Unraveling the DNA of Technology-Based Businesses

By Robert Gunther

The Mack Center BioSciences Crossroads Initiative addresses the real-time challenge of building businesses from life science research.

As Terry Fadem strides through the hallway of the John Morgan building on the campus of Penn’s Medical School, he pauses a moment in front of a display case. He points to what looks like a small sandwich bag with a few dots of color embedded in it. While at DuPont several decades ago, Fadem had helped take this self-contained diagnostic test from the laboratory to the market.

This test, a breakthrough in medical testing when it was developed, now seems almost as quaint and anachronistic as the famous 1889 Thomas Eakins painting of an operating theater that normally hangs just down the hallway in the nation’s oldest medical school. Science has already progressed so rapidly that Fadem has seen his work go from breakthrough to commercialization to historical artifact in the course of a few decades. And the pace is only quickening, driven forward by the lab work of more than a thousand researchers toiling in a rabbit warren of inauspicious-looking laboratories in more than a dozen medical school buildings at Penn. These labs are unraveling some of the deepest secrets of life to create new tests, cures and products that could change our lives in fundamental ways.

“If I had to pick the place to be that I consider the most exciting,it is where I am sitting right now,” said Fadem in his office in the Morgan building. “We are sitting at an intersection of two worlds.”

Fadem, Managing Consultant of the BioSciences Crossroads Initiative of Wharton’s William and Phyllis Mack Center for Technological Innovation (established through a $10-million grant from William L. Mack, W’61) and Director of Corporate Alliances at Penn’s Medical School, has one foot in the world of research and the other in the world of business. “In the past few years, there has been this explosion of knowledge around biology—right here in this research building around us,” said Fadem. “But the application to practice is a big concern. In the academic setting, if it works on one patient, that is great. But converting that to benefit hundreds of thousands or maybe millions of patients is the challenge, and for that you need a commercial partner. At the medical school, we are looking at a path on this side of the fence—what are the scientific markers and the research telling us? But there is expertise around the corner at Wharton about the business and commercialization process. What are the markers and mileposts along that path?”

The Genetic Material of Emerging Technology Businesses

These questions at the intersection of science and business have been the focal point for researchers at the Mack Center since the establishment of the Wharton Emerging Technologies Management Research Program in 1994. While scientists were busy decoding the mysteries of the human genome, teams of Wharton researchers from diverse fields were tackling the complex business questions related to new technologies: How do firms effectively evaluate technologies, develop alliances, establish really new markets, manage intellectual property, design organizations and plan investments to take emerging technologies from lab breakthrough to commercial success? In the process, Wharton researchers had explored lessons from the rise of the Internet, biotechnology and other emerging technologies.They gathered their resulting insights and frameworks into a series of industry-academic conferences, research papers and the book, Wharton on Managing Emerging Technologies

Then, they decided to tackle an even more difficult challenge. Instead of looking backward to the emerging technologies of the past, they wanted to turn their attention to a real-time case as it unfolds. While it may be easier to be a Monday morning quarterback, it is much harder to understand the plays on the field, particularly one so complex, fast-moving and fluid as biosciences. In addition, after looking for general lessons across a variety of technologies, Mack Center researchers wanted to look more specifically at a smaller subset of technologies. The BioSciences Crossroads Initiative was born to look at technologies such as genomics, proteomics, bioinformatics or stem cell research.

“The Emerging Technologies program has been a great success, but we are looking for the next stage in our development,” said George S. Day, Geoffrey T. Boisi Professor, Professor of Marketing, who co-directs the Mack Center with colleague Professor Harbir Singh. “The idea of the BioSciences Crossroads Initiative is to take the lessons we learned and apply them in this emerging domain. We tended to study patterns of success and failure in technologies that had already emerged. Now we want to anticipate how an emerging technology might unfold before it emerges. We are living in it as it evolves. It’s a way to ‘stress test’ our concepts. We’ve developed this knowledge, and now we want to take it into a different domain and see what happens. The science is very deep, and we are fortunate to have the link to the medical school. We also are grateful for the generosity of Bill and Phyllis Mack, which has been absolutely critical.”

Managing Uncertainty

There are few commercialization challenges that could provide more “stress testing” than biosciences. The pace and direction of the science, payoffs, applications and public acceptance are all uncertain. “We realized that most of this is about managing uncertainty,” Day said. “Uncertainty is the hallmark, which makes emerging technologies so much harder to handle. It is not clear whether the payoff is going to be in traditional markets such as pharmaceuticals or through traditional channels. Will there be killer apps? Will they be in diagnostics or therapeutics, agriculture or industrial processes? We don’t know where the fallout is going to be.”

Researchers and executives who have lived through earlier technology revolutions have a healthy appreciation of the complexity of how these technology revolutions unfold.Fadem recalls the whipsaw of hope and heartbreak during the surge of bio-technology in the early 1980s and the revolutions in agriculture and life sciences in the early 1990s led by companies such as Monsanto. “We were going to remake the world with biology, but that didn’t happen,” Fadem said. “It came and went like a tidal wave and left a lot of people bankrupt.”

