Intellectual Property and the Dairy Industry: Securing Innovation for Competitive Advantage Scottsdale, AZ 2/7/06 James G. Conley Professor Kellogg School MEDS, McCormick IE, ME Kellogg Center for Research in Technology & Innovation Visiting Faculty Schulich School, York University, CANADA Keio University Graduate School of Business, Tokyo, JAPAN Recannati Graduate School, HTMS, Tel Aviv University, ISRAEL Otto Beisheim School of Management, WHU, Vallendar, GERMANY Fundamental Question In a world that is increasingly flat and information transparent, how does a firm secure investments in innovation to assure growth and advantages accrue to the investing stakeholders? How does our economic system incent innovators to take risks? Founding Father’s solution… from farmers U.S. Constitution: Article 1, Section 8, Clause 8 “The Congress shall have power….To Promote the progress of science and useful arts, by securing to authors and inventors the exclusive right to their respective writings and discoveries….” Note that this is part of the original Constitution! The Bill of Rights came as amendments. IP regimes for inventors analagous to vote for citizens, use it or lose it! ““Skills Skills and knowledge have become the only source of sustainable competitive advantage. ” advantage.” ––Lester Lester Thurow, Economist All Rights Reserved 2006 Page 4 Intellectual Capital and Intellectual Property The Intellectual Capital of a Firm Human Capital Intellectual Assets Documents, Lists Ideas, Drawings Experience Programs, Data Inventions Know-how Processes Relationships Skills Creativity Corporate memory Intellectual Properties Patents Trade Secrets Copyrights Trademarks, Trade Dress A pathway for organized workflow All Rights Reserved 2006 Page 5 An industrial age economist finds a home in the information economy (cont.) “innovation… the carrying out of new combinations… is the key to entrepreneurial profits…. [innovation] is the only way to create new economic value over the long term.” Joseph A. Schumpeter 1934 Note: New Economic Value = Wealth Creation, Growth, Jobs, Prosperity National policy should thus incent innovation and invention… Firm level policy should incent innovation and invention ! ! ! All Rights Reserved 2006 Page 6 From Michael Porter’s What is Strategy? Harvard Business Review, 12/1996 ““the the essence of strategy is choosing to perform activities differently than rivals do …..a do…..a company can out perform rivals only if it can establish a difference that it can preserve ” preserve” All Rights Reserved 2006 Page 7 How do firms preserve differentiation and or sustain competitive advantage? Defendable property rights in ideas, inventions and and knowledge!!! The Intellectual Properties ¾ Functional ideas/Inventions Patents ¾ Expression of ideas/Innovations Copyrights ¾ Source of ideas/Innovations Marks/Dress ¾ Confidential Information Trade Secrets All Rights Reserved 2006 Page 8 Intellectual Property (IP) Continuum of Protection (maps to product life cycle) Patents 17-20 years Copyrights 70-100 years Trade Names Trade Marks Indefinite Life of Property Protection High Functionality No Functionality Functionality ….a Framework for Innovation Life Cycle Management All Rights Reserved 2006 Page 9 Value Transference: The premeditated use of multiple IP regimes across the product life cycle to achieve sustainable differentiation !!! Dynamics of Value Transference Time Value of Property !!The dreaded “Shark Fin” Curve!! Adopted from Keith Bockus, 2000 All Rights Reserved 2006 Time Value Patent Value Trademark Value Page 10 Maintaining IP – Power Extension through Value Articulation Transference Brand Expression Function Product Diversification M&A Joint Venture Strategic Venture Licensing End User Transportation All Rights Reserved 2006 ASP Derivative Products Supply Chain Integration Translation Page 11 CASE STUDY: Astrazeneca and the Purple Pill Prilosec… a blockbuster – Inhibits Proton Pumps in the Stomach, treats GERD, Ulcers, etc. First drug in its Class (ppi) 2000 global sales $6.2 billion, U.S. sales $4.62 billion (Oh joy!) – >1/3 of AstraZeneca’s revenues Patent extension expires in October 2001……. When generics are introduced sales