Few of today’s pharmaceutical executives would argue with the idea that their organizations are tough places to be. Besides coming to grips with digital-age decision making and asynchronous work patterns driven by the vagaries of time zones, flex scheduling, and telecommuting, they must make tough choices: speed versus flawless execution, creativity versus focus and discipline, siloism versus enterprise-wide application.

Take the need for creativity-a strategic priority in pharma. “In our business, we are looking to create discontinuity and out-of-the-box thinking,” says the senior vice-president of marketing for the consumer healthcare division of a major international pharma company. “Creative thinking is required, but it is asymmetric, involves exploration, debate, idea exchange, and often leads to conflict. While we struggle to innovate and come to the next big breakthrough, there is a need for healthy disagreement.”

Failure to manage such cross pressures has made many pharma companies breeding grounds for conflict. Using best- and worst-case industry examples, this article highlights how pharma companies can convert dysfunctional conflict into healthy confrontation and collaboration-and use both to create speed and business results. 

A large pharmaceutical company located in the Northeast sought to eat into its rival’s market share by launching a new product in the women’s health category. The time frame was tight, given anticipated competitive moves, but external competition paled compared with the internal cross pressures.

The vice-presidents of marketing and research both agreed that a new product launch was a must for future growth, but the question was, “Which product?” Each argued strenuously for a personal favorite, and they became increasingly intransigent. 

The president listened to the raging debate at several board meetings until, in an effort to end the stalemate, he decided to play Solomon. He split the product launch resources in half, giving 50 percent of the advertising and promotion dollars to each product. His move quelled the conflict. But with insufficient resources, neither product could be brought to market ahead of the competition. The company lost market share and its franchise in women’s healthcare took years to rebuild.

Compare the way that team operated to the workings of a senior management team at a pharma company that was going through a complicated merger. Top management of one division realized that there would be great value in retaining the best practices from both companies. But there were strong differences of opinion about how best to run the merged business. And there were significant differences in corporate culture that had to be reconciled. Under pressure to get the new business moving quickly, the division president and his top team decided it was time for a team “alignment.” 

To operate at peak performance, a senior team needs to reach agreement, in four distinct areas. First, strategic goals and the key operational goals that flow from them must be clear, specific, and agreed upon. Second, the roles of the team members need to be carefully delineated. Third, protocols or ground rules must be established to guide group behavior. Finally, interpersonal relationships-the range of personal styles that members of the team adopt when interacting with one another-must be understood and managed. 

 Michael Carey, corporate vice-president of human resources for Johnson & Johnson, gives an example of how having clear strategic goals, from top to bottom, reduces the potential for in-fighting and competition among functions: “Ethicon is one of the cornerstone companies in our wound care franchise. Its base business is wound closure: sutures, stapling, adhesives. Wound care has declared that its goal is to become the innovation leader in its category. For the franchise’s strategy to succeed, the Ethicon team must be committed to the same goal. 

“For example, R&D might suggest pursuing the me-too solution of using synthetic skin to close wounds. Marketing might respond with, ‘No, we need to be more innovative. We need to develop sutures and staples that cause less trauma as they pass through the skin, that produce less swelling and promote faster healing, less chance of infection, and fewer doctor visits.’ If the team is truly aligned around the goal of becoming an innovation leader, the choice should be an easy one.”

The division president of the merging company took a page from J&J’s book. He and his VPs first examined the merged company’s strategy and the goals that had been set for their division. Acting as a business team, they reached an agreement about priorities and how their decisions needed to support company strategy, thus ensuring there would be no “Solomon solutions” for their future product/market choices.

 Next, team members addressed the issue of responsibilities: Who would be responsible for what, and when? In effect, the team determined who “owned” an issue, who needed to be involved in its resolution, and who had to be kept in the loop. The discussion proved crucial in eliminating potential turf wars and bottlenecks, especially on a team whose members came from organizations with different structures and reporting relationships.

 The team members knew that, given the cultural divide, establishing mutually acceptable rules of engagement would be critical. Lack of alignment would open up a free-for-all when inevitable disagreements surfaced. To prevent that, the team moved immediately to outlaw “triangulation”-enlisting third-party rescuers to support one’s point of view. 

For example, one vice-president had often found himself soliciting the president on behalf of fellow team members. “People weren’t being held accountable for resolving problems on their own,” he says, “which didn’t do them or the team any good. From then on, issues were confronted and resolved with no go betweens.” 

 Finally, the team carried the alignment process through to their business relationships and the way they would interact in the future. It was no touchy-feely exercise. Each member needed to become aware of how he or she was perceived-and how that image enhanced or thwarted team performance. They each had to describe their personal style, according to a continuum that stretched from nonassertive to assertive to aggressive. Each colleague then served as a reality test. 

The vice-president of marketing learned a great deal during the exercise. “I was told I was impatient,” he says. “I had never seen my impatience as a problem. In fact, I felt that it was good because it was what drove me to succeed. But I realized that others didn’t understand why I was impatient. Now I stop to explain why something is important to me; communicating the reasons behind my sense of urgency has made my colleagues more responsive.”

Since its alignment, the divisional team has started moving faster. According to one team member, “Our decision making is quicker, more powerful. We have achieved incredible collaboration and speed to market. We’ve put seven new products into the market in the last six months.”

Even a perfectly aligned senior team that excels at managing conflict can’t deliver business results when the people they depend on are paralyzed with strife. Both cross-functional and functional teams must become high performers for an organization to be a strong competitive force. 

 These groups are not typically composed of people who work side by side. Such diversity can be a double-edged sword. Cross-pollination is great, but putting sales and marketing and R&D and manufacturing on the same team can be tantamount to inviting the Hatfields and McCoys to a garden party. 

