The patent cliff facing pharmaceutical companies has been staring down the industry for years, but even as companies now watch former blockbuster drugs tumble off its edge, many of those businesses still remain ill equipped to kick-start their drug pipelines with innovative new drug candidates, according to a new report from the Economist Intelligence Unit.

Consider:

The Economist Intelligence Unit, the research arm of the Economist magazine, based the report “The Innovation Imperative in Biopharma” on an industry survey of 282 life science company executives conducted in April. Nearly 60 percent of those executives surveyed were at the C-level or higher. RTP–based Quintiles, the largest clinical research organization, sponsored the research.

The Economist Intelligence Unit conducted the research and wrote the report, authored by Paul Kielstra. The Economist said that the report does not necessarily reflect the views of Quintiles.

(Read the report here.)

The patent cliff is here. Of the world’s 15 top-selling drugs in 2009, seven will lose patent protection this year and next. Generics companies stand ready to pounce with cheaper versions of those former blockbusters. The report finds that the companies most struggling with innovation are those with a “cultural attachment to existing practices.” Moreover, they’re wedded to a drug development model that relies heavily on internal R&D. In other words, they’re too stuck in their ways to effectively foster innovation.

“Right now, the industry is very much driven by fear rather than by ambition,” Dr. Wolfgang Soehngen, CEO of German biopharmaceutical firm Paion, told the Economist Intelligence Unit.

Cost is cited by most respondents – 47 percent — as the biggest impediment to improving their company’s product innovation. Time involved in drug and product development was second, cited by 38 percent of respondents; regulatory restrictions followed with 33 percent. Many companies are addressing these concerns by slashing their spending, which the report says is unlikely to lead to success.

“Simply starving an ineffective system of funds is unlikely to increase its effectiveness,” the report said. “Instead, the reorganizations that come with consolidation need to be accompanied by more fundamental change.”

The report does describe some new practices that show promise and notes that those companies leading in innovation are more likely to give their employees independence to pursue leads. Bristol Myers Squibb (NYSE: BMY) instituted “innovation awards” that give employees grants and time to pursue ideas of interest. Brian Daniels, senior vice president for global development and medical affairs, told the Economist that the hope is that some of the results will be of use to the company. Lundbeck, a Danish pharmaceutical company, communicates to employees success stories about people who take a chance. Recognition of innovation is an important way to foster it, the report said.

Many companies are looking outside of their organizations to do their work; 54 percent of those surveyed said they have significantly increased their use of partnerships or alliances in the last three years and 60 percent said that such relationships would increase significantly in the next three years. But the report notes that it is not enough to look outside of an organization. Companies must find the right partners and alliances that will work in concert with a pharma’s own existing internal R&D. Pfizer (NYSE: PFE), for example, has a Centers for Therapeutic Innovation program that seeks to partner with academic institutions that aim to translate basic science into medicine. In this “open innovation” model, both entities share research information and resources.

The report also urges pharma companies to fully exploit their intellectual properties, even if the commercialization that results is outside of the life sciences industry. An example is a new drink dispenser used by Coca-Cola (NYSE: KO) to mix up to 106 different beverages in the same size machine as a normal dispenser. The dispenser uses technology originally developed for inserting exact microdoses of drugs into an intravenous drip. With open innovation, ideas from other industries might also find a home in the life sciences.

Finally, the report suggests companies make better use of data to help their R&D efforts. Data analysis can be done on existing products and research to guide new innovation. The report says that 67 percent of “innovation leaders” say they use internal company data to support innovation.

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