Last year, FDA released a series of concept papers that summarized the agency's plans for risk management. One described a new mandate for the pharmaceutical industry: to develop a risk management plan (RMP) for each drug, to be submitted to FDA at the time of the new drug application. The concept papers still need to be finalized and converted into a guidance (a document that explains how companies may comply with FDA regulations), but the mandate is likely to go into effect this year. 	

Risk management is the continuing process of minimizing risks throughout a product's lifecycle to optimize its benefit/risk balance. A risk management program is a strategic safety plan designed to decrease product risk by using one or more interventions or tools. Such tools extend beyond the package insert and routine post-marketing surveillance. An RMP also includes the background, research, rationale, and logic necessary to develop and implement the strategy and tactics for the program. 	

Developing an RMP requires pharma companies to think through not only how a drug is supposed to be used—the indications, contraindications, precautions, and warnings—but also how it will be used or misused by prescribers, dispensers, and patients throughout its lifecycle. To do so, RMP drafters must seek to influence the behavior of all of the parties responsible for drug safety, particularly patients, physicians, pharmacists, and allied medical staff. This is not an easy task, as evidenced by evaluations of current RMPs such as for Roche's Accutane (isotretinoin). Therefore, a reasonable RMP must demonstrate that the company understands the limits of various tools intended to manage risks, that it will use adequate interventions to control risks, and that it will evaluate the impact of its RMP with sufficient specificity to improve outcomes if it does not reach reasonable effectiveness targets.			

Although FDA's risk management concept paper provides pharma companies with a clear set of directions on the format for RMP submissions, to compile the plan, pharma drafters must apply an appropriate analytical framework, along with insights from original research. This article outlines how pharma companies can approach RMP development. 	

Although FDA states that pharma companies need to consider an RMP for all drugs, for many drugs, professional labeling, routine post-marketing surveillance, and perhaps some form of patient labeling will be sufficient. For some drugs, however, pharmaceutical companies must plan for a more aggressive RMP. For drugs for serious or life-threatening illnesses, such as cancer and AIDS, there is a great deal more tolerance for personal risk than for drugs used for cosmetic purposes, such as acne or head lice. Yet even for life-saving drugs, when the risk posed has the potential to be prevented, companies must seriously consider an RMP. 				

The starting point for any RMP is to obtain as complete a knowledge as possible of the product's safety hazards. Some hazards may be suspected and subjected to continuing post-marketing surveillance. There is always debate about which signals denote real risks and which denote false positives. Following the precautionary principle, even suspected risks will likely require some risk intervention, even if it means only notifying prescribers of the possibility. The proposed package insert will serve as the best source of information about the product's known or suspected risks and the be the best basis for risk management planning.	

Drugs that have serious or life-threatening contraindications, warnings, precautions, or adverse effects are the most likely candidates for risk management interventions. Patient behaviors that can mitigate risks, such as pregnancy prevention, blood tests, overdose/misuse avoidance, and awareness and action related to specific safety signals (hypersensitivity reaction, depression, and suicide), will also need to be addressed in an RMP. When people other than the patient may be at risk—by using the product inadvertently—an RMP may also be required.	

FDA has specified four levels of risk management:	

Level 2: level 1 plus education and outreach to health professionals and patients/consumers

Level 3: level 2 plus systems that guide the prescribing, dispensing, or receipt of a product

Level 4: level 3 plus patient adherence to program elements.

It is likely FDA will not require any formal specification of risk management levels in its final guidance. In the past, the industry objected to the concept of specifying levels out of concern that a competitor company could mischaracterize a drug's level as a signal of risk. However, the agency will probably presume that the proper application of risk management requires the progressive application (or "layering") of risk management tools. These tools must be targeted at solving the problems associated with particular pharmaceutical risks and applied with sufficient specificity to mitigate the attendant risks.	

The concept paper outlines a three-step process for developing an RMP.				

 First, the paper says that each plan must specify the overall goals of the product's risk management program—the desired endpoints for safe product use. For example, if a drug causes birth defects, a reasonable goal would be that no women who are pregnant be given the drug. A second goal might be that no women should become pregnant while taking the drug. It should be noted that goals may never be fully met. However, making progress toward meeting the goal, rather than actually achieving it, may be an acceptable outcome.			

 Next, FDA calls for companies to identify a series of objectives for each goal. The objectives must be specific and measurable. They must outline the behaviors and processes necessary for the stated goals to be achieved. For example, if the goal is to prevent pregnancy while taking the product, the RMP may specify an objective that all women must have a pregnancy test within seven days of initiating therapy. Objectives often identify the particular individual—patient, pharmacist, physician, or allied health professional—responsible for the desired behavior. This aids in developing a communications plan directed at that individual, which will likely be a core element of the RMP.	

 Pharma companies must also select a series of tools designed to intervene and mitigate risks. Three general types of tools are available. The first set of tools is used for the dissemination of information to the responsible individual. Companies can use several communication tools to provide a coordinated and augmented message. Each tool is focused on an essential communication objective, and there may be multiple redundancies built into the informational interventions.	

There are also tools that provide educational or certification processes. These tools may either provide feedback for educational purposes so that knowledge deficits may be corrected on an individual level or they may test the individual to determine his or her qualifications or competency for administration, dispensing, or use of the medication. 	

The third group of tools applies systems that influence or control the dispensing of the medication. These systems may limit use to patients who have undergone certain testing that demonstrates their ability to continue to use the product. For example, blood testing may be used to check for the occurrence of adverse reactions, so that the drug may continue to be used in a safe manner. 	

The FDA concept paper asks companies to select and justify their choice of tools. To do so, companies need to develop a conceptual model for how their drugs are used and what system failures may lead to product misuse. In addition to relying on a systems analysis, using a behavioral model of product use—how beliefs, motives, and situational constraints influence the way a drug is used—can help determine a coordinated set of tools and specify core messages that must be communicated or systems that must be implemented to define the elements of the RMP.				

A good starting point for developing a drug-use model is to identify the various steps necessary to use a medication properly. Failure Mode and Effects Analysis (FMEA) is a systematic analysis of how failures may occur in any system. It identifies steps or elements where mistakes may occur, before the system is implemented.	

FMEA is a complement of root-cause analysis, which is aimed at identifying the source of a system's failure once a mistake is identified. An effective FMEA identifies corrective actions required to prevent failures and to assure the highest possible system quality.	

To undertake an FMEA, pharma companies must identify potential failure modes. This action may be broken down into subprocesses, with each step in the system being considered a separate element with the potential for failure. Each of the postulated steps where failure might occur should be assigned a severity value, a probability that a given effect might occur, and a likelihood value that a user may detect (and correct) the problem. Recommended actions are then developed to increase detectability, to reduce the probability, and, most important, to decrease the severity of harm. Priority is given to problems with the highest index of probability and severity.	

