Holding Fast (HBR Case Study and Commentary)



Reprint: R0506A

CEO Peter Walsh faces a classic innovator’s dilemma. His company, Crescordia, produces high-quality metal plates, pins, and screws that orthopedic surgeons use to repair broken bones. In fact, because the company has for decades refused to compromise on quality, there are orthopedic surgeons who use nothing but Crescordia hardware. And now these customers have begun to clamor for the next generation technology: resorbable hardware.

Resorbables offer clear advantages over the traditional hardware. Like dissolving sutures, resorbable plates and screws are made of biodegradable polymers. They hold up long enough to support a healing bone, then gradually and harmlessly disintegrate in the patient’s body. Surgeons are especially looking forward to using resorbables on children, so kids won’t have to undergo a second operation to remove the old hardware after their bones heal, a common procedure in pediatrics. The new products, however, are not yet reliable; they fail about 8% of the time, sometimes disintegrating before the bone completely heals and sometimes not ever fully disintegrating. That’s why Crescordia, mindful of its hard-earned reputation, has delayed launching a line using the new technology.

But time is running out. A few competitors have begun to sell resorbables despite their imperfections, and these companies are picking up market share. Should Crescordia join the fray and risk tarnishing its brand? Or should the company sit tight until it can offer a perfect product?

Commenting on this fictional case study are Robert A. Lutz, vice chairman of product development at General Motors; Clayton M. Christensen, the Robert and Jane Cizik Professor of Business Administration at Harvard Business School; Jason Wittes, a senior equity analyst covering medical supplies and devices at Leerink Swann; and Nick Galakatos, a general partner of MPM Capital.

Now remember, with every blow of the hammer, you’ve got to feel the femoral nail advancing through the bone. If you don’t, then for heaven’s sake, stop. It might be impinging on the cortex or it might be too large for the canal. Keep whacking, and you’ll fracture the cortex.” The trainer’s calm, authoritative voice boomed out across the room as a dozen orthopedic surgeons toiled away on the cadaver limbs laid out before them. Pausing to observe the technique of one of the surgeons, he glanced up to see his boss, CEO Peter Walsh, crack open the door and squeeze through, trying his best to be unobtrusive. The trainer glanced at the clock. “Okay, let’s save some of this fun for the afternoon,” he called out. “We’ll meet in the lobby in ten minutes and walk over to lunch.”

In addition to making a range of products from artificial hips to scalpels, Crescordia was one of a handful of major companies that developed, manufactured, and sold the steel and titanium plates, nails, and screws—known as fixation devices—that surgeons used to repair broken bones. At least twice a month, Crescordia hosted training sessions like this one for orthopedic surgeons who used the company’s products. Walsh joined the group for lunch as often as possible. It was a great opportunity to connect with the physicians and hear firsthand what they liked and didn’t like about Crescordia’s products. Besides, he just plain enjoyed their company. Trauma surgeons tended to be brilliant but down to earth. With their hammers, saws, and drills, they were as much carpenters as they were doctors. Maybe because so many of the cases they saw were the result of bad luck, they had a certain perspective on the world. They tended to joke a lot when they got together, and if you could tolerate some morbid humor you found yourself laughing along.

After the air-conditioned chill and formaldehyde odor of the lab, the heat of the summer day was a welcome change. Strolling along the paved path to the cafeteria, one of the surgeons launched into an account of a difficult case he’d seen that week. “Get this: The guy’s a conductor—you know, with a symphony orchestra—so he really needs that wrist action.” The surgeon flicked an imaginary baton upward by way of illustration. “So, of course, what does he manage to break his very first time on Rollerblades?” Walsh winced in sympathy. “On top of that, it’s the same wrist he fractured five years ago, falling off his podium—and it was fixed that time with a distal radius plate.” The rest of the group made sympathetic noises; no one liked having to remove old plates to implant new ones. “But wait—it gets worse. He’s from Europe, just came here last year. And his surgeon must have fancied himself on the leading edge, because that plate was resorbable. Or, shall we say, it was supposed to be.”

