A Better Way to Build

May 1, 2003
Mark Twomey

,
Jonathan Horn

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-05-01-2003,

Just a few years ago, financiers were celebrating the "recession-proof" US economy, betting on the success of dot-coms and ridiculing the cautious few. Today, pharma industry experts tout mergers and acquisitions as a panacea to solve growth problems, reduce costs, increase sales, and renew R&D productivity.

Just a few years ago, financiers were celebrating the "recession-proof" US economy, betting on the success of dot-coms and ridiculing the cautious few. Today, pharma industry experts tout mergers and acquisitions as a panacea to solve growth problems, reduce costs, increase sales, and renew R&D productivity.

But there are those who doubt the wisdom of that approach. Some believe that M&As are the bane of the industry, that they often destroy rather than create value. They believe that consolidation, because of its monolithic internal bureaucracies, make it more difficult to post double-digit growth year after year. Some argue that the pharma industry is looking for a quick fix for slow growth-a painless solution that will rapidly restore historical profit margins. According to that line of reasoning, if the industry follows the path of consolidation, it will be tinkering with unsustainable growth, a practice much like rearranging deck chairs on the Titanic.

This article proposes that avoiding the "bigger is better" syndrome might just save the sinking ship. It explains how companies can use existing assets to create new value for caregivers, patients, and stockholders by extending, rather than consolidating, the pharmaceutical enterprise. That can be achieved through alternative business structures, such as alliances, joint ventures, co-promotions, and start-ups. The article also offers a rationale for creating such extensions and provides practical strategies for doing so.

Enterprise options and Time and Money

Never Assume

Many industry insiders assume that mergers and acquisitions will quench pharma companies' thirst for more robust pipelines, decreased costs, increased sales, and greater breadth and depth of therapeutic classes. But executives should ask themselves:

  • Why would merging two companies with weak pipelines result in a single company with a strong pipeline?

  • Why would merging two inefficient administrations and infrastructures result in lower costs?

  • Why would combining mammoth sales forces necessarily result in increased sales?

  • Why would larger R&D groups-with increased bureaucratic layers and multiple therapeutic classes competing for finite resources-result in innovative therapies and decreased time to market?

  • Why is bigger better?

As an end goal, it's not. To explore why, it is useful to consider the basic business objective: to create the highest earnings possible by maximizing revenues and minimizing costs. Various strategies can help companies achieve their business goals, but they must reflect the company's overall objectives. Without that link, companies waste time and resources on initiatives that yield little benefit. (See "Back to Basics," page 64.)

In the pharma industry, a company's business objectives could be earning profits to fund further research, improving patients' quality of life, and providing a return on investment to stockholders. Potential alternatives through which to achieve those objectives could include making the pipeline more efficient to optimize time to market and peak sales, increasing customer focus by building and supporting the sales force, or outsourcing to minimize infrastructure and leverage third-party expertise. As with any business, the strategy selected depends on the overall state of the economy and the market's competitive response.

Extended Enterprise

Once the company identifies a strategy, it must select an appropriate organizational structure. (See "Enterprise Options.") If the abilities needed to support the strategy are unavailable in-house, the company has four options for establishing an appropriate enterprise:

Build capabilities internally. This approach requires heavy monetary investment, personnel recruiting, and systems implementation. It also takes significant time to design, build, and implement such capabilities. (See "Time and Money.")

Back To Basics and Risky Business

Stay the course. Although this option calls for no incremental investment and effort, it may not support the business strategy and, as a result, may set the company up for failure or acquisition.

Merge/acquire. This popular choice demands significant investment to integrate disparate systems and processes. Cultural barriers may also create tangible and intangible costs. Consolidation, however, may enhance marketplace stature and image.

Extend the enterprise. This option also requires investments, but they are shared across business partners. Enterprise extension may also enhance marketplace stature and image.

Internal issues related to product pipelines, pricing, costs, and profits have caused, and will continue to cause, pharma executives to look for M&A– based solutions. M&A solutions seem easier to conceptualize and undertake than those that extend the enterprise externally through alternative business structures-but in practice, there is often no end to the difficulties that can arise from collapsing the capabilities of two companies into a single structure. That process necessitates a limited course of action that:

  • focuses internally to make the "integration" work

  • puts technology first and process second-supported by enterprise systems

  • depends on major restructuring to work

  • delivers internal benefits

  • focuses on internal efficiency

  • attempts to decrease costs

In contrast, establishing alternative business structures extends the enterprise through commercial arrangements with outsourcers (such as third-party distributors), joint venture partners, and co-promotion partners. An extended enterprise:

  • focuses externally to create value across business partners

  • puts process first and technology second

  • allows for quick, ROI-based decisions

  • delivers mutual benefits

  • focuses on enhancing external effectiveness

  • attempts to increase revenues

Although M&A activity gives traditional enterprises a shot of "adrenalin," an extended enterprise results in sustainable productivity by magnifying output and value through collaborative business partners.

Devil in the Details

Unfortunately, companies assume that the decision to institute alternative business structures alone will result in success. Empirical evidence suggests that it takes more than that. Even if a specific decision to create an extended enterprise is correct, initiatives to design, build, and implement new structures can fail.

