Networked Pharma

During the next ten years, big pharma companies will need to launch two products a year to generate 5 percent annual growth, five products a year to hit 10 percent growth, and nine products a year to meet a 15 percent annual growth target. Clearly, the stakes are high.

Those goals are not impossible to meet, but pharma companies must augment their core capabilities and productivity by revamping their business models. They must also improve operational effectiveness, through which they can increase process productivity while reducing administrative and infrastructure costs, and they must publicly address critical industry issues.

A New Approach

In an attempt to fit together its increasingly complex and disparate pieces, the industry has begun to transform its business model into a networked structure. (See "New Operating Models," page 74.) Although that model is emerging slowly, it is, in effect, breaking apart the traditional pharma value chain. Consider the following:

• Nine of the top ten companies have pipelines in which 40 percent of their new chemical entities are in-licensed.

• Contract research organizations (CROs) account for 20–25 percent of companies' global R&D budgets.

• Contract sales organizations (CSOs) account for 10–12 percent of sales and marketing budgets.

Contract sales organizations (CSOs) account for 10-12 percent of sales and marketing budgets. Increasingly, the following functions will also be outsourced to the network:

• drug discovery, through external innovative companies and CROs

• development, through contract development organizations (CDOs) or through their counterparts at pharma companies

• manufacturing and supply chain, through contract manufacturing organizations (CMOs) and supply chain functions at pharma companies (See "The Source," page 78)

Accenture's studies show that, through the use of outside partners, networked companies can gain dramatic efficiencies by outsourcing:

• IT operations for 30 percent improved productivity

• finance/HR operations for 20–25 percent improved productivity

• electronic learning-for a 15–30 percent reduction in training costs

Success in the networked environment requires companies to focus on their core capabilities. One approach is to use a "search and development" model that uses two or more outside research groups and keeps development, manufacturing, supply chain, sales and marketing, and supporting infrastructure in house. Another model establishes an "independent research company" to discover and develop innovations beyond the company's commercial portfolio strategy, then sell those innovations to the "best" customers it can find. Some aspects of this model are already in place in the industry. (See "Freedom to Innovate," page 76.)

Wyeth has outsourced the majority of its clinical data management (CDM) operations to improve the time it takes to bring its new drugs to market. That effort is part of a larger program to streamline the company's protocol writing, patient recruitment, site selection, and trial management and monitoring, which, combined with CDM initiatives, will generate significant performance improvement and long-term cost savings.

According to Bruce Schneider, executive vice-president and chief of operations for Wyeth Research, "Recent successes in discovery have produced an explosion of data coming into CDM. It's critical that we transform our clinical development operation to handle that volume. This arrangement is a logical next step in the evolution of pharmaceutical outsourcing."

Supply Chain Savings

The industry's supply chain has been slowly becoming more efficient, but the evidence shows it can still reduce the cost of goods sold by 15–30 percent. A promising approach is to create a broad manufacturing network that combines in-house and outsourced bulk and secondary manufacturing sites and operates as a single entity, producing greater efficiencies and lowered costs and freeing existing resources for more strategic uses.

Takeda Pharmaceuticals North America (TPNA), the US subsidiary of Japan's largest pharma company, has relied on a network of key business partners since its inception. To develop its supply chain, the company created a highly efficient, integrated, quality-control logistics infrastructure, then outsourced the function and supported it with flexible information technology that allows electronic communication with networked suppliers.

In a matter of months, TPNA had industry expertise in packaging, distribution, and warehousing without expending capital on buildings and equipment. That expertise shortened its operational timelines drastically to meet the needs of the company's first product launch. The network has been so successful, in fact, that TPNA has expanded it to include additional packaging and distribution/warehousing partners.

"Our networking strategy has delivered benefits such as speed, quality, flexibility, insulation from business interruption, and cost efficiency," says Chuck Whitmer, TPNA vice-president, business operations. "Capital saved by outsourcing can be rechanneled to R&D to support new compound development, which could improve the overall level of healthcare."

The Biotech Paradox

Biotechnology companies may adopt their own slightly different model. As they grow, they face an emerging paradox: Their core capability is innovation, and growth is critical to their future, but the ability to innovate and increasing size do not always go hand in hand. In fact, a survey of biotech and pharma industry executives showed that 47 percent believe biotechs become less innovative as they grow, and 72 percent believe that emulating the traditional pharma operating model does not necessarily bring success.

Instead, the research suggests a new operating model for growing biotechs that supports innovation, flexibility, and rapid delivery of value: an in-house innovation center interacting with a capability network of third parties. The innovation center identifies new technologies -including platform technologies as well as target identification and validation-outside the parent company and applies them to increase the speed, effectiveness, and efficiency of discovery. Third parties in the capability network provide contract development and manufacturing and sales services, supported and managed by lean, in-house "coordinating" departments.

The result is that biotechs can bring their first products to market up to two years sooner than they could under the old system, protecting an estimated $1.7 billion in sales from future generic competition. Furthermore, the flexibility provided by the network allows companies to save up to $25 million in the cost of clinical development for each successful project. In sum, using such a model, growing biotech companies will have rapid access to the capabilities required to bring products to market while retaining their key attributes of innovation, scientific excellence, entrepreneurial spirit, and flexibility.

