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January 7, 2015

Established pharma has much to learn from the innovative biotech sector.

Recession drives change in a number of ways. In the biotech sector, previously well-funded enterprises are now finding themselves short of cash and suddenly very open to partnerships, mergers and even acquisition by large pharma companies.

Pharma has been buying-in R&D for a number of years. The difference in today’s climate is that there is no time to equivocate over the details of a merger. Deals need to be done quickly, while this window of opportunity exists.

The leading lights of the industry might be big, but they are far from stable, as JP Garnier, the then CEO of GlaxoSmithKline (GSK), pointed out in 2007: “This is a business model where you are guaranteed to lose your entire book every 10 to 12 years.”

Keeping Pace

Some believe that if the big players make the wrong choices now, they may never have another opportunity to keep up with the pace of innovation and will face extinction. This might sound sensational, but so did the words of the few that spoke out against sub-prime lending in the banking sector three years ago.

It is no coincidence that industry number one, Pfizer, experienced a 20 per cent drop in revenue during 2007 and is now pulling out all the stops to achieve a total of 15 to 20 phase III starts by the end of 2009. This news might have brought a smile to those in competitor companies until GSK announced it wanted to deliver annual cost savings of £700m by 2010. At the same time, Merck is aiming to reduce its US marketing spend per brand by up to 20 per cent.

One of the challenges faced by these companies is that they are simply too big. It is a well-worn cliché that big firms in any industry manoeuvre like oil tankers. Decision making is slow

and attitudes to risk are conservative. In an industry based upon innovation this is more than just a frustration, it is a terminal condition. As Seth Godin asserts in his 2007 book ‘Small is the New Big’: “Today, little companies often make more money than big companies.”

So, when an established pharma business takes over a dynamic young biotech enterprise, great care should be taken not to smother the youthful enthusiasm of the smaller business. In fact, the smart players know that the real value exists not just in the new molecular entities, but in the passion and innovative drive of the scientists.

These scientists are generally used to a workplace without dress codes or monitored working hours, where the car parks are full late at night or at weekends when a new discovery is in the offing.

Perfectly Formed

It is a mistake to assume that the larger acquiring company has little to learn from the management and culture of the smaller businesses it buys. All too often, the deal is done on the basis of gaining a research advantage alone.The great danger in this is that the longer-term benefits are overlooked and consequently missed. Let’s consider for a moment a few of the advantages small organisations have over large:

  • More open – in an environment with less than 100 employees everyone should know each other, their roles, strengths and working styles. The departmental divides that spring up in large firms don’t exist in the smaller businesses; consequently communication is clearer, quicker and more honest.
  • Braver – working for a small business is perceived to be less secure than working for a large institution and by their nature biotechs operate in a field in which risk is an occupational hazard, not something to be avoided. This bravery includes the ability to admit something is wrong. One of the greatest threats to large pharma companies is the reluctance to call time on programmes that are destined to fail.
  • Energetic – a clear sense of purpose and place generates energy alongside the knowledge that every role counts. Seeing the business process from inception through to delivery is tremendously motivating and rarely communicated in large organisations.
  • Decisive – the closeness of relationships leads to speedy decision making. There is no place for procrastination; leaders have to lead.
  • Innovative – informality, a sense of fun and a genuine desire to serve the business all encourage original thinking, not just among scientists but throughout the entire culture.
  • Trusting – gained from the sense of team that comes from having a shared goal, combined with a small community of employees. Essential if an organisation is to function efficiently.

These qualities are largely the preserve of founder-owned SMEs (small and medium-sized enterprises) but there are a few exceptions.

WL Gore & Associates (best known as the inventors of the breathable and waterproof fabric Gore-Tex) came about after founder Bill Gore had spent 17 years trying to persuade his employer, DuPont, to explore new applications for expanded polytetrafluoroethylene (ePTFE).

Out of frustration, he and his wife set up their own business from their basement in 1957 to develop his idea.

Now, 50 years on, the business has annual sales of $2bn and employs 8,000 people worldwide making products as diverse as guitar strings, dental floss and lyophilisation trays – alongside leading the development of fuel cells for the automotive industry.

Its diverse product portfolio is testament to the culture of innovation that the business tries to foster and to its unconventional leadership. There is very little hierarchy, with project leaders being nominated by their fellow employees – who also decide on each other’s pay – with the aim of encouraging fairness and external competitiveness.

 

Sense of ownership

The approach has led to the introduction of new products at a speed that few global corporations can hope to match. Like John Lewis in the retail sector, Gore have recognised that in order to get their associates working for the long-term good of the company, not just a monthly pay cheque, they have to have a sense of ownership. Employees own 25 per cent of the company at Gore and the rest is in private hands.

The focus on daily share prices favoured by the heads of some pharma companies and their institutional investors is clearly a recipe for disaster, as banks and property companies have demonstrated over the past 12 months. Executive teams must stop bowing to shareholder demands and make decisions that will ensure their businesses grow in the long term. This will certainly require a change in management practices and probably a fresh approach to ownership.

The time has come to stop talking about entrepreneurship and to start behaving like the dynamic biotech founders that have become so important to the industry.

It is nearly 10 years since Thomas Ebling, CEO of Novartis, explained in a letter sent to the 36,700 employees at the time of the company’s restructure: “Our intention is to create entities which are entrepreneurial, and take appropriate risks and novel approaches to the business.”

In 2008, when announcing GSK’s plan to buy Sirtris, Moncef Slaoui, chairman of R&D, commented: “Our intent is to retain all Sirtris employees and continue the entrepreneurial and innovative culture they created.”

 

Taking Risks

Entrepreneurship is not a skill that can be taught in business schools, it is an attitude that must be modelled and encouraged by leaders. It requires space in which to operate, freedom to take risks and a culture that accepts failure not as a threat but as a sign of progress.

Pharma leaders must choose between staying big and becoming increasingly less efficient or finding new structures that encourage innovation and are places in which the brightest people want to work.

The innovation required to thrive in the next 10 years will not come from supertanker companies, but from flotillas.