But it doesn’t have to be that way. Howmedica Osteonics, Stryker’s largest division, is a medical device manufacturer specializing in orthopedic implants; it is one company in which cross-functional teams on several levels are becoming stars. When its business units formed a steering team made up of three executives, including senior vice-president Bradford Williams, Williams found the new arrangement challenging. He was accustomed to having the last word, and the move to collaborative decision making required that he make adjustments. Although the three co-leaders came from different functions, they occupied parallel niches on the organization chart, so they weren’t always clear about who should take the lead and when. 

The confusion metastasized. On several occasions, when the steering team made an unpopular decision, the business managers who reported to them attempted to “divide and conquer” by going to one of the three to try to get the decision reversed. 

In search of a solution, the steering team went through an alignment process. Simply defining their goals helped to eliminate attempts at triangulation. Once the steering team began relating its decisions to its goals as a team, the executives were able to present a united front to their direct reports. They also began communicating their vision and mission to the troops on a regular basis, which helped them understand the rationale behind the team’s decisions. It also minimized second guessing.

One aha! that resulted from the steering team’s clarification of goals and responsibilities was the realization that it was spending too much time on day-to-day operations and not enough on strategic issues. They upped the ante, making the business managers responsible for many of the operational issues they had been spending time on. 

The next step was to put the business managers through an alignment, thus giving them the knowledge and skills to excel in the new environment. The managers began to work more interdependently to resolve issues among themselves rather than escalate them.

Things have speeded up significantly at Howmedica Osteonics. It now takes only 18–24 months-half the time it used to-to bring a new product to market, and in a market in which product lifecycles have dropped from 10 to five years that’s a worthy competitive edge. 

 Just because these groups are composed of people from the same function or department, conflict management here is no cakewalk. In all departments-sales, marketing, human resources, R&D, finance-intramural conflict can be as intense as on any cross-functional team. 

Craig Mangean is director of human resources, field sales, for Sankyo Pharma. Mangean reports to Gregg Russo, vice-president of HR for Sankyo’s US operations. Joining Mangean on Russo’s functional team are the director of compensation and benefits, the associate director of HR for the clinical development group, and the manager of HR for corporate staff.

In the course of his career, Mangean had worked on high-performance teams, and he realized that one of the things holding the Sankyo group back was its culture of politeness-its inability to confront each other constructively. That politeness often led to dealing with conflict by going to someone else on the team and complaining. Members were uncomfortable with being candid and holding one another accountable, which is not at all unusual, given that people are often admonished from childhood on to avoid conflict. 

As Mangean puts it, “We didn’t have any of the aggressive behavior that some teams show. But conflict can grow under the surface, like a cancer. You can’t treat it until you acknowledge that it exists.” He recommended that the team go through an alignment as a way of bringing the underlying issues to the surface so they could begin to address them.

Mangean has seen some dramatic changes since the alignment. “Once we were able to clarify our roles and responsibilities and the rules of engagement, and made sure that we were presenting a unified front to our team players, our team took a giant step forward. We are now modeling effective teamwork at the top, which in turn helps us in working together as a departmental team to meet our clients’ needs.”

By agreeing on protocols, the team has short-circuited team members’ attempts to play Lone Ranger. “In the past,” Mangean explains, “those responsible for making a decision might go off and conduct an analysis, then simply present their recommendation to the group. That isn’t teamwork, and it’s no longer how we operate. We now have a protocol that says, ‘If you are the key person assigned to a project that would have company wide or multicustomer implications, you must get input from the rest of the team.’

“People now share ideas freely. During meetings there is a good deal of inquiry: deep questioning, asking for additional information. People get into each other’s turf without a problem. They point out when someone seems to be stuck in their own little silo. We’re still polite, but no longer at the expense of the team’s performance.”

At Johnson & Johnson Germany, high-performance teams cascade down through the organization. When its president, Jean-Paul Rigaudeau, began the alignment process, the German unit was healthy and growing. But Rigaudeau believed his teams’ performance in a demanding environment could be improved by completing conflict-resolution training.

Rigaudeau began by getting his top team aligned, then moved to align the next tier: three cross-functional, product-focused teams representing skin care, baby products, and feminine sanitary protection. Those three “business champion teams,” in turn, focused on the next level down to repeat the alignment process. The process will continue through J&J Germany until all its business teams-cross-functional and functional as well-are on the road to high performance.

It takes a great deal of skill-and courage-to look at oneself through the eyes of others. The self-assessment exercise described earlier is a good place to begin, but receiving feedback on one’s personal style isn’t for the weak of heart. Craig Mangean reports that for his team it was the most difficult part of the alignment process. “The word ‘torture’ comes to mind,” he says, “but the exercise was very revealing and got team members to begin opening up to one another.”

A gap often yawns between self-knowledge and behavior change. At another consumer healthcare company, one category manager made the leap from self-awareness to behavior change -and he is reaping the benefits. He describes his former self as a “one-trick pony,” a marketing manager who used his considerable powers of persuasion to push through his ideas and opinions. Not only did he not believe his aggressive style was a liability, he considered it an asset, the sign of a mover and shaker.

The manager began to see himself differently after his team went through an alignment. The feedback he received from his fellow team members was that he was aggressive, hard nosed, and more interested in talking than listening. He immediately began working with a personal coach, who helped him dial down his behavior to become less aggressive and more assertive. Now, six months later, his peers have told his coach that the executive has done a “180.” He listens and probes instead of lecturing, shows more of an interest in their opinions, and has taken on the role of coach. He attributes his turnaround to the cultivation of “active-listening skills,” especially decoding and feeding back the feelings behind his colleagues’ words. 

