pharmafile | July 28, 2010 | Feature | Research and Development |  Kinapse 

In order to mitigate the considerable risks in developing drugs, the pharmaceutical industry is going through an extended phase of consolidation to try to realise economies of scale (e.g. Pfizer-Wyeth deal). However, our analysis, presented in our full whitepaper Big Pharma R&D – thinking big, acting small , suggests that Big Pharma might now be too big. We found that productivity (as indexed by cost per NDA approval) falls the more one spends on R&D. The cost a company appears to incur per approval falls with decreasing scale to around 10% for companies ranked between 51-157 as compared with Top 20 ‘Big Pharma’ companies (indexed by their 2006 R&D spend).

We believe that the main reason for the apparent fall in productivity with increasing scale is the concomitant increase in organisational complexity. It is our premise that breaking Big Pharma into entities of more manageable scale will assist them in increasing R&D productivity. Horizontal disintegration (where end-to-end processes in the value chain are kept together, but the scopes of these activities are limited) and vertical disintegration (where end to end processes in the value chain are broken down and carried out by separate companies) should be actively considered as methods of dividing Big Pharma into more manageable units.

Horizontal disintegration case study: GSK Centres of Excellence for Drug Discovery (CEDDs) and Medicines Development Centres (MDCs)

At the time of the merger between Glaxo Wellcome and SmithKline Beecham in 2001, the industry’s interest was piqued by a novel organisation announced by Tachi Yamada and Jean-Pierre Garnier (then the R&D Chairman and CEO respectively) for drug discovery.  The six Centres of Excellence for Drug Discovery (CEDDs) were configured along TA lines and charged to take drug candidates generated by GSK’s Discovery Research group and bring these as fast as possible to proof of concept (POC).  Proof of concept was to be determined based on a contract agreed with the Full Development organisation. 

While positioned as autonomous groups, the CEDDs continued to be overseen closely by Dr Yamada, and were required to source routine services from GSK’s own infrastructure, and also team with full development staff through a bridging organisation – Clinical Pharmacology & Discovery Medicine – either side of proof of concept.  The CEDD Heads were incentivised largely on achieving POCs delivered.  After a relatively lean period the CEDD model has apparently delivered increased productivity as judged by the number of POCs achieved, although the commercial viability of these assets has yet to be fully determined.  The CEDD model has been reinforced since, and one has been fully virtualised to focus on Discovery through external collaborations.

More recently, as part of further reorganisation  under the leadership of Moncef Slaoui and Andrew Witty (new GSK R&D Chairman and CEO) horizontal disintegration has been further pursued through the strengthening of Medicines Development Centres (MDCs), accountable for developing assets transitioned from the CEDDs at POC to successful commercialisation.  Different organisational models are being pursued for different MDCs in order to tailor the organisation to the needs of the portfolio in that area.  This approach should help GSK in its goal of ‘differentiated development’ but will doubtless cause many leadership and interface challenges as heterogeneous organisational units interact with their many and various internal and external stakeholders.

Some of the advantages of GSK’s R&D structure include:

1. Clarity of incentives for CEDD and MDC leadership with a healthy and focused negotiation on the definition of POC around each asset

2. Increased freedom of decision-making within each group allowing for greater flexibility and focus on the scientific specifics of the respective therapeutic area

3. Reduced scale of operation and span of control within each group allows for increased local leadership and management effectiveness.

However, some of the potential disadvantages are:

1. Both CEDDs and MDCs appear to be challenged by being ‘quasi’-businesses.  We believe that neither of these organisation units is likely to have full visibility and control over their actual costs which is an impediment to true entrepreneurialism. This means that decisions can be taken in practice without a full appreciation of the business implications particularly in terms of cost management. 

2. Operations groups within the GSK organisation need to interface differently with the more   entrepreneurial CEDD and MDC groups which may suffer from a lack of operational expertise that cross-TA groups tend to build up. It is also likely that the leadership and management capability required (in terms of numbers of people) will increase as an organisation disintegrates in this way.

3. Resource inefficiencies tend to occur in these types of organisations, in particular where cost accountability is uncertain. This is a risk in both the CEDD/MDC and its services organisations and could become a particular challenge where the tendency is often to consolidate all resources required to get the job done under ‘one roof’ which risks increased inflexibility and under-utilisation of resources with fluctuating workload.

Vertical disintegration case study: Lilly Chorus

Lilly set up Chorus between 2002-2003 as an independent division charged with speeding up early-stage development by getting compounds to POC stage faster and cheaper than Lilly’s main development engine. Utilising proprietary management software, Chorus aimed to increase the number of late-stage, risk-reduced development candidates, or to ‘de-risk’ development projects. Chorus pursues only what it needs to demonstrate POC, forgoing other activities which are required before starting pivotal clinical trials, but which also increase time and cost to POC. Chorus assumes that most of its compounds will fail, whereas most the Industry assumes ‘success-based behaviour’.

Chorus operates as a lean, virtual organisation (24 people oversee all aspects of development for a maximum 10 compounds), utilizes software which allows all the key players instant access to all the key information and outsources 75-80% of the work, relying on external networks of experts and service providers.

