Big Pharma s New Leadership Formula Key Takeaways n Big Pharma s severe competitive and development challenges have serious implications on leadership. n Business development, clinical development and operational management leadership approaches are changing. n New and innovative leadership models are emerging, including pairing a CMO with an executionminded business executive with deep project management expertise and the hiring of lowcost manufacturing experts from outside the realm of Big Pharma. n Companies that understand and respond to these changing leadership needs will be better positioned than competitors to contend with looming cost and pipeline pressures. Innovations in business development, clinical development and operational management leadership By Jay Kizer Reports of the pharmaceutical industry s potential demise have not been exaggerated. Yet, the leadership and talent management impacts of and potential solutions to these challenges have been underreported and largely misunderstood. As numerous research firms and media outlets repeatedly emphasize, Big Pharma faces a grim prognosis. 1 The need for massive cost reductions and much greater research and development (R&D) efficiency places intense strains on companies business development activities, clinical development capabilities and operational efficiencies. These challenges spark the need for greater innovations in how pharmaceutical companies recruit and select leaders in these areas. In short, new leadership approaches are quickly becoming essential. Business development challenges have grown vastly more complex than the days when the activity simply translated to merging with other large companies or shopping for blockbuster drugs with multiple years left in their lifecycle. Successful clinical leadership now requires much deeper operational expertise and, perhaps, an operationally-minded executive partner to the chief medical office (CMO). A different set of operational skills those focused on wringing out much greater supply chain efficiencies than the industry has ever needed before is also becoming increasingly valuable. Large pharmaceutical companies that understand these impacts and respond with innovative leadership selection practices will be better positioned to contend with looming cost pressures and pipeline challenges that may cripple their competitors. Historic Challenges Big Pharma companies now need to reduce costs while simultaneously accelerating the pace of thinning new-drug pipelines. As one industry consultant put it, pharmaceutical companies are caught in a vise. 2 On the external front, generic competitors are poised to erase nearly $70 billion of annual U.S. revenue between now and 2012 1
Today, the emphasis in business development has expanded considerably. Large-scale M&A activity has given way to smaller, more targeted acquisitions of drugs, either via licensing arrangements or outright acquisitions. as the patent protection on nearly 40 major drugs expires. Those drugs include blockbusters like Merck s Fosamax (2008), Abbott Laboratories/Takeda Chemical Industries Prevacid (2009), Pfizer s Lipitor (2010) and Bristol-Myers Squibb/Sanofi-aventis Plavix (2011), among others. 3 In addition to imminent sales declines, Big Pharma also faces mounting cost pressure from payers, the government and consumer advocacy groups. The U.S. government became one of the industry s largest indirect buyers in 2006, thanks to the passage of Medicare Part D. And legal healthcare experts expect the government will soon use its leverage to drive down prices that already have been negotiated lower by private health plans with the Part D program. 4 Internally, the development of new drugs has steadily slowed during the past nine years. This marks a troubling trend in light of the fact that research and development costs continue to rise. The implications of this squeeze have been noted by various firms that track the industry, several of which have produced grim projections of their own. Datamonitor, a U.K.-based research firm, expects Big Pharma s annual sales to decline between 2011 and 2012. If that occurs, it would mark the industry s first revenue decline in almost 40 years. Moody s Investors Service last year dropped its outlook for the U.S. pharmaceutical industry from stable to negative. And recent reports from the U.S. Government Accountability Office (GAO) and the Pharmaceutical Research and Manufacturers of America (PhRMA) raised concerns about the declining number of new drug applications being submitted to the U.S. Food and Drug Administration (FDA). As the vise tightens, the magnitude of the risks confronting large pharmaceutical companies grows. Pfizer experienced the brunt of this dynamic when it pulled its Torcetrapib trial in late 2006. The company invested an estimated $800 million before pulling the plug on the drug, which was designed to boost levels of high-density lipoproteins (HDL, or good cholesterol ) and prevent heart attacks, in Phase III development. Leadership Impacts The Torcetrapib failure highlights the size of the bets that leaders are currently making. The magnitude of the risks created by cost and pipeline pressures is placing greater emphasis on different skills and capabilities within the leadership ranks of organizations. 2