A while ago, he was assigned to a team charged with replacing, with a single company, the two media-buying agencies used by consumer health and pharmaceuticals. The consumer health group had already decided which company it wanted to go with, but during the discussions the consumer healthcare executive noticed that his pharma-side peer was having trouble committing to that decision. “The old me would have said, ‘I know you don’t know which to choose, but I do, so follow my lead,’” he recalls. “Instead, I decided to hear him out. I said, ‘It seems you are really struggling with this decision. I sense you have some other issues besides cost.’”

This executive’s use of active listening encouraged his counterpart to talk about an issue he hadn’t shared with the team: His unit had recently come under intense pressure from two competitors. “All our product knowledge resides in our current agency,” the pharma peer explained, “and I’m afraid that switching to a new one at this point may undermine our ability to compete.” By the end of the meeting, the two managers decided not to use the same agency. But, observes the changed executive, “If I had continued to push without taking the time to probe, he might have accepted my decision while continuing to have unresolved issues.”

Giving and receiving feedback, adjusting personal style, and active listening are just a few of the skills in which both cross-functional and functional team members need to become proficient and move up to high performance. 

But it’s important not to paper over poor team performance and dysfunctional conflict with a quick dose of training. Smart pharma companies will first align their goals, roles, protocols, and business relationships to resolve larger organizational issues. Then, they move on to developing individual conflict-management skills. But timing is everything. Folding the skill-building portion into the team alignment can risk team overload, but wait too long and the momentum fizzles.

The trek to high performance is a continuous one: team alignment, reassessment, skill development, reassessment, and back to alignment if need be. The time frame for the process depends on how rapidly a team can evolve. Typically, progress is immediate; within six to 12 months, expect dramatic performance improvement. 

Dysfunctional conflict slows companies down and forces them to focus inward. A growing number of pharma companies are eliminating conflict and creating high-performance teams from top to bottom that are prepared to meet challenges and remain competitive in today’s tough environment.

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New rules of engagement can help pharma companies to overcome the paralysis of creative conflict.

From Conflict to Collaboration

In spite of pharmaceutical employers' best intentions to the contrary, sales rep compensation is being squeezed in a vise that is gradually narrowing the gaps between what top, average, and bottom performers are earning. According to the Hay Group's Pharmaceutical Sales Force Effectiveness Study, co-sponsored by Pharmaceutical Executive, reps in the 90th percentile are earning just 40 percent more than the average performer. This is not to suggest that reps aren't being paid handsomely (they are), but that the pay-for-performance model is showing signs of weakness.    	

On the whole, the annual survey confirmed that many of the industry's compensation practices are working well, but sounded a few notes of caution along the way. (See "About the Survey," at the end of this article.)	

When it comes to allocating resources in sales, US pharmaceutical companies are engaged in a staring contest on a grand scale. Collectively, they employ nearly 100,000 sales reps, targeting approximately 250,000 physicians, and they plan to hire still more. The thought of backing away from such a ratio may be appealing, but only if someone else does it first-and survives in the market. No company wants to be the first to blink.  				

Nearly a quarter of US manufacturers plan to increase their sales staff by "a great deal" in the next year. Still, one gets the impression that every major player would do with fewer reps if only others would do the same.  In the absence of one company taking that first bold step, industry is compelled to keep doing what seems to work: get reps in front of physicians as often as possible. 		

Employing an army of salespeople works to achieve reach and frequency, but is that what it all hinges on? Could the whole sales process work even better? Many companies are in the process of answering that question by evaluating various sales force models. Their aim is to improve sales force effectiveness-without adding to the number of people knocking on physician doors. At that point, effectiveness will have to be measured in terms other than reach and frequency. Any new model would, of course, have to prove itself against the increasing numbers of competitive reps clamoring for face time with physicians.   	

Until someone punctures the status quo and adopts a different model, the challenges in using compensation to achieve a company's business goals will remain the same. Pharmaceutical employers continue to make their compensation plans ever more motivating, attractive, fair, equitable, and manageable. In fact, many companies intend to change their incentive plans next year, and several changes in effect this year are quite interesting. 	

Yet, the industry's sales force, which has reached roughly 100,000, continues to grow. In recent surveys, the market appeared on the verge of becoming saturated, and each year, like a magical sponge, it somehow absorbed still more reps. Between May 2002 and May 2003, 78 percent of study respondents increased their sales staffs, and nearly half did so by more than 5 percent. 	

A look down the product pipeline suggests that in the 2005–2008 time frame, the rate of new product introductions may slow, which theoretically should bring a corresponding slowdown in sales force growth. 	

Last year, voluntary turnover rates had begun to drop after they had peaked at 19 percent in 2001 for primary care reps. The ongoing drop has now brought them back to a more "normal" level of 10 percent-the lowest rate since 1998. (A voluntary turnover rate of 10 percent is typical in sales organizations in other industries.) Of course, in theory, the 10 percent a company loses should be the bottom-not top-performers. It seems logical to assume that salespeople were less mobile last year because of the tepid economy and because they recognize that the pharma industry is a good place to be. 				

For the first time, it appears that turnover rates within large pharma companies are slightly higher than those within specialty and biotech companies. It is too early to say if the change will become a trend, but it is at least worth noting and watching. Hay's experience in the field suggests that reps who are not afraid to take risks are frequently drawn to small specialty and biotech companies because of the autonomy, greater visibility, and wider scope of responsibility. 	

While previous study results have demonstrated that pay is not the primary reason for voluntary attrition within a sales force, it is nonetheless a related factor. Companies that targeted their compensation at the market median experienced 16 percent turnover, whereas those that targeted the 75th percentile saw only 10 percent attrition. (See "Pay Them to Stay.") Moreover, compensation is the primary reason for turnover among high performers-the very people companies most want to retain.  		

