The Pharma R&D model is certainly suffering, and the industry’s pandemic sickness is best embodied by “Eroom’s law” of ever-decreasing R&D productivity. But it’s a lot easier to diagnose this disease than it is to prescribe a medicine. In fairness, there might not be medicine for this condition, as it could just be fatal to those unable to change fast enough. But someone asked me a question recently that made me think – what would you do if you were running R&D at a Big Pharma? Or what specific advice would you give?
This isn’t an easy question to answer with credible specifics, and it probably depends on which company. It’s a huge, multi-faceted problem, and I’ve never run an R&D function anywhere so I certainly don’t claim to have a 100-day plan up my sleeve. But I do have few general thoughts – many of which have been batted around for a while by others. I’ve bucketed them into three themes, and hope they trigger debate about these and other more radical measures.
On first principles, as I’ve blogged on previously (here), I don’t believe that we will cure the Pharma industry of its productivity ills through smarter “operational excellence” approaches. Tweaking the stage gates, subtly changing attrition curves, prioritizing projects more effectively, reinvigorating phenotypic screens, doing more of X and less of Y – these are all fine and good, and important levers, but they don’t hit the key issue – which is the ossified, risk-avoiding, “analysis-paralysis” culture of the modern Pharma R&D organization.
The only way to radically change that culture is to recode the DNA of the organization. Here are three basic recoding themes around strategy, organization, and governance:
1. Strategy – Invert the periphery and the core
Most Pharma’s are experimenting with a range of new “outreach” models with academia and biotech; these collaborative approaches may involve capability sharing, academic sponsored research, creative funding structures, venture models, or even starting their own biotech companies from scratch. They are doubling down on their presence in “biotech hubs” like Cambridge, MA through new facilities and a proliferation of “centers of excellence” models for promoting innovation. Furthermore, most Pharma’s have been trying to create smaller distributed R&D units to tackle new areas. These are all great initiatives that attempt to tap into the entrepreneurial culture in biotech and the cutting edge science of academia.
But despite consuming $10s of millions, maybe even $100s of millions, at each major Pharma company, fundamentally these are all tiny investments relative to their annual R&D budgets and they sit out on the periphery of these large R&D organizations. This means that, although interesting, these new models are at the margins financially and organizationally. They can’t change the culture because they are stuck on the outside. The centerpiece of R&D in Pharma still remains the mega-site: the R&D campus model with thousands of co-located employees. This expansive site-based infrastructure was built up over the past 30 years, funded through blockbuster drug profits, to support the end-to-end premise of industrialized, fully integrated R&D (and maybe to celebrate the corporate ego). This is the physical and cultural part of the organization that has become necrotic in many companies, and the closings of several mega-sites (Nutley, Sandwich, Ann Arbor) suggest that Pharma is realizing these sites may be part of the problem.
In order for these innovative experiments at the periphery to have any meaningful impact, they need to be done in the core of the organization, and at a greater scale where they can challenge legacy internal R&D model. Instead of 5% of the R&D budget, why are these initiatives not more like 25 or even 50% of an R&D budget? I’m not referring to plain vanilla in-licensing or M&A deals, which certainly have there place; instead, I mean creative, large scale collaborative models in the spirit of Genentech-Roche. Its too early to know how the endgame will play out, but I would put Celgene’s creative early alliance with Agios into this game-changer category. More of these deals, and of appropriate scale, would help challenge the existing R&D frameworks inside of most companies.
Taken further, bringing the periphery right into the core is worth considering. This is just a thought experiment, and certainly difficult to do in practice, but imagine turning a 5000-person R&D campus into a vibrant biotech park. Disaggregate the research portfolio to create a couple dozen therapeutically-focused “biotech” firms, with their own CEOs, responsible for a 3-5 year plan and with a budget that maps to that plan. Each could have its own Board and internal/external advisors, and flexibility to engage free market service providers outside the biotech park. Invite new venture-backed biotechs and CROs to move into the newly rebranded biotech park, incentivized with free lab space, discounted leases, access to subsidized research capabilities, or even unencumbered matching grants. Put some of the new spin-outs from their direct academic initiatives into the mix. But don’t put strings on those new externally-derived companies like the typical Pharma incubator; these will constrain the growth of these new companies. Focus this big initiative on one simple benefit: strategic proximity to a different culture.
