Under new management

pharmafile | May 6, 2014 | Feature | Manufacturing and Production, Medical Communications, Research and Development, Sales and Marketing |  Financial, brett wells, cfo, finance, under new management, wells 

When something is not working – at least not as well as is expected – it is very tempting to first throw money at it in order to fix the problem. 

When a football team slips down the league, what do supporters call for? Spending money on better players. And if that team is still languishing at the bottom heading into a six-month period? Then the board goes one step further and changes the management. 

Such tactical transformations at the top as seen in the English Premier League will be well-known to all football fans, but can direct parallels to this style of management be seen within the pharmaceutical industry? 

Given the many leadership changes occurring across pharma over the past 10 years, one could be forgiven for thinking that ‘bringing the money men in’ at a time of crisis has become a well-employed tactic, especially when looking at who is being brought in.

A quick scan across recent appointments listed on Pharmafile reveals entries comprising: “AstraZeneca hires MasterCard director”; “Merck chief financial officer turns CEO”; “Shire replaces chairman with former banker”, to name but a few. 

And this is not solely restricted to the pharma press, it would seem: just recently Reuters reported that Merck hired a former Baxter chief financial officer (CFO) in order to “cut costs and focus on drugs that are more likely to be approved by regulators”. 

Merck’s chief executive Kenneth Frazier said the appointment was made to “implement a significantly streamlined, more flexible cost structure and operating model, while enabling us to focus on our highest-potential growth opportunities.” 

Meanwhile, financial news specialists Bloomberg tells us that: “ThromboGenics hires banker amid disappointing drug sales” – and details how the maker of the Jetrea (ocriplasmin) eye drug has employed financial services firm Morgan Stanley – just as Merck has done – to ‘explore strategic options’. 

Some may be surprised to learn also that Stephen Whitehead, the chief executive of UK pharma body the ABPI, once held leadership roles at the Barclays banking group and insurance/financial firm Prudential. Whether it’s tactical business manoeuvring or just sheer coincidence, one thing for certain is that the need for pharma to restructure itself for the future is an ongoing challenge. 

What this boils down to is that if you are in charge of the numbers, you’re in charge of changing the course of any misfortune, and can turn value-based strategic decisions into restructuring efforts. In other words, more ‘business engineering’. 

Financial skills in troubled times

Chris Molloy, who is the chief executive of life sciences and interim management firm RSA, says there is ‘no doubt’ that many executives have had no choice but to address cost-cutting. He points to GlaxoSmithKline CFO Simone Dingemans, who in 2011 said: “Finance has now become ‘embedded’ in decision-making.” 

Molloy adds that in the 30 years to 2000, the average profit margin (as a percentage of revenues) of the Fortune 500 pharma companies was two times greater than the median for all industries in the Fortune 500.

This was driven by a number of ‘blockbuster’ innovations, highly regulated (i.e., closed) markets and very little customer price sensitivity. In 2000, the pharma industry still ranked as the most profitable industry in the US with a return on assets of 17.7% he says. 

He explains: “The top 11 US pharma companies generated almost $200 billion in revenues that year and profits of $28 billion. Whilst this represented good news for shareholders, the seemingly never-ending profits encouraged high spending and corporate largesse.” 

This has not lasted, however, and Molloy points out that the loss of patent protection to the industry has dealt huge body-blows, with hundreds of billions of dollars lost in revenue. For example, Roche recently predicted that the revenue loss associated with expiring patent protection over the next six years will be around $300 billion.

In a nutshell, pharma was doing very well after picking the ‘low-hanging fruit’ inherent in drugmaking from the 1950s to 2000, but has since struggled to replicate the major blockbusters of old. This is where the ability to manage a leaner industry in times of both external austerity and an internal loss of productivity has become key. 

Molloy explains: “Pharma has had to manage costs but are using cash reserves beyond their traditional pipeline. They are therefore looking to financial managers more accustomed to the margins and diversified offerings of the future than those of the past.

“Whether from finance and banking (Merck), technology (Pfizer) or engineering (Roche), companies recognise that they now have much to learn from other sectors. We must look past the casino-bankers to see how the finance industry has grown through the development of personalised, regulated financial products rather than one-size-fits-all ‘blockbusters’.” 

Molloy sees the influx of financial talent as a theme of today’s biopharma sector, from CFOs to financial directors. “While these leaders can bring new tactics into the industry to trim the fat, their bigger impact is going to be on how financial understanding from other industries adds value to segmented business strategy, as the industry comes off the ropes and into the future.” 

