PharmaX, the CEO’s Dilemma and Open Innovation – Part 2

By: Campbell Lockhart / Rick Wielens

In the first installment, Gordon the newly appointed CEO at Pharmax is confronted with an innovation gap of 5 years. Certainly, the potential of the portfolio is high, but the risks are even higher. With market pressure breathing down his neck, Gordon tries to make sense of the options that he has and make the right decisions.

Gordon sees the innovation gap and realizes that he is faced with very difficult decisions. He sees a business with a high risk but high potential innovation portfolio that will not kick in until 5 years, a dwindling IP position and increasing pressure from generic competition and no plan to cover the gap between now and whenever, an aging catalogue and now he sees an aging staff. In this case what are his options?

Business as usual and take the risk of product failure and be punished by the market, in the end he will be seen as not having done what he was brought in to do.

Cut R&D budgets and make public their difficulty in developing new drugs and again be punished.

Jim, I don’t hear you talking much about open innovation and, to tell you the truth, that bothers me.

Or diversify the innovation portfolio by deploying resources in a different way. He has been an avid believer in Open Innovation in his previous job and knows the power of this approach. When he turns to Jim and asks “Jim, I don’t hear you talking much about open innovation and, to tell you the truth, that bothers me.”

Jim realizes the weakness of his position, “But look at all these options! They are all from exterior partners, you could not be more open than this… I think that we are pretty good at doing it.” But Jean chips in again, “You can’t go looking for new ideas in our core business, clinical evaluation. That would be not be manageable. It’s fine for Jim in the discovery phase but not in what we really do and that is: get drugs approved.”

Gordon takes this in, it is not what he expected to hear, “Maybe, but are we addressing the needs? the market needs?”

Jean again, “We know the market needs, everyone in pharma does. It’s about bringing new drugs for the major pathologies, cancer, heart disease, neurology… It’s pretty obvious what we should be doing and I think we do a darn good job.”

How is he going to get this team of seasoned professionals to see that there are other ways to do business?

This is a story but one that is being acted out in many companies. Gordon is confronted with a dilemma, a dilemma of culture. How is he going to get this team of seasoned professionals to see that there are other ways to do business? He turns to his Marketing VP Carlos, who has been particularly quiet. “I think we need to talk about alternative business cases and options.”

Is Gordon taking a good decision by turning to marketing? He thinks so. It’s what he did in the automotive industry where innovation is driven by customer needs. But if he doesn’t involve the R&D, it’s probably not going anywhere. This kind of approach maybe works in the automobile industry but it could be dangerous to disconnect the science from the market. So, let us take a step back and look at his options and try and understand what Gordon is thinking.

The first option, and certainly the easiest option, would be to approve Jim’s R&D program, in other words: business as usual. But here he sees that there is a high risk that nothing, or at best very little will come out of it. When he looks at the recent returns that this type of program has given, he sees that it is low, way too low at 4% and this in the face of eroding margins from generic competition. Gordon sees that it is not sustainable.

As well as that, this program is significantly dependent on exterior collaboration. This could be a good thing, but he wonders if PharmaX is perceived as the partner of choice, if they are attracting the best in class and if perhaps they are spreading their resources too thinly. It goes through his head: “This is not open innovation. It’s just assuring that our incapacity to be innovative is compensated. It’s not sustainable: it’s costing too much and this is what the financial market is seeing”.

Gordon’s second option requires him to take seriously the recommendations in his management consultancy report. When he ordered this he had asked for an in-depth analysis of the R&D organization and its potential at PharmaX. What he read was not exactly what he expected, or even wanted to read. The recommendations were to cut deeply into the organization, freeing resources and reducing the budget. The report brought to the forefront the low ROI of innovation and the dependence on external partners. These cash saving actions, according to the report, will increase the R&D productivity and increase shareholder value by giving cash for share buy-back and dividends.

Gordon is well aware that this is the way industry is moving today and what would be expected. He thinks, “I’ve been there, I’ve done that”, but the result had been almost the end of the business and he was lucky to have come through with little collateral damage. He had taken a personal vow that this was not how he would do business again. Share value is important but it not a way to develop industry or jobs. He saw the pharma business as different and that if there is not serious support to the innovation program then the competitive edge would be very rapidly eroded and the business would be hit even harder. He has seen some of the other pharma businesses applying this tactic and the damage that they suffered.

Gordon sees that neither of these options seems sustainable. When he looks at the innovation culture of PharmaX he sees one that has a long history of technology and science. In the automotive industry he has been used to addressing market and user needs. He finds himself hearing Jean’s words: “We know the needs. Everyone in this industry knows them…”. Of course the needs are to bring new and effective treatments to diseases and pathologies but Gordon wonders: “Are these the true needs? I thought that this industry was about providing quality of life value.” Again his mind wanders and he is thinking about the days before the death of his parents, particularly his mother. He remembers that, if her physical needs were being addressed with the best of medical science, how she lost all quality of life and her needs and dignity as a human being were abandoned to science. He asks again “So are the needs known?”

This is where Gordon’s third option comes in. He sees that the PharmaX innovation model is played out, that the ROI is eroding, and fast. According to Jim the pipeline has high potential but the risk is as high as this potential, and he cannot hedge short term bets on the balance between this risk and return. He sees a looming technology gap in the next 5 years and generic competition. So why not turn the model on its head?

PharmaX is about providing quality of life through medical science. He thinks: “It’s like the car industry. There are lots of 4 wheeled things that people can buy to move them from A to B. What we did was to address their needs and provide the quality of environment in that vehicle. That’s what gave us our competitive edge: build on our core platform and assets to address needs”. This is Gordon’s third option, and he knows it is innovative, daring and goes against the grain of what the market is expecting… but it is a viable, and he thinks, a sustainable option. It will give the breathing space that Jim needs to focus into the pipeline without the 5 year pressure. But it is still going to require some radical changes.

In Part 3, Gordon starts to craft an alternative innovation strategy based on user needs, building on assets and redefining the way the pharma industry sees its role as a provider of quality.

Any resemblance to any company or person is coincidental. The company, characters and story are meant only to illustrate a fictious business case.

Photo: Colorful tablets with capsules from shutterstock.com