Although it was developed as a method to improve product quality, an FMEA can only be as good as the quality of the system description. Specifying steps too broadly can miss important elements. For example, after consultants performed a system analysis for a medications error problem in which pharmacists were dispensing the incorrect medication to patients, they found that the pharmacists were dispensing the drug that physicians had identified.	

Although it is usually assumed that medication errors are caused by pharmacists' difficulty reading physicians' handwriting, in this case the problem was that physicians recalled the incorrect drug name from memory when they wrote the prescription. If they had used an FMEA that did not specify the need for the physician to recall the correct drug name from memory, the consultants would have missed an important source of error.	

In addition, to specify the subprocesses, pharma companies and their RMP crafters need to understand the system from the perspective of the individuals who are performing the tasks involved. The relationship between knowledge and behavior is not direct or simple. People often know what they should do but fail to behave in a fashion that is consistent with that knowledge. To develop a predictive model, it is necessary to understand the:				

full set of beliefs underlying behavioral intentions

motivations that support or stand in the way of exhibiting desired behavior

environmental conditions that facilitate or place barriers to compliance.

There are a variety of psychological and health behavior models that can be used to organize these influences. Some models may improve the processing of presented information, for example, by improving patients' involvement (personal relevance) or competency (self-efficacy) with the information or advocated behavior. 	

Some models may help RMP crafters understand the processes underlying the choices among alternative courses of behavior (behavioral decision making). Other models may help structure advocated behaviors into a series of stages, permitting messages that seek to move patients and physicians through necessary stages to attain behavioral compliance (precaution adoption or stage models). Still, other models attempt to motivate compliance through emotion (positive affect or fear appeals) or through highlighting desired outcomes (approach or avoidance goals).	

Determining which model to use depends on the particular problem addressed. If the RMP advocates complex behaviors (such as avoiding drug dependency), it may be necessary to move respondents through a series of stages to overcome situational barriers. If the plan calls for simpler behaviors (such as standing upright when taking tablets), offering a strong, even emotional, rationale for compliance and a reminder system might provide the best model to influence behavior. Diagnosing the behavioral problem and selecting (or custom building) the correct behavioral model can produce a clear method for the design of the RMP.	

Because companies are dealing with programs that are expected to reach and influence the vast majority of participants, it may be difficult to anticipate the full range of issues influencing the behavior of all patients and healthcare professionals. Research studies that provide insights into the issues are invaluable. Identifying particular at-risk patient segments can also help companies design program interventions targeted at particular failure modes for a specified group of individuals.	

Implementing an RMP involves the dissemination of information to participants. Multiple interventions or multiple distribution methods are often required, if for no other reason than for the redundancy needed to ensure exposure to the key messages. For patient information, there are several communication vehicles, each with a slightly different purpose. (See "Communication Tools.") The vehicle(s) selected should be based on the purpose of the communication. If patient commitment to a long-term behavior is an issue, a patient agreement or contract may be advised. If situational cues are needed, packaging reminders or telephone calls may the right intervention. Tools should match the need for particular impact.				

A broad process model may help companies select the right communication tools. One process model specifies that for communications to influence behavior, participants must:	

incorporate the message in their decision-making process

display the advocated behavior over the time period as needed.

Designing a set of communications that will fulfill all of these steps is complex and requires some tradeoffs. For example, exposing patients to the message may be accomplished by delivering the information in the medication package. But patients may not pay attention to a long document written in small type on thin paper. Thus, a smaller document that provides key messages may be more likely to be noticed. That, in turn, may be augmented by a longer brochure provided by the physician or pharmacist that explains the rationale for advocated behaviors. Adding a reminder program, such as warning symbols on the package, could also help stimulate the advocated behaviors and provide a more complete communications program.	

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Features

Last year, FDA released a series of concept papers that summarized the agency's plans for risk management. One described a new mandate for the pharmaceutical industry: to develop a risk management plan (RMP) for each drug, to be submitted to FDA at the time of the new drug application. The concept papers still need to be finalized and converted into a guidance (a document that explains how companies may comply with FDA regulations), but the mandate is likely to go into effect this year.

The Risk Management Mandate

College isn't just for students anymore. It's for companies too. Over the past decade, institutions of higher education have increasingly found that some of their most important stakeholders are their students' employers—and that they can extend their reach and influence by responding to the needs of local and regional business. 	

Industry has made discoveries as well: that knowledge continually grows obsolescent and needs updating; that professional growth requires more than narrow, job-related training; and that universities, especially today's new breed of entrepreneurial institutions, are flexible, innovative partners.	

This article looks at the range of partnerships between higher ed and pharma, from traditional degree programs to sophisticated, tech-enhanced training sequences. The take-away: In the words of Kathy Grayson, editor of 

 magazine, which covers the business of higher ed, "The companies that are going after what they need are getting it. If they're waiting for the schools to come to them, they're going to be left behind."	

Business training has been part of higher education's role for decades, but in the 1990s that role grew explosively.  There are several reasons why:				

In a time of rapid technological growth, companies became aware of how much their employees needed to learn, and came looking for help.

Local governments, focused increasingly on regional economic development, pushed schools to support industry with training.

New educational technology created new routes to distribute knowledge, and new possibilities for partnering

The rise of for-profit universities such as the University of Phoenix created new models of how schools and companies could work together. 

The pace of deal making between businesses and higher ed has accelerated in the past two years. "There have been a lot of presidential changes over the past two years, and a lot of very young, progressive presidents are coming into these schools from the corporate sector," says Grayson. "Partnerships with regional and local industry are no-brainers for them."	

The simplest form of collaboration occurs when companies provide advice to schools that are developing industry-specific programs for their own students. There's a long history of collaborations of this sort between higher education and pharma. One of the most recent helped create the medical sales major in the department of business administration at the all-women's College of St. Catherine in St. Paul, Minnesota. The program, thought to be the first of its kind, is one of a trio of new sales-related majors at St. Catherine. (The other two focus on business-to-business sales and financial-services sales.) It was launched in 2001, funded and designed with the help of Pfizer.		

The school first focused on sales in 1997 when it received a challenge grant from 3M Corporation. "3M recognized two things about their sales force at the time," explains program manager Debbie Stewart. "One, it was predominantly male. Two, many of them would be retiring soon, and 3M had not done what they needed to do to replace them. So they went to half a dozen colleges and universities around the country and said, 'Build us a curriculum that elevates sales to an academic discipline at a professional level.'"	

St. Catherine set to work, and within a few years additional sponsors came around, asking for industry-specific programs. One was Pfizer,  which provided a list of competencies students needed to develop, and helped administrators decide what existing courses filled the bill and what new ones were required.	

The two principal innovations in the curriculum were a course on how to interpret medical research and another on selling to managed care. In addition, students take liberal arts courses, the core sales curriculum, plus anatomy (or chemistry) and physiology, medical terminology, and healthcare economics.	

