A Study on Innovation Patterns and Business Model of Biopharmaceutical Industry

Abstract

The biopharmaceutical market has shown constant growth and attention from the global pharmaceutical industry. Due to the expiration of patents and declining profitability, companies in the conventional chemical pharmaceutical market face considerable challenges in their business models and in continuing innovation. Particularly, due to long development periods for innovative new drugs, as well as the constant increase in development costs, the decline in research and development (R&D) productivity has led companies to be unable to fulfill investor expectations. In such an environment, the biopharmaceutical market has grown rapidly, and many pharmaceutical companies seeking new engines of growth are expected to continuously expand their territories into the field of biopharmaceuticals. This study compares and contrasts the patterns of organization innovation in biopharmaceuticals, which are gaining increasing importance, and the patterns of innovation in conventional chemical pharmaceuticals. This study proposes a business model that can be applied to the development ecosystem for new biopharmaceuticals in the domestic pharmaceutical industry. First, to understand the patterns of organization innovation in biopharmaceuticals, it is important to define organization innovation, which comprises product, process, and strategic innovation. To better understand the biopharmaceutical industry, the study surveys extant literature to examine the characteristics of the pharmaceutical industry, the definition of biopharmaceuticals, and their differences with chemical pharmaceuticals. The analysis finds that compared to conventional chemical pharmaceuticals, biopharmaceuticals have characteristics that are more complex at the molecular structure level, and this complexity affects both the product and manufacturing process. To examine how such differences in molecular structure levels affect patterns of innovation, this study employs Utterback’s Life Cycle Model, the development of innovation theory, and related literature. Results show that contrary to the existing theory, which divides the product and process innovation, contemporary theories closely link the product and the process innovations. Additionally, these theories explain how developments of high quality processes have direct influence on the developments of products. This study examines such theories on the interrelationship between the product and the process, and confirms this interrelationship through empirical research on chemical pharmaceuticals and biopharmaceuticals. In addition, from the perspective of strategic innovation, this study examines the business model of Royalty Pharma, a patent aggregating company (PAC), which suggested the use of securitization, a new investment method that makes advance payments of future profits. This aims to address the hesitance of traditional pharmaceutical companies to invest in developing biopharmaceuticals and the resulting R&D productivity decline. This also helps biopharmaceutical developer (patent owners) attract investment funds, while freeing these funds for other development projects. Through Royalty Pharma’s royalty monetization model, the study identifies the structure of a virtuous cycle between the biopharmaceutical PACs’ roles and product development due to patent technology analysis capabilities and megafund formation capacity. Last, in order to account for the recession that the Korean economy is currently going through, this study examines the current state of affairs of the domestic bio industry through the patterns of innovation in chemical pharmaceutical and biopharmaceutical. Additionally, it suggests a business model appropriate for Korea based on the Royalty Pharma’s business model. Though it has much potential for growth, the biopharmaceutical industry is still an industry with a short history. The Korean biopharmaceutical industry is a market that is just taking preliminary steps, and in terms of developing new drugs, is technologically far behind advanced countries. New biosimilar companies in Korea are attempting to secure the biosimilar market first through an economy of scale strategy that has been widely used by domestic conglomerates. This strategy is one in which biopharmaceutical drug development is done on the basis of profits and knowledge gained by biosimilar development and sales, which mainly comprises process innovation. A Korean pharmaceutical company, which had recently succeeded in securing a large scale technology export order, is following a strategy of achieving milestones for T2 drugs and royalty income, instead of making new drugs on their own and licensing or selling directly to US and EU markets. In the case of biotech ventures, the most important element in the growth of the biopharmaceutical ecosystem, due to the lack of early investments, is that these often do not last over three years. If Royalty Pharma contributed to the development of biopharmaceuticals by resolving a translational block in T2, and those that have already received licenses, in the case of the domestic market, resolving the translational block in a T1 drug should be prioritized, as it goes from a basic research phase to a pre-trial phase. Therefore, the study suggests a model of royalty monetization for resolving a translational block in domestic T1 drugs. In conclusion, this study compared how conventional innovation models evolve by examining the patterns of innovation in biopharmaceuticals. It showed the relation between product and process innovation, and confirmed that this must be used in R&D strategy decision-making. The study also identified a PAC that positively contributed to the growth of the current biopharmaceutical market by distributing the early risks of biopharmaceuticals by using a business model that monetized intellectual property. In addition, from the perspective of organization innovation, based on the above study results, this study suggested a model for overcoming the limitations of the current domestic biopharmaceutical industry.