Insights from past technology revolutions can be a guide, but they must be applied judiciously. Every technology has distinctive characteristics and a distinctive development path. “There is no one industry experience from the past that quite fits the biosciences, so we need a kaleidoscopic view to mix and match from other fields,” said Mack Center Research Director Paul Schoemaker. “It is not the Internet all over again. It is not biotech all over again. We need to identify the salient characteristics of these technologies that have an antecedent. One of the biggest pitfalls in this work is that people make use of superficial analogies.” To study these uncertain environments in real time, Wharton researchers also need to use different tools such as scenario planning and options thinking to examine potential paths for the unfolding of science and businesses. The initial scenarios the Mack Center is creating, with the help of diverse experts, are designed around the key uncertainties of the advances in science and the acceptance of the new technologies and products in society.

One Certainty

Despite all the uncertainties about the progress of the science and applications, there is one certainty: bio-sciences will have a very significant impact on business and society. By all accounts, these sciences are already the basis of a huge business, and becoming even bigger. Biotechnology generated more than $34 billion in revenues in biotechnology in 2001. By April 2003, there were more than 1,400 biotech companies with a market cap of more than $200 billion.

It has been only 50 years since James Watson and Francis Crick made their pioneering discovery of the double helix structure of DNA. Already, more than 325 million people have been helped by more than 155 biotechnology drugs and vaccines approved by the U.S. FDA. These technologies have shown up in applications including drugs and diagnostic tests, criminal investigations, agriculture, microbes for cleaning up hazardous waste and everyday products such enzymes for laundry detergents and home pregnancy tests.

“I would characterize this as physics in the beginning of the nuclear physics age,” Fadem said. “Physics was just beginning to expand in all different directions, and that age gave rise to a huge number of engineering opportunities. We’ll have things that never existed before as a result of all this.”

The impact will be even more far reaching. While much early attention has focused on pharmaceutical and other human health applications, managers in almost any industry need to pay attention to these developments. Think about fabrics programmed to destroy bacteria and odors or DNA molecules on silicon chips taking the place of traditional microprocessors. “These advances in biosciences will impact any business whose value function involves organic matter,” Schoemaker said. “That is almost everyone.”

Ebbs and Flows

Funding is one of the big uncertainties. In a field with great hype and long development cycles, some investors rush in and then lose patience. Biotech firms lost more than $100 million in collective market capitalization between 2000 and 2002. “The flow of capital has not been reliable and the industry has had ebbs and flows,” said Steve Sammut, WG’84, Venture Partner at life sciences venture firm Burrill & Company and Senior Fellow in Wharton Entrepreneurial Programs. “Whenever we are on the brink of significant downsizing and consolidation, something unexpected happens and the market rushes back in. “There is intense interest from large pharma companies, anxious to strengthen their pipelines as billions of dollars of drugs go off patent. Another potential source of additional funds for the industry today is the government’s renewed focus on bioterrorism. The recently announced U.S. government Bioshield project promises to invest $6 billion in the area, three times the public dollars devoted to the human genome project. “It is one of the largest allocations for biotech that we’ve seen the government undertake,” Sammut said.

Given the high uncertainty and the time it takes to get products to market, there is still a shortage of investment in early-stage projects. “This life cycle development has forced investors into much later stage opportunities,” Sammut said. “This leaves a huge gap earlier in the development cycle.” The industry’s diffused and organic growth in academic labs and small firms in the U.S. and around the world makes it even harder to see where the next important developments will come from. For investors, it also makes the process of determining a company’s clear grip on intellectual property difficult and expensive. “There are thousands of companies and they all have patents and proprietary interests in areas that are of interest to them,” Sammut said. “The good news is that humanity is enormously productive. The bad news is that it creates a level of uncertainty that is probably unprecedented.”

Second Decade Success

One of the lessons Fadem has learned over his years of taking products from lab to market is that it takes a surprisingly long time to move from scientific discovery to viable business. At DuPont, they estimated it took an average of 17 years to go from a research discovery to a viable business, a phenomenon Fadem has dubbed the “second decade success.” While research in the lab moves quickly, it takes a much longer time for businesses to develop, society to accept new things and the infrastructure to be built to support these innovations. “The Wright Brothers flew their airplane in 1903, but how long did it take before the public was willing to trust airplanes and build airports and infrastructure?” Fadem said. Given these lags, timing is critical and the risks are high. It is very easy for companies to arrive with too little too early, or too much too late.

“Even moving at light speed—and we are willing to pay the price and push technology faster for things that are critical to our health—it is still going to take close to a decade not just to get it out to the market but to make it a success,” Fadem said. “If a scientist had a true invention this morning, it would still go through years of processing to get out to the market.”

The long gestation periods for the science and commercialization add to the complexity and risk. “This is indeed a more difficult domain in some respects largely because of the testing regime and long, long development cycles,” Day said. “It is a high risk area and it is very tough to do this. Even bounding the domain in time and scope is difficult. Uncertainty is what makes emerging technologies so much harder to handle, and we are pushing the envelope on uncertainty with the biosciences.”

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