The program also keeps students in close touch with the industry. "From the beginning, we pair them with mentors doing the kinds of jobs they've expressed interest in," Stewart says. "In the introduction course they do an informational interview, getting a sense of what that person's job is all about. As they move forward, they shadow a rep on a sales call or sometimes an entire day of calls. They get a clear notion of what being in that role will be like."	

The program is offered both as a major for traditional undergraduates and as a certificate program for students who already hold a bachelor's degree. The first half-dozen degrees in medical sales will be granted this spring. 	

"The strength of this program is that it kind of gives hiring managers the best of all worlds," says Stewart, who herself once ran a sales force in the field of audiology. "The students have very strong critical thinking skills because of their liberal arts background. They understand business generally and can relate to customers on that basis. They may not have specific product knowledge when they graduate,  but they certainly have the buckets to put that information in."	

When a company helps a university develop an industry-oriented program, it's good for the industry, but there's no guaranteed benefit for the company. As a result, many focus their educational efforts not on possible future hires but on current employees.				

One strategy many companies have employed involves bringing an existing college or university program to the company site. Typically companies are able to work out a schedule that suits their employees. The content can be off-the-rack, or company-specific knowledge and practices can be woven into the curriculum. For example, for the past two years, Watson Pharmaceuticals in Corona, California, has offered a 100-hour certificate program in pharmaceutical engineering, taught on Watson's site by nearby California State University–Fullerton.		

The program is conducted on a cohort model—which means that a group of students enter together and take all their courses together for the length of the program. It lasts about a year, six weeks on, one week off. "It's open to almost anybody as long as it's along the lines of what they do on the job—or what they will be doing," explains Watson senior training specialist Gregg Sherman. 	

Watson has put two groups through the course—a total of about 35 people. A third cohort starts in the fall.	

The program was created by Cal State–Fullerton's University Extended Education division as one of its regular public offerings. The program consists of five courses, each 20 hours long. Courses cover:	

Process engineering in the pharmaceutical industry

Regulatory affairs and quality assurance. 

"The courses are taught by industry experts," says Carol Ferguson, business development specialist for the university. "The courses are not just about technical issues, but also hands-on, real-life applications."	

The use of professionals as instructors can raise issues, Ferguson explains. "We are currently working with one client, and my usual instructor worked for a direct competitor. We had to make other arrangements. We sign a confidentiality agreement, and our teachers are savvy enough to block their ears when student questions might give away proprietary information."	

For Sherman, part of the benefit of the course was the interaction across functions. "In my class, we had  a cross section of the company—manufacturing people, quality folks, support functions," he says. "The thing that's hard to measure is how those 20 people now interact together. We feel like we can solve any problem regardless of whether we covered it in the classroom or not."	

One of the best-known university programs serving pharma is the Executive Pharmaceutical Marketing MBA offered by the Haub School of Business at St. Joseph's University in Philadelphia. The St. Joe's MBA is offered both in a traditional executive format (weekend classes, with a completion time of two to six years) and in an online format (one online course per month plus three on-campus residencies, for a total of 22 months). St. Joe's recently completed a special offering of the online version exclusively for Pfizer.				

"We made a compelling case for higher education and an industry-focused curriculum," says Terese Waldron, director of the executive and executive online programs. "They were looking for a model that would provide opportunities for folks in other parts of the country. And we were certainly able to fulfill that requirement."	

The program, like St. Joe's regular online MBA, is a 48-credit, 22-month program, accredited by the Association to Advance Collegiate Schools of Business (AACSB), the gold standard of business-school accreditation. The first cohort consisted of 25 students from across the country. Applicants were screened by Pfizer, then by St. Joe's. Admission requirements included four years of specific industry experience, a letter of recommendation, and an undergraduate grade point average of 2.5 or better. 	

The program launched with a six-day residency at a conference center near St. Joe's, including orientation and intensive courses on finance and accounting. A second residency was scheduled midway through the program, and the capstone was a three-day simulated product launch, created by StratX. The rest of the program is conducted online, using an "asynchronous" model—most work can be done anytime the student wants, using web-based presentations, discussion boards, and the like. The anytime, anyplace capabilities of the online program were crucial to a student body with busy schedules and heavy travel commitments.	

Overall, online education has a reputation of having high dropout rates. That wasn't the case with Pfizer. "What's remarkable to me is that at least 7 or 8 of the 25 were promoted, transferred, or went through a relocation cycle," says Waldron. "One member and his wife had twins. Another and his  wife had just had triplets. There was an adoption. A lot of life events took place, and amazingly these people were able to keep track with the program."	

One advantage of bringing the MBA in-house—rather than sending students to an executive program populated by employees from other companies—was that students could freely discuss Pfizer material. "We sign confidentiality agreements through the business school, and our faculty are on board with those requirements," says Waldron. "There's a great opportunity for Pfizer issues to be discussed, and students worked on specific projects related to Pfizer products."	

For Waldron, the key benefit of a project like the Pfizer MBA is the loyalty it can create. "The real challenge for companies like Pfizer is the return on investment, short term but also long," she says. "It's related to how well people will perform, how much their lives have been enhanced, how much more they might contribute than ever before, and how truly grateful they might be to someone who has underwritten this kind of advantage for them." 	

Continuing-ed programs have been around for decades, but not all content areas have been equally well served. "We used to laugh that you could get a law degree or a business degree in any storefront," says David Burnett, who recently retired as head of Pfizer Research University and currently works as a consultant in healthcare education. "But if you were a scientist who came to an R&D setting with a bachelor's degree it was a different matter. Master's programs in biology and chemistry were not part of anyone's continuing-education portfolio."				

For Pfizer R&D, that was a problem. "People in bachelor's-level positions in R&D have limitations on their careers," Burnett says. "If you don't have a PhD it's rare to get a chance to move ahead. So there's a pattern by which young scientists work for a year or two, realize they haven't got the credential they want, and leave to go back to school."	

To slow the turnover, Pfizer brought a master's program to its Groton, Connecticut, research facility. To make the program particularly attractive, Pfizer went Ivy League, and negotiated with Brown University to provide a master's in biology. A few years later, Pfizer added a chemistry master's from the University of Rhode Island, and finally a master's in statistics, taught partly on the Pfizer site and partly on the campus of the host institution, Yale.	

"It was really a very traditional partnership," Burnett says. "The innovation had to do with persuading the Brown faculty to travel to the Pfizer site and waive the laboratory requirements, because these people were, after all, working in professional laboratories every day. We tried make sure the rhythm of courses offered was right, so our students could continue to make progress and not get trapped by a required course that suddenly disappeared for a couple of years."	

The least successful of the programs was the statistics degree. "Many people aspire to degrees in statistics, because it is so relevant to the work done in pharmaceutical R&D," says Burnett. "But we learned that after the first couple of introductory courses, the work becomes quite advanced and esoteric, and hardly the kind of thing that a nonspecialist can pick up out of general interest." Pfizer dropped the program after the first few cohorts.  The Brown biology program, on the other hand, after more than 10 years and 100 graduates, is still going strong.	

