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Dare to dream

A new business model based on innovation is essential for the industry

Boy flying a toy planeThe myth goes that, when placed in tepid water, a frog will remain oblivious to impending danger as the water is heated to the point that the creature is boiled alive. For both spectator and frog this would not be nice, so don't try it at home. The point of quoting such an analogy is that survival can only happen if we take action to avoid hostile environmental change, however subtle that may feel.

Our industry has a number of such amphibians in near-mortal danger. The increasingly hostile environment for some pharma companies will become ever more apparent as organisations start to falter amid the revenue loss through patent expiry ($30bn each year for the next five years). The loss of up to 50,000 jobs include some among those people reading this article. A sobering thought.

Changes of this magnitude force a reaction and the flurry of activity in mergers and acquisitions this year allows pipelines to be bolstered, efficiencies to be made and portfolios to be diversified. All good stuff, but is this just fiddling while Rome burns? Our industry continues to operate on business models that worked for the 1980s and 1990s but are now outdated.

Speakers at a recent IMS strategy conference said that the global pharma industry has matured through its own business model life cycle. With explosive growth fuelled by products such as penicillin in the middle of the last century, the model delivered profitable growth through demonstrating clinical efficacy. More and more highly effective products were launched until the tragedy of thalidomide forced regulators to raise the bar of safety, thus modifying the model to achieve growth through both safety and efficacy.

Then came the first blockbuster: Tagamet (cimetidine) was the first $1bn global brand. With the realisation that companies could produce very significant, high-margin cash flows from single brands, the race was on. The mighty marketing machines of big pharma, employing vast armies of salespeople and spending huge promotional budgets, exploited this potential and serial blockbusters ensued. The global pharma industry was having a great time.

Then the party was over. Policy makers and funders realised that their spending on healthcare (not just drugs) was outstripping GDP growth and so along came cost controls under the guise of the health technology appraisal mechanisms and reimbursement hurdles (reference pricing or profit-control frameworks).

Suddenly industry was being squeezed at both ends – longer and more expensive development phases coupled with a plethora of spending controls ranging from incentives for generic prescribing to enforced nationwide price cuts.

This has pushed our industry into a new phase of the business model life cycle. It is a fact that, over the next five years, the revenue losses from patent expiry cannot be recouped – they are simply too big. Never before has the need for innovation, coupled with cost savings, been so pronounced; only this time it is not only technical innovation but also commercial innovation.

PriceWaterhouse Coopers has sounded the death-knell on the traditional model of our industry and predicts that it will simply no longer work by 2020. So, unless you plan to retire by then, you need to be doing something now. The big, public pharma companies will be best resourced to do something more radical, but they are also constrained by the diverse interests of many investors who would feel uncomfortable about a radical strategic shift.

Perhaps parts of businesses could be ring-fenced for pilot activities (but still the clock keeps ticking), even demergers could be on the cards. What is apparent is that the companies with the greatest freedom to really try something new are the independent small to medium-sized organisations. Perhaps this segment of industry will be the vanguard of business innovation.

Strategic leadership
Everybody wants choices – it is a natural human desire. Strategic options are an important first step, but once a preferred strategy is chosen, we need to execute it well. The organisations that thrive at the end of these difficult times will be those with good strategy (doing the right thing) done well (doing things right).

Stephen R Covey in his book The Seven Habits of Highly Effective People recounts an elegant analogy about the differences between good strategy and good tactics and the role that business leaders play in strategic choice. A highly efficient team of lumberjacks is operating in an area of forest.
They have split their workforce into:
• lumberjacks to fell the trees
• markers to select and identify the trees in a planned sequence
• safety experts to manage the health and safety of the workforce
• operational support and maintenance to keep all the tools sharp and functioning well and the workers fed
• logistics to load and remove the logs when felled.

The operation is silky smooth and ruthlessly efficient. In essence, it is the model of perfect tactical execution. But one man, who doesn't really relate to all of this detailed activity, looks around the forest. He selects the tallest tree and climbs it to survey all around him. Having taken in the landscape he calls down to his workmates and shouts: "Wrong forest!"