The pharma industry continues to pay salespeople well for their efforts. Reps earned more in total cash compensation in 2003 than the previous year, more as a result of their incentive earnings than their base salary. Some senior specialty sales reps, for example, earned 9.6 percent more in total cash than the previous year, which was primarily the result of larger incentive payouts. That trend suggests that companies are putting the onus on salespeople to earn their keep through strong performance. Even so, new salespeople can expect to do well for themselves. In 2003, an entry-level pharma sales representative can expect to earn an average of $62,500.				

Most companies examine their salary structures every year and make adjustments to remain competitive, to improve internal equity, or to counteract compression. The next median salary structure increase for all employee groups covered in the study is expected to be 3.2 percent, a slight decline from the previous increase of 3.5 percent.	

On the other hand, merit increases are expected to remain flat over the next year, and the criteria for determining merit raises have changed. In 2003, companies are relying far less on a demonstration of core company values and team skills than the year before. Reliance on core company values declined from 58 percent to 21.6 percent, and companies using team skills as a basis decreased from 34 percent to 5.4 percent, perhaps reflecting an industry preference for quantitative rather than qualitative measures. (See "Who Merits a Raise?")	

The use of sales results and compa ratios (an employee's base salary divided by the salary midpoint for the job level) to determine merit increases remained relatively steady between 2002 and 2003, currently used by 43.2 and 48.6 percent of companies, respectively.	

A growing number of companies claim that their compensation philosophy is to target base pay above the market median. In 2002, 38 percent of respondents aimed to set their reps' base salaries above the median, whereas 62 percent intended to do so in 2003. The constant escalation has the effect of perpetually pushing the median beyond reach, like the mechanical rabbit in greyhound races. The market median is the proverbial moving target. 	

A majority of companies also continue to target above the median for total cash compensation, a practice that is causing the upward spiral of compensation, evidenced by the substantial increases in total cash paid out in 2003. 		

One unintentional consequence of using compensation as a competitive weapon in the battle to attract new talent is that it compresses the spread between what a new hire and a tenured person make-unless sufficient changes are made to the salary structure for existing employees. Some new hires can be offered more in starting salary than experienced incumbents earn-the current situation with a few district managers. Naturally, that imbalance could prompt experienced district managers to look elsewhere.	

A job in pharma sales compensation management is not for the faint of heart; characteristically, the industry's plans are ultracomplex-more so than in any other industry. The most prevalent type of plan (representing 72 of the incentive plans reported) provides a multivariable incentive bonus on top of a base salary. By taking into account a variety of performance measures, the typical plan has a lot of moving parts that can be adjusted and re-adjusted to accommodate changing conditions and expectations. 		

That's the benefit, but there are two drawbacks. First, the plans are devilishly hard to understand, and consequently, they don't always provide reps with the direction and motivation intended. Rather than providing direction toward the required sales behavior and performance, the plan designs are viewed more as abstract algorithms that generate a cash payout that one hopes will be satisfactory. Second, the use of so many variables tends to compress pay, as individual payouts gravitate toward the mean. This is an example of probability theory at work: the more measurements taken, the less variation found in the results. 	

A related phenomenon is that many companies are now treating each quarter as a stand-alone performance period with its own goals and payout. Nearly 70 percent of companies reported using stand-alone quarters, a practice that had not been observed before. The concept is appealing to reps who have a bad quarter and get to start fresh with the next 90 days. It also benefits companies that want to ratchet up standards as the year progresses. 	

Although a short-term focus can be an appropriate performance management tool for sales organizations in a dynamic market, a note of caution should be sounded. To use quarterly stand-alone performance periods effectively, companies must ensure that their plans can stretch sufficiently to differentiate pay. Otherwise, when a rep's four units of compensation are averaged together at the end of the year, the total tends to gravitate toward the mean for all reps. 	

In adjusting an individual's targets upward or downward each quarter according to achievements in the previous quarter, companies are minimizing the difference in incentive payout across reps. Also, the use of quarterly plans for the sales organization and annual plans for other areas of the company could introduce major discrepancies across the company in the year-end perspective.	

As a rule of thumb, companies should strive to have their top performers earning twice the incentive compensation of an average performer. This goal is unrealized, however. In actuality, reps in the 90th percentile are earning only 140 percent of the average performer's incentive compensation. And, the rep in the 10th percentile earns 60 percent of what the average performer earns. (See "Less Than Ideal.") Combine that with the fact that everyone's base salary is essentially the same, and the differentiation between levels of performance becomes even more blurred. 	

Compression of compensation levels is a serious situation because it affects the best salespeople the most, and they are the ones most likely to pull up stakes for better pay elsewhere. The industry's pay-for-performance model is showing some signs of strain in that respect. It is essential that companies take steps to, as one industry member put it, "Let the big dogs eat!"  	

All of this leads to the disappointing fact that the industry's $2 billion incentive compensation budget is not as well appreciated as it should be. Fewer than half of sales reps feel that their incentive payout reflects their performance. Only slightly more are favorable about the fairness of their incentive plans.	

There is clear evidence that new reps are being added to incentive plans earlier and earlier in their employment. The average number of months elapsed before they are put on a plan has decreased from seven in 1999 to three in 2003, according to participants in Hay's semi-annual Sales Incentive Roundtable. That can be viewed as a shrinking security blanket-new reps are expected to start producing sooner-or as a recruitment tool-new reps are promised an opportunity to start earning bonus pay sooner. 				

Most companies (70 percent) incorporate sales incentives for new products into their existing plans, even though in Hay's experience, having a separate plan for the first six months of launch is more effective in boosting sales. A separate plan for a newly launched product gives the launch goals extra visibility and helps reps focus. But establishing a separate plan for a new product makes it difficult to maintain equity for those sales reps who do not have a similar opportunity, and that may be why so many companies refrain from doing so. 	

 Fewer than 20 percent of companies in the study use ranking as a primary method of calculating incentive compensation. In ranking, all reps are placed in order according to their performance, and the sales incentive budget is doled out accordingly. The practice simplifies incentive calculation and has the advantage of keeping budgets predictable. 	

