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Horizons
GUEST COMMENTARY

By Jim Hall

Jim HALLDec. 15, 2002 | INCREASINGLY, THE biopharmaceutical sector is divided by two strategic perspectives. On one side, companies adhere to an "Atlantic" approach — a traditional R&D model designed for scale and blockbuster output. On the other, a "Pacific" perspective places a premium on speed, agility, and technological breakthroughs.

This contrast in strategies underscores a fundamental debate regarding the appropriate R&D strategy and operating model for long-term profitability and scientific success. The result of this debate will leave little middle ground. We will witness either the total deconstruction of R&D as we know it, or business as usual in biopharmaceuticals.


Bigger-is-Better vs. Smaller-is-Smarter 
Big Pharma companies that have traditionally dominated Europe and the eastern United States have adhered to a blockbuster philosophy that relies on sheer scale to drive drug development. This Atlantic, "bigger-is-better" perspective can yield enormous returns and dominate markets, as evidenced by GlaxoSmithKline, AstraZeneca, Merck, Pfizer, and others.

The need to fuel growth with blockbusters does have limits, so this strategy may not hold forever. In addition, the financial results from major pharmaceutical mergers remain somewhat murky. The average merger in this sector can deliver a 7 percent to 10 percent savings according to Deutsche Bank AG, but integration requires about three-and-a-half years on average, and it is unclear whether the reduction in operating costs is accompanied by significant gains in product launch time.

By contrast, the Pacific, "smaller-is-smarter" strategy first championed by U.S. West Coast biotechs stresses the importance of lean, flexible organizations, focusing on key technologies and niche markets. This model has spawned new alliances and partnerships, with major players including Amgen, Genzyme, Biogen, and Genentech.

The pursuit of blockbuster drugs carries a high price, high risk, and uncertain returns. The traditional bigger-is-better strategy may soon be obsolete. In its place, the core strategy that built the biotech companies — a focus on niche markets and platform science — may be the model of the future.


Deconstructing to Rebuild
Given this strategic choice, it may be time to deconstruct the traditional operating model that companies have used for decades and rebuild along more flexible lines. Ground zero for this deconstruction is in R&D, where science is the foundation and nimbleness and delivery are the building blocks of the new model.

In the past, the R&D model was designed with strict boundaries between functional silos. The rift between discovery, preclinical, clinical, safety, regulatory, and the rest of the organization creates incredible inefficiencies and an atmosphere of risk aversion. R&D can be deconstructed and rebuilt into centers of excellence that are managed in an entrepreneurial way, willing to take risks and deliver results.

Some companies are beginning to create smaller, more entrepreneurial units that focus on new science and niche markets. For example, GlaxoSmithKline's Centers for Excellence in Drug Discovery are intended to boost productivity and decrease time to market within the setting of a traditional Atlantic company.

Pfizer Inc.'s recent acquisition of Pharmacia Corp. also illustrates the move toward a less traditional Atlantic worldview. The merger is focused on creating new opportunities and greater returns on marketed products, not improving synergies in the pipeline (although some may already exist). The key challenge for the new company is how to deconstruct and rebuild R&D assets so that the company can shift from blockbuster tunnel vision to a more entrepreneurial approach to improve the pipeline.


Which Perspective Is Right for You? 
We see several important design factors that all companies should consider when deconstructing and rebuilding the R&D organization:

  • Competitiveness of therapeutic markets served
  • Degree of (de)centralization in the current organization
  • Number of geographical locations to be coordinated across the company
  • Number of alliances
  • Ability of the development organization to outsource components of R&D
  • Degree of project focus vs. functional focus
  • Level of generalized and specialized approaches in discovery, science development, and clinical development
  • Type of governance employed — central and hierarchical versus flat and distributed
  • Culture — science orientation or commercial orientation?

Choosing the Atlantic or Pacific perspective for R&D strategy need not be a mutually exclusive

As Pacific companies make M&A activity an essential part of their business strategy, will they begin to overtake pharma in size and strength? Will we soon see an Amgen-Merck? 
decision. Even "pure" biotech and stalwart pharmaceutical companies are looking for solutions that incorporate aspects of both perspectives. At the same time, we are seeing merger activity in the biotech industry: Eight of the top 25 biotech companies announced mergers with one another in the first half of 2002. Unlike Big Pharma's focus on market and patent protection, biotechs want to strengthen their technology pipeline through mergers, once again concentrating on the science.

Biotech companies are also increasing R&D spending and seeing an increasing return on that expenditure, while traditional pharma companies will be decreasing R&D expenditure from 13 percent to 7 percent over the next five years, according to SG Cowen Securities Corp. The outcome of this seismic shift in spending will be fascinating. As Pacific companies make M&A activity an essential part of their business strategy, will they begin to overtake pharma in size and strength? Will we soon see an Amgen-Merck, for example?

Even more interesting will be the outcome of a potential Big Pharma/biotech merger. Would this hypothetical alliance create an Atlantic-leaning Pacific company (or vice versa)? Or would it lead to an entirely new sort of organization, where smaller is still smarter, productivity is higher, and drugs get to market faster, but market position is blue chip, not startup? The future strategy may be a balance between the two perspectives, one that should always influence the overall business strategy of the organization.

The transformation of R&D is inevitable and, in fact, imperative. As market conditions change, stakeholders demand performance while consumers demand new therapeutic products. The new R&D organization must deliver both. While the strength of the Atlantic perspective remains, we predict that the innovation and flexibility of the Pacific view will provide the strategic wave of the future. For biopharmaceutical companies debating which direction to take — Atlantic or Pacific — we offer those timeless words of advice: "Go west, young scientist. Go west."*



Jim Hall is a member of the management group at PA Consulting Group, a management, technology, and systems consulting firm with life science expertise headquartered in London. He can be reached at jim.hall@paconsulting.com.










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