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The pharmaceutical doll's house

Published on 09/10/03 at 04:32pm

The turn of the century has witnessed a period of intense uncertainty and instability within the pharma sector. After decades of unprecedented competition and growth that saw no company with more than 5% of the global market by the mid-1990s, the last four years alone have seen mergers produce mega corporations such as Novartis, AstraZeneca, Aventis, GlaxoSmithKline, and Pfizer, with the latter now poised to gain an extraordinary 11% of the expanded global market.

Whether this consolidation has led to diminished research productivity or has been a response to it is a matter for conjecture. Annual NCE registration is at an all time low despite increasing sums being spent on R&D, which has led to a depression in investor sentiment, collapse in share price and company valuations and a general black cloud of pessimism overhanging the sector.

Despite the buffeting by the same market forces, there is increasing focus and reliance on the biotech sector as a future driver for innovation and growth. Some pundits are predicting the break-up of the traditional integrated pharma company with the rump remaining solely as a development and marketing operation. An alternative point of view is that the current batch of behemoths will continue to merge until there are but a handful of global players cherry picking the more commercial projects arising from a fragmented biotech sector. There are other views too, but the same question applies to all  does the future of the healthcare industry lie in big or small?

All businesses either fail or grow. If successful, they will arrive at a stage whereby they are no longer considered to be small or medium-size enterprises. At that stage, the benefits of size can prove to be a poisoned chalice unless managed very carefully. A point can be reached where the organic mass of an organisation can lead to genuine economies of scale or lost focus, instability and implosion. My contention is that the latter is likely to prevail in the pharma industry in the near future through an over reliance on mechanised, mass production-type processes at the expense of the inspired individual, the maverick thinker, the instinctive innovator. These originators of much of the contents of modern pharmacopoeia are becoming lost in the crowd. Lines of communication are too long. The objectives underpinning a strategy are too distant. The big picture has become too big. The demonstration of novelty with utility is hampered by an excessive number of decision-makers who are not allowed to make decisions without referring to others, more senior, among their number.

To illustrate my point, and in the manner of any consulting document, I would like to draw an analogy with the Russian doll as my model.

The Russian doll

The original purpose of the Russian doll was as an elaborate container for a present, often a precious stone, which would be contained within the smallest, innermost doll. Imagine that in our model, the jewel is a compound with blockbuster potential. Surrounding it is layer upon layer of organisational structure. Let us say that the smallest, innermost layer is the molecular biologist and his team working in target discovery and validation. They work within a discovery biology section, another doll, within a department, yet another doll, within discovery research, and so on. Each doll represents either that group or its representative ie, the team/section/department leader.

Although the doll's dark interior contains the purpose of its existence, its eyes gaze outwards to the inside of the next doll and are focused on how it can fit into the overall structure of the bigger doll. The team leader has become less concerned about the functioning of his team, and more on his relationship with his manager and his place within the overall structure, a prevalent attitude present within each layer of the organisation. This leads to a team leader losing touch with the functions of his team within an overly bureaucratic, multi-layered decision-making structure. What was previously and rather disparagingly associated with the public sector is becoming increasingly prevalent in the commercial.

The biggest doll of all - the one that contains and hides all the others and is the public face of the company - is that of its leader, the CEO. The modern CEO, increasingly outward looking towards his investors, has become too distracted from the true purpose of his calling. How often do we read company mission statements that state: 'To maximise the return for investors'. The product has lost its innate value and has become a tool for value creation for a limited community of investors. The outside Russian doll has become a self-supporting entity, as illustrated by the loss of linkage between personal reward and company performance.

Biotech companies are considered to be more nimble and entrepreneurial than their larger pharma uncles, but how much of this is simply a feature of size, allowing the outermost doll to remain closer to the central jewel? As they enlarge will they fall prey to the same distractions? Company growth is inevitable, however, so how can these problems be overcome in big organisations?

