored, and expounded upon. Digital technology is making the corporate meeting room, and in fact the office, obsolete (take note, commercial real estate investors). Such open access to markets and ideas eliminates traditional barriers to entry and advantage. Any company that is not embracing this new mindset is missing a fundamental ground shift.

What is this mindset precisely? “Relying on their altered sense of reality, digital disruptors innovate differently, building different products, using a different model for partnerships to make it all happen,” McQuivey writes.

Put yourself in the shoes of your customer, McQuivey advises, and design your product accordingly. Don’t make huge “pie-in-the-sky” jumps into new products and systems; move “adjacently” by making slight adjustments to existing products and gradually shifting into new territory. I’m not sure Steve Jobs would’ve agreed with this approach, but for a lot of people, this is sound strategy. He then recommends, “depending on convergent adjacencies” and “persisting on the path to innovation.” Through this process, he develops an essential understanding of innovative ideas and delivers a total product experience that “wraps around and through a product, even a very analog product, to amplify, expand, and digitally redefine the way customer experiences the product.”

Digital Disruption is not a book about new technologies. You can find that information anywhere. It is, however, a solid grounding in the processes that companies can use to identify and capitalize on some of the opportunities that surround them in the digital soup – opportunities just waiting for someone who understands the digital context and can turn the proliferation of new and cheap ideas into products.

Derek G. Hennecke is President and CEO of Xcelience, a CDMO in formulation development and clinical packaging located in Tampa, FL. Mr Hennecke launched Xcelience as a management buyout in 2007, and the company has more than doubled in size. Prior to starting Xcelience, Mr. Hennecke worked for DSM as a turnaround manager in the global drug development community, managing an anti-infectives plant in Egypt, technical and commercial operations in a JV in Mexico, and a biologics facility in Montreal. He developed the formulation and business strategy of several drug compound introductions such as clavulanic acid, erythromycin derivatives and Tiamulin. A Canadian, he covets the Florida sun, but can’t be kept away from the rink for long. He is an avid fan of the Tampa Bay Lightning.