pharma in 2015 and beyond - · pdf filerequired in a knowledge-based economy—the default...

Pharma in 2015 and Beyond What Success Looks Like

Executive Summary

Table of Contents

INTRODUCTION 1

SHIFTING FOCUS 2

M&A: THE DEFAULT SOLUTION 3

FURTHER IMPACT ON INNOVATION 4

EFFECTS ON TALENT 5

FUELING INNOVATION 7

CULTURE OF INNOVATION 10

STRUCTURED FOR COLLABORATION 10

SUCCESS IN 2015 AND BEYOND 12

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© Right Management 2012. All Rights Reserved.

INTRODUCTION

While the U.S. pharmaceutical industry has historically enjoyed strong performance and growth, by the beginning of the new millennium, many pharmaceutical companies found their pipeline of new products drastically declining. Key contributing factors include the dramatic rise in the cost of Research and Development, as well as the growing need to focus on new, molecular-level treatments targeting specific disease states. This shift away from selling lots of pills to lots of people has changed both the discovery model and the sales model dramatically.

In the process, it also has altered the human capital equation for pharmaceutical companies. The next generation of research scientists will need to understand how the business operates and where money can be made. Successful sales organizations will require professionals with the skill set to articulate convincingly the value of new, high-cost genomic treatments. Compounding the situation is a rapidly shrinking pool of talent to drive new strategies and innovation, as well as the traditional organizational structures of large pharmaceutical companies that continue to silo talent, limiting innovation and engagement.

Rather than approach the problem of flagging pipelines from a systems point of view—embracing the new operating structures and strategic talent management required in a knowledge-based economy—the default solution has been to supplement new products through mergers and acquisitions. While this strategy held the promise of appeasing shareholders with better than average short-term growth and operational gains, many of these mergers did not provide the solid, sustainable benefits around innovation that American pharmaceutical and biopharmaceutical companies require to maintain their edge, especially against foreign competition.

Failure to retain and leverage top talent is a big part of the reason why. Many acquiring companies ignored the talent value chain in the process and lost sight of the long-term implications of the wholesale defections and drain of critical innovative knowledge that so often result. When companies lack appropriate talent planning, integration, and development, mergers and acquisitions actually can end up constraining innovation.

To investigate these and other emerging trends in the industry and determine what success will look like in 2015 and beyond, Right Management interviewed executives at 15 of the top global pharmaceutical firms about industry conditions, as well as their competitive business strategies for the next three to five years. We also looked at what successful companies are doing to remain innovative and competitive.

What we found is that the pharmaceutical companies stepping ahead and taking a leadership role in innovation tend to have knowledge-based organizational structures that enable the almost instantaneous sharing of talent, information, and learning. Their culture not only promotes open operational and discovery approaches but also establishes a view to the street that they are great places to work. As clear employers of choice, they attract and retain the best talent and effectively manage new discovery far more successfully than the competition.

Like the drugs and therapies it creates, the pharmaceutical industry is constantly evolving. But the changes at work in the current environment are especially daunting. Revenues are under pressure due to thinning product pipelines and billions of dollars in expiring patents. The industry faces the threat of increased regulation

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from the federal government, hand-in-hand with the expensive mandates of healthcare reform. Emerging markets around the globe offer both the hope of new opportunities and the challenge of new competition.

At the same time, the costs associated with Research and Development (R&D) are rising rapidly. In 2005, estimates on the cost of bringing a product from discovery to market ranged from $200-300 million. By 2010, estimates approached $1 billion. One factor is the growing need to focus on targeted treatments at the molecular level. This shift has raised the efficacy bar and created a barrier to the more traditional compounds approach. In essence, the business model has shifted away from selling high volumes of drugs to large, broad-based populations to a more focused, value-oriented strategy targeting specialists for specific disease states.

Companies that fail to address the impact of these changes internally in a systematic and results oriented manner can quickly lose pace and productivity. The pressure to anticipate and understand the new direction the industry is taking is intense. So is the need for pharmaceutical companies to make sure they have the right set of people on board who can operate—and, more important, innovate—successfully in this new environment.