To help bets pay off, Big Pharma companies must cut costs and speed the pace of innovation, R&D and, above all, the movement of new drugs through their pipelines. Those two demands necessitate what an industry consultant describes as specific and difficult-to-master organizational skills. The sooner Big Pharma companies acquire these skills, the consultant points out, the more likely they are to escape the double jeopardy of falling prices and stalled innovation. 5 The need for those capabilities is most acute in three areas: business development, clinical development and operational management. Executives in these areas must address a daunting collection of big questions, including: n How we can more efficiently drive products through the development cycle? n Where are the best places to spend our dollars while we have them? n Should we invest in sales and marketing or developing our own drugs? n Or, should we obtain the drugs from other companies, either through licensing or acquiring the company? n How can we greatly increase our supply chain and operational efficiency extending from the purchase of raw materials through the manufacturing, packaging and distribution of our products? New Leadership Models Providing the right answers to these questions requires many companies to implement a new set of capabilities within each of the following areas: Business Development In the past, an attitude that it s better to invent it here prevailed throughout most large pharmaceutical companies. As a result, business development strategies predominantly consisted of major mergers and acquisition (M&A) activity, which helped generate costsavings through headcount rationalization, as well as the acquisition of blockbuster drugs already on the market. The mergers primarily took place among large competitors. Drug-acquisition activities tended to target money-making drugs that still had multiple years left in their lifecycle before losing patent protection. Today, the emphasis in business development has expanded considerably. Large-scale M&A activity has given way to smaller, more 3
Job Title of the Future One of the most sought-after forms of leadership talent may reside in a job title that does not yet exist. As large pharmaceutical companies broaden their scope of potential molecule acquisition, chief medical officers (CMOs) must bring to bear more, and new, analyses focused squarely on pharmaceutical science. Yet, their company s expanding clinical development portfolios simultaneously demand greater project management and execution discipline directed toward the pharmaceutical business. These increasingly complex needs are pulling CMOs in two directions. This helps explain why the demand for CMOs who are both superstar medical doctors and top-tier operations executives has never been higher. Yet, the supply of CMOs who possess both skill sets is low. Additionally, the current demands on the position suggest that it makes more sense to pair the CMO with a peer who takes responsibility for all of the projects in the pipeline. This type of leader would come with top-notch business credentials excellent project management skills and a proven track record of operational execution, for example. Outside of the CEO, CMOs face the greatest pressure to ensure that their company is making the right bets on massive, make-or-break investments. It is a safe bet that there may be a better leadership model for improving the odds. targeted acquisitions of drugs, either via licensing arrangements or outright acquisitions. Given the major gaps in many drug pipelines, business development executives need to maintain a continually up-to-date and detailed awareness of products being developing within their own companies and within the development pipelines of competitors. This awareness also requires executives to consistently evaluate which of these multiple drugs, in various states of development, offers the best potential alignment with their company s strategic direction. 4
The most effective business development executives have their ears to the ground so that they can make the best decisions about filling pipeline gaps quickly and effectively. They truly understand the science of drug development, know which competitor s drugs would best address their company s Phase II and Phase III gaps, and keep close tabs on which competitors are gunning for those same molecules. These business development executives tend to complement deep scientific backgrounds with hard-core business experience. For that reason, the demand for business development executives with a biology degree and an MBA or, better yet, an M.D. and an MBA, continues to soar. Clinical Development Chief medical officers face more pressure than ever before to inject greater operating efficiency into clinical development processes. That demand holds true across other life sciences companies. Medical device and diagnostic companies, for example, also are redefining the skill set necessary to become a successful CMO. (For more information on this topic, see Korn/Ferry s recent whitepaper Chief Medical Officer A CEO s New Best Friend.) Large pharmaceutical organizations seek to bolster the CMO s traditional clinical skill set with stronger operational capabilities skills that focus squarely on execution and the ability to move multiple drugs through multiple clinical development processes more efficiently. As a result, the demand for medical doctors with business training and experience is on the rise. Some organizations are beginning to weigh the possibility of obtaining this blended capability by hiring a business executive with top project-management skills and a successful track record of execution to work alongside their CMOs to help facilitate the process. The most effective business development executives have their ears to the ground so that they can make the best decisions about filling pipeline gaps quickly and effectively. They truly understand the science of drug development, know which competitor s drugs would best address their company s Phase II and Phase III gaps, and keep close tabs on which competitors are gunning for those same molecules. This executive may or may not be an M.D., but must understand the clinical development cycle and serve as a super project leader of sorts. The position would be responsible for ensuring that all of the company s development projects are constantly moving forward. When issues arise, the project leader quickly spots and eliminates the obstacles. The reason this sort of leadership approach is being considered is simple: the cost of slow and inefficient clinical development has never been higher. 5
