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Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-07-03-2007
Volume 0
Issue 0

It's bittersweet being one of the leaders of an industry that is not sustainable," a top pharma CEO recently told Carolyn Buck Luce, Ernst & Young's global pharmaceutical sector leader. Bittersweet is a poignant word for a hard-driving exec to issue.

It's bittersweet being one of the leaders of an industry that is not sustainable," a top pharma CEO recently told Carolyn Buck Luce, Ernst & Young's global pharmaceutical sector leader. Bittersweet is a poignant word for a hard-driving exec to issue. But it offers a clue to the pathos that strikes even the guys making eight digits when they contemplate pharma's unprecedented pressures—and, in a certain sense, their own professional mortality. About the best any Big Pharma CEO can hope for these days is 10 years in which to clean up messes, pump up morale, and start breaking a path to sustainability. If he is very lucky, he might—might—get to see a beloved molecule graduate to approved drughood.

Pipeline and products are but two of the CEO's multitude of responsibilities today. "An industry leader needs a broad set of general management skills rather than deep skills in a functional area, as in the past," says Murray Aitken, senior vice president of corporate strategy at IMS Health. "Running a big pharma has become immensely complex, with an expansion on all fronts: globalization, diversity of business units, portfolios, and a broader set of stakeholders."

After interviewing almost 20 analysts, researchers, academics, and industry insiders, this reporter cannot overstate the magnitude and urgency of the CEOs' mandate according to these observers. Buck Luce put it best, calling the challenge "nothing less than reinventing the way business is done." How big a reinvention? Think of the photographic industry's move to digital imaging and the way the automotive companies developed financial-services offerings.

Long flush with cash—and the vulnerabilities and vanities that great success breeds—pharma has woken late to the alarm. "Leaders who believe in their hearts that the business model has to be transformed can only do so much. The system won't let them move too fast," says Dr. David DeMarco, a leader with Ernst & Young's global pharmaceutical center. "What we are seeing now will result, at best, in initial incremental changes necessary for an industry-wide transformation. That transformation, if it succeeds, could take a decade or more."

James Cornelius CEO, Bristol-Myers Squibb

Pharma's top firms have seen rapid turnover at the top in the past decade or so. Consider: Bristol-Myers Squibbs' James Cornelius was tapped in April, Pfizer's Jeffrey Kindler and AstraZeneca's David Brennan in 2006, Merck's Richard Clark in 2005, Schering-Plough's Fred Hassan in 2003, Wyeth's Robert Essner in 2001, GlaxoSmithKline's J.P. Garnier in 2000, Abbott's Miles White and Lilly's Sidney Taurel in 1999, Roche's Dr. Franz Humer in 1998, and Novartis' Daniel Vasella in 1996. (This trend is not unique to pharma, however. According to Booz Allen, annual CEO turnover jumped 59 percent from 1995 to 2006.)

"The one common denominator of these CEO changes is pipeline failure," says Kai Lindholst, who chairs the life sciences practice group of Egon Zehnder International. "When the pipeline is not delivering, the board and the investors understandably get very nervous.

FRED HASSAN CEO and chairman, Schering-Plough

"The other interesting aspect of the turnover is a demographic challenge," Lindholst continues. "So many CEOs were—or are—facing retirement. And each company has to address succession issues." For example, GSK's Garnier has pitted three of his best and brightest against one another pending his exit next year. And Sanofi's Jean-François Dehecq has groomed Gérard Le Fur for the throne, though generational discord has lately emerged between the two over growth, with old-school Dehecq favoring a single major merger with BMS, while nouveau Le Fur wants smaller, strategic acquisitions.

Such clashes are a necessary aspect of turnovers. "New CEOs are brought on to be agents of change," says Fred Frank, vice chair and director, Lehman Brothers. "If you want to see where the action is in pharma, look at what the new guys are up to." He points to AZ's Brennan and Merck's Clark, who immediately set about doing some very un-Merck and un-AZ things. "Both companies had always relied almost solely on their own in-house R&D," says Frank, "but Clark and Brennan saw every reason to do collaborations, alliances, acquisitions—and to do them quickly and smartly."