But, it pits one rep against another in less than healthy competition. The practice brings to mind the old joke about the hunter who realizes that to survive, he need not outrun the bear that is chasing him, only his hunting companion. When they are compensated by rank, reps focus more on how they are doing relative to their peers and less on making their best effort.	

 The number of companies using special achievement awards has increased dramatically over the past two years-from 31 percent in 2001 to 71 percent in 2003-perhaps reflecting a need to counteract compression. Such awards are also often used to even out the score when good performers are adversely affected by managed care policies in their territory.  	

 These programs remain quite popular; 59 percent of reporting companies offer them. The most prevalent type is a nonqualified stock option plan, so smaller companies that can't offer stock are at a disadvantage. The whole practice is worth watching. 	

If Microsoft's move to give its employees restricted stock grants rather than options, the use of incentive stock options in pharma may be a bubble waiting to burst. Because companies can generally afford to be more generous with options, employees tend to prefer them. Reps may view a move toward grants as a negative change.	

In recent years, pharma's marketing function has been gaining ground in a sales-dominated world. Between 2002 and 2003, marketing made major strides, at least in terms of sheer mass. In just one year, the average number of incumbents per company in product management has nearly doubled, indicating a growing reliance on that critical function. The average head count in market research has also increased substantially (67 percent).				

The value of marketing is reflected not only in head count, but also in compensation. Compared with 2002, total cash increased an average of 8.8 percent for incumbents in product management jobs and 12.5 percent for incumbents in market research in 2003. Considering the recent state of the economy, those are healthy increases.	

For now, the pharma industry is focused on using the sales force to achieve reach and frequency. Only when companies are able to change their orientation from those metrics will the size of sales forces self-correct. 	

In the meantime, employers, in their zeal to measure an ever-multiplying array of variables in monitoring performance, risk compromising their ability to differentiate and reward top performers through their compensation and incentive practices.	

Still, companies have been making many improvements in their policies, and in the final analysis, there are many saving graces: turnover is down, total cash targets are moving closer to the median, and sales reps are still generously compensated.	

In spite of pharmaceutical employers' best intentions to the contrary, sales rep compensation is being squeezed in a vise that is gradually narrowing the gaps between what top, average, and bottom performers are earning. According to the Hay Group's Pharmaceutical Sales Force Effectiveness Study, co-sponsored by Pharmaceutical Executive, reps in the 90th percentile are earning just 40 percent more than the average performer. This is not to suggest that reps aren't being paid handsomely (they are), but that the pay-for-performance model is showing signs of weakness.

PE's Annual Sales and Marketing Employment Survey: The Big Squeeze

In PE's December Pipeline Report, an unexpected Phase III candidate rose to the top. The drug: BioMarin's Aryplase. The reason for its success: an amazing turnaround job by chairman and CEO Fred Price. But Aryplase is not Price's first accomplishment at BioMarin, which was spun off from Glyko BioMedical in 1997. 		

It is, in fact, only one of many that resulted from Price's efforts to jump-start a stalled company.	

Price joined BioMarin in October 2000, when its founder, Grant Denison, a former colleague at Pfizer, decided to retire. But when first asked to come on board, he turned the offer down. He thought he was right where he wanted to be.				

After earning an MBA from Wharton, Price spent 13 years coming up through the management and finance side at Pfizer, then jumped ship at age 40. "I didn't want to get divorced or buy a Porsche or change my life," he jokes. After some consulting work and a CFO position,  Price landed the CEO position at Applied Microbiology-a New York biotech that develops protein-based antimicrobials-where he was able to put all his skills to work. Six years later, the BioMarin offer came along. Price was intrigued, but he didn't want to leave the East Coast. So he agreed to help the company select a successor. But the more Price learned about BioMarin, the more he liked it. Six months later, he packed up and headed for Novato, California.	

He had his work cut out for him. The company had too many products in development, no game plan for pushing them through clinicals, and only enough money to last another six months. "The old saw in real estate is location, location, location," Price says. "And in biotech, I've always felt it's focus, focus, focus." He started with the company's mission statement. The original was " long, confusing, disjointed, and almost dysfunctional," he claims. He boiled it down to what he calls an "elevator speech"-what he would say to an analyst about the company during a 30-second elevator ride-"We develop enzymes for life-threatening diseases." 	

With that new focus in mind, Price began to shed projects. "I got rid of all the things that were either enzymes that didn't focus on life-threatening diseases or were not enzymes, whether they were for life-threatening conditions or not," he says. "And I got rid of a diagnostic analytical subsidiary." The second step of the paring process was to look hard at profitability. "If it stands a reasonable chance of being approved, is there a market?" Price asked of each candidate. "Can we price it appropriately? And can we market it effectively ourselves or through a partner and end up making money? If the answer is yes, we continue. If the answer is no, we get rid of them. So we got rid of more candidates."	

Once Price had scrapped noncore projects, his next step was to raise the capital needed to advance the keepers. Even though BioMarin had gone public during the tech boom of early 2000, it had failed to maintain the interest of the investment community. In market capitalization, it ranked 61st among biotech companies, and most of its stockholders were individuals. "I don't think there was an institution that owned more than 100,000 shares," he recalls. "And there were very few accounts that had 50,000 shares."		

Price hit the road in search of cash, traveling to Zurich, London, New York, Boston, San Francisco, and Los Angeles. "I called on my own experience and my connections with Wall Street in the financial community," he says, referring to the five years he worked as a CFO and consultant for venture capital and pharma companies. "By May of 2001, I visited 87 institutions, and of those, there were 10 that I visited at least twice, and five or six that I visited four or five times." 	