Now a great groan went up from the group, to the clear satisfaction of the surgeon. Everyone had a mental image of what he must have encountered, and it wasn’t pretty. The idea behind resorbable hardware was a good one. Like dissolving sutures, resorbable plates and screws were made of biodegradable polymers that held up long enough to do their job—to support a healing bone—then gradually disintegrated harmlessly into the patient’s body. The first and second generations of the technology were far from perfect, though, as the surgeon’s case and many like it made clear. After five years, there should have been nothing left of the plate in the conductor’s wrist—the key words being “should have.”

“Let me guess,” another doctor chimed in. “It looked like the hull of the Titanic in there.” He sighed and shook his head. “And who knows if the resorbables on the market today are any better?” Walsh stiffened slightly and cleared his throat, anticipating what would come next.

Sure enough, someone posed the question right away. “So, when is Crescordia going to make a resorbable fixation system? You guys would do it right. Finally, I’d have the confidence to use the darn things on a regular basis.”

Everyone looked at Walsh, but his response was as noncommittal as ever. “I wish we could give it to you today. But believe me, the science just isn’t there yet. There’s a reason those products are so buggy. And we wouldn’t waste your time selling them to you. Our reputation—and yours—means too much to us.”

“ Believe me, there’s a reason those products are so buggy. And we wouldn’t waste your time selling them to you. Our reputation—and yours—means too much to us.”

Walsh then adroitly shifted the topic to what Crescordia would introduce next, and the conversation moved on. He relaxed again when they arrived at the bustling cafeteria and he could play host, offering pointers on what the various stations had to offer. As the trainees reconvened at the dining tables, Walsh sized up his seating options. Taking care not to spill his soup, he squeezed past a table with a group debating World Series prospects and joined a couple of surgeons who were obviously talking shop. One of them was using his turkey roll-up to describe a femur fracture he’d recently fixed. “So right here’s where the blade plate had to go in,” he was saying as he pressed a plastic knife through the pita. The fellow beside him interrupted. “And we’re in a lateral position, right?”

“Yeah, yeah. Need to get the posterior exposure for this one.” The surgeon guided the blunt plastic point expertly past a layer of Havarti and flicked at some shredded lettuce. “And the question is, Are these fragments here going to take to lag-screw fixation? Because, if so, that’ll save me a lot of work.” He studied his subject intently for a moment, then shoved it into his mouth.

Walsh laughed. “So much for that case!” he said. He wished he could eat with these guys every day.

Fixated on Quality

Later, in his office, Walsh returned to the challenge of resorbables. There was no question they would be great if they were reliable—and indeed Crescordia, along with many of its competitors, had been working on that problem for years. But were they ready for prime time? During internal trials, they still tended to fail about 8% of the time—sometimes disintegrating before the bone had fully healed and sometimes not fully disintegrating at all. Not exactly Six Sigma.

Unfortunately, not every company was so fussy. Walsh remembered the day back in the 1990s when he was stunned to find out that Innostat, an upstart competitor, was ready to launch a line of resorbable plates and screws. Walsh was confident he had the best scientists and R&D facilities in the business; could some geniuses have beaten them to the punch? Soon enough, the truth became clear, though it was only a partial relief: The product was even worse than what Crescordia could have put on the market at the time. Walsh made a strategic decision not to enter the fray and instead channeled resources into developing next-generation steel and titanium hardware. As the resorbables failed to deliver on their promise, Crescordia’s market share and reputation grew.

But orthopedic surgeons, who’d been hearing for years that resorbables were right around the corner, were eager to use them. Some especially looked forward to using resorbables on children, so the kids wouldn’t have to undergo a second operation for removal of the hardware after the bones healed, a common procedure in pediatrics. In patients of all ages, old plates and screws could sometimes shift or come loose, causing painful protrusions. Just enough of the current generation of resorbables worked, it seemed, to keep Innostat in business and everyone else in the industry continuing their research. Even Walsh had to admit that, were he a surgeon, he might occasionally take the risk of using a resorbable.