To keep the discovery process on track, pharmaceutical companies will require the next generation of researchers to possess market-specific business acumen, as well as scientific prowess. Everyone from bench scientists to research, chemistry, and biology specialists will need to understand how the business operates and how to make decisions based upon economic trade-offs. On the business side, future pharma sales and marketing teams will need to take a more solution-oriented approach, articulating—in a clear and compelling way—the value of new genomic treatments where a single dose may cost a patient $40,000.

Right Management interviewed executives at 15 of the top global pharmaceutical firms that have used mergers and acquisitions as a strategy to supplement their product pipeline or improve their market share. We asked about current conditions, as well as their competitive business strategies over the next three to five years. We also studied innovative companies in the U.S. (technology, manufacturing, biopharmaceutical) and identified four major inputs common to all of them. Then we analyzed these factors globally in the pharmaceutical and biopharmaceutical sectors to see if having the same critical inputs in place is giving quick rise to biotechnology and research firms outside the U.S.

SHIFTING FOCUS

After decades of strong performance and growth, the U.S. pharmaceutical industry has been facing unprecedented pressure on its pipeline of new products. During the late 90s, the U.S. Food and Drug Administration (FDA) approved, on average, 35 New Molecular Entities (NME) per year. By 2010, the approval average had fallen to 21— despite the fact that approval times fell from 26 months in the early 90s to just 12.3 months by the end of the decade. Back in 1990, the 10 largest pharmaceutical firms controlled about 12 percent of worldwide sales, but by 2005, the ten largest firms accounted for well over 50 percent of total worldwide sales.

With the economic downturn and sluggish recovery further pressurizing the drug industry, there has been a subtle but important paradigm shift. In order to remain competitive in this high-stakes environment, the focus has moved from R&D to

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improving manufacturing and operational efficiency, sales and marketing technologies, and highly leveraged organizational structures driven by the mantra “less is more.” With all the resulting restructuring, downsizing, and consolidation, the largest pharmaceutical firms continue to operate at about one-half the P/E ratio of smaller, more focused biopharmaceutical companies and, more important, to lag in internally developed innovation

M&A: THE DEFAULT SOLUTION

For many pharmaceutical companies, an immediate, short-term solution over the past 15 years has been to supplement flagging pipelines through mergers and acquisitions (M&A). Typically these M&A strategies focused on acquiring R&D assets, but only from the standpoint of gaining cost advantage over the development lifecycle, i.e., avoiding the long and expensive costs of bringing a product from inception to market.

While this strategy held the promise of appeasing shareholders with better than average growth and decreased spend on R&D, the end-result did not provide the solid long-term benefits around innovation that pharmaceutical companies require to maintain their competitive edge.

Also, while M&A activity appeared to be a viable answer to lagging innovation and discovery, most strategies only focused on immediate operational gains and boosting sagging revenues. There was little regard for the long-term implications of high employee turnover and the loss of critical innovative knowledge that often result. When companies ignored the extended talent value chain, they struggled to maintain their market share. For these companies, the proof lies in the fact that their discovery pipeline has not improved or increased at the same rate R&D investment has.

The news isn’t any better for large pharmaceutical companies—once a source of strong shareholder returns and big profits. Ultimately, acquisitions focused primarily on acquiring pipeline have left big pharmaceutical up against the wall with dry pipelines, a dearth of top talent, fierce competition from generic manufacturers, consumer concerns about safety, false marketing claims, and the strong possibility that the government will have a greater say in purchasing and pricing models.

We acquired a biotech firm of approximately 200 people. Following the approval of the acquisition, our HR team flew out, explained the new benefits, trained employees on our self-service technologies, explained how payroll would move to twice monthly vs. weekly, and then expected for everyone to ‘get with it.’ Within six months, there were approximately 11 employees left.

— EVP, Business Development

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FURTHER IMPACT ON INNOVATION

Few industries are as dependent for growth on radical and discontinuous innovation as pharmaceutical. Of the top 15 global pharmaceutical firms interviewed for this paper, 12 confirmed that they have formalized “innovation initiatives” that are aimed at supporting their competitive business strategies over the next three to five years.

