Finance mismanagement at big pharma – part two


By guest blogger Daniel Hoffman:

As an industry facing lower revenues, pharma has suffered the common fate of falling into the hands of its finance officers. Finance direction can be a good thing if the board is looking to sell a company because those managers will make the financial statements look better in the short term, even if it requires sacrificing the company’s future, by cutting R&D and marketing. In this effort to quench pharma’s thirst by giving it sea water, finance relies on at least two handmaidens: 1) purchasing and 2) human resources (HR).

Finance as a discipline relies on quantifying a large number of cases or processes to develop formulas and ratios. Production processes represent one area where this approach has achieved some success. Where the process involves hundreds of products and millions of final units, each with numerous commodity components, quantitative analysis can yield efficiencies and savings.

When Jack Welch ran General Electric, he popularized the use of Six Sigma for this purpose. Since that time GE’s stock has been hammered and its status as a premier company has been diminished. Six Sigma, meanwhile, has provided terrific fodder for Tina Fey and Alec Baldwin on 30 Rock. Never more than a decade behind other industries, pharma then adopted Six Sigma in a big way.

The core of this finance-driven approach consists of commodifying the various operations, that is, considering them as functionally equivalent to establish lowest-cost-for-comparable-outcomes as the basis for decision making. While the approach makes sense for mass producing widgets or pills, its usefulness remains more questionable in matters such as highly skilled services. If a company is buying 300 consulting engagements or an equal number of clinical trials each year, the large numbers aren't there and the commodity assumptions can mask important differences.

Yet that is the way many Big Pharmas now proceed. Under the hammer of finance, the purchasing departments now place all service vendors into one of two pigeonholes – low-cost “preferred providers,” and everyone else. At one Big Pharma in this area, the job description of a woman who directs an area of business research focuses mainly on convincing brand teams to use low-cost suppliers in India and other developing nations to research the US market.

The CEO at another Big Pharma company stepped out front to show his purchasing department how it’s done by stating his intention to select all service suppliers on the basis of “negative auctions.” An auctioneer’s call at such an event, where contract research organizations (CROs) compete to conduct a pharma’s clinical trials might sound like this.

“The bid for conducting this Phase 3 clinical trial is $20,000 per patient. Do I hear $18,000? $16,000? Going once...”

Any recognition that fulfilling the lowest bid price may require recruiting diseased indigents in underdeveloped countries and the homeless here remains an open question.

The situation has grown serious enough to bring down investigations of a dozen pharma companies by federal prosecutors and securities regulators.

Human Resources makes its own contribution by cutting off another nose. Pharma is ill-suited to formulaic plans and programs. Patent protection and a 10-12 year lead time for product development create a more deliberative pace of business. Under such conditions, intuition born from experience usually serves as a better guide than formulas. Industry veterans in their late 40s and 50s can help place seemingly new situations in broader contexts to suggest solutions.

Yet these are precisely the people HR has been “packaging out,” i.e. forcing out or just laying off. HR’s boilerplate lines are the ones the script writers gave to George Clooney in Up in the Air: “This will give you the opportunity to better utilize your talents and do what you've always wanted to do.” “Take some time to think about it and, when you’re ready, our package includes help from an out-placement service that we're paying for.”

In the process pharma loses the very people who can provide it with a realistic sense of person, place, time and context, the basic elements of cognitive competence. The formulas and ratios for those capabilities are as yet undetermined.

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