But Walsh wasn’t a surgeon. He was the CEO of a company whose products were respected throughout the industry. Thanks to decades of refusing to compromise on quality, there were orthopedic surgeons out there who used nothing but Crescordia hardware. The company simply could not afford to do something and not do it right.

Under Stress

Walsh arrived at his office the next morning to a typical flurry of meetings, conference calls, and paperwork. It was ten o’clock before he found a chance to pop down to see Gary Miskimen, his head of R&D. Miskimen was in the testing lab at the moment, his assistant told Walsh. She offered to page him.

“No, no,” Walsh said. “I’m heading that way anyway.” Soon after, he found Miskimen and one of his managers, both in pristine lab coats, looking on as a technician operated one of the company’s servohydraulic fatigue testing machines. The technician clamped a long, slender, metal screw into place, picked up her strain gauge and started the test.

Miskimen filled Walsh in, murmuring, “The new cannulated screw versus the standard cortex screw.” They stood staring, scarcely breathing, as the tension built and built more. Finally, the screw snapped. Miskimen’s eyebrows rose. “Not bad,” he said. The technician grinned.

Miskimen turned to Walsh and gave him a proper greeting. “And what brings you down to the lab on this fine day?”

“Actually, I was just curious to know if there was any news on the resorbables front,” Walsh answered. “I know we’re not due for a status update, but the subject came up yesterday.”

Miskimen looked to the manager beside him. “We just finished some trials on the latest prototypes, didn’t we?” The manager hurried off to get the data.

“Don’t get your hopes up,” Miskimen said, as he and Walsh followed at a more measured pace. “It’s not perfection.” They walked along in silence for a few moments. Then Walsh spoke up.

“I think it may be time to step up our efforts. Let’s say we delay those new compression plates and put Wilkins on the case and maybe Sid Stratton…” Walsh glanced at Miskimen for a reaction.

Miskimen rubbed his close-cropped beard, then shook his head. “Peter, the truth is we’ve done as much as we can with resorbables in the lab. I know you don’t want to hear this, but we’re not going to know what we need to know to make the product better until we get it out in the field. We need to get it into the surgeons’ hands.”

“And into the patients’ bodies,” Walsh said with a sigh. Miskimen was right; it wasn’t what Walsh wanted to hear. But Walsh knew enough about the science to know Miskimen wasn’t just making excuses. Metal plates were relatively straightforward to test. They were inert, nonreactive with body tissue, so what you saw in the lab was what you’d get in the human body. The whole point of resorbables, on the other hand, was to be reactive—to interact with the body and dissolve over time. But every body was different and it wasn’t possible to replicate every individual’s physiology in the lab.

The Governing Body

A week later, as Walsh approached the boardroom door for the executive committee meeting, the atmosphere seemed charged. Everyone had a strong opinion on the main topic the committee would be discussing today.

Probably most excited to see resorbables back on the agenda was Jane LaMott, vice president of sales. Walsh noted how antsy she seemed during Miskimen’s R&D update and, as soon as Miskimen finished, gave her the nod to lead off the discussion.

“In the past few months, three of our top-tier accounts have placed substantial orders with Innostat,” she said ominously. “And here’s the kicker: They weren’t just for resorbables. They included metal devices directly equivalent to ones that we sell.” She went on to offer her analysis. These were surgeons who were doing some experimentation with resorbables, which they couldn’t procure from Crescordia. “And once they turned to Innostat for resorbables—well, the camel’s nose was under the tent.”

Walsh leaned forward in his chair. “That’s an important point, Jane. Having a resorbables option, even if limited, might prevent market share erosion in other areas.”

Chief marketer Diane Robinson took her cue. “I couldn’t disagree more,” she said. “Our market share is a function of our reputation for quality. If we put out a product that isn’t up to our standards, will people trust us with the rest of the product line?” She gave LaMott a conciliatory look. “Perhaps if we could move into this new technology in a very limited way—”

“Can’t do it,” Rob Bond piped up. As chief operating officer, he was acutely aware of the complexity of a new platform launch. “If we enter the market at all, we’ll need to do it with the full set of implants—plates and screws in all relevant sizes—plus the hand and power tools to attach these implants.” He nodded in LaMott’s direction. “And you’ll need an education offering to support them. And none of it has a chance of profitability if we can’t scale production.” That sent the group into a discussion of the retooling and inventory levels required, which quickly devolved into side debates.