And with good reason.

Essentially a fully integrated pharmaceutical firm has just two fundamental activities apart from actual production: Research and Development, which is a labor- and capital-intensive activity that discovers new drug compounds and performs the necessary clinical trials to achieve regulatory approval; and the Sales and Marketing function.

Innovative new compounds approved by the FDA generally receive patent protection for about 12 years. Once these patents expire, generic manufacturers and competition step in, often times resulting in as much as a 30 percent loss of sales revenue to the original firm—unless the company can replace the expired patent with new product.

The fact that most of the body’s major enzymes—the foundational element for many drugs that target the population at large—have already been leveraged intensifies the pressure to come up with innovative strategies for broadening the product portfolio. What remains are unmet needs in discreet populations, where discovery is far more complex and the skills to develop them are even scarcer.

Despite investment in new technologies aimed at discovering unique drug therapies, the benefits may be years away, with a significant gap between available talent—the only asset capable of innovating—and leveragable technology. Research shows that there is a steady decline in population rates for specific skills directly connected to the potential for innovation and, therefore the potential for growth. A recent study published by Deloitte1 pointed out a massive skills gap occurring in science and engineering, including “the scientists and clinicians who discover and develop the blockbuster drugs that fuel pharmaceutical companies’ growth.”

If a pharmaceutical firm fails to replace its off-patent compounds with new discoveries, create new intellectual assets, generate license deals, or capture new product through acquisition, the sales and marketing function becomes unproductive and drags down profits at a very steep rate of decline. Often, this cycle is balanced with the rapid downsizing of sales, marketing, and discovery populations, resulting in a revolving door for top talent and a continued downward spiral in innovation. Most U.S. pharmaceutical companies found themselves in the middle of this cycle in 2011.

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EFFECTS ON TALENT

Most studies conclude that mergers create shareholder value, with the lion’s share of the gains being captured by the acquiring firm.2 However, there are no studies demonstrating that, over the long-term, these acquisitions have resulted in significantly better-than-industry performance or improvement in innovation and discovery. One reason may well be the lack of appropriate talent planning and integration.

While being acquired may be an attractive exit strategy for the founders and boards of small firms, generally the rank-and-file employees that chose the smaller firm over a traditional pharmaceutical structure do not consider themselves the beneficiaries of a large pharmaceutical’s development strategy. For most of these knowledge-based workers, there is little or no appeal to being absorbed by a larger pharmaceutical. When no integration plan is in place and there is little value attributed to the talent of the acquired organization, wholesale defections occur, thus exacerbating the talent issues in the industry.

As recently as 2011, one top executive at a major pharmaceutical admitted that they still had no talent strategy for acquisitions, but instead focused entirely on acquiring product pipeline, which had historically been their approach. This large pharmaceutical operates at a significantly lower P/E than the industry average. It has been unable to offset a number of expiring patents or foster any innovation and growth through new products in the pipeline.

What we have learned is that radical and discontinuous innovation is constrained by the way that U.S. pharmaceutical companies shape their organizations and develop their managers. In the long-run, lack of appropriate talent planning and integration actually hampers innovation and discovery. While the short-term pipeline grows, the lack of focus on talent and knowledge retention, in effect, diminishes medium- and long-term returns to shareholders and gives foreign competition a significant window of opportunity.

That’s not to say all companies are getting it wrong. The biotechnology sector, for example, deserves a close look. Since the 1980s, new discovery processes and technologies have led to remarkable growth in this sector—much of it from smaller, focused companies that specialize in the discovery of targeted therapies and specific technologies to bring them to market. These smaller firms also tend to have organizational cultures that are far more concentrated on growth and agility. Leaders in innovation, they tend to have knowledge-based organizational structures, rather than traditional hierarchical management models, and cultures that encourage and enable the almost instantaneous sharing of talent, information, and learning.

