Commercial and R&D: reinventing the relationship
pharmafile | October 17, 2003 | Feature | Research and Development |Â Â R&D, commercialÂ
Traditionally, pharma companies have been run as research-based organisations relying on well-integrated internal R&D capabilities to feed their commercial pipelines and nourish continued growth in profits.
New research suggests that this model is under increasing pressure and there may be a significant alternative to the ongoing attempts to bring 'commercial' and 'R&D' closer together; an alternative that would unleash commercial and enable it to focus solely on taking the right products to the right customer in the right way, and free both research and development to realise the value of all their innovations and expertise.
To drive growth, organisations need a steady supply of high-quality products to fulfil their portfolio strategy. Market demands of double-digit growth require R&D to deliver ever-larger numbers of new molecular entities. However, the R&D process is intrinsically risky and uncertain and has struggled to deliver the throughput and type of drugs demanded.
Pharma companies with larger market capitalisation must average three NMEs annually to sustain expected growth rates but many have struggled to achieve this and an increasing proportion of NMEs are coming from biotech and small pharma companies. For every NDA, 10,000 compounds are currently entering the research funnel. They then require 10 years of development at a cost of approximately $800 million. After all this, commercial is asked to launch a product into a market that may have changed strikingly and during this time, commercial strategies will have moved on. It is hard for the R&D process to change rapidly, in-line with the desires of the commercial organisation.
A large number of companies now rely heavily on in-licensed drugs to plug the portfolio gaps left by late-stage failures, and deals are increasing in complexity and value. Risk is balanced in the portfolio by sourcing multiple products from multiple R&D partners to ensure their ability to select the right products at the right time. Clearly defined 'business' relationships will be formed by commercial with R&D organisations to provide a framework to manage their inherent differences.
Success or failure
Commercial organisations have created, and continue to create, blockbusters from average, so-called 'me-too' products. Many commercial organisations have revived dwindling revenues through innovative marketing strategies.
In 1981, Glaxo launched Zantac, the product that eventually propelled the company into the big league of pharma players. Zantac was launched to run head to head with SmithKline's Tagamet, launched in 1976, despite the FDA commenting that it added "little or no contribution to existing drug therapies". The intense marketing support and challenging pricing strategy resulted in peak year sales of $4 billion, eclipsing those of Tagamet.
Innovative marketing strategies have enabled many companies to revive fortunes. In 1993, Ciba-Geigy was faced with generic competition when Voltarol came off patent. Commercial defence tactics included line and indication extensions and the switch to OTC status in the US. Smart marketing created heightened awareness of the treatment and the brand, which facilitated profitable growth post-patent expiry.
Commercial can respond to sudden changes in the market. Schering-Plough took the initiative to capitalise on changes in FDA regulations allowing DTC advertising to successfully market its allergy relief drug, Claritin. The company spent more than twice as much as any other pharma company in 1998 to promote awareness of allergic conditions and its brand, leading Claritin to become the largest selling antihistamine drug with sales exceeding $2 billion in 2000.
As DTC promotion spreads and matures, and patient empowerment increases, commercial will become increasingly influential. This was demonstrated in previous research by Accenture, which found that 70% of the difference in return on sales between pharma companies is attributable to commercial effectiveness. Moreover, a company may increase revenue by 10% by investing in key commercial capabilities.
But what does this mean for executives today? Executives should reassess the value that commercial derives from in-house R&D, and their ability to link the disparate goals and cultures of these diverse organisations. They should also ensure that commercial is building the capabilities required to be successful in an environment where they are partly or wholly reliant on external providers of their products.
Commercial therefore needs a reliable source of high-quality products that meet portfolio requirements and can be marketed successfully to achieve maximum return on R&D investment. "50% of product flows should come from other peoples labs," commented the CEO of one leading pharma company. But Accentures research with commercial executives found that over 45% thought internal R&D could not consistently deliver products to a commercial portfolio.
The number of new chemical entities developed by the top 50 pharma companies has remained static over the last 10 years. In 1993, 3,000 of the 4,000 drugs in development were drawn from top 50 pharma companies portfolios. In 1999, the total number of drugs in development increased to around 7,500 compounds but the contribution by the top 50 companies had not changed.
The intrinsic risks and uncertainty of the R&D process have left a majority of pharma companies with gaps in their portfolios as late-stage products fail. British Biotechs marimastat was rejected for lack of efficacy in phase III, as was Novartis' Zelnorm. Both failures had a major negative impact on share value. Recent post-launch failures have sent tremors through the industry; Johnson & Johnson's withdrawal of Propulsid in July 2000, and, more recently, Bayers withdrawal of Lipobay led to multiple co-marketing partners feeling the effects, and significant falls in share price.
R&D may not be directly responsible for such disasters, but they place the onus onto commercial to initiate back-up plans to drive growth. This can force companies to market products emerging from internal R&D that do not fit their planned therapeutic strategies, which can result in a diverse, disparate marketed portfolio. Attention is then diverted away from main franchise areas of the company, necessitating retraining salesforces and research of new customers.