Pfizer made no attempt to integrate company material into the master's programs. On the other hand, the company is well aware of the value of the proprietary knowledge it has acquired over the years. To capture and disseminate that information, Burnett was in charge of developing "Pfizer Research University" to collect business knowledge and use company experts, assisted by instructional design consultants, to teach it back to younger employees.	

As for the degree program, says Burnett, "it was an employee benefit in the most robust way. The leadership of the Pfizer research division wanted this to be the classiest place to work that could possibly be imagined for a scientist."	

For universities that want to work with global corporations, the challenge has been to move beyond the limitations of the traditional campus. Online education has been one strategy. In some fields, universities have developed extensive multicampus systems. (The largest include both the for-profit University of Phoenix with 130 csites, and the not-for-profit University of Maryland University College, which thanks to its long history of training US military personnel, has locations in 23 countries.)				

College isn't just for students anymore. It's for companies too. Over the past decade, institutions of higher education have increasingly found that some of their most important stakeholders are their students' employers?and that they can extend their reach and influence by responding to the needs of local and regional business.

Partners in Learning

Alliances are a favorite of corporate strategists everywhere. More than 10,000 interfirm collaborations were formed worldwide in 2000, double the number of five years before. Alliances now generate 25 percent of the top 1,000 public US companies' revenues, up from 7 percent in 1990. 

Pharma and biotech companies are particularly prone to partnering. The 20 biggest pharmaceutical firms formed nearly 1,500 alliances with biotech companies between 1997 and 2002. According to Strategic Decisions Group, a consulting firm, "40 50 percent of products in development by global pharmaceutical firms are externally sourced," and "more than half of the current 20 best-selling prescriptions drugs are co-developed, co-marketed, or in-licensed." By 2007, in-licensing alone is expected to account for 40 percent of the revenues of pharma's top 20 companies. 

What's driving biotech and pharma into each other's arms is the need to find complementary resources pharma's innovation gap meets biotech's funding crisis plus the desire to share risk and access new markets and information. Given these trends, it seems there are two kinds of pharma executives today those participating in biotech alliances and those who will be soon. 

What is the reality of alliance life? Two of the most celebrated biotech pharma alliances in recent times can serve as an introduction. One, a phenomenally productive venture, scientifically and commercially, has degenerated into a bitter squabble over the spoils. The other, just formed, bears a striking resemblance to the most successful biotech pharma hookup of all time. 

In 1993, Knoll Pharmaceuticals, a divison of BASF, the German chemical company, called on UK-based Cambridge Antibody Technology (CAT). Knoll had six autoimmune disease targets. CAT had an advanced phage display technology ideal for identifying high-quality, lead-optimized candidates for human antibody drugs. CAT also had a vast library of antibodies (now more than 100 billion, according to the company). They were a perfect match.  

The two signed an agreement (updated in 1995) that committed Knoll to pay up-front research fees to CAT and milestones along the way. Knoll would license promising products, assume their development and commercialization, and pay CAT royalties on any resulting sales. 

Amazingly, the first target they selected, tumor necrosis factor-alpha (TNFa), was successfully neutralized. The partnership was off to a promsing start, then, in 2001, BASF sold Knoll to Abbott Laboratories for $7.1 billion. The key asset was the TNFa candidate developed by CAT called D2E7. 

In 2003, D2E7 was approved for the treatment of rheumatoid arthritis in the United States and Europe as Humira (adalimumab). That year, its first on the market, sales hit $280 milllion. This year they are expected to exceed $700 million, then rise to nearly $1.2 billion in 2005. 

It took 10 years but the alliance hit a home run in its first at bat. Humira, Abbott claims, is "one of a few new potential blockbuster drugs to emerge from a collaboration between biotech and Big Pharma." CAT became not only the first British biotech to produce a potential blockbuster but also one of the few European biotechs to get anything to market. 

In March 2003, with royalties due but not yet paid, Abbott told CAT it intended to cut the royalty rate from what analysts estimate to be between 5 and 6 percent to the contractual minimum, perhaps 2 percent. Multiply the difference by strong sales over a long time and it amounts to hundreds of millions of dollars at net present value. (CAT is not the only one affected. It owes a portion of its royalties to the Medical Research Council, the UK equivalent of NIH, the originators of phage display technology. MRC, in turn, owes something to the Scripps Institute.) 

The timing of Abbott's pronouncement couldn't have been worse for CAT, which had made an all-stock bid to acquire Oxford Glycosciences (OGS). Investors responded to the news by knocking down CAT's shares, and OGS went to Celltech instead. 

CAT, of course, disputed Abbott's decision. The parties first held private talks then engaged in four mandated mediation sessions, all of which proved fruitless. In November 2003, CAT filed legal proceedings in the UK High Court. A trial before a specialist judge in the patent division is likely unless a settlement is reached within 7 13 months. 

The source of the dispute in this uncommonly successful collaboration is two overlapping and possibly conflicting contractual clauses, Articles 5 and 12. Both relate to royalty offsets, a common element of biotech pharma licenses that offers protection to licensors of intellectual property (IP).  

To get a drug like Humira to market, you need three pieces of IP: one for the target, one for the product, and one for the downstream manufacturing process. Knoll owned the target IP, they came to CAT for the product IP, and they licensed the manufacturing IP from Genentech. 

A company's claim to own intellectual property may not free and clear. Sign a license with one party and you may have to deal with others claiming their IP rights have been infringed. If that happens, the offset clause kicks in, letting you cut payments due the initial claimant in order to pay the rest. 

Knoll had more than the usual reasons to request an offset (or anti-stacking) provision because CAT's patents were still pending when the contract was signed. Even Peter Chambre, CAT's CEO since 2002, admits: "It was quite natural for Knoll to seek some protection in the event that it had to take multiple licenses to operate the phage display technology described in our patents." 

This provision, Article 5, is fairly standard stuff. Translated from the legalese, it says that if Knoll needs to pay anyone else (other than MRC) to use CAT's technology, those payments will come out of CAT's end. 

CAT, in any event, got its patents. Knoll and, for that matter, Abbott never had reason to pay anyone else for CAT's IP. So CAT had every reason to expect a full royalty. But it seems that Abbott is reading another clause, Article 12, to mean any patent royalties paid for any purpose even those on the target (owed to Serono and Peptech) or the manufacturing process and not just the IP licensed from CAT, could be used to offset payments to CAT. 

Article 12, available from an SEC filing, says: "In the event that Knoll or its Collaborators must pay royalties or license fees to third parties under one or more claims of one or more patents to enable Knoll or its Collaborators to utilize or have utilized the inventions of the Patents, [content omitted] shall be credited to Knoll's royalty obligation to CAT for sales in that country where the patents exist." But it then goes on to state: "This offset shall not include royalties or license fees which are beyond the scope of the technology described in the Patents, for example fees paid to third parties for delivery systems." 