He first raised $45 million through a private placement with UBS, a Switzerland-based global bank. Having the support of a prestigious investment firm behind it helped BioMarin generate some excitement. In three years, Price raised $376 million, doubling the company's market cap. 	

While Price was raising capital, BioMarin's R&D staff-headed by Emil Kakkis, MD, PhD, formerly a professor at UCLA, and Chris Starr, PhD-was building its own buzz with strong clinical trial data for Aldurazyme (laronidase), the company's first product. Kakkis had developed the enzyme replacement therapy at UCLA, then joined BioMarin when it licensed the molecule in 1998. The company set up a 50/50 partnership with Genzyme-which has a successful track record for commercializing enzyme therapies-to develop and commercialize Aldurazyme. In early 2003, FDA and the European Commission approved it for the treatment of mucopolysaccharidosis I (MPS-I). 				

Patients with MPS-I are born without an enzyme necessary for breaking down carbohydrates. Their bodies build up an excess of glycosaminoglycan (GAG) in the tissue and organs. Before Aldurazyme, most of those patients died before reaching adulthood. (See "A Father's Quest," page 66.) 	

The drug reduces carbohydrate buildup, slows the damage to liver, kidneys, lungs, and heart, and improves-and may extend-patients' lives. Nearly 4,000 people worldwide are affected by MPS-I, so Aldurazyme has a small market. But it is currently under review in Australia, Canada, Israel, and New Zealand, and its sales potential is about $175,000 per year per patient.	

BioMarin's next launch will likely be Aryplase, developed in-house and rated by analysts as one of the best pipeline candidates in Phase III. Aryplase, a recombinant human arylsulfatase B, is intended for patients with mucopolysaccharidosis VI (MPS-VI), a condition similar to the one treated by Aldurazyme. The disease is also characterized by a carbohydrate buildup, but in this case, the 1,100 people worldwide who have it are lacking a different enzyme. The company plans to submit it to FDA next fall, and with its orphan/fast-track status, it could be approved in early 2005. Price believes its market potential is around $150 million.		

"Aryplase has a enormous amount of near-term excitement," Price says. "We have extraordinary Phase II data, and there are many important milestones coming up. It should really get the financial community's interest." BioMarin intends to be involved in commercializing Aryplase in the United States and will seek a partner to market it elsewhere, but Price is in no hurry. "Our view is, the longer you can wait, the bigger the deal," he says.	

Enzyme deficiencies may affect only small patient populations, but there are a surprising number of variations. And BioMarin has more such treatments in the pipeline. (See "The Enzyme Pipeline.") At least 50,000 people in the developed world suffer from phenylketonuria (PKU) and lack the enzyme needed to break down an amino acid in protein. To survive, those patients can consume only a liquid formulation of predigested proteins-for their lifetime. 		

BioMarin's Phenoptin, a second-generation oral form of tetrahydrobiopterin, if approved, will allow PKU patients to eat a more normal diet, depending on the severity of their condition. The product will enter clinical trials next year. For those with a more severe form of the disease, BioMarin is developing Phenylase, an injectable enzyme therapy. Another item of interest in the pipeline is a technology called NeuroTrans that takes enzymes and possibly other therapeutic proteins across the blood–brain barrier. If approved, it could create a healthy revenue stream from licensing agreements with companies that develop neurological drugs.	

The timeline for those projects will accelerate now that the company has discontinued development of Neutralase (heparinase) and can reallocate its resources. The compound had been intended as a treatment to reverse the effects of heparin (an anticoagulant) in coronary artery bypass graft surgery. But in the first Phase III trial, it became immediately clear that the positive results of the Phase II trials would not repeat themselves. "That's why you do large-scale trials," Price comments. Overall, the company is disappointed, but unfazed. At the time, its stock price dropped 20 percent (to $6.80), but has since regained half the loss. 				

"I don't want to call it a silver lining," Price says, "but in drug development, considering how expensive it is, if you're going to get a bad answer, it's better to get it early than late. By stopping the trial when we did, we saved $30–$40 million in development costs."	

The long-term result is that BioMarin's cash burn will be less than it had projected and its risk profile has decreased. "We're pretty excited here," Price says. "We have a lot of good near-term markers, and we're well on our way to achieving profitability in '06."	

In PE's December Pipeline Report, an unexpected Phase III candidate rose to the top. The drug: BioMarin's Aryplase. The reason for its success: an amazing turnaround job by chairman and CEO Fred Price. But Aryplase is not Price's first accomplishment at BioMarin, which was spun off from Glyko BioMedical in 1997. It is, in fact, only one of many that resulted from Price's efforts to jump-start a stalled company.

Streamlining For Success with Fred Price of BioMarin

Think back: When did you first hear the phrase metabolic syndrome? When did it start to become part of your business and its plans?	

Maybe that second step hasn't taken place yet. But for many in pharma it's coming soon. In the past few years, scientists, researchers, and healthcare companies have been paying increasing attention to the concept that obesity, hyperlipidemia, diabetes, and hypertension-and perhaps other diseases, including some cancers-are linked. 	

And the pace of new developments is accelerating. For example:	

The American College of Cardiology and the American Diabetes Association (ADA) recently launched "Make the Link," a campaign that informs physicians and consumers that type 2 diabetics run an increased risk of heart disease and stroke.

MSAToday.com, an alliance with a corresponding website funded by unrestricted grants from GlaxoSmith-Kline (GSK), offers physicians information about metabolic syndrome and continuing medical education credit.

November 2003 saw the launch of the first annual scientific meeting devoted to insulin resistance, which most scientists believe is the cause of metabolic syndrome. 

In early 2004, a new society devoted to metabolic syndrome called the International Society of Diabetes and Vascular Research is expected to launch and begin publishing its own journal. 

It's not just that metabolic syndrome has become better understood, better publicized, or better supported by an infrastructure of journal articles, meetings, and associations. Behind those events and dozens more like them something far more basic is happening: A new disease is being born.		