To Do or Not To Do

To increase revenues, for example, a company could use underdeveloped assets in a start-up initiative. But if the new entity lacks the design and implementation needed to support those assets, an ineffective company launch, insufficient support infrastructure, and a poor competitive position could result.

Most newly minted business-school graduates would say, that for a pharma company to launch an alternative business structure it must focus on global strategies and marketing campaigns. A few may mention the capabilities it must establish to support functions such as discovering, developing, supplying, and marketing products. But none are likely to mention that the company must also:

  • establish a suitable infrastructure: office space, desks, phones, computers, and networking capabilities hire, manage, and pay employees

  • develop processes and document standard operating procedures

  • establish systems, point solutions, and interfaces

  • manage revenues, costs, capital, and cash flow

  • comply with applicable regulations

A business structure that extends the enterprise must perform the core functions of a traditional stand-alone company. As many failed dot-coms learned the hard way, a good idea or fancy office space isn't enough. Supply without distribution capabilities, processes that fail to satisfy safety and FDA regulations, and revenue without financial controls all result in the same outcome: failure. Ethics, traditional business rigor, and uncompromising attention to detail are required to manage any business, particularly the successful launch of an extended business enterprise.

Building capabilities calls for pragmatism. Because departmental silos are strong, integrating their processes and sharing information almost always prove difficult and can highlight both technology and process weaknesses. Integration across multiple departments-or within a single department-involves hand-offs among individuals, units, or third parties.

Those process and systemic exchanges make integration more complex, which increases the potential for risk. Such interface/risk points can surface between multiple functional areas. The discovery process requires work between research and development, for instance, and product stocking cannot occur without good interactions between supply chain and trade relations. (See "Risky Business," page 64.) And all of those added complexities eventually draw on already tight budgets and timelines, reducing the probability of success.

Practical Solutions

Pharma companies can realistically deal with those issues by following four steps:

Determine the functional capabilities required. Companies must identify critical functions, including people, processes, and technology components by functional area and either develop them internally or outsource them.

Structure teams according to capabilities. Teams should be structured according to an "organization" view, each focused on establishing one or more functional areas.

Integrate the components being built.

Integration teams need to review and modify the components established by the functional teams to create end-to-end business processes that work across departments and business partners.

Test and validate, then "go live." Testing teams need to develop and execute process/system tests and required validation to demonstrate that business processes and supporting systems are ready to go. That includes simulations of business operations, as appropriate.

Some basic rules can help companies further manage the overall effort:

Avoid the "nirvana" syndrome. Do not attempt to perfect everything at once in the newly formed entity. And be aware that "best practices," though highly touted in the industry, often turn out to be nothing more than "what everybody else is doing." If the bar has been set low, matching a "benchmark" may not indicate optimal, or even adequate, performance. In addition, although companies should have a vision, it is also important to focus on reality instead of theory. Ultimately, an initiative's success will be measured by whether the company is up and running and able to create value.

Focus on attainable goals. Rome wasn't built-and the aqueducts certainly weren't tested, validated, and implemented-in a day, and a newly extended pharma entity can't be either. Make good use of what already exists, focus on what the enterprise can implement rather than on endless possibilities, and get things done.

Don't over-rely on systems. Systems are not a panacea and can actually cause more problems than they solve. Focus on implementing sound business processes, supported by a systemic infrastructure. Avoid implementing new technology for technology's sake, because it can increase integration complexity, often delaying results or leading to failure.

Control the process. If it can't be tracked, it can't be managed. If it can't be managed, it can't be implemented. And if it can't be implemented, it will fail. Extended enterprise initiatives often have extremely compressed time frames, so companies must identify and actively manage the critical path quickly. Such initiatives are also often complex, with many moving parts. As a result, initiative leaders must empower employees but also visibly control the initiative and not abdicate responsibility.

It is important to be pragmatic. During launch initiatives, "good enough" often suffices. It is better to develop "must have" point solutions that will ensure the company's ability to operate than to implement multiple long-term information systems that could easily lead to significant delays or launch failure.

The practical approach also emphasizes fiscal responsibility to avoid unnecessary investment. Although companies may need long lead times to institute capabilities in many cases, they should only undertake implementation activities when they are on the critical path. There will be time to implement long-term systems and infrastructure as a subsequent phase if it makes sense and if the launch is successful. In any case, the total ROI and risk to the company must justify those decisions . (See "To Do or Not to Do," page 66.)

To successfully launch an extended enterprise, companies must establish processes and "must-have" technology capabilities that create an infrastructural backbone. Eventually, they will also be obligated to enhance those processes and capabilities to support future requirements. If they take those steps and actively manage the disparate components of extended enterprise efforts to ensure readiness, they will achieve coordination and integration over time.

Running contrary to the experts of the hour is never easy. But history has proven that the most popular option is not always the best. By braving the uncharted territory of extending the enterprise through alternative business structures-and by diverging from the high-traffic M&A road-companies may discover the smoothest path to growth.

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