Does an industry’s past inform the future? Many digital transformation experts say no; that technology is rewriting the laws of industry. However, in the pharmaceutical industry, companies use well-defined, time-honored processes to develop new products and take them to market. So why is it that many pharmaceutical companies don’t study the past to inform their strategies for new product launches?
Taking a pharmaceutical product to market takes tens to hundreds of millions of dollars because of the extensive R&D, regulatory approvals, and marketing required. While the payoff for successful drugs can be enormous – Lipitor has notched sales of $150B for Pfizer; Humira, $109B for AbbVie; and Advair, $96B for GSK – the industry’s failure rate is as high as 60% and only one in 60,000 drugs is considered highly successful. Given the high stakes involved, our research team sought to deepen our understanding of the new product introduction (NPI) process and demonstrate how firms could deliberately increase value.
Past research on the pharmaceutical industry has focused on market conditions and the product development process. We sought to explicitly model the value created by new products during development, such as insights about the technology and markets, and after development, such as the response of customers, competitors, and other partners.
We analyzed data from 1,904 NPIs from 73 public firms between 1991 and 2015, which accounted for 68.8% of all products introduced during that time frame. We used robust panel-data econometric methods that account for endogeneity and unobserved heterogeneity to test our framework.
We used three key criteria: pace and irregularity, which explained the “how” of NPIs; and scope, which explained the “what” of NPIs. More precisely defined, pace refers to the speed of product introductions; irregularity refers to the lack of rhythm or consistency in product introductions; and scope refers to the spread of products across different product markets. Given that such a larger portion of product value is created post-introduction, we also included two sets of moderators, strategic emphasis, which is the ratio of value creation over value appropriation, and product complexity, or the lack of complete information about products.
- All three criteria – pace, irregularity, and scope – were required to create a robust model for NPI analysis.
- Pace has a diminishing return on firm value. Companies that introduce products too rapidly aren’t able to allocate appropriate resources and have little time to learn from introductions.
- Irregular introductions negatively affect firm value, leading to a decay in firm knowledge, due to technological obsolescence, incomplete transfer of information, loss of data, attrition, turnovers, and other factors.
- The relationship between scope and firm value is more complex than previously thought. The impact of new product introductions on firm value increases at a decreasing rate as the product scope of NPI increases.
- Strategic emphasis and product complexity negatively moderate the relationship between irregularity and scope of NPI and firm value.
Based on our research, a firm can increase its market value by $702M by reducing the irregularity of NPIs by 10% from the average irregularity. However, with complex product introductions, the same 10% reduction increases the market value of a firm by only $42M.
A firm that reduces irregularity by 10% and strategic emphasis by 10% can create an additional $21M (from the baseline of $702m) in market value, highlighting the value of the contingencies.
Increasing scope by 10% can drive $2.77B in firm value. However, the same 10% increase in scope with a complex product introduction can actually reduce market value by $870M (from the baseline of $2.77B).
Developing and introducing new pharmaceutical products is risky. Our research finds that a large portion of launch insights are developed post-introduction. Thus, firms that take a portfolio approach to product introductions learn the “why” of past successes and failures and can operationalize those insights to generate better results with each launch, scaling them over time. Managers should use our research to develop a product strategy that is balanced with regard to pace, irregularity, and scope and use key learnings to influence new product launches.
With pharmaceutical introductions it seems, the past is prologue.
Read the Harvard Business Review article based on this research
From: Amalesh Sharma, Alok Saboo, and V Kumar, “Investigating the Influence of Characteristics of New Product Introduction Process on FirmValue: The Case of the Pharmaceutical Industry,” Journal of Marketing, 83 (September).
Go to the Journal of Marketing