Even the most aggressive acquisition of molecules, coupled with the most earnest efforts to streamline in-house development, can go only so far in upping productivity. That's why the new CEO needs to hit the ground sprinting. Life is short, but the art of innovative drug design is long.

The drug industry was humiliated last year by the ouster of two top CEOs. Following a foolhardy, failed deal to keep generic competition away from Plavix (clopidogrel), BMS' Peter Dolan was given the boot last September—but not before a federal investigation had the FBI searching his office and an accounting scandal tied the firm up for two years. A few months earlier, Hank McKinnell was thrown overboard after driving Pfizer's stock value down 43 percent in five years; his $83 million golden parachute triggered shareholder revolt and put pharma in the center of the controversy over executive "pay for failure."

This new low in leadership seemed to mark the final bankruptcy of a way of doing business. "We don't have charismatic leaders," says Albert Wertheimer, founding director of the Center for Pharmaceutical Health Services Research at Temple University School of Pharmacy. "We have people who manage for the quarter. Their main concern is to make sure there is no trouble on their watch. They are terrified to make any bold moves."

Richard Clark CEO, chairman, and president, Merck & Co.

Michael Russo, partner in the Bruckner Group, agrees. "There's not a lot of accountability or ownership. Many top managers know they'll be in the job for only a few years. Plus, they're constantly restructuring, moving people from place to place, so few people take the risk of starting anything, because they probably won't see it through. People keep their heads down."

Wertheimer traces this malaise to the mega-mergers of the '90s, when the scientists who ran drug companies got sidelined by "business people." Others blame the influx of lawyers. "Lawyers are paralyzing pharma," says Sander Flaum, CEO of Flaum Partners and founder of the Leadership Forum at Fordham Graduate School of Business. "Given the tight regulatory environment, they build walls to block communication between medical and marketing. They foster a climate of fear of doing anything new or different."

Words like insular and arrogant crop up when analysts describe pharma CEOs. This was (and partly remains) a generation of leaders who, as Whitney Baldwin, president of Brand Engagement Strategies, says, "subscribed to the notion that 'If we make good drugs, everything will be all right'"—as if external forces were beneath their attention. Patent expiration and generic competition were seen as no threat because old cash cows would be replaced by an ever-returning crop of low-hanging fruit.

"They wasted a lot of time devising strategies for what they wish the market was—or for what it was 20 years ago—rather than how it really is," says Michael Russo. "Now, when a new CEO comes in, there's a lot of activity. But is it real action? No." Missing is what he calls "horizon thinking"—analyzing the dynamics and trends and, above all, the unmet medical needs whose pursuit will keep pharma's products innovative.

"There remains little recognition that the concept of risk has turned 180 degrees," Russo says. "Because of new market forces and pay-for-value, brand extensions are now much riskier than innovation." He points to Exubera, Pfizer's recent inhaled-insulin drug. Green-lighted by McKinnell as a low-risk R&D gamble, this me-too drug with a new delivery was, he says, "long in development before the question 'Is there a market for it?' was adequately studied. The answer was 'Uh, not really.'"

Fear. Heads down. Twenty years ago and next quarter. These were doomed states of mind for leaders of an enterprise whose core is inspired innovation. So it's hardly surprising that when asked to define what kind of new leadership pharma needs, the most common answer from our panel was courage.

"The courage to take the company in new directions, to take risks, even to fail. It's a tough commodity to come by, unlike the ability to manipulate a brand before the public," says Ed Silverman, a veteran journalist for New Jersey's Star-Ledger and the blogger for pharmalot.com.

"The courage of his convictions—whether it's creating a culture based on ethical standards, channeling competition into productivity, or inspiring people to be better than they are," says Bill Trombetta, professor of pharmaceutical marketing at the Haub School of Business, St. Joseph's University.

Tony zook CEO and president, AstraZeneca US

"The courage to surround themselves with smarter people, to encourage pushback, and to give others credit," says Sander Flaum, whose long research into leadership has yielded the finding that "true leaders all share one characteristic: They lead not by the bottom line but by the mission."