“One conversation, folks,” Walsh reminded them, then noticed that Miskimen was waiting patiently for the floor. He invited him to speak his mind.

“What about targeting just the pediatric market for a start?” Miskimen suggested. “It’s a smaller range of sizes, and, from my perspective, it offers the greatest potential benefit to doctors and patients.”

LaMott looked at Miskimen gratefully. “Not to mention the biggest source of demand,” she said. “If there is one thing surgeons hate to do, it’s to go back in on a kid to remove an implant. They get no credit if it goes right and a huge headache if it goes wrong. That’s a terrific idea.”

“ If there is one thing surgeons hate to do, it’s to go back in on a kid to remove an implant. They get no credit if it goes right and a huge headache if it goes wrong.”

Up to this point, legal counsel Sam Maddox had hung back, observing the back-and-forth with an air of detachment. Now he made a face as though he were smelling sulfur. “Let me get this straight,” he drawled. “We have a product that is probably substandard. We’re expecting it to get better based on what we learn in the field. And our human guinea pigs are…children? Sounds like a field day for tort lawyers. Can’t we try it out on old people or something?” He frowned thoughtfully. “Then again, I’m not sure I want my mother suing us, either.”

What’s In It for Us?

Walsh was glad he’d put the item on the agenda, even though the discussion was far from conclusive. The group tabled the resorbables debate until the next meeting, with various people promising to scare up relevant data.

The next day, however, Walsh had a morning of work scheduled with CFO Calvin Westbrook, and it struck him that Westbrook hadn’t weighed in.

“I don’t know, Peter,” Westbrook admitted. “I’m no expert, but at this point I question the whole resorbables idea. Scientists have been promising us results for 20 years, and what do we have to show for it? It reminds me of that joke about Brazil: It’s the country of the future—and always will be.”

Walsh smiled. “But I think we’re getting close. What if the market does materialize? It will be very fertile for whoever gets it right. I want Crescordia to be the one to make that happen.”

“Well, there again, I’m not so sure,” Westbrook said. “I was thinking about this last night. Let’s assume the very best scenario—that we are the ones to get it right. Our resorbable implants succeed in the field and become the product of choice. Then, everyone responds and we see a gradual shift to the new technology. As I see it, we may be no better off.”

“How’s that?” Walsh asked.

“The margins will be only slightly better. But the retooling needed to make resorbables will be a huge capital expense.” He sat for a few moments silently, letting Walsh ponder the point.

Walsh raised his head finally and stared at his colleague intently. “I get what you’re saying,” he said. “With the rest of the industry making no headway, why be in a hurry?”

“Exactly,” said Westbrook. “Why usher out a golden era?”

Should Crescordia launch a resorbables offering?

Robert A. Lutz is General Motors’ vice chairman of global product development.

Certain aspects of Crescordia’s dilemma feel all too familiar for those of us in the auto industry. First, there’s the advice from legal counsel predicting “a field day for tort lawyers,” words that cause senior executives everywhere to tremble. America’s litigious culture has created a society in which a child’s Batman cape carries a label that reads, “Warning: This does not enable the user to fly,” and nobody seems surprised.

I’ll put it as gently as I can: Contingency fee lawsuits and sky’s-the-limit punitive damage awards are cancers eating away at society. Until there is considerable and meaningful tort reform in this country, true risk-taking innovation—the kind that moves a society forward in giant leaps—will suffer. The auto industry knows that as well as anybody else.

Another familiar enemy of innovation comes up at the very end: the all-powerful Voice of Finance. The CFO deftly pleads his case: Why make the huge capital expenditure necessary to innovate when we’re already on top and the competition isn’t making any headway?