The same language applies to the other five targets Knoll brought to CAT as well as the five additional indications for Humira now in late-stage clinical trials. Presumably, any resulting products will be subject to similar dispute. There's a lot to quarrel over. Abbott estimates Humira, all told, has a market potential of $14 billion by 2010. 

In a statement, Abbott says, "The dispute is related to the proper interpretation of the royalty offset provisions of the agreement under which Humira was developed," but makes no attempt to square that interpretation with what the contract says. Meanwhile, Chambre says, "We strongly believe that the offset provisions were not designed for the purpose to which Abbott is putting them. We are seeking an outcome consistent with that, and are determined to get it." 

The second case history opened just a few weeks ago, when GlaxoSmithKline and privately held Bay Area biotech Theravance announced "an innovative broad-based strategic alliance" hailed by some experts. "A very, very, very smart deal," said Edward Saltzman, president of Defined Health, a biopharmaceutical consulting firm that specializes in business development strategy, including helping biotech clients find the right partner. Fintan Walton, PhD, chief executive of PharmaVentures, which also helps biotechs do deals, described it as "a good example of a next-generation deal."  

Why such praise? GSK paid $129 million to up its stake in Theravance from 6 to 19 percent. GSK also obtained an exclusive option to license Theravance's product portfolio through August 2007, with milestone payments worth potentially between $162 million and $240 million per program. If GSK winds up owning more than 50 percent of Theravance, its licensing option will be extended five years. 

So far, nothing special. But GSK's investment also paid for a call  option permitting it to 

 up to 50 percent of the shares outstanding in 2007. What's more, a put option was established giving Theravance shareholders (other than GSK) the right to 

 half of their shares to GSK, also in 2007. 

In an interview, Theravance CEO Rick Winningham pointed out that "a floor valuation of $525  million for the 50 percent of non-GSK stock means GSK has put $654 million on the table." 

He also stressed that "Theravance remains, both in the short and the long term, an independent company, in charge of all decisions related to a program prior to the point at which GSK might opt in." 

He would not comment on plans for an IPO but admitted that "the transaction certainly creates an attractive security for current and future shareholders of Theravance," adding that "since it pertains to only 50 percent of the shares," the call option "provides unlimited long-term potential for our shareholders." 

Winningham described some possible scenarios: "The price of the call, which has been defined but not disclosed, is at a multiple a premium of the put. In the event that our stock were a public security and trading below the put price, owners may decide to sell to GSK at the put price. If it were trading above the put price, they would probably decide not to sell. If the stock were trading above the call price, then it may make sense for GSK and it is completely their decision to exercise the call and buy some 50 percent of the outstanding stock. If the put or call were exercised, GSK would own roughly 60 percent of Theravance in 2007 own but not control. They would have a minority of board seats." 

Theravance's only prior collaboration, also with GSK, was similarly unusual, and may shed light on the nature of their relationship. David Brinkley, Theravance's senior vice-president, commercial development, explains that it was "structured as a pooling of assets." Each company "put two compounds into a pool. Those compounds then moved forward based on their merits not origins. Theravance receives the same royalty rate on sales of any compound or medicine that results, even if GSK discovered and developed it." The same holds for GSK as well. "What's extraordinary about that," Brinkley says, "is GSK's willingness to say great compounds, great ideas, great approaches can come from anywhere. They don't have a monopoly, even in an area where they have a certain amount of expertise, such as beta agonists. This latest deal is just a natural step in the evolution" of this philosophy. He says, "We've heard GSK refer to it as 'increasing the genetic diversity of our discovery effort.'" 

Winningham predicts that "transactions like this, that leverage the strengths of small companies, are going to continue to be done with large pharma, probably at a greater rate, because large pharmaceutical companies require an incredible level of innovation to maintain their financial strength and success in the marketplace." 

What is an alliance? Professor Gomes-Casseres, author of Mastering Alliance Strategy, says: "It's a way to combine the capabilities of companies that gives added value, but in a way that is not transactional and also not fully merged." Companies collaborate when a simple exchange I buy, you sell won't answer their needs, and neither will buying an entire company. He adds: "An alliance is a longer relationship where you need to manage joint decision making. You can't set everything down in the beginning and just execute against it. You have to continually come up with answers for problems that arise that you  didn't foresee at the beginning. It's a moving target."  

Lawyers have a way of talking about this, also used in economics: an incomplete contract. "A complete contract," Gomes-Casseres says, "sets down in explicit terms every contingency, every state of the world like your mortgage. There is nothing you can litigate. An alliance is not like that because you deal with an uncertain project, things that cannot be predicted. So what we do is create a kind of contract which is not complete but which allows us to go with the target and answer new questions as they arise and make joint decisions when new problems arise. You must create a decision making structure for your relatively open-ended relationship, what is called a relational contract. You contract on the fact that you're going to have a relationship to resolve issues. You don't necessarily contract on all the answers to the issues because you don't even know what the questions are yet." 

This open-endedness may be why, as Stuart Kliman,  founder of Vantage Partners, an offshoot of the Harvard Negotiation Project, says, "Folks use the marriage or family metaphor for alliances all the time." An alliance, like a marriage, he says, "is a complex, interdependent relationship." According to Professor Mike Peng, "Formal regulations and contracts can only govern a small (although important) portion of alliance/network behavior," much as in "the institutions governing human marriages." In the end, "the success and failure of such relationships depend, to a large degree," Peng says, "on the day-in-day-out interaction between partners influenced by informal norms and cognitions."  

The flip side of trust is risk. A good nontechnical definition: whatever can go wrong. And, as Murphy observed, whatever can go wrong will (O'Toole's Commentary on Murphy's Law is: "Murphy was an optimist").  Alliances thrive on trust while limiting the cost of risk. 

Why did Saltzman call GSK Theravance smart? "Because it attempts to re-create in microcosm what is unquestionably the most successful strategic alliance, the one between Roche and Genentech." What  do they  have in common? Both used (private, nontradeable) financial options that gave both parties the right, but not the obligation, to buy (or sell) equity at a set price within a fixed time. (See "Back to the Future.") 

A real option is the application of financial options to actual investment decisions. Real option reasoning encourages the notion that decisions are not all-at-once or all-or-nothing. For a relatively small initial outlay, a financial option gives you the right to buy or sell something  later. It lets you sequentially increase your stake as you learn more about the risks and benefits. It's like poker not everything is wagered on one hand. You get more cards (more information) and make your decision to call, raise, or fold accordingly. That's also how alliances work.  "Every deal," says Michael McCully, director of consulting at biotech alliance experts Recombinant Capital, "is basically structured as an option. All have some sort of termination component, provisions that state how each party can get out of them." Companies enter alliances because they can get out of them. Impermanence entails flexibility. 