Incentives to financially incentivise

Maybe the most agile, adaptable and cash-rich pharma firms can recover from such patent expiries and austerity blows, and stagger into the next round with financial recruitment talent that is used to a lower margin – and a more diversified, segmented market. But the question remains, is that enough? 

And what about the smaller firms and biotech companies who can’t survive the onslaught – what innovations could the world be losing as a result? What is clear is that there is no shortage of financial heads ready to step up when plans do hit the buffers: in fact according to US financial services organisation EV, which publishes BoardMatters Quarterly, CFOs are in very high demand. 

Its research found that over the past decade, the percentage of business board members with a finance background has increased significantly. In 2002, for example, 8% of board members at 347 of the world’s largest companies were current or former CFOs. A decade later, that share had climbed to 14 per cent. 

It says there are three main reasons finance leaders are becoming more common on corporate boards: the challenging macroeconomic environment, the expanding scope of the CFO role – and changing regulatory requirements. 

Its findings show that between 2002 and 2012, the likelihood that a CFO would also be a director increased ‘significantly’. In 2002, 36% of CFOs from the largest companies it surveyed held a director role at another company. By 2012, this percentage had increased to 46 per cent. 

The publication concludes: “As companies grapple with the aftermath of the financial crisis and the divergent growth trajectories of developed and rapid-growth markets, they want executives and directors who can provide comfort and confidence in an uncertain world.

“The CFO’s unique combination of analytical, technical and strategic capabilities means that they are arguably very qualified to provide it. However, they should choose the role carefully – and at the right time.” 

The good news for anyone looking to branch out into a financial career – not just in the healthcare industry but in many sectors – is that not only could you be in demand, it is also rather lucrative. According to the corporate magazine Business Insider, financial analysts rank fourth out of 12 in its recent article on the “12 fast-growing, high-paying jobs in 2014”. 

Perhaps then the incentive to replace top pharma executives with financial heads is not so much a board tactic, but rather individuals seizing the opportunity to progress. This tallies with a survey by specialist business publication Financial Director, that found the pay packets of finance chiefs at Britain’s top companies still lag behind those of chief executives, who on average earn a total package of £4.3 million, a figure that includes their salary and bonus. 

It does, however, note that the earnings of CFOs are up fractionally to a collective £100.9 million this year, compared to £100.8 million in 2011/12.

What the board wants in return

Whilst the financial sector role is a lucrative and progressive career choice, it also comes with a level of responsibility at times in line with the pressures felt by chief executives. For example, a CFO must serve as the financial authority throughout the organisation and ensure the integrity of fiscal data and modelling of transparency and accountability. 

The CFO can be as much a part of governance and oversight as the chief executive, playing a fundamental role in the development and critique of strategic choices. A key player in stakeholder education and communication, the role is viewed as that of a leader and team builder who sets the finance agenda for the organisation, supports the chief executive directly, and provides timely advice to the board. 

With all that in place, is it fair to say financial heads could be the number one choice for leading big pharma and its boards? Not exactly, says Pharmafile writer and clinical trials expert Les Rose. 

“Domination of management by accountants will not work. It failed for [German car manufacturer] Mercedes-Benz, which was run by ‘bean counters’ in the late 1990s. The company gained a reputation for poor quality caused by cost-cutting. They had to fire the accountants (and pull out of their merger with US car firm Chrysler), and have now had to rebuild their reputation.

“My guess is that such people are being attracted into pharma in response to a harsh sales environment, with a remit to cut costs. But will they be able to foresee profits that will accrue after 10 years of R&D, as opposed to costs they can cut today?” 

Rose adds, however, that a lot of pharma projects do fail because costs are not understood properly. Not many firms track staff effort as cost. Staff effort is usually the biggest cost, whether it’s internal or external he says. 

Science, R&D and money

Should a noticeable trend to hire finance executives over pharma’s elite increase, one of the key issues will be that the understanding of the fundamentals of science and research within pharma becomes overlooked. Rose says: “One of the huge problems in government is that politicians do not understand science or evidence, and the trend there is away from evidence-based policy.

“The message is that without an understanding of science, and especially in a science-based industry, bad decisions will be made. For decades I have been railing against the disconnect between R&D at the coalface and top management decisions.”

He concludes that financial people have a role in pharma, as in any business, but only as contributors to policy, not as sole drivers. 

For the former Pfizer head of R&D (and also Pharmafile columnist) John LaMattina, there is no obvious trend emerging towards finance-led recruitment. “I don’t think that is being done intentionally,” he argues.

