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When Pfizer CEO Jeffrey Kindler took the podium in January and announced that the struggling company would scale back and restructure its operations, he did more than just signal the end of an era. He proved that to turn around Pfizer-and in a way, the industry at large-companies need to hack away the parts that just aren't working anymore.
When Pfizer CEO Jeffrey Kindler took the podium in January and announced that the struggling company would scale back and restructure its operations, he did more than just signal the end of an era. He proved that to turn around Pfizer—and in a way, the industry at large—companies need to hack away the parts that just aren't working anymore.
Certainly, the reorganization plan of the world's largest drug company is ambitious. It involves streamlining operations under five newly created business umbrellas, ramping up communications with payers and patients, ending smothering sales tactics with physicians, and cutting the fat out of middle management. In every sense, it was swift and unforgiving—but observers were unimpressed.
"It's not even close to revolutionary; I wouldn't even say it's evolutionary. It's just stand-pat," said Bill Trombetta, professor of pharmaceutical marketing at St. Joseph's University in Philadelphia, who noted that GlaxoSmithKline and Merck have already undertaken similar strategies. "They're not doing anything that's different from what any company would do when its back is against the wall."
The moves were all practical. Unable to build a beanstalk from its magic bean torcetrapib, Pfizer had no choice but to scale down its infrastructure. But observers didn't believe that Pfizer's plan got at the heart of the industry's troubles: the costly and time-intensive R&D process, higher hurdles at FDA, ever-present risk of unforeseen adverse events, and the ticking clock on blockbuster patents.
Trombetta and others talk about the need for drug companies to think beyond their role as drug suppliers and become companies that offer a strategic advantage to their customers. They're certainly capable of doing so. After all, it was Pfizer, Trombetta noted, that worked with Florida's Medicaid program in 2004 to fund health education, triage services, bloodpressure cuffs, scales, and other personal health aids for people who couldn't otherwise afford them.
But the program wasn't institutionalized. "The drug industry is there to sell products—it hasn't been there as a source of strategic advantage," Trombetta said.
"The ramifications are all the way up the chain: from drug discovery to what business pharma companies are in. Are they in the drug business or the solution business?" said Steve Wunker, a partner at consulting firm Innosight. "That will be the hardest challenge for pharma to address. They're very good at innovation—in the sense that they're good at finding new molecules—but they're very bad at innovating what they do."
Mighty Pfizer sets the tone for the rest of pharma. But now, when all eyes were on the industry's role model, some observers believed company executives dropped the ball. They talked about innovating new products, but they didn't talk about innovating what they do.
So we asked observers, critics and supporters, to fill in the missing pieces. If they ran Pfizer—or more specifically, a Big Pharma company that wielded a similar position of influence—what model would they create? How would they tackle the issues facing the industry?
Here's what they had to say.
One thing that certainly no longer works is pharma's sales and promotional model. I've seen pharma's current model described as the "more is better" "Red Army," and, my favorite, "Mongol horde" approach. All the evidence points to a significant deterioration of the relationship with doctors because of this type of promotion. The signs of unhappiness include declining call rates, lower sales productivity, and, most directly of all, customer feedback that laid it out point blank—they're saying, we're not getting the support from you that we feel we should. To reestablish positive relationships with doctors, pharma must develop a relationship strategy that benefits their customers. Pfizer has stated very clearly its intentions to get its customer relationships and activities right. In their recent analyst presentation, two of their five strategic priorities were directly linked to this goal.
Andrew Brana, consultant, TNS Healthcare
To move away from blockbusters, Pfizer is going to have to do what they're talking about: set tough goals. Kindler announced that Pfizer would launch two externally developed products and four internally developed products a year by 2010. Those goals certainly will stretch their R&D capabilities.
You can also cut costs. Pfizer continues to streamline its operations from the Warner-Lambert and Pharmacia acquisitions. Management has to make these tough challenges look doable, and hope for some early wins to build momentum.
GlaxoSmithKline is running a parallel experiment. After its merger, it broke the company down into autonomous Centers for Excellence in Drug Discovery. The model at Pfizer doesn't seem to be going that far, but there may be some similarity in the desire to break up the organization into more functional, smaller, quicker groups.
Molly Schmid, professor, Keck Graduate Institute
The business model has to change over the next five years. Pharma will be navigating a political environment that appears to be growing more hostile toward Big Pharma by the day. They are also facing increasing skepticism on the part of payers, who will probably require further data to justify a branded drug, particularly when even remotely similar generics exist. Also, FDA has been getting more conservative, approving fewer drugs in recent years than it has historically, and will likely require ever more data given problems like Vioxx—so developing drugs is not likely to get cheaper any time soon.
Heather Brilliant, analyst, Morningstar
I think Pfizer's plan takes reasonable steps to deal with some of these industry issues. Particularly, the firm's intention to continue to invest significantly in R&D, reduce internal manufacturing, and improve the focus and efficiency of its marketing efforts should help realign the firm to better address current industry challenges."
