Rethink the Model of R&D: Finding a New Way to Innovate

 The story: Founded in 1876 by civil war hero Colonel Eli Lilly, the company is one of the biggest pharmaceutical companies in the world. It was the first to produce on a large scale the pharmaceutical staples insulin (in 1923), penicillin (1943), and erythromycin (1952). It also brought to market the blockbuster antidepressant drug fluoxetine under the brand name Prozac, which became one of the biggest-selling drugs in the industry’s history.

A pharmaceutical company’s share price tends to be tied to promising new drugs in the pipeline. As a result, research is central to Lilly’s model and it retains thousands of PhD researchers to work on the molecular problems involved in bringing breakthrough pharmaceutical products to market.

The challenge: The company faced a dangerous deadline: a key patent would expire in August 2001, ending its exclusive patent protection on Prozac, a drug that was responsible for roughly one-third of annual sales.

A dramatic example of what might be at stake came in August 2000, when the company was stripped by a US court of almost three years of patent protection from generic competition. Lilly’s share price dropped by nearly one-third, erasing more than $36bn in its market capitalisation, in a single day.

In fact, it had already ramped up its research and development budget by 30 per cent in a quest to find the next blockbuster. But this was not enough to hire the additional 1,000 PhD researchers it estimated it would need to recapture the ground lost by declining Prozac revenues.

The response: In 1998, two Lilly employees had an idea for an internet-based problem-solving forum, which they dubbed “Bounty Chem”. In 2001, Lilly provided seed funding to help launch it, and a new independent company, InnoCentive, was set up.

Lilly then posted difficult chemical and molecular problems on the InnoCentive forum and offered to pay for solutions. By making the site open to any scientist with an internet connection and posting the problems in several languages, the company created a global, virtual R&D talent pool that soon found answers to problems that had stumped its own, in-house researchers.

One of the beauties of this strategy was that Eli Lilly paid only for those solutions that worked, with the amount depending on the complexity of the problem. Awards have been as high as $100,000, but most are $2,000-3,000.

Thanks to contributions generated by InnoCentive, Eli Lilly created new drugs – including Cialis, a longer-acting competitor to Viagra, Pfizer’s 1998 market blockbuster – and its share price rebounded. Other companies followed its lead, including Procter & Gamble and Dow Chemical.

Key lessons: First, the best way to solve a problem is often to skip it altogether – in this case, bypassing the problem of funding new in-house researchers by not recruiting any. This is not denial, avoidance or procrastination, but a way of teasing new and previously unseen solutions out into the open.

By conventional analysis, Lilly’s problem was lack of funding to add 1,000 inhouse PhD researchers. But lack of funds was not the real problem. Focusing on strategies to make up a budgetary shortfall would have obscured the true challenge – the need to solve more molecular problems in order to create new drugs.

Second, advances in technology make the impossible possible. By developing the InnoCentive online forum idea, Lilly was able to create a virtual “brain trust” that would have been economically impossible and logistically difficult within the confines of the existing company. Engineers and scientists from dozens of countries worked at solving the company’s molecular problems, without being onsite or on the payroll.