To alleviate the symptoms of patent expiration, pharmaceutical companies need to start co-creating. It wouldn't hurt you to try it, too

By G. Michael Maddock and Raphael Louis Vitón

Are you struggling to break your addiction to a bad business model, or are you living in denial? Either way, admitting that you have a problem is the first step toward solving the problem.

Otherwise, it's an extremely tough way to make a living.

Pharmaceutical companies such as Pfizer (PFE) invest eight years on average developing and gaining regulatory approval to sell a new drug. Since patent protection lasts only 17 years, the company gets only about nine years of exclusivity. Once the patent (not patient) expires, any other company is free to use the formerly proprietary formula. Inevitably the original patent holder's market share falls by 89 percent in the first 6 months. IMS Health, a Norwalk, Conn., firm that does research on the pharmaceutical and health-care industries, estimates that from 2010 to 2013, pharmaceutical companies (often referred to collectively as "Pharma") will lose a total of $137 billion to patent expiration and generic competition.

That was not a typo—$137 billion.

What brought this to mind is the fact that the Pfizer drug Lipitor, an $11 billion-a-year brand that lowers cholesterol, goes off patent early next year. That has to be a tough pill for Ian Read, chief executive officer of Pfizer, to swallow.

MORE THAN PATENT PROBLEMS ABOUND

Unfortunately for Pharma, the bad news does not end there. As Will Suvari—Maddock Douglas's industry expert, who helped us think through all this—points out, if you dig a bit deeper, the problem for the industry is actually more challenging than just having limited patent protection.

Innovation is generally difficult in any industry, and creating new drugs shows just how hard it can be. Despite having spent a total of $64 billion in 2010, the industry received approval to market only 21 new drugs. It remains extremely difficult to make the research and development process move much faster. The parallel is this: Just because it takes one woman nine months to carry a baby to term doesn't mean you could reduce gestation to a single month if you were to involve nine women.

Big breakthroughs that were supposed to change things have not. The Human Genome Project, long predicted to bring about a new-product windfall for biopharmaceutical manufacturers, was completed in 2003. It has yet to produce a single commercially successful new drug.

If ever there was an industry ripe for innovation, this is it.

If the solution were applicable to the pharmaceutical industry only, we wouldn't have written the column. (The appeal would have been too limited.) What we are about to suggest could apply to your industry, too, once you conclude that the existing way of doing business doesn't work well.

CLIMB OUT OF THAT PILL BOTTLE

In our experience, industry paradigm shifts come from shifting your focus. Or as we like to put it: "You can't read the label if you're sitting inside the pill bottle." For Pharma, the most obvious "outside the pill bottle" advice might be to change the historical focus from "finding druggable targets" (what you and I call people) to locating target insights big enough to build a business around.

Why? When companies create the discipline to focus on needs first, technology second, they move from inventing to innovating. Said differently, they deliver a consumer-focused product and service and a business model that goes far beyond the product itself.

There are plenty of examples of this. Ask yourself: Is Starbucks (SBUX) really about the best coffee? Is Apple (AAPL) really creating the best computer? Does Southwest (LUV) fly better planes? Does Cancer Treatment Centers of America have access to better doctors or drugs? All these companies would be making less money and serving fewer people tomorrow if they relied only on invention.

We can feel you rolling your eyes. Your business is so much more complicated. No, it is not. Your competitors can make better planes, computers, hospitals, coffee, and medication. But if you richly understand your consumer's needs first, you will deliver an innovation—not an invention—that rises above patent protection. You will win because what you deliver makes it clear that you understand your customers and your consumers better than everyone else does.

We argue that a simplistic, yet ground-breaking, way for pharma to succeed is to start by looking at the needs of customers and consumers. Perhaps if Pfizer did this better, it might be able to keep 50 percent of the revenue that Lipitor currently delivers.

CO-CREATION INNOVATION

How? Often it is best not to go it alone. A strong partnership can help you see what you're missing and get results quickly. We call this co-creation—the practice of finding a synergistic partner and making something together. It is a 1+1=4 equation: win-win. It often creates unexpected unions and it's going to change our world for the better.

For Pharma, here's one hypothetical example of how it could work: "Readi-Clinic at Wal-Mart, Powered by Pfizer." Pfizer would not only provide the drugs—such as Lipitor—that the patients at the Wal-Mart (WMT) clinic would be prescribed. Pfizer also could devise a service model that would help customers change their behavior and habits with the goal of achieving exponentially better health results than could be obtained by relying on pills to do all the work. (Experts agree that it is unrealistic and irresponsible for companies and patients to rely on pills to fix everything.)

Pfizer (and Wal-Mart in our hypothetical example) could brand the combined service and product offering, which would not be so easily devalued when a patent on a drug expires and the generic comes to market. The combined offering managed by Pfizer and Wal-Mart would deliver the value and earn the value of the drug, but not the drug's exclusivity.

Note to Pharma CEOs: Your customers are enablers. They are condoning, even encouraging, bad behavior. Consumers need you to lead differently. Your contribution to the overall process of making human beings healthier starts with strategically refocusing your operations—not just shrinking them to the size of a pill. We absolutely believe you can integrate purpose and profit more deliberately toward a sustainable competitive advantage for your company while delivering inspiring outcomes for humanity. You can do it by rethinking your target insight, value proposition, and business model.

It starts by admitting you have a problem.

G. Michael Maddock is chief executive, and Raphael Louis Vitón is president of Maddock Douglas, an innovation consultancy that helps clients invent, brand, and launch new products, services, and business models. Maddock is author of the upcoming book Brand New: Solving the Innovation Paradox—How Great Brands Invent and Launch New Products, Services, and Business Models (Wiley, April 2011).

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