The deconstructed doll

Giant corporations need to find ways of keeping all their employees in touch with the common purpose, concentrated on their tasks yet collaborating with other parts of the organisation. In our example, the doll can be opened up with each doll displayed intact on an exhibit case. Each becomes free of the others, containing its own microenvironment yet can look out at all the other members previously contained within the overall structure. The jewel is clearly displayed for all to see. In reality, this allows the molecular biologist to easily relate to the pharmacologist or indeed the CEO. Moreover, the CEO is forced to look inwards as well as out. All layers of the organisation stay in touch with the product of that company. Organisational transparency prevails.

However, if our analogy reverts to the face of each doll representing the team/group leader, then we see that that leader is still not focused on the inner functions of the team, but on other parts of the organisation. The team members remain enclosed and cut off. The structure needs to be opened up further to achieve true transparency and individual involvement.

The exploded doll

To achieve a totally open company structure we need not only to separate each doll from each other but also open it up. Each individual will then be fully aware of the external representative of a group and can more easily access information on the inner functions of that group. Knowledge is shared and individuals become more fully engaged. Moreover, the jewel is visible to all, providing a commonality of purpose and allowing every employee to become an ambassador for the company.

However, this can only apply to SMEs such as biotech start-ups, drug discovery, niche service providers or small pharma companies. Traditional large pharma is far too big and complex to benefit if all the dolls were released. Anarchy that would take place. And therein lies the competitive edge that the emerging industry has produced. The inter-related knowledge coupled with the freedom that occurs within a small organisation, the easy communication between its constituent parts, allows for a degree of flexibility, the entrepreneurial culture, to flourish. But in order to continue flourishing the structure has to remain limited. How can bigger, more complex businesses achieve this while remaining competitive?

The exhibition of dolls

Large dolls, when opened up, take up too much room, are harder to put back together and are generally messy. Yet within any large pharma company there are clear functional groups that can exist in more manageable sections. A vertically integrated industry comprises research, development, manufacturing, distribution, sales and marketing, and core services. Each is a big doll in its own right. The larger they are the more difficult it is to inter-relate at all levels. In order to emulate the open doll they can be divided and grouped either as smaller integrated businesses or by function.

Grouping dolls

Dolls can be separated and sorted by size or colour. The biotech ideal can be achieved by deconstructing large pharma companies into smaller, more intimate business units focused on R&D in a therapeutic area. To achieve the desired culture these units have to have a high degree of autonomy and given time to achieve their aim of bringing compounds in to the clinic. Reporting lines must be kept short.

Alternatively, large pharma companies can divest themselves of all non-essential functions. This may include divestment of discovery research, development, manufacturing, regulatory, etc, if a business decides that it is purely a sales and marketing operation. This model is at the heart of the contract service industry and corresponds in our example to dolls of differing colours having differing functions. Taken to extremes, we end up with a virtual doll, one that is small and totally dependent on outsourcing for its existence. A number of young companies, set up purely to develop projects with a small, highly expert and experienced team, function in this manner.

This would not be a retrograde step. Many major advances in medicine over the past 50 years preceded the introduction of a commercial perspective to drug research. History certainly does not indicate that such philosophy was less productive than that which currently drives the industry. Current target-focused research may be rational but has still not eliminated the serendipitous findings that drove drug discovery in the golden years. The current dearth of NCEs is as much to do with the business constraints on researchers as it is on the overly bureaucratic nature of decision-making within these bloated companies. The so-called economies of scale are a false horizon, at best delaying the recognition of a need to return to core values of scientific productivity.


Large corporations contain too many layers of decision-making. Those at the top are too easily distracted from the core purpose of the business, making medicines, not solely money for investors. However, the latter will naturally follow on from the former if the business is well run. At all layers of management, the manager is too concerned with looking outwards rather than ensuring that his team is motivated and performing. There are a number of strategies available for overcoming this but they all have a common theme of reducing the size of the organisational structure.

Successful and growing biotech businesses should not link success to size and overextend themselves in a desire to meet investor expectations. As for CEOs of major corporations, instead of looking outwards, forever seeking ways to placate the unrealistic expectations of the investment community, they should consider divesting all but the core businesses, retaining a loose control of the remaining operations. The CEO needs to remain in touch with all elements of the organisation to remain focused and effective.

The jewel in the centre of the Russian doll must not be too distant from the outer carcass. Only then can the industry continue to flourish and be relevant to its customers - the public seeking better health.

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