That’s a classic example of left-brained thinking shooting its pencil-sharp arrows straight into the heart of right-brained creativity. When all is said and done, more good ideas are snuffed out in the name of the bottom line than there are dollars saved in doing so. The best companies balance perspectives from both sides of the brain when making decisions. That way, the CEO has the greatest possible input before deciding whether to play it safe or leap into the fray. The creation of the Dodge Viper when I was at Chrysler is a good example.

The best companies balance perspectives from both sides of the brain when making decisions.

The Viper wasn’t new technology by any stretch. It was good, old-fashioned, American V-10 power. But it was a radical idea and certainly disruptive. There were those at Chrysler who, quite rationally, thought the budget could be spent more prudently. Let’s face it: We weren’t exactly printing money at that time. But those of us who looked at the idea from an emotional, right-brained perspective saw what the car could do for the company. Sure, we could’ve spent another $100 million on a glitzy ad campaign or on refurbishing our plants, but how would that set us apart from any other automaker? In the end, we decided to take the risk.

If I’d had any lingering doubts that we’d done the right thing (and I didn’t), a Wall Street institutional-investor analyst put them to rest. In 1991, two years into the Viper program, he asked what we’d cut if things started going south, and I soberly replied, “Viper.” “My God,” he said. “You can’t do that! This car’s changing everyone’s perception of the company. It’s reestablishing confidence. It’s the last thing you should cut!” And he was absolutely right.

Automotive hybrids are another good example of the need for careful balance. You have to weigh the questionable business case that hybrids present versus the reputational benefit of connecting emotionally with consumers and breaking new technological ground. The same applies to the fuel cell issue. Once a company like GM commits itself to hydrogen fuel cells as the future of automotive transportation, it will have to go at it the way we’re doing it—full throttle, no excuses, large investment. We know exactly how Peter Walsh feels when he says the market “will be very fertile for whoever gets it right. I want Crescordia to be the one to make that happen.”

Now, I’m not saying that all decisions should be based on right-brained thought. Risks need to be carefully calculated, not foolishly hazarded. But it takes instinct, common sense, creativity, and a risk-taking mind-set to know when to take the plunge—any plunge. The problems occur when the left-brainers wield too much power in senior management.

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School in Boston. He is the author of several books, including The Innovator’s Dilemma (Harvard Business School Press, 1997). Most recently, he coauthored Seeing What’s Next (Harvard Business School Press, 2004).

Resorbable implants are a textbook example of a disruptive technology—my term for products that promise to render current technology obsolete but that aren’t yet good enough to be used in mainstream applications. Therefore, Crescordia stands at the fork in the road that all established companies face when a disruption emerges in their industry. One possible direction to take is to commercialize the disruption as a sustaining technology that helps the company’s mainstream customers do what they’re already doing, only better. The other is to commercialize it as a disruption.

The sustaining direction entails keeping the technology in the lab and spending large amounts on R&D until the new product is better than the existing technology. This is the direction Walsh favors when he suggests that it’s “time to step up our efforts” on the R&D front. He knows that his current customers—the ones looking for high quality and reliability—won’t buy resorbables unless they are at least as good as metal implants on traditional metrics of performance and better on new metrics. Of course, as CFO Calvin Westbrook anticipates, the rewards and drawbacks for going down that path are mixed. Crescordia could spend millions to perfect the technology, only to watch it cannibalize the current product line and provide little growth beyond that. In many ways, then, this is a defensive strategy. The motivation is: “If the technology ever becomes good enough to start displacing our permanent implant technology, then, by gosh, we’re going to be there.”

Pursuing a disruptive strategy is harder. It requires competing against nonconsumption—finding applications where implants historically haven’t been possible because of the complexity, cost, or unfavorable characteristics of permanent implants. From my reading of the case, it appears that the pediatric market may offer just such applications. If, as the vice president of sales notes, “one thing surgeons hate to do [is] to go back in on a kid to remove an implant,” then it’s probably true that many orthopedists opt not to use implants at all on young bones. The beauty of using resorbables in pediatrics is that, although they don’t attain the same level of perfection as established offerings, surgeons will embrace them because they are much better than nothing. And the howling packs of tort lawyers will be held at bay for the same reasons.