Most larger, traditional pharmaceutical companies, on the other hand, have been slow to adopt these organizational approaches or change their structures, which are notoriously hierarchical and siloed, difficult to navigate, and inhibit collaboration and information flow. They continue to support the reliance on “blockbuster” therapies by acquiring smaller, more innovative companies, or, in a few cases, taking majority stakes in other firms primarily focused on discovery.

“The trouble with the [pharmaceutical] industry today is

that the discovery pipeline is so thin there’s just not enough product out there to sustain

everyone’s growth ambitions.”

—Chief Strategy Officer Top 10 Pharmaceutical Company

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“You get some increase in sales for the first few years, but unless you are really doing something innovative, and retaining the top talent, you haven’t achieved much that will let you maintain your position in the marketplace.”

— EVP, Global Commercial

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FUELING INNOVATION

After studying successful companies in the U.S. (technology, manufacturing, biopharmaceutical), we identified four major inputs that are common to all of the most innovative firms. The four common inputs are:

1. Favorable government environment 2. Access to capital 3. Access to talent/labor 4. Culture (at a national level, but more important, within the organization)

Moreover, when we analyzed these factors globally in the pharmaceutical and biopharmaceutical sectors, we were able to see the same critical inputs in place that are giving quick rise to biotechnology and research firms outside the U.S.

Fueling Innovation Around the Globe

In A Strategy for American Innovation: Securing our Economic Growth and Prosperity (February 2011), the National Economic Council, Council of Economic Advisers, and Office of Science and Technology Policy stated, “Innovation—the process by which individuals and

organizations generate new ideas and put them into practice—is the foundation of American economic growth and national competitiveness.” It also acknowledged that the U.S. has a way to go in supporting that belief through robust, proactive government programs. Other countries, however, have already taken some of those steps. In the case of Singapore,

the government has set aside the equivalent of (US) $2.8 billion to fuel the area’s growth and enhance its attractiveness by ensuring that there will be enough qualified talent to energize

the continued expansion of the biopharmaceutical sector. Through expanded curriculum and incentives, the Singapore government is directly involved in secondary school and university-level education programs targeting biology and general science program participation. As a result of the government’s strategy and investments, the number of multi-nationals with a direct manufacturing presence in Singapore has risen considerably in recent years, with the

government openly seeking continued investment from foreign pharmaceutical companies in support of its education framework. In fact, the government of Singapore has targeted an increase in the number of pharmaceutical jobs to 15,000 over the next few years, with a growth in industrial production facilities from 30 to 50. China, although still to emerge as a dominant player in the biotechnology sector, has already

realized that the future of competition is talent. Its national “Talent Development Plan”

emphasizes graduating domestic high-tech and bio-tech researchers over the next 10 years, with a goal of having 3.8 million new researchers and 40,000 high-level scientists leading the nation’s drive to innovate. Even while developing domestic talent is a priority, China is also focusing on attracting top foreign talent and continuing a program to bring home Chinese scientists who studied and trained abroad. Some 1,300 top scientists have returned to China and plans are in place to

bring home 6,700 researchers every year. Since 2005, nearly 60 percent of jobs related to biopharmaceutical research and discovery were created outside the U.S. A recent study found that the U.S. ranked last among 40 countries and regions when it comes to progress made over the last decade in the new “knowledge-based innovation economy in pharmaceuticals.” In terms of overall competitiveness, the study ranks America sixth behind Singapore, Sweden, Luxembourg,

Denmark, and South Korea.3

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3 Atkinson, Robert D. and Andes, Scott M., “The Atlantic Century: Benchmarking EU and US Innovation and

Competitiveness” (September 2009). The Information Technology and Innovation Foundation (ITIF)

It is relatively easy to identify these inputs in action. For example, in the U.S., New Jersey, California, and Maryland all share favorable government environments (business and tax incentives) that account for the first two critical inputs that stimulate innovation. Both of these inputs, however, are largely dependent on outside intervention and forces beyond the direct control of individual companies.

