Pharma Gets Focused

In many ways, the challenges faced by the pharmaceuticals industry are similar in scope to those faced by other industry sectors. Compliance is a major watchword. There are struggles with the rising costs of bringing a new product to market. And those that don’t innovative don’t survive for long. So as the drug industry faces up to a tough operating climate, what can it learn from peers in other sectors? Business Management’s Louise Druce reports on how pharma is finding remedies in unlikely sources.

Turn the clock back a couple of decades and Big Pharma was seemingly untouchable. Companies were riding high on the success of their blockbuster drugs, raking in annual sales of at least US$1 billion while spending out a relative pittance (around US$231 million) to bring them to market.

It’s a very different story today. Bring a new drug to market and you’re looking at spending anything between US$900 million and US$1.2 billion. Unfortunately, this surge in costs has also coincided with a period when the blockbuster pipelines are drying up and generic drugs have flooded the market with cheaper alternatives. Compounding the problem is that fact that an increasing number of blockbusters are seeing their patents expire – experts predict of the 44 products generating blockbuster sales in 2000, 33 will lose patent protection in the US before 2007, exposing approximately US$45.5 billion of ethical revenues to generic competition.

Recent health scares have been another fly in the ointment. In the last decade, over 15 drugs have been permanently withdrawn from the market due to safety concerns, triggering tougher regulatory scrutiny. And no stone has been left unturned as the government turns Big Brother on sales and marketing practices, clinical operations and post-approval safety surveillance systems, signalling spiralling costs for those who want to survive by conforming.

The low point came in 2004, when the global pharma market failed to reach double-digit growth for the first time in almost a decade – and predictions for future growth did nothing to quell the air of uncertainty in the Big Pharma boardrooms. “Looking back two or three years, the industry was wrestling with a whole host of different issues,” says Simon Friend, Global Pharmaceutical Industry Leader at PricewaterhouseCoopers. “It was grappling with the pipeline issue, pricing, the regulatory challenges, as well as the impact of generics. At that point the industry was at the dividing line between the heady days of 20-30 percent returns to where we are now, and it was a watershed period in terms of how the industry would react.”

However, far from sounding the death knell for the ailing industry, Big Pharma realised that the way forward was reinvention by streamlining operations and looking at new ways to carry out the most purse-draining activities – without compromising standards. Research and development seemed an obvious first target.

“The healthcare market has been radically altered, the expectations of doctors and patients have advanced and science has progressed beyond recognition,” says John LaMattina, President of Pfizer Global Research & Development (PGRD). “That pace of change means we must effectively re-invent our R&D function every decade. One significant challenge is our industry’s consolidation. Today’s PGRD represents the combined strengths of Pfizer, Warner Lambert and Pharmacia, plus other smaller acquisitions. We believe our integration speed and sophistication set new and higher standards.

“At the same time, we developed new capabilities, better processes and improved structures to keep pace with emerging science and growing demands,” continues LaMattina. “From the outset, we sought not just efficiencies but new organizational structures designed to streamline the organization. For example, post-acquisition we saw opportunities to moderate our capital spending and develop more efficient information technology. The net result is the reduction of the combined capital and IT budget from almost a third of our R&D spend in 2002 to less than 17 percent of today’s budget. As a result, funds have been transferred to our development programs.”

This new philosophy has extended beyond capital and IT spending. PGRD has globalized the clinical supply chain management, safety sciences and infrastructure support systems. For example, pilot plant operations in Michigan and Connecticut have been consolidated into a single global center of excellence at its second-largest R&D site in Sandwich, UK. “The savings and efficiencies realized have surprised even us,” says LaMattina. “Modulated spending does not signal reduced emphasis on R&D. Instead it indicates greater efficiencies, generating more funds to invest in the pipeline.”

Looking outside the industry

Of course, Pfizer is not the only company to realize the business impact greater operating efficiencies can have on the bottom line. Robert Ruffolo, President of Research and Development for Wyeth Pharmaceuticals and Senior Vice President at the drugs giant, has taken it one step further. He believes the key to survival lies in looking beyond the usually closed ranks of the pharma industry to learn lessons from peers in other professions; indeed, Ruffolo is in the process of hiring a handful of process engineers from industries such as airlines, electronics and automotive to help develop more cross-functional skill sets and bring in fresh ways of tackling old problems. After all, he argues, the major pharma companies are all hiring from essentially the same talent pool. It is time for a new mindset.

“I’ve said this to my peers before,” he asserts. “I am not going to learn anything from Pfizer, GSK, BMS or even from what we have done internally here with Wyeth. However, I do think I can learn from other industries that have gone through hard times and have had to change, like the steel industry in the 1970s, the automotive industry in the 1980s, computers in the 1990s and airlines post-9/11.”

Merck also took the lead from other large firms outside the pharma industry to change its ordering and delivery procedures for goods such as syringes and thermometers used during clinical trials through Six Sigma analysis. By identifying vendors and employing dedicated purchasing staff, among other things, it was able to make significant cost savings by freeing up scientific staff who were spending valuable time ordering products.