If history is any guide, the technology will take root in these applications. And if Innostat or some other upstart seizes that turf first, it will be in position to make the products better and better and, ultimately, to invade Crescordia’s original market—a very attractive endgame for the company.

So the question for Crescordia isn’t whether it should follow a disruptive strategy. The question is how. Overwhelmingly, the evidence shows that the only way to address such a market is to create or acquire an autonomous business unit, including a new sales force that can target the new applications. This is what IBM did, with great success, when it entered the minicomputer and PC markets. Johnson & Johnson, similarly, has transformed itself repeatedly over the past few decades, always by setting up or acquiring new disruptive business units.

The question for Crescordia isn’t whether it should follow a disruptive strategy. The question is how.

If Crescordia does not set up a resorbables business that is autonomous, the technology will be killed by a corporate sales force that is not motivated to seek new (and therefore small) applications. Instead, salespeople will try to sell that technology to existing customers in existing applications, because they think that’s their path of least resistance. From Crescordia’s perspective, that would constitute cramming a disruption down a sustaining path. And that amounts to a death march.

Jason Wittes (jasonw@leerink.com) is a New York–based senior equity analyst covering medical supplies and devices at Leerink Swann. In Institutional Investor magazine’s most recent survey of the best of the boutiques, Leerink Swann was voted best in the following sectors: biotechnology, medical supplies and devices, pharmaceuticals/major, and pharmaceuticals/specialty.

Medical devices companies often wait too long to put an emerging technology on the market. Clinical, intellectual-property, and industry trade-secret requirements often constrain them for years, and then they are forced to make a rushed, possibly irrational, decision on how to proceed.

In Crescordia’s case, at least two considerations should be persuading Walsh to move sooner rather than later into the resorbables business. First, even though most of Crescordia’s customers aren’t ready to embrace the technology, it is capturing the interest of an influential subset made up of more experimental physicians. Second, Crescordia’s investors assuredly expect the company to hedge its bets. In the face of a potentially disruptive competing technology, it must at least position itself to eventually capitalize on the opportunity.

Interestingly, we don’t see Crescordia’s management team contemplating one of the most common moves in this kind of situation—simply acquiring Innostat. Acquisitions are, of course, the most expensive way to finance R&D. If you buy early, it’s often unclear what you’re paying for, and if you wait for the technology to mature, you’ve waited too long and will pay a significant premium. But the reality of the industry is that smaller private companies do have innovation advantages—such as more focused management and a better talent pool attracted to the potential rewards (cashing out at the IPO)—that typically can’t be matched by larger, established companies. In this case, an acquisition would give Crescordia a jump-start into the business of resorbables, with the added bonus of eliminating a competitor. It’s worth considering.

An acquisition would give Crescordia a jump-start into the business of resorbables, with the added bonus of eliminating a competitor.

Unfortunately, whether it buys or builds the new venture, Crescordia will have to worry about Wall Street breathing down its neck. Publicly financed ventures are the worst settings for nascent disruptive technologies because the investment horizons are so short. In medical devices, the adoption curve for new technologies typically extends from three to five years. But investors aren’t that patient. They want to see measurable revenue generation on investment within two years. Given the inherent risks, it would be naive to expect public investors to pay or wait for investments beyond this horizon—especially when the profitability outlook is not significantly better than in Crescordia’s current markets.

The result of this conflict is that the successful, larger companies in the industry have become very good at sales and marketing and at product iterations in established markets where turnover is quick. But their track records in developing new, disruptive markets with slower turnover have proven abysmal.

The best solution for Crescordia is to shelter its investment in resorbables from Wall Street expectations. It can do this through a passive (less than 50%) investment in a new venture. That would give the venture itself significant autonomy—a benefit in attracting managerial and research talent—while still allowing Crescordia a measure of control. And Walsh can maintain Crescordia’s focus on serving its core group of physicians instead of alienating them with experimental, possibly buggy, products. Meanwhile, the new entity can appropriately develop resorbable technologies and serve the more experimental physicians.