The open-endednesss and complexity of alliance life make it more difficult to grade the two alliances discused here than one might think. 

Is Abbott CAT a failure? Scientifically and commercially, no. CAT might yet win its suit and Abbott, should it triumph, may gain only a Pyrrhic victory. It could win the royalty battle but lose the reputational war. Indeed, a survey of 17 biotech CEOs conducted by Cambridge Healthcare and Biotech, unrelated to CAT, Abbott was rated the least desirable pharma licensing partner of the 20 named. (Bristol-Myers Squibb was tops.) 

Is GSK Theravance a sure thing? Decidedly not. 

The uncertainties and ambiguities of alliances is precisely why such structures exist. 

The only certainty is that alliances play a vital role in pharma today. 

Alliances are a favorite of corporate strategists everywhere. More than 10,000 interfirm collaborations were formed worldwide in 2000, double the number of five years before. Alliances now generate 25 percent of the top 1,000 public US companies' revenues, up from 7 percent in 1990.

Dangerous Liaisons

How well is the pharma industry prepared for rapidly approaching industry upheavals? Not very, according to a 2002 global survey on corporate early warning systems conducted by the Fuld-Gilad-Herring Academy of Competitive Intelligence. More than 100 managers responded, most of whom work in their companies' strategy, product management, or intelligence departments. 	

Although 77 percent say their companies anticipate an increased level of business risk in the next two or three years, only 2.6 percent claim to have a formal early warning process in place. The majority (56.4 percent), say their companies have only some components in place, and more than 37 percent report they have no systematic process. 	

The survey, modest as it is, exposes a large gap in competitive preparedness. Nearly every manager sees one or more looming threats just over the horizon, yet only a small fraction have done anything to see around the corner. This article describes how pharma companies can implement an early warning system that will help them prepare for the future, no matter how it unfolds.	

Despite deal making and some farsighted alliances and acquisitions, the industry has collectively neglected to anticipate a number of significant shocks that have begun to erode its potency and future earning potential. Pharma companies involved in producing AIDS drugs did not anticipate the moral backlash and media frenzy surrounding the provision of low-cost drugs to Africa. Back in the early 1990s, many pharmaceutical companies did not believe that price controls were imminent in the United States. They saw Hillary Clinton's failed attempt to rein in the healthcare and pharmaceutical industries and breathed a sigh of relief. Nevertheless, price controls became a norm in Western Europe and Canada and are now one of the US public's biggest concerns. Even if Congress hears some of Big Pharma's arguments, chief of which is that price controls will choke cash needed for R&D investment, one outcome is definite: Change will occur. The decades-long US pricing policy status quo is about to come to an end.		

At the company level, competitive blindness is the biggest reason managers fail to prepare for dramatic change. The blindness is mostly self-induced. That is, managers are often unable to see the long-term threat or opportunity because of the way they categorize it in their minds. An example of that competitive blindness expressed itself during a consultation with a US-based biotech. 				

This particular company has had a successful run with two of its treatments but is now encountering competition for the first time. Suddenly, it is dealing with problems such as me-too products on the market, alternative treatments, generics, and pricing pressure from managed care insurers.	

When the product managers and marketers were asked, "How do you know when you need to learn about long-term threats  (or opportunities) or what those threats might be?" they weren't sure. So they were asked to examine and rate only two factors: 	

the impact a particular set of events might have on their company and its bottom line

how certain they were that the event would happen in the first place.

They were given a list of six events that might occur over the next few years and asked to apply the two criteria. Following are three of the scenarios and how they rated the impact and certainty of those events. 	

Generic forms of their leading drug will enter the market within one year after their patent expires: complete certainty and extremely high impact.

Technology development, new delivery technology, genomic lead discovery, and continued small-molecule development will replace the need for their biotech solutions within 10 years: very uncertain but high impact.

Medicare reimbursements for one of their key products will drop precipitously over the next few years: highly certain and also high impact.

They quickly realized that they were dealing with two very different sets of problems. When an issue has both high impact and high certainty, it means the problem or the opportunity is already here and needs to be dealt with. It is a tactical issue that needs to be tracked with all of the company's resources—databases, heard-on-the-street information from salespeople, news sources, etc. Price controls are one prominent example of a "high impact, high certainty, here now" problem.	

When a coming event has high impact on the business but a great deal of uncertainty surrounding it, then it is a true long-term threat or opportunity and is a prime candidate for early warning. Genomics, for example, hits this mark. Its role in drug discovery and development has the potential to affect the entire pharma food chain. Yet, the uncertainty of where and when genomics will have that impact makes it a perfect topic for early warning.  	

What makes an early warning process valuable is its ability to help a company avoid driving itself toward one specific outcome, which increases its chances of being wrong. That's risk. Taking the time to sketch three or four outcomes—and plan strategies that account for each outcome—gives companies a safety net. 	

How will pharma executives deal with major upheavals when they arrive? Based on other industries that have recently experienced tsunamis, the answer is that some companies will thrive on the changes, while others will end up fighting for survival. Unfortunately, there are many examples of pharma firms waking up too late to do anything but to try to plug the dike. 				

The biotech tsunami—now over 20 years in its formation—has caught a number of traditional pharmas by surprise. Pfizer is one example. By the late '90s, the company's pipeline had thinned, and Pfizer needed to fill it—at any cost. Instead of recognizing the potentially long-term but less expensive biotech approach to developing future blockbusters, the company ignored the tsunami and found itself up against a wall. So it paid dearly to acquire the blockbuster Lipitor (atorvastatin).  	

Another example is the HIV tsunami, which took a bite out of GlaxoSmithKline and others in recent years. Following Glaxo's Zantac blockbuster of the '80s and '90s, the company saw the HIV market as a potentially explosive opportunity. What it and others did not anticipate was the backlash from countries in Africa where AIDS had reached epidemic proportions and for whom the high-priced drugs were out of reach. Political pressures from the United Nations and from other groups have forced companies to deliver HIV-fighting medications at or below cost. A once promising blockbuster opportunity disappeared. Again, the AIDS tsunami did not suddenly emerge; it was more than a decade in the making. 		

 A few years ago, a large European-based pharmaceutical company that faced a competitive shock decided to run a war game. Its blockbuster's patent would expire within the next 24 months, and having lived off the product for so long, the company kept trying to find ways of extending its lifecycle through various formulations and patent-extending approaches.	

Management began the exercise with the belief that they should acquire a new pipeline with the cash hoard from the blockbuster product. They ended the exercise with a realization that the future would not be theirs to control. Even when the management split into two isolated groups, the two teams independently came to the same general conclusion: A Big Pharma would either detour around them by buying or developing the new products the company wanted to develop or would simply acquire the company directly.	