Pfizer needs to do two things. One, they need a cultural change. Pfizer has an aggressive, sales-driven culture. There's nothing wrong with being aggressive, per se, but they should probably focus more on R&D and adopt more of a science-driven culture.
Secondly, they need to have a strategy post-Lipitor—which requires getting smaller before they get bigger. My view is that they should buy a lot of companies with early-stage compounds on the assumption that they're really not going to have anything major break before Lipitor goes off patent. If you start buying a bunch of small Phase I, Phase II compounds, then by 2012, 2013, your late-stage pipeline starts to look really good.
The death of the blockbuster model has been talked about for a long time. I think that argument misses the point, quite frankly. Even the smallest company needs a certain amount of revenue to justify the expense of clinical trials. I don't think we'll ever enter an era where Pfizer is deliberately trying to develop products that only bring in $30 or 40 million a year. I don't think they can justify that.
Les Funtleyder, analyst, Miller Tabak
Even though people can see the slow death of the blockbuster model, times are still reasonably good. There are many forces that advise against change. We look at companies as being sort of an aggregation of resources, processes, and priorities. Resources, which are things like your brands and your sales force, can be changed fairly easily if you have a mandate from the executive suite. But it's very hard to change your processes and your priorities, because of the culture that people have grown up with in pharma.
What you need is support from the middle- and upper-middle levels of management. You need cross-functional, cross-business units—groups of people who will find a new vision for what the company is and what business it's in—to initially identify what are some quick wins and small steps to generate momentum while still having a longer-term vision of what the company should become. If you're asking people to change what they do, to tailor it based on the drug on the market, then decentralization becomes really important.
Steve Wunker, partner, Innosight
Despite the magnitude of the issues facing Big Pharma, industry observers seem to agree on some common solutions—even if they didn't always see eye to eye on the finer details of execution.
Molecular diagnostics will increasingly play a role in developing therapeutics. And I think the biomarker revolution will continue, where companies will be looking at how to better tailor a therapeutic to a patient and minimize the risk profile.
Companies also won't have as much scale per experimental set. Since the size of the patient population for today's therapeutics is getting smaller, there needs to be new ways to efficiently run these trials. We also need to get much better at creating tests that are much more predictive of the human. There's been a lot of excitement over in vitro testing because the costs are so low and throughput is so high. We need to do in vitro better, and we need to bring throughput to the in vivo model. Iink Pfizer's plan takes reasonable steps to deal with some of these industry issues. Particularly, the firm's intention to continue to invest significantly in R&D, reduce internal manufacturing, and improve the focus and efficiency of its marketing efforts should help realign the firm to better address current industry challenges."
Kevin Hrusovsky, CEO, Caliper
To reduce costs, large organizations can do two things. First, they can rationalize the scope of the disease areas that they go after. That certainly helps to cut costs because you stop activities in those areas that you choose not to be in. The second thing you need to do is to rationalize your operating model, and really figure out what is core to R&D and what's not core. For the things that are not core, you need to find someone else to do it better, faster, cheaper. We think there's an opportunity for removing five-to-eight percent of the overall R&D costs.
On the output side, companies should look externally more aggressively, broadening that external funnel almost two-or-three-fold. You have to change your organizational model to accommodate the fact that a lot of your innovation is coming from the outside versus the present model, where 90 percent or more is sourced internally. Companies can also focus their efforts on shifting the attrition curve. Finally, pharma must inject operational discipline into the R&D process.
Arjun Bedi, partner, Accenture
One of the things I've seen pretty consistently over the last 10-15 years is that pipelines seem to be driven by short-term vision. That view leads to things like mergers and acquisitions in the hopes that the combined pipeline will be stronger than the individual pipelines. The problem is that the combined R&D capabilities aren't any better. On top of that, once these mergers occur, it takes between one and two years to integrate the early-stage discovery functions.
If I were running Pfizer—or a top-five pharmaceutical company—I'd resist the shareholder pressure to try to address my near-term pipeline issues and instead try to create a more realistic strategy for a 10-year plan to generate medium-stage pipeline products by emphasizing internal R&D.
Large companies also have trouble being innovative because it takes longer to communicate internally. So one of my beliefs is that the more efficiently large companies can interface with small entrepreneurial companies, the better it is for the long-term prospects of the pipeline.
Ken Carter, CEO Avalon Pharmaceuticals
It's always hard to tell whether a cutback is just a cutback or a deep, rational rethinking of the right model. And I think the industry needs to move more in the direction of rethinking the model.
Certainly on the R&D side, there's a lot that has to change. I think innovation matters at the end of the day. I think the model that doesn't work is when companies say, we're not terribly innovative but we can win this game through brute sales and marketing. Ultimately the winners in this business long-term are the ones who can be really effective at research and development. Unfortunately, it's certainly not a thing that you can do overnight. So in the meantime, you have to resize yourself. And I think that's part of what you're seeing at Pfizer.
Gary Pisano, professor, Harvard Business School
The traditional approach is having armies of detail people calling on doctors and trying to convince them to prescribe. That's an expensive way to sell. Sales points are also changing; it's more about getting the managed care organization to accept the drug—the payer is the customer. That requires fewer sales people.