Unlike a new pathogen bursting from the jungle like Ebola or mutating from something familiar like each year's "new" strain of influenza, metabolic syndrome must be both socially and scientifically constructed. Well-known medical facts have been reorganized into a new understanding. And with that knowledge comes the need and opportunity for new research, new modalities of treatment, and, on the pharma side, new market risks, demands, and opportunities.	

"Just think of cholesterol," says John Wendel, PhD, a medical anthropologist at Integrated Marketing Associates. "Cholesterol wasn't something people talked about 20 years ago. Merck spent years getting physicians to think about it as a big problem. Now they do."	

The emergence of cholesterol reduction as a market was a major event for pharma. Metabolic syndrome promises to be as big or bigger. Like any new disease, this one offers significant challenges to pharma. But for companies that meet them-especially the challenge of finding an appropriate role for medication in treating a disease with a large lifestyle component-metabolic syndrome will be a force reshaping products, companies, and markets for decades to come.	

The observation that obesity, hyperlipidemia, diabetes, and hypertension frequently can be found together dates back to the late 1970s, when German researchers named the phenomenon "metabolic syndrome." (See "What's in a Name?" page 52.) But no one paid much attention until 1988, when Gerald Reaven, MD, a professor of medicine at Stanford University, articulated the risk factors related to what he called "Syndrome X" during an acceptance speech for the ADA's Banting award. Reaven was also the first to focus on insulin resistance as the underlying cause of metabolic syndrome. 			

"Nothing helped metabolic syndrome more than the establishment of the ICD9 code." - Yehuda Handelsman, MD				

Insulin resistance is the state in which a person's normal level of pancreatic insulin secretion is inadequate to unlock glucose from food and transport it to the body's cells for energy. The condition is thought to be genetic, but it can be aggravated by obesity and physical inactivity because fat cells aren't receptive to insulin. Most patients with type 2 diabetes, though not all, are insulin resistant and take medications to sensitize the body to insulin, address insulin deficiency, or target other problems related to blood-glucose control. But insulin resistance doesn't always lead to type 2 diabetes. Reaven says that most people with insulin resistance don't even develop the disease. 	

In 1989, Norman Kaplan, MD, professor of internal medicine at the University of Texas' Southwestern Medical Center identified four risk factors for heart disease-upper body obesity, impaired glucose intolerance, high triglyceride levels, and hypertension-and dubbed it the "Deadly Quartet."	

Underlying the Quartet: the excessive blood-insulin levels often associated with insulin resistance.	

Additional studies in the early 1990s-most notably one by a team led by Ele Ferrannini, MD, who heads the European group for the research of obesity, hypertension, and insulin resistance based in Pisa, Italy-confirmed the basic insights of the preceding years. But it took a decade before a fairly rapid series of developments took metabolic syndrome out of the academic realm and introduced it into the world of medical practice.	

First, in 1999, the World Health Organization issued its own description of metabolic syndrome. Yehuda Handelsman, MD, co-chair of the International Committee for Insulin Resistance and medical director of the Metabolic Institute of America, explains, "They again described that same constellation of abdominal obesity, elevated fasting blood triglycerides, low levels of HDL or 'good' cholesterol, high fasting blood sugar, and high blood pressure, and said if somebody has those, they have a high risk of developing diabetes and cardiovascular disease (CVD)."		

Two years later, the National Cholesterol Education Program (NCEP) Adult Treatment Panel (ATP) III released a simplified set of diagnostic guidelines. (See "ATP III Criteria," page 51) 	

"NCEP came out with their guidelines in the JAMA of May 2001," says Christine Beebe, director of education and scientific affairs for Takeda. "That was a call to action for physicians to not only focus on LDL cholesterol, but on metabolic syndrome and this constellation of other risk factors to prevent CVD." More important, metabolic syndrome received its own code in the International Classification of Diseases, Ninth Revision (ICD9). In a world in which a condition isn't really a disease until it becomes part of physicians' paperwork, metabolic syndrome had crossed an important threshold.	

"The fact that metabolic syndrome has been identified as an actual disease state is a huge step in the right direction," says Beebe. "Before that, physicians didn't have a reason to focus on these individuals before they developed diabetes or CVD."	

To Handelsman, who can methodically recount the syndrome's genesis, as a parent recounts the maturation of a child, that was the tipping point. "Nothing helped metabolic syndrome more than the establishment of the ICD9 code."		

The"Make the Link" campaign, sponsored by the American College of Cardiology and the American Diabetes Association, is an example of the type of cross-pollination of specialties emerging in metabolic syndrome.  				

Pharma then opened its floodgates and began to publicly fund market development initiatives to make physicians more aware of the role of insulin resistance in diabetes and heart disease. Although physicians knew that the two often existed in the same patients, the initiatives helped to cross-pollinate cardiologists and endocrinologists. Some of those initiatives included:	

Partners Against Insulin Resistance, an educational program underwritten by Takeda Pharmaceuticals North America and Eli Lilly, designed to promote awareness about insulin resistance. 

The first professorship at the University of Liverpool dedicated to obesity research, funded by AstraZeneca-an early mover in the field, having backed "Future Forum," a physician website targeting metabolic and vascular disease management, in 1999.

"Insulin Resistance: Cardiovascular Risks and Therapeutic Interventions," an interactive satellite videoconference presented by the Endocrine Society and funded by GSK. 

The scope of research on metabolic syndrome has widened, and today scientists cite mounting evidence that insulin resistance is related to breast, prostate, and colon cancer, polycystic ovarian syndrome, and nonalcoholic liver disease, among other conditions.	

