Earlier this year an article in Forbes magazine discussed the much talked about ‘freshness index’ as the measure of corporate – specifically pharmaceutical – innovation. The basic idea is that a certain minimum threshold of company revenue should come from products that have been launched within the last five years. Furthermore, it is assumed that the greater the amount of revenue that comes from products that have been commercialised in the last five years, the better this is as an indicator of innovation.
By looking through the article, it is abundantly clear that the majority of big pharma revenue comes from products that are older than five years. In fact, only 10 per cent of global pharma revenue can be attributed to drugs that have been launched since 2007 and only seven global pharma players have been able to achieve the ‘magical’ 5-in-5 (5 per cent of revenue coming from products launched within the last five years). So, we know this is a difficult task to achieve. But what are the problems with this metric and what does, or more to the point, should this metric tell us.
Firstly, the mathematical theory surrounding this metric is messy. Who decided that we should be measuring five-year revenue versus overall revenue anyway? The five-year time period is arbitrary – it could be three years or seven years and the rankings would change. The threshold of innovation at 5 per cent is also arbitrary – it could be 2 per cent or 20 per cent and the number of companies deemed to be innovative would change.
We can all appreciate that metrics like this are merely guideposts and meant to provide directional insight and so we live with these arbitrarily established thresholds. What we cannot get past, however, is the fact that the freshness index can change dramatically depending on loss of exclusivity of top brands.
All things being equal, if older brands move to patent loss then newer brands represent a greater percentage of total revenue and, thus, a company’s total revenue can fall while their freshness index rises. So we need to be very careful with how we interpret such new-fangled indices as measures of innovation.
Assuming we can accept the mathematics, what should this metric tell us? Most would think that an innovation index reflects the health of an organisation’s R&D capabilities. While this is true, it is only a small part of the story. In fact, an organisation can have a well-oiled R&D machine that consistently excels at bench research, identifies new molecular entities with consistency and moves compounds through the various phases of development with alarming efficiency and still not meet the ‘5-in-5’ threshold. Why would this happen? Because the very nature of innovation is such that it cannot be the domain of one functional area. Companies that are innovative are systemically innovative. Innovation is pervasive throughout the organisation and across all functional areas.
So, if your R&D is up to snuff, then maybe your sales competency is stagnant. Or, perhaps, your marketing competency is moribund. Dare I say, perhaps your regulatory affairs competency is sub-optimal? The point is that a company’s freshness index (assuming we accept the math) is a function of the entire organisation’s skill sets – not just R&D’s. If your regulatory team can’t file on time or drags its feet responding to regulatory authorities, this will affect approvals, which in turn will affect revenue, and which undeniably impacts the freshness index. What if your market access/reimbursement specialists are unable to achieve public/private payer listings within established timelines? Wouldn’t this affect revenue, which in turn would affect the freshness index?
The very nature of innovation is such that it cannot be the domain of one functional area
Let’s face it, regulatory and market access/reimbursement are probably as fundamentally important to driving revenue for a given brand as any other functional areas within the pharmaceutical/biotech industry. What about manufacturing, distribution and service (for those in the medical device industries)? Without some serious attention to these core areas, revenue can be severely impacted by constricted capacity or consistent backorders and product shortages, which would, of course, adversely affect the freshness index. Similarly, sales and marketing can never be overlooked as areas within the organisation that drive revenue and, accordingly, need to be considered as key pillars in the innovation debate. A low sale share-of-voice or poorly thought out brand positioning, messaging, and tactical execution at the marketing level can kill a brand.
The next time someone wants to talk to you about innovation and the freshness index, remind yourself that this is simply one of many metrics used to examine a company’s current state. And, more than anything, remind yourself that if the conversation steers itself towards R&D as the only lever to pull to impact innovation within an organisation, the discussion is over before it even begins.