The new leaders of today may not be innovators of the caliber of Steve Jobs, but many of them, according to Ernst & Young's Buck Luce, "recognize the need for change and are slowly making progress in creating the preconditions for transformation that goes beyond new models of drug discovery." Others agreed, pointing to CEOs who are inching their companies in a new direction:

Robert Essner, who spent 15 years at Wyeth before taking over as CEO in 2001, has marshaled a $450 million R&D assault on Alzheimer's. "This is going to be the disease, and maybe one of the biggest healthcare political issues, of my generation," Essner told the New York Times. Essner has empowered his R&D guru, Dr. Robert Ruffalo, to take what Bill Trombetta praises as a "tough-love approach to drug development, using new technologies and metrics to speed it up and cut costs."

Novartis' Daniel Vasella received high marks from the Pharm Exec panel. The head of Sandoz when it merged with Ciba-Geigy in 1996 to form Novartis, Vasella seized the opportunity to separate R from D, moving research to the biotech hotbed of Cambridge, MA, while development stayed in sleepy Basel. He was an early proponent of in-licensing. And when the rest of pharma was shedding generics businesses, Vasella bucked the trend by sticking with Sandoz.

Most famously, Vasella stuck with an experimental drug for chronic myeloid leukemia, heeding the pleas of patients, though the niche market seemed to offer minimal profits. That drug became Gleevec (imatinib), Novartis' second-biggest seller, pulling in $500 million a year for use in numerous cancers. "His reign has been branded as innovative partly because of Gleevec," says Bill Trombetta.

Fred Hassan was recruited by Schering-Plough because of his rep as a turnaround wizard. His first day on the job, he conducted a survey, soliciting advice from all employees about the firm's five most urgent problems. He cleared up a federal fraud investigation, announcing a new ethical regime. "If you ever have to choose between doing what's right and making a sale," he told reps at an annual sales meeting, "walk away from the sale."

Then the blockbuster sales of Claritin (loratadine) sagged and cash got tight. Convinced that Schering's sales force was a key asset—and that within a few years, new launches would keep it busy—he decided to distribute the pain equally among all Schering stakeholders, cutting dividends, slashing bonuses, and ending executive perks. (But hands off R&D.) He warned employees and shareholders that it might take seven years to turn a profit. Hassan did it in two. "I want to build things, not just fix them," he says.

What makes these three CEOs' actions leadership is that they were courageous, innovative, and ethical. Yet the bittersweet question nags at the mind: Can any of these trailblazers go far enough, fast enough?

Ernst & Young's David DeMarco is doubtful. While it's true that Wyeth, Novartis, and Schering are now better companies, he says, "these bold moves only help create the platform that enables transformation to take place." To DeMarco, the key is to get pharma where it needs to be in 10 or 20 years. By then he expects the industry to have two new drivers: health outcomes, including pharmacoeconomics, and cooperation, such as biomarker sharing and other cross-company alliances.

Today's leader, says Kai Lindholst, "is challenging R&D management to question their assumptions and constantly adjust to new technologies and breakthroughs." The effervescence of new knowledge in hot fields like oncology has rendered the top-down R&D model obsolete. Execs need to motivate frontline scientists to make decisions and then hold them accountable. "If scientists are incentivized, they back the projects that are going to 'go' rather than just aiming for a high number that makes the pipeline look robust," says Lindholst.

Lindholst gives props to GSK's J.P. Garnier and his R&D head, Dr. Tachi Yamada, for pioneering this innovative structure with their seven Centers of Excellence, each with its own independent resources and mission. The model, which was eyed warily when first launched in 2001, has produced a truly robust pipeline and been copied by Big Pharma rivals.

But Lindholst adds that only Roche, under Franz Humer, has innovated the innovation, by integrating discovery, clinical, and commercial teams in each of the independent disease centers, sparking strategic planning for a molecule's entire life cycle.

No pharma leader commands—or suffers—the media attention Pfizer CEO Jeffrey Kindler does. Something more is at work here than the fact that the biggest of Big Pharma is wrestling with enormous challenges. The spotlight on Kindler also points to a deeper curiosity about whether his resumé represents the future face of pharma leadership.

Kindler never "carried the bag." He's an outsider with a Harvard law degree who once worked for the legendary Jack Welch at General Electric. That fact may have had totemic value in the Pfizer board's decision to anoint him over two rivals, each of whom had done 30 years in pharma.