Imagine his unpopularity among his co-workers below, but if he is right, then his brave insight could save his business.

We know ourselves from our junior marketing days that there are those campaigns that are absolutely pin-neat, where every detail is correct, on message, well integrated... but they just don't work and the sales return does not happen. Good tactics but poor strategy will lead to a slow and unwitting demise – like the frog in hot water. This commercial unconscious incompetence becomes even more apparent in times of hardship. The clear goal is to get both strategy and tactics right – under such circumstances businesses will thrive.

The very least we should do is get our strategy right (see the box below) even if our tactical execution is not perfect. Such organisations will survive, but not thrive, even in difficult times. The lesson from this is that we must devote time and the right brains to strategy development – and have the courage to make changes happen, however unpopular.

What makes a strong strategy?

Real segments
• Poor segmentation often results in a Pareto-type effect

Tailored offering
• A price-sensitive market usually indicates an insufficiently tailored offering


• If we disappeared, would our customers mind?

• Environmental changes affecting customer behaviour are accounted for

OTSW* aligned
• Honest and robust OTSW analysis informs proper joined-up thinking

* Opportunites, threats, strengths, weaknesses

Clearly, then, we must adapt to the changes or wither and die. To do this effectively takes a combination of courageous entrepreneurial spirit in our executive teams and an environment that allows risk-taking – or ideally actively supports it. Perhaps there is a role for HR strategy here to provide incentives and reward value-adding behaviours in executive management teams.

When it comes to mergers and acquisitions, the best chances of value retention and creation will be borne out of a truly objective and meritocratic approach by the acquirer. Advocates of this approach retain the best talent regardless of its origin, and the result is most likely a dynamic, hybrid culture united by capability and achievement.

Many other 'mergers' simply result in the acquired company executives yielding to the home team, regardless of experience or capability. It will be people who make the difference over the next decade and our business leaders, like the man up the tree, will have to make some potentially politically unpopular decisions.

All successful entrepreneurs share a characteristic that is critical in most business success stories – the willingness to take risks. Without this emotional approach to business (coupled with a rational business savvy) the true exploitation of opportunities will almost certainly never come to fruition. The trouble is, however, that our industry is becoming increasingly risk-averse.

First do no harm
Driven by caution among the regulators, the real desire for innovation is unfortunately secondary to cost savings and safety. Deep down, however, we all know that an approach of taking a chance is more likely to lead to innovation, accepting that there will be some failures along the way.

Of course, our medicines have to be safe – or have a safety profile that is acceptable, in the context of informed choice, when balanced with the therapeutic effect. Given the choice, many patients will consider the risk associated with their medicines acceptable. Increasingly, this decision is being taking out of the hands of patients and healthcare professionals by regulators who may fear making a decision that could attract criticism. Risk aversion is an inherent trait in our industry, driven by the experiences of Vioxx, Seroxat, Raptiva, Prozac, Tysabri and others. To avoid risk and comply with corporate governance, management teams will have to be able to show they did what was right. Increasingly, this means following a tight set of restrictive rules.

Nick Stephens, chief executive officer of recruitment company RSA, notes that the advances in measurement tools and technology available to pharma means that executives and their teams will be increasingly judged on hard, objective and, most importantly, almost immediately measurable end-points. The risk is that if these end-points or key performance indicators (KPIs) are just inputs – such as call rate, customer coverage, ad spend, patient recruitment – then the focus becomes far more on achieving what gets measured rather than trying something new. A strategy that Stephens says "can lead to death through risk-minimisation".

As industry watches what big pharma does, perhaps it would pay to keep an eye out for some of those smaller, more nimble private companies who not only sense that the temperature is rising around them, but are acting to change before the environment does its worst. Although nobody ever got fired for not innovating, the chances are that those who do nothing now will end up in some pretty hot water.

The Author
Stuart Rose is managing  director of Merz Pharma UK Ltd
To comment on this article, email

28th July 2009


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