This obviously couldn’t happen overnight, but the idea of reconstructing a big monolithic Pharma campus as a vibrant biotech park full of smaller more nimble companies and opening the entire place up to “market” engagement could be catalytic. Even if only part of this if directed at some of the big R&D campus’ of Pharma I think it would have big effects.
As an aside, I am not convinced the big R&D campus model works anymore in Pharma. Some of the most productive R&D sites in history were the smallest – like Merck’s Montreal site of ~200 researchers. Other Pharma, like Celgene, probably have more “external” R&D activities than “internal” core-driven efforts. Many of the big core resources underlying the rationale for a large site, like high throughput screening, big sequencing cores, expensive imaging equipment, big vivariums, toxicology divisions, pharm science and manufacturing etc are now accessible virtually and less expensively. Further, and more importantly, there’s little room for innovation in the huge bureaucracy required to keep the mega-site infrastructure going. I joke that our startup biotechs are too big when they’ve hired a full-time HR person; these big R&D organizations have armies of service lines just to support the infrastructure and importantly to “rein in outlier behavior”. It’s this very outlier behavior – the rule-breakers and risk-takers – that Pharma should be cultivating. These mega-sites also have tons of committees to extract a pound of flesh from those that work there. Dress codes, lengthy employee handbooks, filling out the equivalent of endless TPS reports, etc – they all add up to a stifling level of compliance and the suffocation of innovation. I think it’s fair to say that if you need a “culture committee” you’ve probably got a problem. I’m not advocating organizational anarchy but delayering these cultural aspects is key. Furthermore, cushy Pharma work environments can feed a culture of entitlement and complacency, and there are plenty of those two elements in the “dead wood” ranks of middle management in Pharma. Sadly these elements can slowly destroy the productivity of a science-based research organization.
So if deconstructing the campus model is part of bringing the periphery into the core of Pharma R&D, what about the inverse? There are lots of ways to send innovative, high value elements of the Pharma core out to benefit from the periphery. There are great people inside of Pharma, and there’s a vast institutional memory for how to develop (and how not to develop) drugs. Sharing this experienced talent base could be one example, and could manifest itself through an aggressive use of secondments or sabbaticals as both career development tools and a cultural exchanges. Imagine if Pharma took a few dozen of its “best and brightest” rising stars in R&D and offered to place them for 1-2 years inside top tier venture-backed biotechs. Most Pharma have large biotech equity portfolios through their corporate venture arms; it could be a compelling value-add to have a superstar clinical researcher join the biotech’s team along with an equity investment from a Corporate VC firm. Pushing the model further, the Pharma could offer to pay their salary so they are “free” to the biotech, but make them otherwise full-time employees of the biotech. They would experience the biotech model, help advance its drug programs, and return to Pharma energized about how to do things differently. A big criticism of this is that the Pharma might be afraid to lose great people this way. Two answers to that: first, you already are losing great people to biotech, and second, you could use that wonderful tool called the vesting of equity to incentivize their return. Their stock grant in the young biotech could vest in the 1-2 years after they’ve returned to Pharma, facilitating their productive return into the core Pharma R&D world. This is just one idea for pushing the core out towards the periphery; although seemingly a small commitment, if after 5 years a good portion of the top 100 leaders in an R&D organization had done this type of exchange I suspect it would have a profound impact on the parent Pharma’s R&D culture.
