Friday, October 24, 2014
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How big pharma discourages innovation

Big Pharma has been keeping itself afloat for some time on a number of myths. For several years, as investors saw the industry's business model breaking down, pharma tried to assuage them by perpetrating the myth that the emerging global markets (China, India, Russia) will restore earlier profit levels. Then in response to the general public's complaint about high drug prices, pharma spread the myth that such exorbitance is needed to fund research.

How big pharma discourages innovation

Big Pharma has been keeping itself afloat for some time on a number of myths.  For several years, as investors saw the industry's business model breaking down, pharma tried to assuage them by perpetrating the myth that the emerging global markets (China, India, Russia) will restore earlier profit levels.  Then in response to the general public's complaint about high drug prices, pharma spread the myth that such exorbitance is needed to fund research.  More recently pharma has shown the vacuity of the myth that it is downsizing and decentralizing its operations in such a way that it can approximate the innovativeness, mobility and accountability of smaller biotechs.

If that last one ever contained even the slightest plausibility, recent events have shown it to be pure myth.  Of course, the idea of large corporations with their soul-killing accountants and time-wasting procedures as impediments to creative science makes axiomatic sense.  So it seems reasonable if Big Pharmas, trying to distract from the mediocrity of their new brands, would want to show they're at least trying to justify their enormous margins by modifying operations to develop better drugs.  Pharma's leaders can then boast that they possess the good aim to hit the broad side of a barn by virtue of their desire to emulate the industry's smaller companies. Innovation and a fervid devotion to research are good qualities, after all, not to mention the fact that biological drugs are more immune to steep revenue losses when their patents expire.

Toward that end, GlaxoSmithKline (GSK) announced a few years ago that it was separating its R&D into several silos, giving the collectivity a chamber of commerce designation as Centers of Excellence.  The idea was that each unit would need to demonstrate the accountability for results and the fervor of inspired biotechs.  Shortly afterward GSK recognized that some excellent centers could prove to be mediocre, so they decided to fund the silos with reviewable grants instead of annual budgets. 

The efforts to pantomime the appearances of innovation at GSK were even extended to the daily workplace experience.  The offices and Dilbert cubicles from Franklin Plaza were tossed out.  In their place the company built new offices near the naval shipyard that they arranged into bullpens, open atria and the catch-as-catch-can arrangements similar to the way people occupy park benches.  If genuine advancements to the state of the art aren't likely, then at least the shop can acquire the look of Silicon Valley startups.  Word hasn't yet drifted back about mid-morning basketball games at the end of hall, with opposing teams from medical affairs and regulatory, but the inspiration was to create a stage-set version of that environment.

Lately this whole fabrication about emulating biotechs has been looking threadbare.  At the end of 2008, for example, Merck formed its Bioventures unit to pursue the development of follow-on biologicals.  Then this January they essentially off-loaded the operation to the CRO, Parexel.  Under terms of the deal, "a dedicated Merck BioVentures unit will be set up within the Parexel organization." (See here.)

In 2007 AstraZeneca (AZ) also thought a biotech would provide it with innovative inspiration.  As a result they spent 20% of their entire market capitalization to acquire MedImmune.  The way AZ's management went about integrating its new biotech soon made observers question whether the effort to develop a more innovative R&D was ever really serious.  AZ quickly drove away MedImmune's senior managers and replaced them with someone from Wilmington who was central casting's version of a bean counter.  Altogether, the company mismanaged the process so badly (see here) that it made them gun shy about another large acquisition at a time that its starving pipeline desperately needs one. 

But GSK comes back in focus to take the prize for belying the myth that Big Pharmas can emulate biotechs.  Any serious effort to acquire the innovativeness of small companies must necessarily recognize that one of their advantages rests on the capability of a few individuals to quickly decide on big and small course corrections without a cumbersome process and the delay needed to get seven other signatures.  Those departures from routine often occur when a pattern of doing things no longer works so well.  When that happens, one of the best ways small companies make innovative departures involves using small, out-of-the-box suppliers instead of big ones with their own, and encrusted ways of doing things.

Several years ago GSK, along with other Big Pharmas, severely reduced the possibility that its middle managers could retain small, innovative suppliers by imposing a preferred vendor system with a catch-22 requirement.  Middle managers could only use preferred vendors; a basic requirement for gaining preferred status was the need to have performed a large dollar volume of business with GSK the previous year.  The process is reminiscent of Archie Bunker's claim that he only goes to an "Eyetalian" restaurant if he's been there before.

That was a typical imposition by finance.  The number crunchers simply issued a decree that all services are commodities.  That allowed even ignoramus purchasing agents to pick the ones offering the largest, volume-based discounts.  Since the company uses that approach to buy chemicals, lab equipment and paper, why not do it with marketing and R&D functions?

Then a few weeks ago GSK put the cherry on top of that cake. That's when it announced it would hold vendor invoices for 95 days before paying them (see here).  A more direct way of showing that it doesn't want anything to do with small, innovative suppliers is hardly imaginable.  Since finance does not believe innovativeness exists, and eschews it as a differentiating quality, the decision on going to 95 days was easy.  One strategic assessment or launch plan is the same as any other, right?  Coming up next: 120 days to pay invoices.

This finance control over operations deliberately ignores the fact that big companies often generate substantial chunks of their lucrative profits by applying economies of scale to useful ideas, big and small, that they get from small suppliers.  When the process works, it represents a good marriage of big capital and inventive thinking.  Now if some small supplier has a useful idea, one that might successfully launch a new product in a foreign market or one that can complete recruitment for a clinical trial 18 months sooner, how likely is she to take it to a company that will bleed her into bankruptcy because she must pay her rent, utilities and employees every 30 days?  GSK's directors in Brentford, UK, can even ask the son of a bovine insemination inspector in Lancashire about that. He would probably tell them, "not bloody likely."

Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

Michael R. Cohen, R.Ph. President, Institute for Safe Medication Practices
Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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