Lean New Pharma
By Scott Gottlieb, M.D.
With 10,000 jobs and as much as $2 billion in costs set to disappear from Pfizer by the end of 2008, the pharmaceutical giantâ€™s new chief executive is proving that he has a brain for bean counting and a body for Six Sigma.
The promotion of Pfizerâ€™s Jeff Kindler to CEO from his former role as the companyâ€™s general counsel is of a piece with similar management makeovers inside big pharmaâ€™s boardrooms and may speak as much about where the industry is heading as where it has been.
Merckâ€™s new chief executive, Richard Clark, was the president of his firmâ€™s manufacturing division before he took the top job, and one of Clarkâ€™s first orders of business on his ascendancy was to announce the closure or sale of five of Merckâ€™s manufacturing facilities as part of a package of efficiencies aimed at yielding pre-tax savings of up to $4 billion by 2010. About $2 billion of that will come from manufacturing reforms alone.
Once upon a time, a pharmaceutical CEO who did not hail from one of the creative parts of the drug business would have been met with skepticism on Wall Street. Certainly, a drug CEO would have been expected to have been schooled in the sales and marketing side of the business, if not originate from its core competency in research and development of new drugs.
Instead, Clark and Kindler, who have little comparative background in these disciplines, have been cheered. What gives?
Clark and Kindler are professional managers, and the administrative discipline they bring may be in order after the industry bloated itself on mergers--some cobbled together with little long-term vision beyond the urge to capture a few prized medicines. But this focus inside the executive suite on cost cutting cannot help but leave the impression that the drug industry is less a growth story than an aging industrial complex readying itself for life as a regulated public utility. Maybe itâ€™s time the drug firms increase their dividends.
After all, if the prevailing political mood is any indication of the future, then the price of this industryâ€™s core medical products will increasingly be a reckoning of government actuaries working for the Medicare drug benefit. And the Food and Drug Administration has always tightly regulated the manner in which pharma companies develop drugs, setting a close parameter on their cost.
In the end, this cost cutting is not a transformational strategy, just an exercise in defense to maintain the margin. These companies are treading water until they can start to grow again, which begs the question: When will the celebrated slump in the industryâ€™s research productivity start to reverse itself.
Truth is, there have been some spectacular breakthroughs produced in recent years out of big pharma labs, including Merck and Pfizer--drugs aimed at specialized conditions and unmet medical needs. But these medicines have been given short shrift by the mass media because many have not been the kind of big primary care sellers that turn into multibillion-dollar blockbusters. Nevertheless, nobody can mistake the fact that big pharmaâ€™s spending on research and development has increased about 150% over the decade from 1993 to 2004, to more than $60 billion today, yet the number of drugs from the industry that reach the market has not changed measurably.
Some blame corporate bloat for the falloff, arguing that the drug companies got too big to be entrepreneurial. Others say the incessant focus on blockbusters prompted companies to prematurely cast aside promising but potentially niche molecules. Optimists say we are at a point when fundamental discoveries made in recent years in genomics and proteomics are just filtering into development programs. We will soon see a surge in productivity, similar to previous periods when the application of new sciences like combinatorial chemistry needed time to mature.
Hereâ€™s another theory. All of that increased R&D spending has been dwarfed by inflation. Over the past decade, the regulations on development and the demands of government payers have grown far faster than those research budgets, meaning we are not buying nearly as much science as we used to.
This is a fact of life that the National Institutes of Health has been bemoaning as it sees its own budget flatlined. The NIH has not had its budget â€œcut,â€ but it announced last week that it is closing swaths of research nonetheless because a dollar today does not buy nearly as much research as it did a few years ago. The furtive secret is that NIH trials are not even subject to the full brunt of Food and Drug Administration oversight. So they get away a lot cheaper than the industry does.
In this kind of regulated world, where the cost of development and the price of finished goods are increasingly controlled by the government, and where the cost of production goes up even as the selling price goes down, the drug companies will need to find additional ways to cast off more of their fixed costs to focus instead on core competencies in late development, distribution and marketing. This will push drugs firms increasingly toward a more disaggregated model, with work put to a growing legion of smaller outfits--from biotech firms that will continue to do research and early development and offload some of the scientific risks to contract organizations that do the testing and freelancers that sell.