"Kindler was probably chosen because he has little background in classic pharma culture," says Whitney Baldwin. "He has presumably been given the freedom to challenge the status quo, and God knows that was needed at Pfizer." And an outsider might be just the person to handle the job. "When an industry requires dramatic change, years of experience can be your enemy," says Peter Young, president of Young & Associates. "Especially if you have gone through a long period of stability, you tend to misdiagnose what is no longer working in the structure and the strategy."

Kindler has acted quickly—though not quickly enough for detractors who fear that his lawyerliness will squelch innovation. His moves so far have been bold but not especially original: He shook up his management team and restructured R&D into nine therapeutic areas, Glaxo-style. More dramatically, he is shrinking Pfizer's storied sales force by 20 percent.

That last achievement impressed Ernst & Young's Carolyn Buck Luce. "When Kindler announced the end to the 'arms race,' it was akin to when Walter Wriston, as CEO of Citibank in the early 1980s, consented to the write-down of Latin American debt, which created a whole new dynamic in the capital markets."

To maintain his Wriston-esque stature, though, Kindler will have to pull more rabbits out of his hat. Or maybe just one big one. As Bill Trombetta says, "It's easy to cut costs. But you can only lower them so far. The big question is, how is he going to increase Pfizer's single-digit sales growth?"

Restoring public trust in the pharmaceutical industry is no less critical a mission for a CEO than revolutionizing the business model. Unless pharma commits to greater accountability and transparency as well as to engaging consumers in the complex realities of safety, pricing, and patents, the industry's viability may be in doubt. Yet, so far, most CEOs have shirked the bully pulpit. "They prefer to let their actions speak louder than their words," says Fred Frank. Unfortunately, actions such as developing orphan drugs, donating HIV drugs to Africa, public/private R&D partnerships for neglected diseases, and patient-assistance programs, to name a few, have gotten lost in the noise of negative press.

This takes a toll on morale, says Kai Lindholst. "Across the industry, you see individuals who feel immensely responsible for the health of patients, but there is a lack of recognition," he says. "They feel like they are being treated as if they produce asbestos, not medicines."

The apparent disconnect between how the public views pharma and how pharma views itself could hardly be wider, says Jeff Moe, senior director of health sector management at the University of North Carolina, who did a long stint at Glaxo: "When you're inside the industry, you feel like you're inside the bunker. There's no one out there applauding. In fact, there's the sense that you're always under attack."

It's a peculiar paradox: Pharma spends more than any other industry seeking influence on Capitol Hill, but it remains, in the words of Terry Hisey, US managing principal of life sciences for Deloitte Consulting, "a public punching bag." In turn, it views much of the mainstream media with disdain. It's true that, say, the New York Times sometimes inflates scant evidence into scandals. Yet there's a level of industry misbehavior, especially in the marketing of drugs, that merits such scrutiny. As drug-industry newshound Ed Silverman says, "Virtually every company has had serious safety and ethical issues that the public is aware of. Yet they have also had to pay billions of dollars in fines and lawsuit settlements—and that's mostly kept in the shadows."

Dr. Sid Wolfe, the outspoken director of Public Citizen's health research group, says, "It grieves me that they do so much good—but they do so much bad too. The level of fraud and corruption is so high that CEOs need to start cleaning it up." Not surprisingly, Wolfe supports holding executives personally responsible—with high fines and even jail time for crimes that seriously harm patients. If the recent OxyContin settlement is any indication, he may get his wish.

Leaders do not end up in bunkers or behind bars. "The industry has learned that CEOs need to be more proactive to answer challenges and charges," says PhRMA head Billy Tauzin, citing Richard Clark's passionate public defense of Merck's integrity amid the Vioxx hysteria. Tauzin notes that when he agreed to take the reins of the lobbying group, he made it a condition that what he calls the "'No Comment' era" was over. "Still," he says, "we have a long way to go."

