Underperforming Pharma companies, why? …and how to fix? (a short overview)

The landscape

In light of patent expiries, it's imperative for pharmaceutical companies to remain at the forefront of innovation. This not only paves the way for the introduction of advanced drugs with better efficacy and safety, but it also contributes to enhancing the quality and longevity of human lives. Concurrently, it ensures a robust revenue stream, rewarding companies and their stakeholders for the inherent risks undertaken.

Presently, the cost associated with the discovery of a new drug until its approval is approximated at USD 6.8 billion. Throughout the drug development cycle, there are critical junctures where a potential drug might fail to meet requisite efficacy or safety benchmarks. At such instances, its commercial value plummets drastically, rendering the substantial investment fruitless.

Given this landscape, the investment strategies adopted by pharmaceutical firms and the choices they make concerning which compounds to pursue are pivotal determinants of their success. Investors keenly observe these metrics to discern which firms to invest in, sidestep, or potentially bet against.

The performance issue

The industry employs tens of thousands of highly skilled professionals dedicated to pioneering medical breakthroughs, collectively channeling billions of dollars annually. The top Pharma companies actively seek top-tier managerial talent to spearhead these innovations and routinely engage esteemed consultancy firms for strategic guidance. Yet, disparities in outcomes are pronounced, many are not delivering.

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It's intriguing to note that both mainstream publications, such as Forbes, and scholarly journals have assessed this performance. It is reported that only 9 of 16 companies achieved positive R&D productivity based on the commercial returns from their new drugs versus R&D costs. The other 7 companies had negative R&D productivity but used mergers and acquisitions to compensate financially. One firm has been identified as consistently eroding value each year, despite all efforts...

What's the underlying cause of such disparities in performance?

Pharmaceutical companies, despite having vast financial resources and access to top-tier talent and consultants, often encounter challenges that can impede their R&D successes and consequently diminish shareholder value. Several widely known reasons contribute to these outcomes:

• High complexity & uncertainty: Drug development is a complex process with a high degree of inherent uncertainty. The human body's responses to new compounds can be unpredictable, and what works well in pre-clinical trials might fail in human trials.
• Long development cycles: It can take 10-15 years to develop a new drug. During this period, a lot can change – including scientific understanding, technology, and market demand.
• Regulatory challenges: Gaining approval from regulatory bodies like the FDA or EMA is tough. Even if a drug is effective, it might not meet the rigorous safety standards set by these agencies.
• High costs: Developing a new drug can cost billions. Thus, if a drug fails in the later stages of clinical trials, the sunk costs can be tremendous.
• Market dynamics: By the time a drug is developed, the market dynamics might have shifted. New competitors might have emerged, or the disease landscape might have evolved, diminishing the drug's market potential.
• Intellectual property issues: Patents have a limited lifespan. If a company cannot bring a drug to market before its patent expires, generic competitors can quickly erode its market share.
• Innovation challenges: Sometimes, a company's internal culture can stifle innovation. Bureaucratic processes, resistance to change, or a lack of diversity in thought can all hamper R&D efforts.
• Failed Mergers and Acquisitions: Pharma companies often acquire or merge with other firms to bolster their R&D pipelines. However, if the integration process is mishandled, it can lead to a loss of key talent, disrupted R&D processes, and a poor return on investment. Recent examples abound.
• Over-reliance on Blockbusters: Companies may focus on potential 'blockbuster' drugs while neglecting other promising compounds. If the blockbuster fails, the financial repercussions can be significant.
• Clinical trial design: A poorly designed clinical trial can lead to inconclusive or misleading results, causing potentially effective drugs to be abandoned.
• External factors: External events, like political shifts, changes in healthcare policies, or global crises, can impact a drug's development, production, or distribution.
• Ethical concerns: Ethical dilemmas can arise in drug development, especially in areas like gene therapy or the use of certain types of animal testing. Addressing these concerns can delay or halt R&D efforts.

So, as this is widely known, why are still so many falling short?