It is the last two factors—access to talent and the right kind of culture—that enable, or conversely, threaten continued growth in the U.S. pharmaceutical and biopharmaceutical sectors. They also fall completely within each company’s control. Yet, commitment to the factors that fuel innovation can vary widely.

Post-merger talent and cultural integration, historically overlooked in the domestic pharmaceutical industry, may prove to be its Achilles heel when evaluating the long-term benefits of merger and acquisitions. In contrast, mobilizing diverse talent and establishing knowledge-based operating structures create a more compelling environment and attract the critical research and discovery talent needed to succeed.

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“Our first reorganization was very poorly managed. Productivity definitely

fell off . . . As the result of poor communications and planning, we weren’t able to provide [employees] with a high level of certitude about the future.

The general view was, ‘We’ve been around a long time, and we’re not going anywhere.’ However, within 14 months, we witnessed about one third of

our top talent leaving to the competition . . . The impact on our operations wasn’t truly appreciated until we heard [from the HR department] that our

pipeline for key scientific people had dropped by half within 24 months.“

— EVP, Human Resources

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CULTURE OF INNOVATION

Much of the data around talent may appear bleak, but a number of U.S. pharmaceutical and biopharmaceutical companies we studied are having success around talent integration and innovation. These companies took a structured approach and answered difficult questions about integration long before they commenced their acquisition activities. While there are differing strategies, the key to their innovation and growth lies within the fourth critical input from our research: culture.

In a 2010 pharmaceutical and biopharmaceutical survey conducted by the Organisation for Economic Co-operation and Development (OECD), 52 percent of those surveyed viewed corporate culture, plus the qualifications of employees (42%), as crucial to their innovative power.

Their attitudes echoed the findings of an earlier research study (2001) by Booz-Allen Hamilton, “Merger Integration: Delivering on the Promise.” Researchers found that the most commonly cited reasons for mergers not meeting expectations (68%) were primarily execution related. The top execution issues included culture clash and loss of key staff.

In speaking with pharmaceutical executives, we discovered that, in order to optimize the scale and benefit of M&A, successful companies pre-determined the degree of integration—both operational and cultural—required to retain and leverage top talent. Typically, they evaluated and put into place one of two broad strategies: Partial R&D Integration or Full R&D Integration.

In a partial integration, companies expend considerable effort to understand the “start-up” environment of the new entity. As a result, significantly fewer issues arise around the “us vs. them” mentality so common in these situations, and there is less concern about who controls the discovery process. This strategy also is the least disruptive to the overall discovery process and allows work to continue in much the same way it always had. The disadvantage of partial integration to the acquiring company is a higher degree of difficulty in achieving true cost savings through synergies. Unless the process is thoughtfully managed—and social technologies effectively deployed—the opportunity to cross-pollinate critical knowledge workers and leverage diverse experience remains unrealized.

In a full integration, the opportunities to eliminate duplicative costs increase. In the absence of a strong talent retention plan, however, the risk of losing critical knowledge workers (often the most sought-after by the competition) is also very high. Understanding the variances in culture—and how they can be adjusted and blended—needs to be planned and worked out long before the two organizations are integrated. If done right, full integration offers numerous advantages. Integrating top scientists and researchers within the same facilities increases the likelihood of job satisfaction and provides a valuable retention incentive. It also creates a more fertile platform for internal collaboration leading to innovative discoveries.

STRUCTURED FOR COLLABORATION

In addition to having a well-articulated post-merger integration plan in place, successful companies also understand the importance of knowledge sharing as it pertains to innovation. In many large pharmaceutical companies, different therapeutic areas do not share knowledge. In other companies, knowledge is not

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shared freely even within a discreet therapeutic area. We found that a large part of the reason many mergers failed to yield any significant innovation was a lack of diversity of knowledge due to the siloed nature of the organization. Successful companies manage to maintain a diverse portfolio of discovery projects while continuing to leverage the knowledge that strengthens and increases the discovery and innovation process. At the close of a deal, “knowledge risk” is typically enormous. The post-deal integration process must manage this risk down to zero as quickly as possible. Successful organizations understand the value of a highly integrated organizational structure that, from the earliest point in the integration, allows discovery to work across functions within the business and to be integrated within the strategic decisions that are moving the organization forward. Matrixed organizations that share talent and ideas across traditionally siloed functions are more likely to become breakthrough companies. They also use the Internet and social media to extend the organization’s knowledge base—not just within but also well beyond the four walls of the company. Just five years ago, sharing discovery and innovation ideas with external resources was considered anathema to maintaining primacy on critical patents. Now, companies that have created the technical and cultural infrastructure to support collaboration have been able to achieve more value for every dollar they have invested.