Although the war game did reveal some intriguing alternatives, it failed to provide management with the desperately sought miracle cure to its pipeline woes. War games are not early warning systems, as many executives have thought. War games are a useful way to adjust the company's strategy when it has already prepared for the future and has resources in place for acting on that future.		

 These are the building blocks companies should use to paint different scenario images. Drivers prescribe the future world because they define the rules of that world and how companies, societies, and people behave. Drivers can emanate from technology, government regulation, shifts in the economy, or shifts in competitive power as would occur through mergers or increased buying power of a particular customer, such as a Medicare program or a giant managed care program.	

Like billiard balls ricocheting around a table, how these drivers interact can shape the scenario and change the outcome. For example, if a driver is "Government will enact stricter price controls," the result could be to create a scenario of a new world of giant managed care. Another scenario would be a world of "shriveled pharma," whose financially starved R&D operations radically tip the balance of power in the industry away from brand-name companies and to generics or biogenerics.	

Once the company has decided what the drivers are, it can begin to shape the scenarios that become the targets of its early warning system.	

Companies as diverse as Visa International and AstraZeneca have greatly benefited from an early warning process. The common bond among those companies' programs is the consistency and the discipline their managers have applied all along. 				

The tools are simple: scenario analysis, constant information collection and analysis, and, finally, an effective means to expedite decisions—when you see the wave approaching. Although the payoff can be enormous, management needs to have the same type of patience it does in bringing a decade-long developmental drug to market. Early warning is a process, not a quick fix. 	

Scenario analysis is an art that many companies have adopted. Executives generally enjoy such exercises. Unfortunately, once the storytelling has ended, often so does the discipline. That is, most companies fail to connect the future road maps they created through scenarios with a process to track those potential futures. The road maps gather dust—and surprises and shocks inevitably arrive.	

 This company did connect the dots. It also followed through by running a process to track the stories. The one that concerned it most during 2000 was the potential invasion of peer-to-peer (P2P) internet alternative payment systems, which promised to make paying on the web and elsewhere very easy. At the same time, these systems threatened to marginalize the traditional credit card players, Visa and MasterCard among them.	

Visa's intelligence organization not only developed the scenarios, it also identified signals necessary to track which road maps would emerge. The result: comfort intelligence. The signals included P2P's level of advertising expenditures, their ability to sign up (and sign away) merchants, and even the level of capital that venture funds were investing in these start-ups. Quarter after quarter, the intelligence team tracked the markers. By early 2001, the scenario that emerged was far less threatening. Monitoring and reporting on the evolving nature of the potential threat also gave Visa management time to roll out a reasoned strategy that would both strengthen its market position and retain its customer base.	

 Three years ago, this company's strategy and intelligence organizations began to build a similar early warning process. But the US commercial organization has taken the concepts the furthest and the fastest compared with other areas within the business. "Our commercial group has experienced some very dramatic changes in the US business as a result of the early warning work we've done," says Wayne Rosenkrans, intelligence affairs director at AstraZeneca. "Money and people have been moved around." Rosenkrans says that strategy creation and early warning processes are linked, and he breaks them down into six steps:	

At the start, the AstraZeneca team spent a great deal of time determining the drivers and preparing the foundation for each potential scenario. Team members interviewed panels of internal and external experts to elicit those drivers, test, and ultimately prioritize them.	

The drivers were used to create a series of future storyboards, which in turn had to be distilled into a small set of plausible, if not probable, scenarios that delineated the possible boundaries of the future. Those scenarios then became a "toolkit" for the management team to use in creation of its business strategies. For the early warning process to be effective, the team must also understand how the driver set will evolve and how that evolution will affect both the scenarios and associated strategies. Looking back at the three-year odyssey of AstraZeneca's process, Rosenkrans recalls that the first round, including interactions with management, took an entire year. 	

If a year seems like a long time frame, keep in mind that early warning will help a company take advantage of a multibillion-dollar opportunity or avoid an equally gargantuan mistake. As a result of such systems, Shell predicted the drop in the value of crude oil, Fuji established a competitive leg-up on Kodak in a consumer digital-camera market that is forecast to be worth nearly $12 billion by 2007, and Visa avoided making costly jump-too-soon mistakes by prematurely acting on the P2P threat.				

Big Pharma has a lot of expensive chips on the table. Early warning can help companies shelter those investments from the next tsunami, find ways to ride the wave to the next market opportunity, or—even better—create a more profitable market.	

How well is the pharma industry prepared for rapidly approaching industry upheavals? Not very, according to a 2002 global survey on corporate early warning systems conducted by the Fuld-Gilad-Herring Academy of Competitive Intelligence. More than 100 managers responded, most of whom work in their companies' strategy, product management, or intelligence departments.

Early Warnings

May 2004 Table of Contents

A major unresolved issue for the pharmaceutical industry in the 21st century is that few, if any, optimization techniques have found their way into the research portfolio arena. That is surprising, for several reasons: 

The industry has been very open to using sophisticated mathematical optimization techniques in the sales and marketing arenas. 

Research project management increasingly includes MBAs who are familiar with these techniques.

Our preliminary research strongly suggests that the top pharmaceutical companies are pursuing too many therapeutic categories, and that by reducing the number of categories they could have more backup candidates in the therapeutic categories remaining as research areas. 

The industry is consolidating; there are fewer and fewer companies. Those that remain are increasing their R&D spending at double-digit annual percentage growth. This pattern suggests that pharma is becoming mature and, like all mature industries, more commodity oriented. As "commoditization" occurs, there is a need for increased quality through the use of systematic planning and benchmarking metrics. 

This article discusses some of the current issues in the use of optimization techniques to manage an R&D portfolio, particularly some recent trends that make optimization techniques a more practical choice for companies.

Early in the development of total quality management concepts the quality-improvement pioneer W. Edwards Deming offered:

"Competent men [sic] in every position, from top management to the humblest worker, if they are doing their best, know all there is to know about their work except how to improve it. Help toward improvement can come only from some other kind of knowledge. Help may come from outside the company, or from better use of knowledge and skills already within the company, or both."

In the arena of the R&D portfolio, the pharmaceutical industry actually has a poor performance record. The need for improvement in portfolio management exists because "scientists traditionally have been reluctant to try new R&D management approaches." (See "In the Eye of the Storm," 

 The need for improved portfolio management was expressed by Pfizer’s research chief, Dr. Peter B. Corr, who "is trying to reduce the number of projects that fail later in development, when costs are escalating. And Pfizer is forging earlier and stronger links between researchers and marketing executives" (

The essential elements of effective portfolio management are well documented. They include working as a team with marketing, sales, and finance to:

 Quantitatively determine acceptable ranges for the key input factors of timing, cost, risk, and expected return (e.g., NPV) for each project under consideration.

 Select projects based on management specified criteria aimed at balancing risk and return. 

, vol. 32, 1998) state, "the key is to focus on the best projects in terms of NPV, taking advantage of experience curve effects and then balance the portfolio accordingly to insure both short- and long-term success."

