Thursday, October 25, 2012

Book Review: The Business of Healthcare Innovation

The Business of Healthcare Innovation, a new book edited by my friend Lawton Burns of the Wharton School, is a highly-recommended examination of four major business sectors developing innovative healthcare products—pharmaceuticals, biotechnology, medical devices, and information technology.

The second edition brings the analyses (mostly) up-to-date, so it’s a worthwhile and cost-effective purchase, even if you already own the 2005 edition. The chapter on mergers and acquisition is particularly useful. Experienced executives will appreciate the book’s focus on the big picture ideas, while everyone else will benefit from the broad strategic perspectives on each sector.

Read on for my review.

Each sector receives a chapter-length analysis that includes market structure, key players, product development, commercialization, alliances, business strategy, and growth prospects. The pharmaceutical and biotechnology sectors each have an additional analytic chapter. Here are the chapters:
  1. The business of healthcare innovation in the Wharton School curriculum
  2. The pharmaceutical sector: rebooted and reinvigorated
  3. Pharmaceutical strategy and the evolving role of merger and acquisition
  4. The biotechnology sector: therapeutics
  5. Biotechnology business and revenue models: implications for strategic alliances and capitalization
  6. The medical device sector
  7. The healthcare information technology sector
  8. Healthcare innovation across sectors: convergences and divergences
I particularly enjoyed Chapter Three. The authors ask whether mergers and acquisitions among pharmaceutical manufacturers are “…short-term fixes to the current challenges or serve as long-term solutions that will challenge the productivity frontier.” As the exhibit below shows, the number of transforming mergers—deals worth more than $500 million—has grown sharply over the past 20 years.

This chapter provides a fantastic historical perspective on this trend and the various deal rationales cited by pharmaceutical companies. The authors then examine the academic evidence with a detached, clear-eyed view. Alas, the evidence seems very mixed and even slightly negative. As the authors note: “Firm scale has little relationship with R&D intensity (inputs) and, at best, a small impact on R&D productivity (outputs)—arguably the two industry value drivers.” Hmmm.

The final chapter provides a nice capstone by looking at the dual challenge faced by all four sectors: “the invention of new technology and assuring its long-term clinical adoption by customers.” The discussion is framed around technological convergence—the development of products combining multiple technologies. Imagine new drug-device therapies or the smartphone-enabled medical devices.

There are a few drawbacks to this otherwise valuable book. As an edited collection, the book suffers from the lack of an integrated, coherent narrative viewpoint. The quality of individual chapters also varies. All chapters tell a “big picture” story, but some get mired in less-interesting (and rather basic) foundational material. And due to its academic publishing schedule, certain sections of the book are dated. Many data series only go through 2009 or 2010, and there are only two brief references to the Patient Protection and Affordable Care Act (PPACA).

Despite these minor reservations, I highly recommend The Business of Healthcare Innovation for anyone who wants to step back from the day-to-day and reflect on manufacturers’ strategic challenges.

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