Not long ago the average pharma development organization spent $100 to $200 million a year. It consisted of about 100 people working on only a half dozen compounds. Its leaders typically knew all their employees by name. There was a good deal of visibility within the organization: Managers could see from top to bottom and could make decisions aided by nothing but their own brains. 

In the past ten or 15 years, much has changed. Each of the top ten pharma companies spends more than a billion dollars a year on development. A development organization today consists of 1,000 or more people and works on dozens if not hundreds of compounds. The visibility of a decade ago has vanished. Basic decisions-setting priorities, allocating funds, deploying and re-deploying resources and so on-have become extraordinarily difficult. 

If there is a top-down visibility problem, there is also a corresponding bottom-up problem. From the operational level, it is often difficult to see strategic vision and business objectives, or at least to see how they connect to a department's day-to-day activities. To senior management, corporate strategy may be vivid and urgent, but too often the people who need to execute the strategy see it as something abstract and irrelevant. 

The results for R&D are predictable: a crisis in productivity that has left most companies scrambling for new products. Many factors contribute to the crisis, but one key to solving it is better management. Companies need a system of accountability so that each component of R&D has disciplined, focused operational objectives that support corporate strategy and enable decision makers to identify and support rewarding avenues. However, that is not as simple as it sounds. Mid-size and large pharmaceutical companies typically address multiple therapeutic areas, have globally dispersed R&D facilities, and must work with large networks of clinical coordinators, physicians, and patient groups around the world.

What is more, until recently, R&D managers have found it almost impossible to structure and analyze the enormous volumes of data their departments generate. Paper reports, the management tool of choice for most companies, are too slow and do not permit managers to work directly with business data across the operation. Moreover, these reports address only results, giving management little or no chance for early intervention. 

During the past few years, however, powerful tools have become available to structure and analyze large volumes of data for managers. One of the most promising developments is the emergence of "balanced scorecard" software. Made by several dozen suppliers, balanced scorecards are both a means of processing data and a tool for implementing a management philosophy. Though they have only recently been applied to pharmaceutical R&D operations, balanced scorecards are well suited to the industry's needs.

A balanced scorecard system is designed to achieve several goals: 

visualize data in a dynamic and clear manner

objectively identify opportunities for improvement

This article describes the balanced scorecard system implemented in the medical development operation of Pharmacia. The system has provided greater transparency for managers, and though intended for long-term results, it has had impressive short-term effects. In the past two years, Medical Development introduced several process redesign initiatives that could be visualized in a dynamic way using the balanced scorecard approach. Cycle times on critical path in clinical trials were shortened dramatically, by 34-75 percent; per patient costs were reduced by 5 percent; and the number of patients recruited per clinical research site manager increased by 34 percent, while maintaining quality. Although it did not bring about these astonishing improvements directly, the scorecard supports and contributes to the overall implementation and ongoing decision making.

The balanced scorecard concept grew out of research done at KPMG in the early 1990s. Beginning in 1992 it was introduced in an influential series of articles in the Harvard Business Review by Harvard business professor Robert S. Kaplan and consultant David P. Norton. The two authors explained that traditional accounting was not up to the task of analyzing the health of complex contemporary businesses. "Ideally," they wrote in their book The Balanced Scorecard, "this financial accounting model should have been expanded to incorporate the valuation of a company's intangible and intellectual assets, such as high-quality products and services, motivated and skilled employees, responsive and predictable internal processes, and satisfied and loyal customers."

Most important, traditional accounting focused on lagging indicators: outcome measures such as sales figures that showed what a company had done in the past but not what it would do in the future. Kaplan and Norton wanted to mix outcome measures with "performance drivers": leading indicators such as manufacturing cycle times that suggested where the business was headed. And these indicators needed to be linked to overall business strategy.

To accomplish that, Kaplan and Norton argued that managers should track a company's performance in four main areas:

financial-return on investment, value added

customers-satisfaction, retention, market and account share

 internal-quality, response time, cost, new product introduction

satisfaction, information system availability.

They encouraged managers to build a logical structure that linked measurable indicators to corporate goals in each of those areas. That structure, which often entailed thousands of performance indicators organized under several dozen goals, was the essence of the scorecard.

It took a few years for the balanced scorecard concept to become a success. In part, that was because, for the approach to work, companies need the ability to assemble vast amounts of data in data warehouses and deliver the information to managers' desktops. Today, the term "balanced scorecard" is as likely to refer to a software product as to a logical structure, but both are necessary.

On one hand, a balanced scorecard is simply part of a software chain that moves data from corporate databases onto the executive's desktop. A development organization typically has many databases. At Pharmacia, for example, the list included, among others:

 the clinical management trial system, which collects cycle times and similar sorts of data

 a database of information related to patient recruitment

 a customer satisfaction database, which contains results of surveys of clinical investigators.

Other sources of data can be easily added to the system, according to business needs.

On top of the source databases sits a data warehouse, which collects and indexes information. The ideal is one warehouse for all of a company's data. In practice, it is often necessary to use several warehouses. Typically, only experts and analysts possess the skills to work directly with warehoused data. Other users need a software tool that sits on top of the data warehouse to extract, structure, and organize the information.

What makes balanced scorecard software unique, though,is not the fact that it moves data from the warehouse to the desktop but how it organizes the data. Instead of confronting raw data, executives can see information that is already plugged into a structure of corporate goals and benchmarks. And that is perhaps easiest to understand by experiencing the scorecard the way a manager would experience it. 