Consistent failures in pharmaceutical companies, even with substantial resources at their disposal, can be attributed to a combination of systemic, strategic, and operational challenges (and not to some form of “bad luck”). Here are some reasons why certain pharmaceutical companies might consistently not achieve expectations, their own and the ones of the shareholders:

• Inadequate corporate strategy: Firms might have a misguided corporate strategy that doesn’t align with their strengths, or they may be slow to adapt to industry changes.
• Organizational culture: A company culture resistant to change or one that discourages innovation can stifle R&D efforts. If failures are met with blame rather than seen as learning opportunities, it can inhibit risk-taking and creative problem-solving.
• Poor decision-making framework: Some companies might have decision-making processes that are overly bureaucratic, lack transparency, or don’t adequately integrate insights from different parts of the organization.
• Misaligned incentives: Performance metrics and rewards might emphasize short-term gains over long-term innovation and value creation, leading to a focus on immediate profitability at the expense of sustainable R&D.
• Operational inefficiencies: Some firms suffer from operational bottlenecks, outdated technologies, inefficient workflows or suboptimal execution which hamper their R&D processes.
• Talent management issues: Consistently losing top talent, failing to attract skilled professionals, or not investing in employee growth can lead to a lack of expertise and innovation.
• Over-reliance on external innovation: Some firms overly depend on acquiring external assets or companies for their pipeline. If not done judiciously, this can lead to inflated costs and poor integration.
• Ineffective risk management: If a company doesn’t have a robust risk management framework, it might repeatedly invest in high-risk, low-reward projects.
• Poor portfolio management: Companies might spread their resources too thinly across too many projects or focus too heavily on one potential blockbuster drug, leading to neglect of other promising compounds.
• Lack of diversification: Relying heavily on a single therapeutic area can be risky. If new challenges or competitors emerge in that area, the company can be disproportionately affected. (Ok, not everyone has the resources to diversify...)
• Inadequate market research: Companies that don’t adequately understand patient needs, market trends, or competitor dynamics might invest in drugs that don’t address a real market need or have too much competition.
• Failure to learn from past mistakes: Organizations that don't have a feedback loop to learn from previous setbacks may find themselves repeating the same errors.

In essence, consistent failure often stems from a combination of systemic issues within the company and external challenges. Addressing these requires a holistic approach that evaluates strategy, operations, culture, and external partnerships.

Listed like this... it all looks obvious, avoidable and yet.... it’s still happening (check the market capitalizations)

What could Boards and Executive Teams do to address, fix or better... prevent these shortcomings?

Given the size and complexity, the adoption of a multifaceted approach that integrates strategic, operational, cultural, and governance measures seems needed. Here are 12 steps that could be considered:

1. Strategic re-evaluation: Undertake a comprehensive review of the company’s strategic direction. This should involve assessing current and future market trends, evaluating the company's strengths and weaknesses, and identifying potential growth areas.
2. Strengthening organizational culture: Foster a culture of innovation and continuous learning. Create an environment where failures are seen as learning opportunities. Encourage open communication and collaboration across departments.
3. Enhanced decision-making: Streamline decision-making processes to make them more agile. Incorporate data-driven insights and prioritize projects based on potential returns and alignment with the company's core competencies. Ensure that decisions are informed by cross-functional perspectives.
4. Talent management: Invest in training and development to upskill employees. Attract and retain top talent through competitive compensation, benefits, and growth opportunities. Foster leadership development programs to nurture future leaders.
5. Effective risk management: Develop a robust risk assessment framework. Regularly review and update risk management strategies based on industry dynamics and internal changes.
6. Portfolio optimization: Prioritize projects based on their potential impact and alignment with strategic objectives. Periodically review and adjust the portfolio to ensure diversification and balance between short-term and long-term projects.
7. Promote external collaborations: Establish partnerships with academia, biotech startups, or other pharmaceutical companies to tap into external innovation. Consider licensing or acquiring external assets judiciously, ensuring proper due diligence.
8. Reinforce market research: Invest in robust market research to understand evolving patient needs, competitor landscapes, and emerging trends. Use insights from market research to inform R&D and commercial strategies.
9. Enhance Board oversight: Ensure that the Board has diverse expertise, including members with deep industry knowledge, to provide informed guidance. Conduct regular reviews of the company’s performance against strategic objectives.
10. Operational efficiency: Invest in technology and systems to optimize R&D processes, streamline operations, and foster innovation. Continuously assess and refine operational workflows to eliminate bottlenecks and redundancies.
11. Stakeholder engagement: Regularly engage with shareholders, patients, healthcare providers, and regulators to gain insights and build trust. Be transparent in communication, especially when addressing failures or challenges.
12. Learning and feedback loop: Establish mechanisms to capture lessons from past successes and failures. Ensure that insights from these lessons are disseminated across the organization and inform future strategies and operations.

In conclusion, hand on heart...

how many can claim that their companies are best-in-class in following these 12 steps which are based on common sense??

Non est ad astra mollis e terris via

There is no easy way from the earth to the stars….ehr, to the innovative game-changing life-enhancing and profitable new drug.

(What have I missed? Please add your thoughts)