How-To's of Networking

Of course, there is no one right answer for everyone. Many successful pharma companies will continue to supply their pipelines by acquiring others and removing or paring the excess.

Most, however, will find it increasingly difficult to be the best at everything. They will need to identify those areas in which they excel, ensure that they have complementary partners, and optimize those core capabilities. To that end, they should consider:

• their capabilities in accordance with what works best globally rather than locally

• who is responsible for the process and for continuous improvement

• the company's commitment to invest in those functions

They should then create new management systems-planning, monitoring, evaluation, and training-that support both accountability and integration.

The best networked models use outside resources to optimize in-house expertise and to move their companies toward success. Companies that want a world-class research group but don't have it in-house can increase their capability through networking.

Operations Excellence

In the networked environment, operational excellence can also improve management performance by allowing companies to react to changes more quickly and efficiently and to make more accurate decisions. Companies can become more productive by operating their discovery, development, supply chain, and sales and marketing functions more effectively. They can decrease cycle times, increase the impact of those functions, and, by eliminating waste, increase output. They can reduce discovery timelines by employing parallel research activities such as shotgun sequencing, whole genome chips, pathway predictive tools, in silico, high throughput screening, and genotyping.

Wyeth is a good case in point. To improve productivity in its discovery organization, it set goals to:

• increase annual output of small molecule and biopharma development candidates by 300 percent

• decrease the time from discovery team formation to development track compound by one-third

• double success rates

• ensure quality by defining specific compound requirements for entry into development

Teamwork issues, unclear decision-making processes, and false starts created roadblocks to achieving those goals. Furthermore, multiple cultures, born from Wyeth's many legacy companies, led to inefficiencies and anxiety about change and risk-taking. And issues regarding resource allocation and prioritization, knowledge management, and teamwork remained unresolved. Yet Wyeth also had significant assets to support the effort, including strong CEO backing, recognition that improvements could be made, leading-edge technology in many areas, and strong people and science underpinning most capabilities.

"The results have been profound," says Robert Ruffolo, Wyeth's president of R&D. "With a new governance model covering decision making, prioritization, and resource allocation, new advancement criteria, new processes for discovery and exploratory teams, and new team structures and leadership programs, we are meeting our stretch goals."

In their quest to accelerate the application of scientific advances and bring better medicines to patients faster, innovative R&D organizations have focused on increasing operational efficiency and reducing time to market. The next set of challenges includes improving drug candidate screening and creating stronger patient/customer relationships to achieve higher success rates.

The Bottom Line

Finally, leading-edge sales and marketing capabilities can drive superior financial performance. Recent Accenture research found that, if a pharma company with $1 billion in annual sales improves its sales and marketing capabilities, it can gain a total of $135 million in extra operating margin. To accomplish that, a company should establish:

• a highly skilled and motivated sales force (to add $45 million in operating margin)

• sophisticated sales planning (to add $24 million)

• excellence in customer information management (to add $32 million)

• effective leverage of advertising and promotional vehicles (to add $18 million)

• the ability to understand customer economics (adding $16 million)

Through partnering with companies that provide practical analytics and advanced technology tools that help analyze all available historical data and measure return on marketing investment, companies can achieve core administrative and infrastructure cost savings and extend product market share and revenue.

Some of the most advanced practices create a loop, linking marketing intent and program execution with prescribing and purchasing behavior. The insights gained from that closed "loop" form the basis of new marketing strategies. Companies can finally understand the promotional activities that drive customer behavior and subsequent market share.

In another approach to superior efficiency and service, AstraZeneca is teaming with several external technology providers to increase the effectiveness of its communications among headquarters employees, its sales organization, and its customers. Wanting to foster business discussions among disparate resources throughout the organization-and recognizing the financial and personal costs of travel to meetings-the company established an e-collaboration capability in May 2002. Pilot meetings quickly overcame initial resistance as employees discovered the advantages of collaborating with colleagues from their homes, the office, or the road. By year's end, the company had conducted more than 700 meetings involving more than 8,000 attendees through e-collaboration, resulting in savings of more than $3 million. Subsequently, word spread throughout AstraZeneca, and the company began using e-collaboration capabilities across the global organization.

"E-collaboration is exceeding our expectations in terms of adding value for our customers and supporting the achievement of our business objectives," comments Rich Williams, vice-president, business information services and e-business at AstraZeneca. "It is helping us meet the needs of our customers by efficiently leveraging the tremendous skill base across our organization."

The Future Belongs To...

Some industry critics maintain that pharma's glory days are over, that all the "easy" compounds have been discovered, and no blockbusters remain to be developed. But those pundits are much like the patent official who suggested closing the office at the end of the 19th century because all the important inventions had been made. Through networked organizations, supported by operational excellence and a new marketplace role, the industry has the opportunity to continue its success.

But the future belongs to the brave and the innovative. It may be difficult for executives to take a close look at their business models, operations, and marketplace role and steer their companies in a new direction. They may have to overcome cultural barriers and entrenched resistance. They will also have to excel at integrating and managing volumes of information and new ideas, as well as managing outside resources. Those who do will gain a significant competitive advantage and emerge as the dominant forces in reshaping the industry.