Drug safety, pricing, and patents will grow only more controversial and convoluted. Leaders will find it increasingly difficult to present the industry's case. Although judgments about whether a drug should be withdrawn from the market are rarely clear-cut, drug firms' denials and silence play to the public as indifference. As Jeff Moe says, "Imagine if J.P. Garnier had stepped up as soon as the news broke about the Avandia heart-attack risk study and said, 'We welcome people coming to our Web site, analyzing the data, and offering a new interpretation. We will look into it.'

"Doctors and patients are growing wary of new drugs," Moe adds. "If that trend continues, it could be the death knell for industry innovation."

As for the prickly pricing issue, there is little doubt that a new era of price-for-value is upon us. Yet the industry's bunker mentality has blocked it from either confronting or collaborating with increasingly powerful external stakeholders, such as the health-insurance industry.

"Pharma unfairly bears the brunt of the 'healthcare crisis' rage," says Michael Russo. "The other players have deflected public anger to focus on the price of drugs, even though that composes only 14 percent of healthcare costs. Still, if you turn your chronic meds into brands, people grow resentful about $20 monthly co-pays. They'll shell out for cable, but pharma needs to communicate why they should shell out for health."

CEOs who wish to recalibrate the debate will have to embrace greater transparency around how prices are set. "Pharma needs to be much more proactive in communicating both the benefits of their drugs and the investment demanded to develop them," says Stefan Thomke, a Harvard Business School professor. For all their fury at Big, Bad Pharma, consumers have little grasp of its unique economics. "Because R&D is invisible, people tend to think that it's free or that the government pays for it," Thomke says. "They can't conceive of a drug company investing billions of dollars in research, much of which shows no immediate profit."

"It would be nice if the industry could have a credible human face—a Dr. Koop figure," says Jeff Moe. But the notion of weekly news conferences with a white-bearded, straight-shooting avuncular Dr. Pharma is a little too neat for this murky reality. Industry CEOs need to risk stepping out and mixing it up with the press and the public. And ultimately, the mission to restore public trust is an opportunity to show collective leadership. Says Ernst & Young's Buck Luce: "The industry will rise or fall together. What is required is for leaders to learn how to give up a little sovereignty and redefine—in their hearts—what collaboration with regulators, the government, and each other could look like in the pursuit of greater health outcomes."

The Faces of Mount Pharma

This month's cover features Big Pharma's version of that surrealistic national monument in the middle of nowhere, Mount Rushmore. Meet the three towering figures—the industry's Washington, Jefferson, and Lincoln—whose giant mugs would be carved into that granite rock:

Robert Wood Johnson (1845–1910)

Johnson & Johnson Corp. (1886–1910)

If you're stuck on Band-Aid brand, you've got Robert Wood Johnson to thank. Though not as famous as his son, RWJ II, this pharmacist's apprentice turned salesman was 44 when he founded Johnson & Johnson with his two brothers in 1886. Long fascinated by Joseph Lister's revolutionary theory that airborne germs caused infection, he and R&D maestro Dr. Fred Kilmer turned out a seemingly endless line of innovations, including sterile surgical tools, sterilized bandages, talcum powder, baby cream, and the first-ever first-aid kit.

Robert Wood Johnson (1845–1910)

Johnson & Johnson Corp. (1886–1910)

If you're stuck on Band-Aid brand, you've got Robert Wood Johnson to thank. Though not as famous as his son, RWJ II, this pharmacist's apprentice turned salesman was 44 when he founded Johnson & Johnson with his two brothers in 1886. Long fascinated by Joseph Lister's revolutionary theory that airborne germs caused infection, he and R&D maestro Dr. Fred Kilmer turned out a seemingly endless line of innovations, including sterile surgical tools, sterilized bandages, talcum powder, baby cream, and the first-ever first-aid kit.

Edmund T. Pratt Jr. (1927–2002)

Pfizer, Inc. (1964–1997)

After stints in the Navy, at IBM, and as Kennedy's assistant secretary of the army, Edmund Pratt joined Pfizer as controller at its brand-new world headquarters in midtown Manhattan and never looked back. During his CEO heyday, he expanded Pfizer into a global leader—acquiring, diversifying, opening a raft of R&D facilities, and turning patent protection into an international-trade issue. But Pratt made sure Pfizer remained a good neighbor to the Big Apple, marshalling ambitious urban-renewal initiatives while marketing one billion-dollar drug after another.

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