When Pharmacia's balanced scorecard program (created by Oracle) is launched, it displays an executive summary screen. (See "The Big Picture," page 86.) On the screen are five basic headings, slightly modified from Kaplan and Norris's original four:

Learning & Growth (Organizational Capacity)

Under each heading are either four or five operational objectives, for a total of 23 (a number that Norris and Kaplan called optimal). Under the heading Process Excellence, for example, there are five objectives:

Each objective is flagged with a traffic signal icon: green if the R&D department is meeting or exceeding its targets, yellow for borderline performance, and red for objectives the department is failing to reach. 

The opening page is both a dashboard that gives current information on performance and an index to thousands of specific numbers that underlie it. For example, if a manager sees a red icon marking "optimize trial performance-timeline" and clicks on it, he or she will be offered a menu of the key performance indicators (KPIs) that it represents. 

Each KPI is aligned with the business objective. Click on a KPI, and it is possible to view the numbers in several different graphic representations. (See "Data in Depth.") Pharmacia's balanced scorecard system calculates about 20 KPIs, and most can be broken into several measures. For example, clinical trial cycle time is a KPI, but a manager who wants more detail can click through to its individual components: study set-up cycle time, patient recruitment cycle time, report writing time, and so forth. Pharmacia's balanced scorecard tracks about 2,000 measures in all.

The goal in designing such a system is to build up a logical relationship among KPIs. The ideal would be to set up mathematical relationships, but that is not often possible. Even the relationship between clinical trial cycle times and the overall project cycle time in bringing new products to market is only semi-mathematical. 

Other goals are much more difficult to measure. For example, an R&D organization needs to train its people and develop its leadership team. It is possible to set up some measures that track progress toward those goals: One might decide that the drug development effort would benefit if everyone in the department were fluent in using Microsoft Excel and then set up milestones for getting 15, 50, and 100 percent of personnel trained. But the connection to the corporate goal of bringing drugs to market is much less direct.

Pharmacia's balanced scorecard is designed to focus managers' attention on three aspects of the R&D process: 

 Of the large number of compounds that enter the development process, only a small fraction make it through. Attrition rate as a measurement shows how many compounds are needed at any point in the development process to achieve a target number of successful registrations. The scorecard provides detailed attrition rates for every phase of the development process. 

 Project cycle time is the amount of time it takes for one compound to make it through the entire development process from first testing in humans to approval. The balanced scorecard also provides a detailed breakdown of cycle times for individual phases of development. 

. Funding is more or less fixed on an annual basis, but it is an important limitation on how many projects a development organization can afford to finance. 

With those three factors, a manager can calculate how many compounds are needed at each development stage and identify gaps. That is a dynamic process. On a quarterly basis, cycle times change and attrition changes, so the gaps also vary. But occasionally there will be a huge, obvious gap, and then the availability of complete, current data makes it easier to come up with an appropriate strategy. If there is a shortage of compounds in an earlier stage, for example, there is the option of licensing a compound from outside or of accelerating targets in the discovery stage. Either of those solutions would cost tens of millions of dollars but would still be a substantial saving compared to the hundreds of millions or billions of dollars it costs to license a compound in Phase III. 

Compared with the more widely used metrics report on paper, a balanced scorecard offers several advantages:

capability to monitor business status through intranet/internet in "real time,"with data directly supported by source systems

flexibility in slicing and dicing data to get to the heart of business issues 

ability to design sub-scorecards according to business areas and functions.

In today's R&D units, senior managers get paper reports from professional analysts. The analysts often end up scrambling to verify data extracted from different databases. Operational people, though spending time and effort entering information in databases, don't get much back in return. 

Through a balanced scorecard system, people will get feedback from what they provided almost in real time. It is in their own interest to maintain the quality of the data and keep them up to date. Moreover, they have the opportunity to communicate with their colleagues, senior management, and the balanced scorecard manager through electronic forums that are part of the system.

The balanced scorecard approach enabled Pharmacia's medical development organization to set up a series of internal and external performance metrics to measure adherence to strategic objectives and the operational requirements to support them. 

By using this dynamic measurement tool and receiving an immediate indication of performance, senior managers can be more results-driven. At any time, they can see what's happening in the pipeline, the status of each project, its staff and resource costs, and whether it is meeting its milestones and its forecast deadlines. The benefits of any process reengineering can be seen visibly and quickly, thus ensuring that the organization realizes value on its investment. Furthermore, a feedback loop from the scorecard outputs enables the senior management team to adjust targets and priorities in an ongoing, focused manner. In this way, the management team can start to use data from many sources to influence its strategies, targets and decision making and thereby improve its overall business productivity. 

A word of warning, though: There may be initial resistance to the idea of bringing greater accountability to R&D. Line functional heads are accustomed to running their own show, and may not be comfortable with such transparency of performance. But if the scorecard is used in a positive, constructive manner to support business decisions, give greater focus to key goals, and improve uptake of new processes, managers will come to appreciate its benefits. 

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Not long ago the average pharma development organization spent $100 to $200 million a year. It consisted of about 100 people working on only a half dozen compounds. Its leaders typically knew all their employees by name. There was a good deal of visibility within the organization: Managers could see from top to bottom and could make decisions aided by nothing but their own brains.