Communications about the new disease have achieved a critical mass. "Today, if you scan the medical journals, there are plenty of articles on metabolic syndrome," says Richard Nesto, MD, chairman of the department of cardiovascular medicine at the Lahey Clinic Medical Center in Burlington, Massachusetts; associate professor of medicine at Harvard Medical School; and co-principal investigator of BARI 2D, a trial evaluating treatment strategies to improve survival in type 2 diabetic patients with coronary artery disease. "And if you look at the websites that have anything to do with high blood pressure, diabetes, cholesterol-many of them supported by drug companies-you'll see there is enough out there that the average mindful physician should have heard about it."	

That is fortunate, since by all accounts, physicians are seeing an enormous number of patients with metabolic syndrome, and the number is expected to grow.		

Cardiologist Mark McGovern, MD, chief medical officer of Kos Pharmaceuticals, says that the US obesity epidemic is driving metabolic syndrome, and, therefore, increases in type 2 diabetes and heart disease. "It's estimated that 20 percent of the adult population has metabolic syndrome," says McGovern. "Similarly, 20 percent of adults are obese. Within the next decade, by some estimates, obesity will climb to 40 percent of the population. Another frightful statistic from the NIH is that for an American born in the year 2000, the lifetime odds of developing diabetes will be one in three. The American College of Cardiology made another estimate: the prevalence of heart disease will double by the year 2040."				

According to some estimates, 86 million Americans will have metabolic syndrome by 2025. Many are already being treated for type 2 diabetes or heart disease. (It is estimated that metabolic syndrome raises the likelihood of heart attack between four and 20 times.) But the real challenge is to find a way to prevent millions of at-risk patients from developing type 2 diabetes and heart disease in the first place. 	

"In metabolic syndrome, the risk for type 2 diabetes has been there for years before the person becomes formally diagnosed," says Nesto. "So you may see a 60-year-old diabetic who had a heart attack at age 50. But that heart attack may actually have been an early manifestation of this underlying metabolic condition. CVD begins well before the person loses the ability to manage their glucose.	

"It used to be that patients who have family histories of early heart attacks had 'bad genes.' But if you look at families with premature heart attacks or strokes, very often they have metabolic syndrome."	

Nesto talks to his patients about metabolic syndrome-but he may be one of the few. John Buse, MD, chairperson of the ADA diabetes/cardiovascular disease initiative, which fueled the "Make the Link" campaign, says some doctors wouldn't recognize metabolic syndrome "if it bit them in the face." But others ignore it intentionally because there's not yet enough clinical evidence to determine what to do for patients.	

 "Until we learn more about the root causes and can test some of these new hypotheses, we're still left with treating individual entities-one drug for hypertension, one to treat lipids, one to treat glucose abnormalities," says Gunnar Olsson, global vice-president of cardiovascular therapy area for AstraZeneca. "So you end up with a cocktail of therapies, unless some of these drugs in development that treat glucose and lipids simultaneously come to fruition." (See "PPAR Pipeline," page 54.)	

Even though there are no FDA-approved treatments for the group of symptoms suffered by metabolic syndrome patients, there is still value in communicating to physicians about it. "The problem comes when you have a lot of 'milds'-mild hypertension, mild disturbances in cholesterol, and mild obesity," says Nesto. "No one bothers to treat them because, individually, the risk factors don't look so bad. With metabolic syndrome, you have a collection of mild risk factors, but the risk of that collection is greater than the sum of the parts."			

A recent flood of research including the Diabetes Prevention Program (DPP), STOP-NIDM, and the Troglitazone in Prevention of Diabetes (TRIPOD) proved that diabetes drugs administered to high-risk patients can prevent or delay the onset of type 2 diabetes. The Xenical in the Prevention of Diabetes in Obese Subjects (XENDOS) study demonstrated that pharmacotherapy plus improved diet delayed or prevented the development of type 2 diabetes more than lifestyle modification alone. 	

 "What remains to be tested," says Olsson, "is if any of the therapies treating different parts of metabolic syndrome could have a broader effect on one or more of the risk factors, which could simplify treatment."	

The next question for industry to answer is more complex: What are the effects of using cardiovascular and diabetes drugs to prevent or treat heart disease and diabetes? Several clinical trials are already underway to answer that. Three of the most prominent are:				

 In November 2000, GSK and Aventis announced the Diabetes Reduction Approaches with Ramipril (Altace) and Rosiglitazone (Avandia) Medications (DREAM) study. The 4,000-patient trial builds on two earlier studies: TRIPOD and a subgroup analysis done in HOPE (Heart Outcomes Prevention Evaluation), which found that Altace reduced the number of patient self-reported cases of diabetes by 34 percent.		      	

 Launched in September 2001, Novartis' Nateglinide (Starlix) and Valsartan (Diovan) in Impaired Glucose Tolerance Outcome Research study is designed to determine whether long-term administration of either drug can reduce or delay the development of type 2 diabetes and cardiovascular disease in individuals with impaired glucose tolerance and at increased risk for CVD. It is the largest diabetes prevention trial ever, with more than 7,500 patients in 40 countries. 	

 The University of Pittsburgh Graduate School of Public Health, with funding from Bristol-Myers Squibb, GSK, and several public institutions, is conducting the Bypass Angioplasty Revascularization Investigation 2 Diabetes study to determine whether, in patients with type 2 diabetes, initial treatment with angioplasty or bypass surgery is better than initial treatment with a medical program. At the same time, 	

BARI 2D will compare two approaches to control blood sugar: providing insulin-stimulating medication or providing medication that sensitizes the body to the available insulin.	

Think back: When did you first hear the phrase metabolic syndrome? When did it start to become part of your business and its plans?

Pharmaceutical Executive-01-01-2004

From Conflict to Collaboration

PE's Annual Sales and Marketing Employment Survey: The Big Squeeze

Streamlining For Success with Fred Price of BioMarin

The Making of a New Disease

Table of Contents