Commercial is quick to adapt to the changing market and concentrates on the short to medium-term. While commercial aims to deliver a focused, high-value portfolio through excellence in marketing and sales, R&D aims to develop low-risk, efficacious, innovative drugs for a wide range of diseases. R&D organisations have traditionally concentrated on ensuring technical success of their products and have been less sensitive to changes in the marketplace. R&D concentrates on the mid to long-term (8 to 10 years), the typical length of a research programme. Isolation from downstream strategies has at times resulted in the development of products with weak strategic fit, distracting the company from its commercial strategy.
Our research revealed that 79% of commercial executives believe R&D and commercial strategies are not well aligned. Furthermore, 81% stated that R&D and commercial have very different cultures and organisations. So commercial has a predicament – falling streams of products from in-house R&D may not align with market needs. Seventy nine per cent of respondents stated that it is not important where the commercial organisation sources a product to market, whether from the internal R&D organisation or external partners.
In-licensing of products developed elsewhere is already a common activity and has enjoyed a great deal of success. All of Bristol-Myers Squibb's blockbusters products (Pravachol, Taxol, Glucophage, Plavix and Avapro) were the result of in-licensing, for example. Pfizer marketed Yamanouchi's Lipitor (initially on behalf of Warner Lambert) to compete with drugs such as Zocor, Pravachol and Lipobay for the lucrative cholesterol-lowering drug market. Pfizer had the marketing strength and sales capabilities to turn this externally sourced 'me-too' drug into a $5 billion blockbuster within the space of four years.
Biotech and big pharma have enjoyed mutual success. Large pharma companies have provided much sought after capital, while biotechs have come up with products to help plug portfolio gaps. In fact, 9 of the top 10 pharma companies have in-licensed more than 40% of their marketed NMEs. In 2000, 14 of the top 55 drugs by sales were in-licensed. When asked what is the major challenge facing the commercial organisation, the largest proportion (38%) of survey respondents chose 'selecting the right products'. As this trend grows, companies are less dependent on internal R&D to fill a portfolio.
A vision for the future
So is the long-standing affair with R&D still worth the cost and the risk? Is value better delivered by disaggregating, perhaps even severing, these links?
Accenture suggests that in the future commercial organisations that are separate will be able to make better decisions. By removing the subjective support for internal R&D and by ensuring consistent assessment criteria for all decisions, commercial can ensure that the correct 'go/no-go' decisions are made at the earliest possible stage. All potential products will compete on a level playing field for funding, with no tendency toward bias. Potential failures will be weeded out earlier as compounds developed in-house will no longer be nurtured because there were no other suitable products to fill the portfolio gap.
On the other side, autonomous R&D organisations can become highly competitive and generate high return on investment by forging deals with multiple partners to discover, develop and divest products. R&D organisations can further disaggregate into specialist research centres and development service providers. Research can offer innovations to the companies with the best portfolio fit, and development can offer services to companies working in complementary disease areas.
Divesting R&D may also result in more research being conducted in disease areas that do not form a core part of a major company's portfolio. Today's portfolio and franchise-focused strategies can lead to non-core innovations sitting on the shelf, never to be developed. R&D will be actively licensing-out to all companies willing to take innovations to market, therefore satisfying a wider range of strategic requirements. This will encourage the development of a more diverse range of treatments for wide variety of diseases and may help reduce unmet medical need.
Larger company commercial executives are most supportive of the autonomous commercial model. A number of major companies have divested parts of their R&D organisation while maintaining limited ownership and rights of first refusal on outputs. Pharmacia sold half its interest in its Stockholm based R&D centre to venture capitalists, while Novo Nordisk spun-off ZymoGenetics, but maintained approximately 40% ownership.
Although not all companies would consider adopting this new paradigm today, 35% or those surveyed believed that the new model would be successful. The study supports our belief that companies are already adopting many of the facets required to eventually separate from their internal R&D group.
Many companies will find such a radical re-evaluation of the current integrated pharma operating model challenging. For these companies, and those wishing to move stepwise to a fully autonomous model, there is a middle way.
A semi-autonomous commercial group would still be a part of the company but would be freer to focus on its own needs. This would result in a new relationship: R&D and commercial remaining linked in the same networked value chain while functioning as independent profit centres. Commercial would work closely with R&D within a clearly defined set of contracts and service arrangements detailing each groups expectations and requirements.
This would free up internal R&D to forge alliances with external players both to purchase new products to develop, but also to trade products and other innovations and services that did not fit the internal commercial portfolio but which have significant value. This differs from the current situation in that it would give internal commercial predominant control over pipeline decisions, while R&D would be free to forge alliances to maximise the value of the pipeline and to capitalise on its skills.
Whatever companies decide to do, the relationship between commercial and R&D is already significantly changing, and the 'affair' may be nearing the end. The vision of an autonomous future represents an opportunity to create more meaningful and healthier business relationships between the groups. They can create relationships focused on recognising strengths and acknowledging weaknesses; working together in pursuit of their complimentary strategic ambitions.
This article was based on Accenture's Commcial and R&D: Reinventing the relationship report. For further information or a copy of the full report, visit www.accenture.com
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