Balanced Scorecard for R&D

Since the historic decoding of the human genome, there has been a lot of buzz about pharmacogenomics (PGx), defined simply as how people respond to drugs based on their genes. Within the pharma industry, researchers are excited about PGx's potential to accelerate drug discovery and development by identifying better drug targets, establishing preferred patient populations, and improving safety and efficacy profiles. But there has been much less excitement among industry's business executives, especially marketers, many of whom have concerns about PGx's business impact.	

The emerging field has the potential to dramatically change the pharma business, perhaps even more than the way managed care has altered the industry's marketing model. Consequently, executives need to understand the implications and applications of pharmacogenomics today-because they have already begun to influence the use and marketing of pharma products. Unfortunately, many executives have misconceptions, misunderstandings, and misgivings about pharmacogenomics. This article attempts to put the emerging technology into perspective by identifying and debunking five common myths. 	

Many industry execs believe that pharmacogenomics is primarily a research and development tool used to identify drug targets more quickly and that it has yet to have a role in the success or failure of marketed drugs. 				

In the broadest sense, PGx has both research and clinical applications: to identify drug targets (research) and to predict the safety and efficacy of drugs in individual patients or groups of patients (clinical). The second application is referred to as pharmacogenetics. For the purposes of this article, the term pharmacogenomics encompasses the subgroup of pharmacogenetics. 	

The first half of the myth is based on experience: Most major pharma companies use PGx to identify new drug targets and to select appropriate study patients. But there are several cases that demonstrate how pharmacogenomic differences have affected products' commercial prospects. For example, in 1998, FDA forced Hoechst Marion Roussel (now Aventis) to withdraw its $600-million-a-year anti-allergy medication Seldane (terfenadine) from the market because of pharmacogenomic differences in a very small segment of patients. Fewer than 0.5 percent of all people have a variant CYP3A gene that makes them unable to metabolize Seldane in the presence of the antibiotic erythromycin, resulting in severe cardiotoxicity. If the company had had a pharmacogenomic test to identify the small population of adverse reactants at the time, Seldane may have remained on the market. Consequently, Aventis was forced to focus its marketing efforts on another anti-allergy medication, Allegra (fexofenadine). 	

Researchers now believe that many recent drug withdrawals-Bayer's cholesterol agent Baycol, Wyeth's appetite suppressant Redux, and GlaxoSmithKline's oral diabetes agent Rezulin-may have been a direct result of pharmacogenomic differences among small patient subpopulations. Many more potentially useful and lucrative drugs may have never reached the market because poor responders negatively affected the overall safety or efficacy data.	

Isolating pharmacogenomic responses can also rescue a drug. Genentech found that its breast cancer drug Herceptin (trastuzumab) was effective only in the 25 percent of women whose tumors generated excess proteins from a HER2 gene. 	

Consequently, the company saved the "failing" drug by coupling it with a PGx test (HercepTest) to identify potential responders. GSK's Ziagen (abacavir), an important HIV treatment, may precipitate a severe and potentially fatal hypersensitivity reaction in approximately 5 percent of people with a certain genetic marker. To rescue the product's $200 million in annual sales, GSK is currently working with FDA to develop a PGx test to identify patients likely to have the adverse reaction. 	

The second most common misconception is that pharmacogenomics is a technology that will not be used by doctors in clinical practice for at least five to ten years. The reality is that physicians have been using some pharmacogenomic tests in clinical practice for several years. 				

GlaxoSmithKline's drug Purinethol (mercaptopurine) is commonly prescribed for leukemia in children. Yet one in 300 children has a gene defect for the enzyme thiopurine methyltransferase (TPMT), which normally inactivates the drug. It is now standard practice to give a TPMT test to screen for kids at risk of developing life-threatening bone marrow toxicity. Oncologists also routinely use HercepTest on  metastatic breast cancer patients to identify candidates for Herceptin therapy. Many other pharmacogenomic tests are in development that will identify patient responses to other cancer therapies.		

Several companies, including Genelex and Roche Diagnostics, offer a series of PGx screening tests for cytochrome p450 (CYP) enzymes and pathways. Produced in the liver, the enzymes metabolize more than half of all marketed drugs. About 5–10 percent of Caucasians have defects in those pathways that may reduce the effectiveness or increase the toxicity of certain categories of drugs, including analgesics such as morphine and Demerol (meperidine), anti-arhythmics, and antidepressants like Prozac (fluoxetine).	

One high-profile case involving cytochrome p450 enzymes dramatically demonstrates the promises and pitfalls of pharmacogenomic testing. In 1999, FDA reported the Prozac-related death of Michael Adams-Conroy, a nine-year-old boy with mental illness. The medical examiner concluded that the boy's adoptive parents had administered an intentional Prozac overdose. Indicted for murder, the parents sought a second medical opinion, which found the boy had a CYP 2D6 gene defect, resulting in poor drug metabolism and a toxic accumulation of his prescribed Prozac dose.	

 The murder charge was dropped, and in a Fortune article (10/02), Michael's mother, Jayne Adams-Conroy, stated: "After Michael died, we found out that there were tests to spot enzyme deficiencies that can cause adverse drug reactions. I felt devastated when I heard that. It should be the norm that the tests are used whenever there are concerns about possible side effects." 	

Many in the industry also believe that the only major factor driving the adoption of pharmacogenomics in clinical practice is the rate at which PGx technology develops. Despite the highly profiled Adams-Conroy case, CYP tests-unlike the TPMT test and HercepTest- are seldom used in clinical practice, although they are commercially available.				