plummet… the dreaded shark fin curve…. All Rights Reserved 2006 Page 12 Prilosec: The Purple Pill A US$ 6 billion/year global blockbuster drug…… with patent expiration on the original compound set for CY 2001 All Rights Reserved 2006 Page 13 Business Issue: How to Extend the Differentiation and Competitive advantage of Prilosec?! All Rights Reserved 2006 Page 14 Prilosec, the Purple Pill! and Nexium, Today’s Purple Pill ! All Rights Reserved 2006 Page 15 Prilosec/Nexium DTC advertising 2002-2005 Prilosec brand elements: Color purple, first mover in ppi technology, relieve the heartburn Nexium brand elements: Color purple, relieve the heartburn AND heal the damage, better is better. Can we leverage any of these elements to address cost based competition? All Rights Reserved 2006 Page 16 Value Transference: The premeditated use of multiple IP regimes across the product life cycle to achieve sustainable differentiation !!! Dynamics of Value Transference Time Value of Property !!The dreaded “Shark Fin” Curve!! Adopted from Keith Bockus, 2000 All Rights Reserved 2006 Time Value Patent Value Trademark Value Page 17 And the Generics Strike Back!!! often undertaken in response to as a paragraph 3 or paragraph 4 action Nexium (Esompemrazole mg) launched in Q1/2001 Oct 11, 2002- Judge Barbara Jones ruled against Andrx, Genpharm & Cheminor. KUDCO OK Oct 31, 2002 FDA issues shared exclus. to Andrx and Genpharm Early November 2002 Negotiations between Andrx, Genpharm & KUDCO ….alliance. Mid November 2002, Andrx & Genpharm relinquish their 180 day exclusive rights to FDA permitting other ANDA approvals… Nov 16, 2002- FDA approves KUDCO’s ANDA. KUDCO launched 10 & 20 mg products in Q1/2003 Shwarz Pharma (KUDCO) revenue increased by >200% in 2003, $1.2 billion from sale of generic Omeprazole. “Alliance” royalties pushed Genpharm to 2nd position in Canada All Rights Reserved 2006 Page 18 And AZ responds: AZ AND venture partner P&G pursue FDA approval for OTC Omeprazole 20 mg dose (most common prescription strength). FDA approval granted for OTC omeprazole in 20 mg does in June 2003 Aggressive launch of Prilosec OTC in with massive media campaign, purple trucks in 24 cities, “burntown challenge” See media clip All Rights Reserved 2006 Page 19 Pricing Strategies applied….: The Sandwich Strategy: market expansion through product and pricing innovations Nexium Product innovation: Better is better Price: $5+ /20 mg pill Generic Omeprazole, prescription required Price RANGE: $1.1 to $3.8/20 mg pill Prilosec pre-expiry Price: $4.0/20 mg pill Prilosec OTC Product innovation: Non-prescription perfect substitute for generic Price: $0.71/20 mg pill All Rights Reserved 2006 Page 20 All Rights Reserved 2006 Page 21 Patience with the portfolio approach pays off… And in Sales Growth both domestically and internationally. All Rights Reserved 2006 Page 22 Value Transference in Big Pharma All Rights Reserved 2006 Page 23 And where has all the Prilosec Gone?... Follow the color purple! From NYTImes 3/2/05 All of this success the result of a comprehensive, proactive NPD/marketing begun in 1995, seven years before patent expiry. More details on AZ “Shark fin” team in June 6 2002 WSJ article posted to courseinfo site All Rights Reserved 2006 Page 24 AZ Purple Pill CASE STUDY – Important Conclusions: Value Articulation on all dimensions, transference, translation, and transportation…. it really works. Leveraging the brand at both ends of the market brings about bigger revenue than pre-expiry… a completely counterintuitive result! NPD market planning should anticipate entrants of cost based competitors, planning for a follow-on product like Nexium should be premeditated. AZ/Prilosec/Nexium/PrilosecOTC market management a best practice example of how to manage brand/price marketing variables via premeditated IP tactical maneuvers in a competitive market. All Rights Reserved 2006 Page 25 How Does This Apply to the Dairy Industry? Same value transfer principles as Prilosec, executed differently… – Protection on unique formulations and manufacturing procedures – Strong brands can effectively circumvent standards of identity – Trademarks carry value-added meanings All Rights Reserved 2006 Page 26 