One of the main arguments among industry professionals is that R&D operations in big pharma have been inefficient in the past decade because companies are often just too big to be controlled. Which is why Ruffolo, ever the innovator, is also not shy to outsource some functions within R&D. “The key here – and I think this is where our industry sometimes gets it wrong – is that we always think we are so special and so different. We are reluctant to give anything up,” he said. “There are some things about us that are so special and so different that we can’t give up, but there is a lot that we can. And every time we have done this, we have ended up building better processes because we had somebody else do it better for us, more cost-effectively and with higher quality.”

A pioneering move was to partner with Accenture, a global management consulting, technology services and outsourcing company, to cultivate an organizational culture within Wyeth’s R&D operations. This was focused on personal performance accountability by better coordinating the efforts of its four research centers. The result was a team-based structure that crosses functions and allows for the appropriate level of delegation and empowerment. Accenture also helped implement a new governance structure that focuses senior managers on a single set of principles and improves their accountability.

To measure progress, performance metrics were designed for both individual R&D employees and groups, and amalgamated in a comprehensive balanced scorecard that provides a quantitative method of assessing performance on a quarterly basis through web-based technology that simplifies data collection.

“Once you start measuring things and telling everybody you’re measuring them, that gets your employees’ attention,” says Ruffolo. “When we put our metrics-based system in place, we saw enormous improvements in output because people knew we were looking, measuring and holding them accountable – even to a point where we linked a component of their compensation to performance against pre-specified objectives based on those metrics. Our improvements in output were almost instantaneous, but we also had to change the organisation in order to sustain it.”

There is an obvious flaw in putting employees under a constant, watchful eye – the temptation to cut corners to ensure their targets are met. Obviously, this could have dangerous consequences not just for the company but also for patients. Realising this, Wyeth made sure measures were put in place to weed out sub-standard products. “We put quality standards in place so that nobody could put low quality drugs out just to hit a metric. Then we changed the entire organisation,” he said. “We literally ripped apart every part of R&D, starting with drug discovery the first year, then pre-clinical development the next year, then early clinical development the year after, then late critical development the year after that, and then regulatory affairs and some other groups.

“In the six years since we introduced metrics we have not only sustained growth, we’ve increased it. By the end of this year, discovery output will be up 500 percent and preclinical development output will increase 800 percent from where we started.”

Joining forces

Alliances, buy-outs and licensing with related fields such as biotechnology are also emerging as increasingly critical strategies to access innovation in novel areas of science and new products in different therapeutic areas. “The collaboration between the biotechnology industry and the pharmaceutical industry will continue to increase because the pharma industry recognizes that innovations in R&D are particularly strong in the biotech field, while the pharma industry is relying on other things such as regulatory clinical development, patent filing and so on,” suggests Capgemini Life Sciences’ Senior Consultant Dr Aldo Ammendola. “Novartis, for instance, is entering a new field via its acquisition of Chiron. Other companies are looking at other small biotech firms. And this will be the future way to concentrate knowledge and research and discovery in large pharma companies.”

This doesn’t just benefit big pharma – farming out R&D is also proving a ripe cherry picking option for mid-sized pharma companies. According to Datamonitor, 44 percent of mid-pharma revenues in 2005 were from products discovered outside their own pipelines and analysts forecast revenues from products discovered by external sources will reach 49 percent by 2010 based only on the deals already in place.

Most in-licensing deals are for the right to develop and market the drug, which gives acquiring companies a greater share of the financial returns. But mid-sized pharmas also are brokering distribution and product acquisition deals. “Compared to big pharma, mid-pharma companies tend to have a narrower focus in a particular dimension – often in terms of therapy or geography,” says Datamonitor analyst Brett Scottorn. “By selecting a mid-pharma partner that specializes in the same therapy area/geography as the product, the source company is maximizing its chances of commanding a higher price, because the partner company should be able to pay a high price and yet still extract value for its shareholders by exploiting the good fit/synergy that the product offers.”

Big pharma certainly hasn’t been left out in the cold though. In comparison, Datamonitor statistics show that the number of licensing deals signed by the top 20 pharma companies has risen 16 percent in the past five years. It also predicts more dependence on licensing over the next five years that will see big pharma claw back over US$100 billion in ethical sales from licensed products by 2010 – double the figures in 2002.

In-licensing and acquisitions are certainly major drivers of Pfizer’s pipeline. This year alone it acquired biotech company Rinat Neuroscience and announced a development and licensing agreement with France-based NicOX. In addition, it is collaborating with Germany-based NOXXON to use its proprietary technology to create product candidates to targets identified by Pfizer. “In 2005 we reviewed over 400 licensing or acquisition opportunities. If there is a candidate available for licensing, you can bet we’ve taken a look at it,” LaMattina admits.

There are companies on the other side of the fence who argue that mergers and acquisitions can contribute to a slow down in R&D productivity. Speaking earlier this year at the Scrip R&D Productivity Summit in London, Ruffolo quoted a Cambridge Healthtech study that revealed that R&D productivity is reduced by almost 50 percent three years post-merger. But many big pharmas such as Pfizer, GSK, Merck and Wyeth are recognizing the need to change their R&D models, be it through outsourcing or creating centers of excellence to foster drug discovery.

Ruffolo concludes: “Alignment around a common vision is the cheapest way to improve R&D productivity. The problem is scientists are tougher to align than any other group of employees.”