 One possible explanation is that the CYP  technology is not as accurate or drug-specific as the other two tests. Although it is  likely that technology advances will help drive overall adoption, there are several other important and interdependent factors that are driving the adoption of PGx testing in clinical practice. 	

Regulations. One of the major reasons that HercepTest has become standard clinical practice is that FDA required in the product labeling that it be given before prescribing Herceptin. In a 2002 Pharmacogenomics Journal article, FDA regulators said. "It is likely that the FDA would not have approved Herceptin without the accompanying diagnostic [pharmacogenomic] data." The agency is also encouraging pharma companies to conduct PGx research and submit the data to a proposed "Interdisciplinary Pharmacogenomic Review Group" that is separate from the drug approval process. (See PE's Washington Report, June 2003.) Other international regulatory bodies are also developing PGx  regulations.	

Reimbursement. US reimbursement for diagnostics often follows regulatory or governmental policies. For example, most third-party payers reimburse for HercepTest. In fact, they typically require the test before reimbursing for Herceptin. In cases where there is no regulation or government policy, payers often follow "the standard of care." Consequently, the TPMT test is typically covered, while CYP tests usually are not.	

Most payers view PGx testing as another medical technology that will ultimately increase their costs. However, a few are conducting studies to ascertain if they can "cherry pick" pharmacogenomic tests to reduce drug costs in carefully selected cases. United Healthcare is conducting a study with Interleukin Genetics to develop a PGx test that could exclude patients who may be non-responsive to certain high-cost rheumatoid arthritis drugs. Payers are thus likely to selectively support and use pharmacogenomic testing and data.	

Legalities. Use of the TPMT test has been implicitly driven by the threat of medical liability. Oncologists do not want to risk prescribing Purinethol to a child with leukemia without ensuring that the child is not at risk of bone marrow toxicity from a TPMT gene defect. However, legal liability in the quickly evolving pharmacogenomic area can be ambiguous. The doctor who prescribed Prozac to Michael Adams-Conroy was sued by the boy's parents, despite the fact that the CYP test was not a standard of care at that time. 		

The case was settled out of court. In a separate lawsuit (Georgia, November 2002) a widower alleged that Lilly, Prozac's maker, failed to publicize research showing that some people are "poor metabolizers of Prozac," referring to patients with CYP2D6 gene defects. Medical and product liability threats will likely hasten PGx's use.	

Competition. There are a plethora of pharmacogenomic players who see the field as a lucrative business opportunity. Many small companies, such as Affymetrix, Aureon Biosciences, Dako, and Decode Genetics, are developing and selling PGx tests, information, and supplies. Large diagnostic and laboratory testing companies, including Roche Diagnostics and Quest Diagnostics, are also involved in the field. 	

Premier hospitals and academic centers have embraced the genomics business as well. Harvard and MIT recently launched a $300 million "genome institute" joint venture. Massachusetts General Hospital, Johns Hopkins, and Columbia all have announced multimillion- dollar genetic initiatives. The quality and quantity of healthcare entities investing in genomics and pharmacogenomics will expedite the technology's adoption. 	

Stakeholders. Three key groups will significantly influence PGx's adoption rate: physicians, patients, and pharma companies. Physicians will be influenced most notably by patient safety, medical liability, regulations, and reimbursement, especially if they can be reimbursed for conducting or consulting on PGx tests. They will also have to be convinced of PGx's clinical validity and benefit, which suggests that most physicians may take a cautious and somewhat skeptical approach to the technology. 	

Although consumers and patients may have concerns about insurance and privacy issues, they are likely to support PGx tests that predetermine which drugs are helpful or harmful. That assessment is based on the assumption that consumers will not have to pay much out of their pocket for the tests. The prevailing view in the pharma industry is that most executives and marketers do not want PGx testing and will resist its adoption.	

The main reason for that resistance is the myth that pharmacogenomics will fragment and reduce products' market size and, ultimately, kill the blockbuster model. Reporter Geeta Anand summarized that view in a 2001 Wall Street Journal story: "The technique threatens to be so disruptive to the business of big pharmaceutical companies-it could limit the market for some of their blockbuster products-that many of them are resisting its widespread use."				

But the reality is that pharmacogenomics has the potential to either reduce or increase market size, depending on a variety of factors specific to the individual product at a certain point in time. Imagine that drug X has market share Y before genetic testing is introduced. Then PGx testing comes into the marketplace. Product X is likely to lose the market share of patients identified to have adverse events (A), no efficacy (B),  or low efficacy (C). Consequently, the market share of product X with pharmacogenomics becomes Y-(A+B+C).  (See "Win Some, Lose Some.") That is the "glass is half empty" perception shared by many pharma executives and marketers. 	

However, PGx testing has several benefits, most of which have the potential to increase market share:	

Faster approvals with earlier market introductions (D): PGx testing early during R&D should identify drug targets and responsive patients more quickly. 

Recruitment of patients from less effective drugs (E): Patients who fail PGx testing for competing drugs could become new patients for product X.  

lIncreased use in diagnosed but untreated patients (F): Patients who have refused treatment because of safety or efficacy concerns would be more likely to try product X if a test confirmed that they would be a good candidate.

Expansion of treatment to new subgroups/diseases (G): Understanding of the genomic basis of diseases helps researchers identify disease subgroups and new diseases that can be treated with the same drug.

Preventive use (H): Patients who have been identified as susceptible to certain diseases may elect to take product X to slow the rate of disease progression. 