Success Tactics

Some of the successful talent and knowledge management techniques Right

Management discovered within the companies interviewed include:

Establishing a program management office for all discovery and innovation

projects—a centralized place where a researcher or top scientist can ask, “is

someone else in the organization working on this . . .?“

Developing internal innovation trade shows—publicly recognizing learning

and rewarding the contributions and ideas of individuals and teams within

the organization

Creating pre-merger teams that brainstorm integration activities

Using the Internet and social media to gather knowledge from a more

diverse community

It is important to remember that a collaborative and innovative environment is not just a function of internal marketing and inspirational town hall speeches offered by executives. Simply mandating an integrated or “matrixed” structure does not guarantee success. It is vitally important to first understand what is non-negotiable—the practices, systems, and policies of the lead organization that must be accepted by all parts of the combining organization—before determining where and how the combining organizations should be integrated. Top performing organizations continuously evaluate the health of the organization’s culture, review collaborative technologies, and make a concerted effort to avoid inwardly focused cultures that result in siloed thinking and behaviors. Compensation systems are designed to reward collaboration and encourage engagement.

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Managers and executives invest significant time in learning and improving operational dexterity. The most innovative companies we observed create reporting systems that keep management informed of key discovery projects. They encourage scientists to share research data and the operational side of the business to focus on business results.

SUCCESS IN 2015 AND BEYOND

Change in the pharmaceutical industry has been constant, and as a result highly taxing to the management and discovery processes. Failure to address the impact of change internally in a systematic, talent-focused, and results oriented manner has caused companies of all sizes to quickly lose pace and productivity. Access to top talent is increasingly becoming a competitive advantage. As companies hope to find new and creative ways of thinking and working, internal corporate culture is also being rediscovered as a competitive factor. For the next three to five years, creating and maintaining a culture that values talent, promotes open operational and discovery approaches, encourages people to attain their best, and has minimal hierarchical baggage will be critical to success for pharmaceutical companies, both large and small. It will clearly identify a company as an employer brand of choice and create an atmosphere that attracts the qualified talent to innovate. Companies often mistake the “brand of choice” designation with an over-abundance of work-life balance programs. What we have witnessed is little correlation of these programs with better corporate performance or employee engagement. What is more significant is a culture that promotes open operational and discovery approaches. High performing companies have a solid blend of work-life balance, management systems, infrastructure, and rewards that encourage people to attain their best and consider input from all sectors within the organization. These flexible organizations continue to attract and retain talent irrespective of their size, and have effectively managed new discovery, as well as products coming off patent, far more successfully than their competition.

"The pharmaceutical sector has become used to success, but is now faced with major upheaval. This is precisely why innovation has to be put at the top of the agenda. Innovation includes not just new products, but also the pharmaceutical

industry's entire business model. Less integration and more cooperation with external partners are essential for continued profitable growth.”

— Chief Operating Officer

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About Right Management Right Management is the global leader in talent and career management workforce solutions. As the workforce consulting experts within ManpowerGroup, the firm designs and delivers solutions to align talent strategy with business strategy. Expertise spans Talent Assessment, Leader Development, Organizational Effectiveness, Employee Engagement, and Workforce Transition and Outplacement. With offices in over 50 countries, Right Management partners with companies of all sizes–including more than 80% of the Fortune 500–to help grow and engage their talent, increase productivity and optimize business performance. Contact for more information: Stacey Narveson Marketing Manager Right Management 155 Federal Street Boston, MA United States Phone +1 617-556-9114 [email protected]

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