Change or Doom? How grave is the imminent sales drop confronting large pharmaceutical companies? Eli Lilly & Co. Chairman Sidney Taurel told The Wall Street Journal that he thought the industry is doomed if we don t change. Those changes extend to select areas of leadership that companies will rely on to help stave off performance woes. The following leadership areas are particularly ripe for innovative approaches: Capability n Business Development n Clinical Development n Operational Management Traditional Approach n Emphasis on home-grown R&D; mergers with other Big Pharma companies; acquiring moneymaking drugs with multiple years left in their lifecycle n Chief medical officer (CMO), an M.D., manages other M.D. s responsible for specific development projects n Intense emphasis on quality; supply chain management efficiency not treated as a priority New Leadership Model n Maintain a constant awareness of multiple products in development in companies throughout the world; emphasis on molecule acquisition and buying companies or licensing drugs to address Phase II and III gaps n CMOs with M.D. and MBA skills are highly sought after; much greater operational and project management rigor is brought to bear on development; executionminded business executive may partner with CMO n Intense emphasis on quality and a much greater need to achieve greater efficiency throughout the entire supply chain Operational Management In addition to increasing the efficiency of clinical development, large pharmaceutical companies also must boost the cost-efficiency of their operations throughout their entire supply chain. Quality has always represented the top priority of operational leaders within Big Pharma and all life science companies. And it remains so today, as recently illustrated by Baxter International s supply chain troubles in a Chinese factory. 6
However, the importance of reducing costs throughout the supply chain will intensify as Big Pharma seeks to maintain profits in the face of pending sales declines. This shift has created a need for operational leaders who understand the absolute importance of quality and also simultaneously possess the ability to deliver sizeable efficiency improvements that can help boost cash flows. These improvements must occur in the procurement of raw materials, manufacturing, packaging and distribution. Just as leading companies are exploring innovative models in clinical development leadership, so too are they weighing new approaches to hiring operational leaders. Searches for operational leaders are beginning to extend beyond Big Pharma to generics, where executives have extensive experience addressing the challenges that lower margins pose. Some companies may even begin to look outside of life sciences and healthcare to glean best practices in low-cost manufacturing and to consider recruiting leaders who helped devise these best practices. Some organizations are beginning to weigh the possibility of hiring a business executive with top project-management skills and a successful track record of execution to work alongside their CMOs. Some of these shifts may sound dramatic, and they should: the challenges bearing down on Big Pharma are momentous. These issues require bold responses, particularly in the area of leadership. Companies that act sooner and more effectively than their competitors will in five years stand the best chance of proclaiming that today s predictions of their demise were off the mark. Endnotes 1 Martinez, Barbara and Goldstein, Jacob. Big Pharma Faces Grim Prognosis, The Wall Street Journal, Dec. 6, 2007. 2 Tempio, Joe. Squeeze Play 2008: Price Pressure and Declining R&D Productivity, Pharmaceutical Processing, Jan. 2008, Advantage Business Media. 3 Martinez, Barbara and Goldstein, Jacob. Big Pharma Faces Grim Prognosis, The Wall Street Journal, Dec. 6, 2007. 4 Tempio, Joe. Squeeze Play 2008: Price Pressure and Declining R&D Productivity, Pharmaceutical Processing, Jan. 2008, Advantage Business Media. 5 Martinez, Barbara and Goldstein, Jacob. Big Pharma Faces Grim Prognosis, The Wall Street Journal, Dec. 6, 2007. 7
Jay Kizer is Global Managing Director of Korn/Ferry International s Life Science Market. Based in Dallas, Mr. Kizer has completed searches for CEOs, CFOs, board directors and other functional executives for leading biotechnology, pharmaceutical and consumer health clients. About The Korn/Ferry Institute The Korn/Ferry Institute was founded to serve as a premier global voice on a range of talent management and leadership issues. The Institute commissions, originates and publishes groundbreaking research utilizing Korn/Ferry s unparalleled expertise in executive recruitment and talent development combined with its preeminent behavioral research library. The Institute is dedicated to improving the state of global human capital for businesses of all sizes around the world. About Korn/Ferry International Korn/Ferry International, with more than 80 offices in 39 countries, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to identify, deploy, develop, retain and reward their talent. For more information on the Korn/Ferry International family of companies, visit www.kornferry.com. 8 Copyright 2008 Korn/Ferry International