Enhanced patient compliance (I): Patients who know that the drug will work for them will be more likely to comply with the treatment. Moreover, if patients fail to respond appropriately, their doctors are more likely to know the problem is noncompliance.

Potential for higher pricing/reimbursement (J): Governments and other payers may be willing to pay a premium for drugs that, with PGx tests, can identify the patients who will respond favorably. Or at least those products may have a formulary advantage over products without PGx testing support.

Thus, the net result of pharmacogenomics' effect on product X's market share could be an overall gain.	

The last misconception is that, because it will be years before pharmacogenomics is applied in clinical practice, it will take even longer to affect marketing. But some pharma marketers have been dealing with, or reacting to, pharmacogenomic issues for several years. Even though there are only a handful of such tests in the marketplace, there is a groundswell of PGx research, reports, and opinions that could influence how physicians and other stakeholders view the efficacy and safety of particular products. There are three primary sources of PGx information: scientific researchers, pharmacogenomic companies, and pharma companies. 				

Researchers have published numerous scientific articles that have been covered in the lay media. Consider, for example, the many stories about "individualized hormone replacement therapy," based on a 2002 New England Journal of Medicine article about women taking estrogen who have a particular genetic variation in the estrogen receptor. Those women therefore obtain higher HDL (good cholesterol) responses and presumably better cardio-protective effects than women without the genetic variation. That information could potentially explain some of the controversy surrounding the differential responses of women taking HRT. 	

Pharmacogenomic testing companies are also interested in publicizing their data for specific products to demonstrate their capabilities. For example, Genaissance has been conducting a highly publicized trial of the statins Lipitor (atorvastatin), Zocor (simvastatin), and Pravachol (pravastatin). It is no accident that Genaissance selected the lipid-lowering category-it is the chemical class with the highest annual sales. Although the company has distributed press releases announcing that it has "discovered genetic markers associated with responses to individual statin drugs," it has not yet released information about which statin drugs have the greatest cholesterol-reducing effects in patient populations with certain genetic profiles. If Genaissance or another testing company were to publicize the significant differential effects of those drugs, it would likely influence physicians' prescribing behavior long before supporting scientific studies and tests became available. 	

And pharma companies themselves are conducting or sponsoring PGx studies to differentiate their products. In 2000, Craig Fitzgerald, vice-president of applied genetics for GlaxoSmithKline, wrote about such activities in Advance Tech Monitor: "At Glaxo, we intend to generate evidence for pharmacogenetic claims and use them as a novel and unique way to differentiate our products. For example, Glaxo intends to publish its first differentiation study later during the year 2000. This study will use pharmacogenetics to differentiate Glaxo compounds from competing products and make additional claims or superiority claims for the company's products. Hopefully, the FDA will be willing to discuss the results of this study and allow us to use them for marketing purposes."	

Clearly, marketers cannot wait until PGx tests become widely available. Nancy Lurker, former group vice-president of Pharmacia's Global Prescription Business, said it best at the 2002 Pharmaceutical Marketing Congress: "If you want to be a leading executive in the industry, then you need to know about pharmacogenomics. It is coming. Marketers need to be aware of these changes as they are going to alter the landscape of marketing."	

So what can marketers do to prepare? Initially, they should become better educated about pharmacogenomics, particularly in their therapeutic areas. Next, they should work with their teams and other experts to determine the potential implications and applications for their products. Specifically, marketers need to determine what clinical trials their company initiated or completed for specific products and what the competition is doing or could do to differentiate its products using pharmacogenomics. See "Marketers' Checklist" on page 74 for a more complete list of activities.	

Senior executives and strategists have their own list of priorities. (See "Executives' Checklist," page 72) They need to understand and appreciate PGx's business implications for the industry and their company. It is important that they develop an overall corporate pharmacogenomic strategic plan. The company should monitor PGx developments and identify potential partners to assist in research and test development. Executives also need to ensure that their company trains and develops internal staff and embeds PGx in the company's business processes, not just R&D. 	

Perhaps the most important thing that pharma executives and marketers need to understand is that the prevailing notions about pharmacogenomics are often based on myths. Pharmacogenomics is not a futuristic force. It is a reality of doing business in the pharmaceutical industry today, and its impact is likely to grow dramatically.	

Prevailing notions about PGx are often based on misconceptions. But in reality, the Technology plays a vital role in pharma's business today.

The 5 Myths of Pharmacogenomics

The next five years will determine whether pharma retains its position as the most profitable major industry. It will do so only if it succeeds in justifying its profit margins and the high prices that US consumers pay for its products. That will be tough.	

When Adlai Stevenson was running for president, an enthusiastic supporter gushed, "Oh, Mr. Stevenson, you will win the thinking man's vote." "Unfortunately, Madam," he replied, "I need a majority." 	

The pharma industry has a plausible justification for its pricing policy. Unfortunately it is plausible only to the minority who take the time to listen and consider its merits as an intellectual argument, unencumbered by the emotional pressures of the real world. When it comes to the battle for the hearts and minds of the American people, winning the thinking man's vote is not enough. 	

I have naîµ¥ friends in the industry who believe that all that pharma has to do is keep repeating its current arguments and perhaps make them more effective. It seems so obvious to them that if pharma's margins fall, R&D budgets will be slashed and the cornucopia of innovative blockbuster drugs will dry up. 	

Surely, they argue, no sane person-not even in Washington-wants that to happen. Alas, it is not that simple. Three years ago, when my colleagues and I were warning people at a pharma meeting of the potentially dire consequences of the growing backlash against the industry, one of my clients said, "It doesn't matter what the public thinks of us. Intelligent people will understand that a very profitable drug industry is very good for the public and the economy."	