Dairy Innovation: Dreyer's/Edy's Slow Churned Ice Cream Revolutionary Technology: Half the fat, one third fewer calories, consumer-preferred taste • involves no fat substitutes or artificial sweeteners The result of a five-year, $100 million R&D effort 68% sales growth of its light ice cream business in 2004 – Nearly 70% of Slow Churned consumers switched from a competitor's full-fat ice cream – Grew reduced fat ice cream segment 18% in 2004-2005 – The only ice cream category growing! All Rights Reserved 2006 Page 27 Dreyer's/Edy's Slow Churned Ice Cream: IP Underpinnings…. Proprietary technology – Patented? YES. – Trade Secret? Perhaps. Eight “slow churned” trademarks Significant investment in brandbuilding advertising Plans to extend technology to other categories Critical to building of $100 million plant expansion Key piece/rationale of Nestle’s strategy for acquisition. All Rights Reserved 2006 Page 28 Dreyer’s Patent application on slow churned process All Rights Reserved 2006 Page 29 Dreyer’s Patent application on extruder…. All Rights Reserved 2006 Page 30 Dreyer’s Patent application on extruder…. (cont.) All Rights Reserved 2006 Page 31 Dreyer’s dairy product (?) TM’s Filed 1/23/2006 for dairy AND non-dairy frozen products All Rights Reserved 2006 Page 32 From 9/19/05 intent to use TM applications All Rights Reserved 2006 Page 33 Founding Father’s solution… from farmers U.S. Constitution: Article 1, Section 8, Clause 8 “The Congress shall have power….To Promote the progress of science and useful arts, by securing to authors and inventors the exclusive right to their respective writings and discoveries….” Note that this is part of the original Constitution! The Bill of Rights came as amendments. IP regimes for inventors analagous to vote for citizens, All Rights Reserved 2006 use it or lose it! Page 34 Intellectual Property: DMI’s View & Current Activities Dr. Gregory D, Miller, Ph.D., M.A.C.N. Executive Vice President -- Innovation Confidential © 2006 Dairy Management Inc. All Rights Reserved. DMI: Renewed Focus and Direction New mission statement speaks very clearly to DMI’s role within industry: Purpose: On behalf of US Dairy farmers, drive increased sales of, and demand for US dairy products and ingredients Role: Work proactively, and in partnership with leaders and innovators, to increase and apply knowledge that leverages opportunities to expand dairy markets Research & Innovation are critical platforms for future growth of US dairy products & ingredients Confidential © 2006 Dairy Management Inc. All Rights Reserved. Why Now? Why Does DMI Care About IP? • • • • IP can no longer be ignored Increasing engagement by various entities Freedom of action Effective Commercialization & Sales/Demand-Building Increasingly, IP will impact the type and scope of research that can be undertaken Confidential © 2006 Dairy Management Inc. All Rights Reserved. Example: Licensing to Protect & Promote The Science • Licensed property – Create consistent equity that will accelerate consumer understanding and industry utilization. • Licensed science – Accrue value of weight loss benefit primarily to dairy. Confidential © 2006 Dairy Management Inc. All Rights Reserved. Why Do We Care About Commercialization? Science/ IP New & Improved Dairy Products Increased Dairy Sales Innovations “sitting on the shelf” don’t drive sales. Confidential © 2006 Dairy Management Inc. All Rights Reserved. IP: A Strategy, Not an Objective • For DMI intellectual property is a part of managing an overall Innovation/Research program – However, generating patents & licensing fees NOT a specific end-goal – But where DMI and universities see a valuable idea, steps should be taken to capture this value and effectively protect, license, and promote it Increased sales & demand remain DMI’s primary objective Confidential © 2006 Dairy Management Inc. All Rights Reserved. Intellectual Property: Summary • Engaging in IP is a critical piece of managing DMI’s Innovation program • Shared IP helps give Farmer Funders a voice in how the research they fund is commericalized • Managing IP will help ensure a relevant, robust research program Confidential © 2006 Dairy Management Inc. All Rights Reserved.