2. Organization: Get the rest of the company out of Research’s way.
Organizations have a superb tendency to group think their way to incrementalism. Multiple stakeholders begin to weigh in with differing interests and then consensus beats out the outliers. Dominant mental models formed from yesterday’s (and, less commonly, today’s) “idea marketplace” are projected onto early research programs destined for the next decade. This is the signature of one of the biggest obstacles to pursuing high impact biomedical science in Pharma today – the tyranny of commercial groups over their R&D colleagues.
One immediate solution would be to kick Commercial input out of decision-making in Research. Or, more practically, at least reduce it dramatically. Let them know that Research will hand them high quality post-PoC Phase 3-ready programs addressing important medical needs. Remove the market research gates and project NPV assessment models from critical decision-making points. Ignore the commercially-defined “in” vs “out” disease states that limit Research teams’ degrees of freedom. Let the science and medicine guide early program identification and progress.
“Commercial strategy” input pervades most Research organizations today. Some of it has been good, but I’d argue that the pendulum has swung too far. In the last 15 years, the industry has witnessed the proliferation of complex multi-parametric analyses of disease areas and targets. These models for portfolio management became nearly un-challengable as “rules” for ranking projects and areas. These models create the illusion of precision but are almost always precisely wrong. They give great comfort to risk-averse decision-makers who can point to the model instead of their judgment: “Sorry, we can’t go after that disease because the commercial portfolio model says it’s not attractive”. Using this type of modeling as a crutch has likely destroyed significant value in Pharma.
Risk-takers need to be unleashed with their Research teams to explore new mechanisms, indications, diseases and let the real medical needs define how the programs evolve. If, after human proof of concept, their colleagues in full development and commercial don’t want an asset, then hold the Research team accountable: coupled with a more disaggregated R&D core model (from #1 above), Research’s Biotech NewCo’s/team’s would be expected to deliver high quality drugs in a reasonable period of time or transition to another role outside the company. If they’ve truly been focused on real medical needs, it would be hard to imagine a credible commercial group not wanting an impactful medicine. Further, in many cases, if there’s positive PoC, there will be a willing external buyer for it to generate a reasonable ROI.
The key in this new organization would be to trust your Research teams to deliver impactful medicines, and empower them to do so. If you don’t trust the intellect of your Research leaders, then replace them. But second-guessing, micro-managing, and over-analyzing doesn’t aid in the exploration of innovation.
This admonishment of commercial input isn’t an appeal to drop discussions about differentiation. I still put a huge amount of value in appropriate Target Product Profiles (TPPs), and insist on them in our venture-backed biotechs. But these TPPs can and should be designed and constructed by clinically-minded colleagues who know the patients, their treatment options today and tomorrow, and where the real unmet needs are. TPPs should focus on having big medical impact. I’m also not saying that Research teams shouldn’t get reimbursement input: in fact, I think getting it is a must, especially for designing the right Phase 1 and 2 program. Research project teams can and do benefit from direct engagement with clinical colleagues at payors, P&T committees, and healthcare delivery networks. Clinician to clinician dialogues about what matters for patient care should be at the core of these decisions. I know these outreach models are starting to happen today.
Great drugs will reveal themselves both clinically and commercially if the organization gets out of its own way and empowers its Research line.
3. Governance – Establish a longer-term, science-based approach
The way Pharma companies are governed needs to change on lots of dimensions, but three of them include reworking their Boards, engaging more external “open market” input, and transitioning to a more long-term view with the Street.