It ain't necessarily so. Sadly, there are many reasons to believe that the industry will be unable to sustain its margins as it becomes just another profitable, but not exceptionally profitable, industry. Public and corporate attitudes toward the drug industry have become much more negative during the last decade. 	

Why? In many ways the industry is the victim of its success as the fastest growing segment of one of the fastest growing segments of the economy. Until recently, pharmaceuticals were such a small percentage of all healthcare costs that they were almost invisible. And because third-party payers absorbed much of the rapidly growing costs, consumer were mostly unaware of what was happening.	

Now, as co-pays increase, the public tends to think that drug prices are unreasonable and wants the government to control them. Furthermore, consumers are increasingly aware of how much more drugs cost in the United States than elsewhere. And, during the last few years, even employers and doctors have become critical of the industry's pricing policies.	

The price of pharmaceuticals, whether paid by consumers, employers, or the government, would be much less of an issue if people thought they were getting great value for the money paid. Just how badly the industry has failed to demonstrate the value of pharmaceuticals is evident in an August Wall Street Journal/Harris Interactive survey that asked the public to rate ten medical products and services on their value relative to price.				

Generic drugs top the list: 63 percent of the public thinks they are good value for the money. Nursing homes and health insurance are at the bottom: Only 12 and 14 percent, respectively, of the public thinks they are good value for what they cost. No surprises so far.	

The real shocker is that brand-name prescriptions rank eighth out of ten on the list. Only 21 percent said they are good value compared with 43 percent who said so about medical devices, 36 percent for over-the-counter drugs, 36 percent for vitamins and mineral supplements (that really hurts!), 35 percent for doctors, and 32 percent for pharmacies.	

Fully 45 percent of the public believe prescription drugs are a poor value for the money, second only to health insurance (55 percent). Forecasting the future of public opinion is even riskier than forecasting the weather or the economy. But there are solid reasons to believe that the backlash against the pharma industry and its pricing will get worse before it gets better. 	

All of the forces driving the backlash are still in place. With every passing year, consumers are being asked to pay substantially more out of pocket for prescriptions-not just for new drugs but for the same drugs. The costs to federal and state governments and to employers are also increasingly rapidly. 	

The best hope for the industry to maintain its profitability is to demonstrate that pharmaceuticals are a great value for their price. Spending on drugs may be rising rapidly, but it is a cost-effective way to spend money. The return on investment-in terms of longer life, less pain and suffering, and a better quality of life-is outstanding. I believe it is necessary, and possible, for industry to make this case because it is true. But if it fails to do so, the consequences will be disastrous.	

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The next five years will determine whether pharma retains its position as the most profitable major industry. It will do so only if it succeeds in justifying its profit margins and the high prices that US consumers pay for its products. That will be tough. When Adlai Stevenson was running for president, an enthusiastic supporter gushed, "Oh, Mr. Stevenson, you will win the thinking man's vote.

Pharma's Value Proposition

Thanks to growth in international trade, rapid technological innovation, and a willingness to share intellectual property (IP), the number of corporate cross border alliances has grown steadily. Pharma, in particular, has embraced the practice, because the risks associated with commercialization of its products are so great and because the industry realizes the value of jointly developed IP. In fact, pharma has achieved some of the world's best cross-border collaborations. The most successful have been formed with careful legal planning that minimizes a company's chances for jeopardizing the alliance's greatest asset: the IP that goes into and comes out of it.  	

"We see more and more companies trying to aggressively tap into partnerships, in-licensing, and out-licensing and not letting IP issues get in the way of extending their reach into other companies," says Russ Hagey, managing director of the Los Angeles office of Bain & Company, a global business consulting firm."There has been a historic view that IP is the hurdle that has kept people away from alliances. But with a dearth of good opportunities in companies' product pipelines, there's a willingness to work through whatever historical stumbling blocks may have existed."	

This article examines how pharma companies can use business and legal planning to protect their intellectual property and any that the alliance develops, while focusing on what really matters: the opportunities of collaboration.	

Alliances can be structured in several different ways. Several factors, including business, legal, liability, tax, accounting, and IP, dictate what the most appropriate form may be. An alliance may be implemented through a jointly owned entity or by contract. But before choosing a structure or even a partner, the initiating company should consider the benefits and risks of establishing a cross-border alliance in any given country. For a variety of reasons, such as tax incentives to companies that develop IP and commercialize products there, certain countries and regions may be more favorable to the project. Many countries in Asia, including Singapore and Taiwan, offer such incentives. Taiwan, for instance, may allow research and development costs to be deducted from income tax. Most European countries also offer such incentives. 	

"The Irish tax laws will give you a break if you have a manufacturing site there, but the real break comes if you are an Ireland-based company earning royalty income from patents based on R&D that originated in Ireland-and that flow of royalty income is tax-free," explains Marla Church, former corporate patent counsel for Elan Pharmaceuticals Research, a US subsidiary of Dublin-based Elan. "In the early days, it gave [Elan] an edge in that we had all our R&D in Ireland and all the patents originated in Ireland."  	

Once a company targets a country or region for further inquiry, it must get answers to more specific questions that will uncover the potential risks of establishing an alliance there. For example:  	

What is the scope of IP protection in the region/country? 

Do the country's patent laws adequately cover compositions and methods of treatment ? 