“I just think that companies pick the person who is best qualified. Sometimes that’s a scientist (such as Lilly’s leader John Lechleiter), sometimes a lawyer (Merck’s chief Kenneth Frazier) and sometimes a sales/marketing pro (Pfizer’s boss Ian Read – although he has a chemical engineering degree).” 

Brad Abbey, a pseudonym for an experienced pharma industry executive, says he believes that it’s about taking things back to basics. “Pharma is a business that makes a profit by selling healthcare products that should be safe, effective and of high quality. Ideally, there is sufficient profit to please shareholders, and plough money back into R&D. 

“Even if you subscribe to the Monty Python definition of accountants, they still understand profit and loss. Those agencies that deliver healthcare are under pressure to do so at the cheapest possible price.”

Abbey adds: “Whilst it may be true that some illnesses are cheaper to treat by virtue of medical advances – e.g., peptic ulcer – there are now treatments for diseases that previously would have attracted little expenditure, such as erectile dysfunction, and 40 years ago, only the worst cases of hyperlipidaemia would have had medicines. New medical condition emerges, to invent new treatments and spend money. 

“As the Greeks have discovered, there is no such thing as a pot of public money big enough to satisfy the health of a nation.” He says it’s a long way from the days when Wellcome used to proclaim ‘Research is our only shareholder’. Bosses now need to deliver the numbers, and those that understand finance are in pole position. 

“If I had to give any school leaver advice on where to get their higher education, accounting and finance seem to be the only growth places left, and good finance directors are popular people (as are forensic accountants). The ability to understand the nuances of healthcare finance, pricing and future prospects has become key performance indicators.”

Abbey continues: “Every penny/cent of profit now needs to be milked out of sales and marketing budgets, and altruistic activities that do not directly contribute to profit are an ever diminishing phenomenon.” 

Finance leading research?

Can an accountant be an effective leader of research? Mostly they are intelligent people used to dealing with numbers, but lacking scientific and medical training. The old saying is that accountants know the cost of everything, but the value of nothing. 

For Rose it’s a practical issue: “For example, a project manager might identify the need to buy in particular expertise, without which the project will fail. But they will have to get approval from further up the chain. The problem is that, the further up you go the less understanding there is of the day-to-day needs of a project, so the chances are that the request will be rejected.” 

Abbey adds that research is a risky business, and sometimes the value can change. “If the accountants and scientist work together eventually the accountants win. “Experience suggests that they can be educated, but cost becomes the driving factors, and projects may be terminated or abbreviated (shortcuts or eliminating waste, call it what you will).”

He says it makes perfect sense to budget properly for research projects and to finance those which have a return on investment, but possible consequences may include the science function vastly overestimating the cost of a project, knowing that if the budget gets cut, there will still be sufficient to complete.

“A worse phenomenon I have seen is the crazy world of someone working out what would be acceptable to accountants for a promising project and then shoehorning the project elements to make them fit the budget. The first overspend is the crack in the dam that will provoke the flow of further changes of budget, and by that time you may be too far in to escape.” 

Leadership style and pharma

The world of accounting does seem to be very black and white: rows and columns of figures that must always add up to the same result every time. Research is of course rarely that easy, and motivation for projects and their effective conclusion may be hampered by a constant threat of cost-cutting. 

However, this reads well in company reports: shareholder value is the driving factor, and only projects that deliver receive accounting approval. Maybe that is a good thing as it limits time and money spent on lost causes. Abbey believes that in the end it comes down to leadership style. He says it is critical to the progress of research, and that the “monochromatic perspective from finance may jar with the research mentality reducing motivation and progress”. 

You have to be a special type to really enjoy reviewing finance and data, and the question is whether that mind-set is compatible with the leadership needed for research and pharma. Industry needs true leaders who are able to get the most out of teams. Abbey notes that scientists and medics are commonly know to operate in teams, but accountants are more usually isolated operators, but those that do are likely to succeed. 

“Scientists and medics become frustrated if they are answerable to managers who do not understand what they are saying. It is easy to get the notion that accountants don’t care if anyone understand what they are saying, but costs, profit and loss are easy concepts. 

“Widely announced cost-cutting exercises induce a combination of panic and apathy (take your pick depending on the motivations of the individuals) and it may take a long time for the dust to settle.”

There is an increasing trend for tactical transformations at the top as pharma restructures to align itself to a thinner, and ever-shifting marketplace. 

The switching of management to move with the tide is not quite as cut and thrust as that found in English Premier League football – but as with any good team, if pharma does not get the balance right between science, research and business acumen, the prospects of relegation are only a quarter away.

Brett Wells