Regarding the Board, it is well accepted that running a Pharma company is different than selling online widgets, farm tractors, or life insurance. It’s a science-based business with huge biologic, medical, regulatory, and reimbursement complexity and should have R&D at its core. It’s also a business that in most companies today is trying to reinvent itself – largely in the image of biotech. But most Big Pharma Boards are composed of Directors with little R&D or Biotech experience: in fact, as of 2011, only 2% of the Directors were former Biotech or Pharma veterans (here). I would encourage the evolution/transition of these Boards into more science-led governance bodies. Specifically, I’d suggest creating a 3-year timeframe to completely rework the makeup of the Board. Today 60% of Directors aren’t from R&D or Biotech/Pharma backgrounds; in the future, I think it should be – and I’d push to make it a stated goal to transition the Board to this more science-driven makeup. An active “R&D Subcommittee” of the Board should be in place (and is in place at a number of companies). Boards are too often “yes”-men who either don’t or can’t challenge the status quo, and this needs to change. I know there’s real value to “alternative” perspectives from other industries or academia, but I’m confident this input can be captured by the 4 out of 10 Directors from those backgrounds.
The second area is around overcoming organizational biases and shining the harsh light of the outside into the company. I’m a big believer in getting “open market” feedback into the thinking of a company. It’s too easy to drink your own bathwater in a large insular R&D organization. Bringing open market input into portfolio evaluations is helpful. I think the Head of R&D should have a well-functioning group of external R&D advisors – an SAB on steroids – to help champion and challenge the internal team. The makeup of this should be a mix of retired R&D executives, biotech investors, and drug R&D-minded academics – which creates a diversity of viewpoints to increase the overall value of the input. Too often Pharma defaults to not engaging the outside because “they know their programs best” or for fear of sharing confidential information that might leak to its competition. Reality is the latter is the least of their worries, and I’ve yet to hear this as being a source of profound competitive intelligence leakage. A far worse outcome is unchallenged “group think” about the merits (or demerits) of a program and its development strategy. Importantly, I’m not talking about specific Key Opinion Leader engagement on projects, as most Pharma companies do this effectively already. I’m referring to a senior, strategic, experienced advisory function from true practitioners in the field to help the R&D leadership team get a fresh perspective.
Lastly, I think Pharma needs to manage Wall Street better and its budgeting/forecasting process. First, scale the R&D budget according to the attractive opportunities available, not according to where Wall Street wants the number or as a default percentage of sales. Is 15% the right number? 20%? It seems to me that the old logic of a steady amount of R&D spend as a function of sales is part of what got us into this mess. The fear of “losing” a budget allocation next year if you accept a lower budget this year is endemic in most organizations and is clearly counter productive. R&D should be scaled to the opportunity set inside or outside the company’s walls. Second, why give quarterly R&D, sales and EPS guidance? Traders want that information, but is it really that helpful to long term investors? It fosters a short termist culture of metrics management. I’d argue that a 1- and 3-year forecast conveys the long-term nature of these product cycles and businesses in a far more effective manner. R&D funding, in particular, should be communicated not with a quarterly “what have you cut for me lately” basis, but on a much longer-term view of pipeline maturation and growth. Lastly, don’t let the accountants run the R&D organization: I’ve heard countless discussions about how partnerships or collaborations need to be P&L-sparing by accessing the Balance Sheet rather than consolidated on the Income Statement. In the grand scheme of things, is this really relevant? The contortions that some companies fall into in order to manage this P&L or EPS sensitivity (because they are giving guidance towards specific quarterly numbers) is amazingly wasteful of senior mindshare in a company and have probably sabotaged a fair share of potential collaborations in the past. Pushing back on the accountants and the Street is likely a worthwhile endeavor no matter how painful in the near term. This won’t solve the bigger issues, but it might help companies focus more attention on them rather than punching at ghosts.
Some of these ideas might be unworkable on a practical basis, but the spirit of where they are trying to steer the R&D organization of the future is clear: a healthier culture that is both more entrepreneurial and empowered to take risks, and less encumbered by legacy baggage and short-termist thinking.
With its deep bench of experienced talent, huge resources, cutting-edge capabilities, and unparalleled global development and downstream footprint, Big Pharma should be well positioned to drive biomedical research and innovation. And there are select examples of that happening today. But collectively as an industry it’s not able to unlock this potential – recoding its cultural DNA may hold the key.