If not, are there significant risks for entering the alliance partner's market?  

Is there sufficient enforcement for violations of IP rights?  

Most Western European countries and Canada have strong IP protection. However, the IP landscape of many other countries that companies might consider as a site for a collaborative effort present IP risks and challenges that should be closely considered before any deal is brokered. (See "At Your Own Risk-A Sampler" on page 64 for a representative list of such countries and examples of potential concerns.) 	

Some countries-China and Argentina are two examples-have a history of poor IP enforcement. According to Peter C. Richardson, Pfizer's senior assistant general counsel and general patent counsel, it can be difficult to determine how courts in those countries will handle patent disputes. He says, "China doesn't have a history of patent enforcement. They've enacted laws that provide for patent protection, but not many cases have been litigated. Argentina has a national pharmaceutical industry and they've had a system that tends to favor their own companies. They have historically not been ready to grant IP rights in the first place, and enforcing rights has been problematic."	

Other countries have requirements that significantly reduce an alliance's value. For instance, Japan's patent law requires that companies provide "appropriate compensation" for discoveries made by employees. Over the last few years, there have been several high-profile lawsuits involving this requirement, as well as other issues related to the ownership of IP rights.	

Worse yet, there may be compulsory license provisions, whereby a government can compel a patent holder to license rights to a third party to produce and sell a product with royalties determined by the government instead of the patent holder and the third party. Developing countries, with low or nonexistent levels of IP protection and limited access to new pharma products, are more likely to enact legislation permitting compulsory licensing under a broad range of circumstances, including loosely defined "national requirements." In the United States compulsory licensing is not permitted except in limited circumstances. 	

Recently, Argentina's compulsory licensing provisions have been criticized as "overbroad," because they allow the government to compel licenses without a legitimate market rationale. And Malaysia's Ministry of Health has been moving toward compulsory licensing of HIV therapies so it can obtain the lowest possible price.	

Successful alliances ensure that legal and IP issues are addressed up front and that both parties share an understanding of the value of IP before establishing a formal relationship. Because cross-border alliances often include companies with drastically different corporate cultures, it is important to recognize beforehand if there are differences regarding IP. According to Frederick F. Giarrusso, vice-president of business development for Santen Holding U.S., "It's almost impossible to negotiate with someone who has no idea about, or respect for, IP."	

It is likewise imperative to conduct a formal due diligence analysis of the IP. In fact, due diligence analysis, which is the hallmark of avoiding pitfalls in most alliances, may also assist the parties in valuing both the technology and the IP.	

In certain regions of the world, valuing technology presents specific problems. Melvin Rodriguez, director of Willamette Management Associates' inter-company transfer pricing practice in New York, points out,"It is not easy to do valuations in Latin America because reliable information about comparable companies or transaction data is hard to come by.	

"That is true there and elsewhere, as few countries require exchange-traded companies to publicly disclose financial information. Likewise, Europe tends to be an area of concern because partners outside that region may find their products subject to 'gray markets'-loss of protection because products can be sold under a different or similar label by distributors in other jurisdictions that seek to enhance free trade." 	

Taking care of due diligence up front means that partners understand what IP the other party has and that they know whether the partner can make good on the technology or IP they promise. There must be a thorough analysis of the partner's technology. Due diligence also reveals the value of the partner's IP as well as the strength of the proposed partner's IP portfolio, which may include experience in blocking patents and other important knowledge assets. 	

Any investigation should also include a risk assessment to see whether the proposed partner is involved in, or is likely to be involved in, any high-stakes IP litigation. If patents are the alliance centerpiece, companies should consider counsel's opinion addressing potential infringement, validity, and enforceability issues. For instance, if there is any chance that the alliance could be sued for patent infringement in the United States, obtaining a "freedom to operate" opinion can establish the necessary written record to avoid a successful claim of willful infringement.  	

The due diligence process can also include a search and analysis of state-of-the-art developments in the pharma industry, including a careful review of related and competitive technologies, and a legal analysis of whether the technology and IP can be conveyed to the alliance: that is, whether they are owned by, or are free to be licensed by, the contributing partner. "You don't want to enter into negotiations with somebody, get too far down the road, have an agreement, and then find out that the whole thing is going to die because somebody else has the patent rights and they are just going to stop you from developing the product," says Richardson. "We often find that we need to do a fair amount of independent evaluation to determine what rights there are and to make sure that there are no third-party rights. We don't want to be in the position where we take a license and then find out that we can't market the product because somebody else has a patent and we are unable to negotiate a further license."				

If the alliance will be structured as a co-development deal, the company will want to make sure that the potential partner can deliver what it proposes. The best way to determine a partner's capabilities is to visit its facilities in-person-especially if the alliance will be structured as an R&D alliance. "You want to see their labs, you want to see how they're set up, you want to see that they have the equipment necessary to carry out the experiments that they say they are going to do," cautions Corinne Marie Pouliquen, senior counsel in the Washington DC office of Epstein, Becker & Green. "If you walk in and they have no venting system, that's not a good thing. 	

I have seen places where they have loose leaf papers flying around the bench and they're just taking notes. If I think there's going to be a problem, I will spell it out [in the agreement]."	

It also matters who conducts the due diligence. Those doing so should have an in-depth knowledge of the applicable technology and broad knowledge of technology management, implementation, and deployment, ideally including expertise in pharma or a related industry. For some purposes, even companies with sophisticated in-house technological capacities require that independent experts conduct technology assessments to avoid the potentially negative impact of hidden agendas and vested interests. Although it can be easy to get bogged down in the due diligence process, once it is completed, the alliance partners have valuable information about how best to structure the alliance and address any anticipated IP challenges. 	