Some of the apparent advantages of Chorus are:

1. Productivity gains: Rapid POC and potential to save money by failing the failures faster and cheaper. Chorus reaches POC in 29 months (compared with Lilly average of 40 months) at a cost of $3.2 million (Tufts data quotes Phase I only, without reaching POC, costs about $15 million)

2. Value creation: additional time required post POC is offset by the savings accrued getting to POC because there is a big valuation increase for compounds which demonstrate positive POC. It allows Lilly to unlock value that would be otherwise trapped in its R&D pipeline. Drugs which don’t make Lilly’s criteria for full Development or even positive POC might be well suited to another company.

3. Benefit of being independent to, yet linked with, the larger parent company. As Chorus works autonomously from Lilly, it is not restricted by the organisational infrastructure of the larger organisation. Chorus is also compound ‘agnostic’; no-one at Chorus has a driving loyalty to a molecule which might sway them to select one project over another.

However some of the potential disadvantages are:

1. There is no evidence that the Chorus model works well for successful compounds. A Chorus POC-approved compound cannot   immediately be put into registration trials; many of the activities which were skipped over in pursuit of POC need to be completed. It is possible that development may actually take longer in the long run.

2. Chorus has limited capacity and the Chorus approach is not right for all development programmes. For example, it won’t work for novel compounds which don’t have predictive biomarkers; probably slow down drug programmes pursing well-validated mechanisms, or where time to submission is crucial and confidence is high. Also, because Chorus works autonomously, in isolation from other groups, it seems less suitable for working on molecules with challenges that require more substantial work, e.g. complex CMC or manufacturing problems.

3. The level of outsourcing which Chorus requires is likely to be troubling to most Big Pharma. It seems unlikely that companies would be willing to adopt such a strategy unless there is significant proof that improves R&D productivity.

How to make disintegration work

A good operating model from which to learn in setting up such organisational units is the military’s concept of mission command.

The two main aspects of mission command are to establish alignment by setting out the ‘what’ and the ‘why’ and granting a high degree of decision making authority to appointed leaders in the organisation who deal with the issue of ‘how’. Instead of following detailed orders, the responsibility of subordinates is to understand their commander’s intention and to take whatever actions are deemed necessary to complete it. When the situation changes, the original intent dictates subsequent decision-making. Much like the concept of ‘empowerment’, this involves giving decision making power to those that need it and not allowing it to be withheld by those who do not. By aligning everyone on the ‘what’ and ‘why’ and pushing down decision-making, it creates organisational units that can adapt rapidly in the face of uncertainty while retaining cohesion.

With governance provided by a Management Board in the parent company, we propose ten high-level steps that need to be taken to implement a disintegrated operating model:

i)      Determine areas of distinctive R&D competence and performance, where possible using objective and externally validated process performance measures. Classify processes at which the R&D organisation excels, performs acceptably and under-performs the industry.

ii)     Structure operating units in support of these processes. These units should trade clearly defined inputs and outputs which can be bought from suppliers and sold to customers. Exit processes which significantly underperform through closure or divestment.

iii)    Define clear and separate accountabilities which can be written in a simple list for each operating unit head. These accountabilities will include financial performance of the unit, successful delivery to customer requirements, people and team development and retention of key talent.

iv)    Review leadership talent across the R&D organisation. Identifying the right talent is a must, leaders should have a track record of implementing new ideas with a willingness to take measured risks. Leaders which bring engagement and passion to get the job done ‘whatever it takes’ should be at the top of the list.

v)     Appoint existing best leaders to most critical business areas, wherever possible aligning technical and therapeutic skill sets with the organisational unit. Where clear gaps exist, seek external talent from smaller R&D and services organisations where a clear track record for business leadership has been demonstrated. 

vi)    For all Unit leaders and potential successors, invest in leadership development, career development and succession planning. In all Units, leaders must spend time with their team members and Units should therefore have no more than three organisational layers below the Leader.

vii)   Increase emphasis on business skills including communication and negotiation skills as well as customer and supplier management. Seek regular career moves for best performers between organisational units to increase ‘joined up’ thinking between customers and suppliers in the network.

viii)  Invest in an enabling infrastructure which allows transparent cost accounting at the level of each organisational unit, with unit leaders quality, outsourcing management should also be considered in the network, ideally as financially self-standing operating units which may or may not be owned by the parent organisation.

ix)    Ensure operational decision-making resides within the unit.  The Management Board should intervene only when fact-based operational performance issues become apparent through pre-defined performance metrics. Consider exiting under-performing operating units.

x)     Accept that successful units will tend to grow as unsuccessful ones will contract or disappear. This raises the question of the ideal size of organisational units? It is interesting that many organisations, including the military, hunter-gather societies and some businesses favour Dunbar’s magic number of 150 (the postulated maximum number of individuals with whom we can have a genuine social relationship) Over time, the network needs to be managed with incorporation of new units and breaking up of larger units to ensure the benefits of disintegration are maintained in the long-term. 

In order to thrive, we believe that Big Pharma needs to start thinking ‘big’ and acting ‘small’. Simply tweaking the old business model is no longer a viable strategy. Given the mooted wave of Big Pharma merger & acquisitions this year, disintegration needs to be at the forefront of every senior pharmaceutical executive’s thinking. 

The full white paper, upon which this article is based, can be found here.  

If you are interested in reading other Kinapse articles please go to: http://www.kinapse.co.uk/insights/ 

About the Authors

James Man is a Manager in Business Transformation Consulting

E: james.man@kinapse.com 

Andy Black is a Co-founder of Kinapse and the Global Head of Client Services

E: Andy.Black@Kinapse.com 

About Kinapse

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