This is a bottom-up approach in the sense that, first, various graphical displays and spreadsheets are used to assess the value of the current portfolio. Then comparative results are determined for "trial" alternative portfolios to identify and exploit opportunities for improvement. This type of fine-tuning will lead to improvements in the strategic portfolio, but could provide results that fall short of a portfolio that is "optimal" with respect to minimizing risk and/or maximizing ROI. In addition, seeking improvements by adjusting the current portfolio may overlook opportunities that might be of significant long-term value to the firm. 

Recent advances in portfolio management go beyond the current commonly used practice of identifying which projects to continue or drop based on consideration of a set of reasonable scenarios. Optimization modeling as applied to portfolio management is not new. For example, mutual funds use optimization techniques (e.g., "Markowitz" models) to select stocks that will maximize overall return subject to a desired overall risk as measured by volatility. However, approaches applied successfully to other disciplines are not directly applicable to pharmaceutical R&D portfolio optimization for a variety of reasons, including differences in risk measurement and the impact of multiple clinical phases. 	

				The two charts pictured here illustrate two approaches to the problem of optimizing an R&D portfolio. The chart on top ("Structuring the Pipeline"), drawn from the research of Min Ding of Penn State University and John Eliashberg of the Wharton School, provides a good example of using modeling techniques to optimally structure the pipeline for a given therapeutic class. Ding and Eliashberg determine the number of projects at each clinical phase that maximize expected NPV, given information on the cost of development, probability of surviving each clinical phase and the magnitude of the business opportunity. Using historically based assumptions on required model input data, they show that achieving high NPV would require much greater levels of spending on more projects than in the past.

While these results are interesting and significant, they probably raise more questions than they answer. Can the number of projects actually be increased to levels anywhere near those suggested, given budget constraints and the current state of research? And if the number of projects can’t be raised to the levels suggested by the models, what is the best practical  strategy? In particular, what number of projects should be in each therapeutic class to maximize portfolio NPV? These questions, and others, have been the subject of continued research and implementation of software to provide effective decision support to strategic R&D portfolio management. 

The bottom chart ("Optimizing the R&D Portfolio") shows one response to these questions. Here the focus is not on maximizing NPV, but rather on getting the best possible NPV within a fixed budget. Where a pure NPV approach yielded results that couldn’t really be acted upon, these results (based on the actual research portfolio of a major pharma company) are fairly practical: Drop projects for immune systems, blood, and cardiovascular, and increase projects for cancer and infectious diseases. This result is the "top" of the top-down approach. Good decision-support software would allow R&D project management to evaluate changes in NPV for various "what if" scenarios relative to the initial optimal model results. These scenarios may be based on considerations of the firm’s own research, partnering, joint ventures, support of contract sales organizations (CSOs) and other avenues to augment their own acquisition/divestiture needs.

Is the pharmaceutical industry prepared to effectively utilize optimization models? The answer is based on key considerations of data, software availability and support staff.

 Since the problem of strategic portfolio management is not new, methods are commonly available to adequately satisfy data input needs. Firms have developed their own internal procedures (often with the help of suppliers and management-science consultants) to determine likely values and optimistic-pessimistic ranges for project timing, cost, chance of surviving clinical phases (i.e., risk measures), and NPV.  For example, risk measures may be based on internal/industry benchmarks combined with management input (e.g., using "Delphi" methods). With regard to NPV, continual improvement in forecasting accuracy has been realized through ongoing development of new methods and models that can accurately measure the impact of anticipated product positioning and alternative marketing mix strategies.

 There is definitely a need for user-friendly optimization software. Good commercial and academic modules exist for many optimization methods, but they have to be tied to the specific needs of R&D portfolio management. Minimal criteria for software are that it be PC based, provide a meaningful initial optimal strategy through easy-to-read tables and graphs, and allow efficient interactive evaluation of "what if" adjustments to the initial strategy (known technically as "sensitivity analysis").

 A project manager with a technical/scientific background plus a quantitatively focused MBA should be adequately prepared to effectively use optimization software specifically developed for R&D portfolio optimization. Most MBA programs sufficiently cover mathematical optimization and statistical methods to allow effective use of optimization software and supporting data input methods. It is important, however, that a project manager be able to interact with and provide feedback to the software supplier’s analysts and consultants for most effective use and customization of software to the firm’s specific needs. 

We consider this work to be preliminary. We hope other contributors and corporate R&D insiders can add to our perspective. At a February 2003 Drug Information Association meeting in New Orleans, it was encouraging to note several large enterprise software vendors in attendance. These vendors appear to have found a market in the R&D area. While none of them was presenting optimization features, their data-repository features should prove invaluable in providing the data necessary to drive optimization models.

Pharma is a large industry, and much cost leverage is possible here. The work of earlier optimizers in areas other than R&D (such as Prabha Sinha and Andris Zoltners, who have studied the optimization of sales forces) demonstrates cost improvements in the 10 to 20 percent range. That suggests opportunities for a high level of savings for an industry that clearly need to finds these types of efficiencies going forward.	

Columns

A major unresolved issue for the pharmaceutical industry in the 21st century is that few, if any, optimization techniques have found their way into the research portfolio arena.

A Better Way to Manage the Pipeline

 MSL programs were a technical outgrowth of sales, but they have since evolved to partake in field-based clinical and educational efforts for companies’ products. However, in many pharma companies, that evolution has not gone far enough. Companies still continue to focus MSL activities on pushing information out rather than pulling it in from the field and integrating it into their decision-making processes. As such, companies are missing the opportunity to leverage MSLs within a sensory web.  

The sensory web is part of a strategic early warning system (SEWS) that signals to management to look at early signs of significant risks and opportunities and to act before a crisis is inevitable, or the opportunity is lost to a competitor. Early adopters of better sensory pathways enjoy a significant period of first-move advantage. Two examples were Merck and Glaxo-Wellcome, which during the early 1990s benefited from good use of trained competitive intelligence (CI) professionals in sensing external changes. In the 2000s, AstraZeneca enjoys such a lead.  

However, pharma companies have yet to integrate MSLs into their SEWS. This article examines why companies should use those professionals as part of such a system and explains where and how intelligence can pay dividends.  

Pharma companies typically keep a finger on the pulse of the industry through many sources such as conferences, scientific publications, and patent searches. Scientists monitor technological innovation to update their discovery process. The sales force gathers anecdotal competitor information from the field. CI professionals collect competitive information systematically; regulatory and lobbying groups track regulatory changes; pharma executives interact with peers and regulators; and multitudes of consulting firms and vendors create a flood of market reports and product utilization trends.  

Those activities produce data, and often analysis, for pharma’s decision makers. However, some large companies think that type of market research is a substitute for a SEWS. Yet, market research can never achieve the level of discourse with trendsetters in the industry that MSLs can and will leave companies without the information most important to their future.  