Ultimately, this new business could begin to significantly encroach on Crescordia’s traditional business, but that is not a development to be feared. In fact, that is precisely when Crescordia should choose to exercise its option. Everyone would be well served at that point by bringing the resorbables venture into Crescordia’s organization, because the technology would be ready for prime time. The company would then need to shift its focus from development to selling into an established market, bringing Crescordia’s core competencies to the fore.

Nick Galakatos (ngalakatos@mpmcapital.com) is a general partner of MPM Capital in Boston. He has extensive experience in building new life-sciences businesses both as an executive in major pharmaceutical companies and as an entrepreneur.

What’s missing in this case is a clear sense of whether the resorbable products’ shortcomings are only a question of efficacy or also of safety. If the product is safe in clinical trials, and if the efficacy potential is there but not fully proven, then I would take the risk of launching it. That’s a fairly common approach in the pharmaceutical and biotech industries, given that (as it’s phrased in the case) every body is different, and it isn’t possible to replicate every individual’s physiology in the lab. On the other hand, I would certainly not take the risk if the product threatened to lead to safety problems. If things went wrong on that front, it would be very tough to recover.

I would certainly not take the risk if the product threatened to lead to safety problems.

Consider the challenge that the entire gene therapy sector has faced for the past six years. Gene therapy is a disruptive technology that promises to revolutionize the practice of medicine. With this treatment, a patient would no longer take drugs to control symptoms of a genetic disorder; instead, the therapy would control the expression of the therapeutic gene in the patient’s defective cells. But the several dozen companies pursuing that promise were dealt a stunning blow by the death of just one patient—a young man participating in a trial at the University of Pennsylvania in 1999. It seems that less-than-optimal clinical planning was to blame, but investors became extremely skeptical of the whole sector. Only now do we see the ill perceptions beginning to dissipate and some venture capitalists making contrarian bets.

Let’s assume, however, that Crescordia’s qualms are not fundamentally about safety and that the resorbables already on the market have produced no disastrous outcomes (beyond wasting surgeons’ time). In that case, the company is proceeding too cautiously. I am reminded of the sad story of a Cambridge, Massachusetts–based company called Genesis Pharmaceuticals. In the early 1990s, Genesis was a pioneer in the brand-new field of combinatorial chemistry. At the time, this was another disruptive technology; instead of the conventional drug-discovery method of focusing on one molecule at a time, the technology introduced the now common procedure of creating many, many molecules in parallel and rapidly screening them for desirable properties. The potential for accelerating drug discovery made every big pharmaceutical company sit up and take notice. Genesis’s missteps in bringing this new capability to market, however, cost its investors dearly. They netted less than $30 million when the company was ultimately acquired by Sphinx Pharmaceuticals (itself later acquired by Eli Lilly). The fact that Affymax—a Palo Alto, California, company that came up with the same concept a year later—was sold in 1995 to Glaxo Wellcome for more than $500 million gives a sense of the lost opportunity.

Today, of course, the big story in health care is genomics. Thanks to the study of the human genome, we now have a better understanding of human biology as an integrated system rather than a set of individual drug targets—and that is a profoundly disruptive shift. Surely companies that stand on the sidelines too long will suffer. They will see their business models overturned by the likes of Millennium Pharmaceuticals, probably the most aggressive player in the field. Since 1993, Millennium has completed large transactions with pharmaceutical companies and raised more than $2 billion to explore genomics. It has used the created value to buy companies like ChemGenics, LeukoSite, and COR Therapeutics and to accelerate its transition from a technology company to a product company. The strategy is paying off: In a business where it takes 12 to 14 years to go from concept to launch, Millennium already has two products on the market. It’s a great example of how upstarts can turn into major players in a hurry. Walsh should take note.

A version of this article appeared in the June 2005 issue of Harvard Business Review.


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