For a company contributing IP to an alliance, nothing is more important than retaining maximum control over its IP. Likewise, both parties must consider ownership of IP generated by the alliance. The agreement should be flexible enough to account for changes in the competitive and IP landscape that the alliance is targeting. 				

"From a cross-border point of view, companies need to keep in mind the importance of arriving at flexible but workable arrangements that meet operational and tax objectives and provide them with the flexibility to adjust to changes in the IP environment," notes Rodriguez. "Flexibility can be understood as having a financial option, but one that is operational and embedded in the way the companies structure the transaction. These are called 'real options,' such as the option to abandon a project, given some new performance criteria, or to delay a project, given the presence or absence of a new economic condition in the marketplace. A few companies have cross-border arrangements that cannot be abandoned at a reasonable price because they failed to include in the negotiations the conditions under which the project would be abandoned and the cost of abandonment."	

Once the alliance begins producing IP, the partners must determine how to protect and manage it. In many instances, pharma alliances should first look to patent protection in each country involved. That will generally allow both parties to fully realize the benefits and protection of their patent rights. The scope of patent protection is not uniform from country to country, however, and in some countries, patent protection may pose more risks than rewards. In a country where enforcement is weak, the cost and difficulty of procuring a patent and the requirement for disclosure of the technology may not be justified. In India, for example, it can take many years to obtain a patent, and once a patent is procured, it may have very little value because of the uncertain enforcement climate.	

It may, in fact, be impossible to obtain a patent under a foreign country's patent law. Instead, the alliance may want to protect the invention as a trade secret, a form of protection that is at least equal in duration to a patent and that also maintains confidentiality. Richardson points to China as an example. "China is a young country from a patent law point of view [10–15 years], so it has had to develop systems and learn how to operate dispute resolutions. But the biggest issue in China is the long-term predictability. Nobody has had much experience in what that does to market exclusivity." 	

Moreover, the alliance should ensure that the party with the responsibility for generating and maintaining the IP is also well versed in proper IP development and documentation. That includes determining who will file patent applications before established bar dates and disclosures. Companies should also maintain accurate records and signed documentation to memorialize the IP production. 	

Vigorous enforcement of the IP by both partners is extremely important. Even with the increased focus on IP protection, countries with weak patent systems generally are less aware of the power that patents and IP could have if they were properly enforced. Fortunately, alliance partners in some of those countries are patent savvy.  				

"We seek patent protection for companies in more than 130 countries," Richardson says. "Patents are critical for us to be able to sell Pfizer products. So we have a whole staff of people obtaining patent rights for its inventions. We also enforce patents globally. But once you have a patent, it means something only if you're prepared to sue somebody who's copying your product." 	

At the same time, such enforcement should be coordinated so the action does not put either partner at a disadvantage. For instance, one partner could irreparably harm a relationship with a third party that is a valuable partner in another collaboration, or the enforcement action might harm other worldwide interests. 	

"We've got close to 300 cases of infringement litigations around the world, in which we are enforcing our patent rights," says Richardson. "Many of those have a cross-border aspect, because it's common to have litigation in more than one jurisdiction. So it's important to tie those together and to have the interaction between the law firms in different countries coordinated by the legal division's IP group. You can't say one thing in litigation in one country and something different in another. For patent enforcement, that is not a recipe for success."	

Alliance partners should start their collaboration with the end in mind, because a well planned termination agreement makes for a smoother transition when it is time for the alliance to part ways.  				

In China, for example, Rodriguez cautions, it "could be difficult if you do not go with a very clear mind on what the terms of the transaction will be and who is responsible for ownership, development, and exploitation of property. It's very difficult to be successful in these arrangements if you don't have any strategies relative to exiting the arrangement." For instance, deciding which party owns any jointly developed IP should be a top priority. That includes any obligations that survive the termination, such as maintenance of licenses to use the IP that is produced by the alliance and maintenance of its value.	

Throughout the world, IP is being recognized as the cornerstone of the pharmaceutical industry, even in countries and regions that have historically ignored its importance. As Giarrusso has said, "You can have a factory burn down, you can have a laboratory blow up, all kinds of things can happen. Your computers can go to heck. But if you own IP, you can pull it back together. You've got the core of your business. You can always build another building. You can always put up another lab. And you can always straighten up a computer mess."				

Hagey expects cross border alliances to continue to grow in the coming years, despite concerns over IP protection. For starters, increasing numbers of companies need to fill pipelines with good products, which means they will reach beyond their traditional borders. Also, more companies are going to look across borders for talent, as the high tech industry has done to find engineers.	

Finally, he expects more companies will view alliances as windows into international geographies. Bain's research finds that companies successful in international expansion use data-driven test market results to determine the likelihood of achieving commercialization before they invest directly. But alliance opportunities are the ultimate commercialization test in those markets. "Those geographies will provide growth options in the future," he says "and you have a range of companies that will be willing to make the long-term bet."	

Thanks to growth in international trade, rapid technological innovation, and a willingness to share intellectual property (IP), the number of corporate cross border alliances has grown steadily.

Pharmaceutical Executive-10-01-2003

Balanced Scorecard for R&D

The 5 Myths of Pharmacogenomics

Pharma's Value Proposition

Sharing IP, Sharing Risk

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