No question: 2016 will be a tough year for many pharmaceutical companies. Some of the biggest blockbusters in the field have faced - or will soon face - patent expirations, opening the doors to an increasingly aggressive army of generics companies, which are ready to conquer their slice of the market. AstraZeneca, AbbVie, Merck and Novartis are only a few of the names that will face this big challenge, and not all of them have a drug pipeline lined up to parry the blow.
To make things even more interesting, regulations have tightened and with increased scrutiny comes an ever increasing number of Phase III drugs failing the test to market. Add into the equation the shake-up in the global economic landscape, and it’s clear that big pharma is facing a challenge bigger than it has ever faced before. However, challenge can also mean opportunity. Some of the big pharma companies have started moving their operational model from disperse research units to “Innovation Clusters”, but this in itself poses some big questions that will need to be answered if pharmaceutical companies are going to successfully traverse the patent cliff.
A mass shift from spokes to clusters and the drive for talent
In the early 2000s, Novartis pioneered a new trend, shifting the heart of its R&D business to Cambridge (MA), where it established the Novartis Institute for Biomedical Research Inc. (NIBRI), making Cambridge the centre of its worldwide research activities. The move was driven by a strong desire to align global functions and redeploy resources to meet the needs of the business. The historical model of siloed spokes took a first hit, showing the market the potential cost-benefits of a centralised unit. Since then, the bio-cluster model has gone a long way and now Cambridge (MA), San Francisco, Boston, Cambridge (UK) and Shanghai are recognised clusters for scientific excellence.
After Novartis’s bold move, many followed the same model. At the end of 2013, Roche closed its Nutley (NJ) research site and relocated its North American research units to the Roche Innovation Centre in New York and its North American Pharmaceuticals headquarters, Genentech, in South San Francisco. During the same year, AstraZeneca announced plans to move its Global R&D Centre and Corporate Headquarters to Cambridge (UK) to the Cambridge Biomedical Campus.
There is no question that the initial driver for consolidation and centralisation has been a desire to rationalise the property portfolio and reduce costs; however, the location of these clusters is indicative of something different: a desire to move headquarters and research centres closer to the heart of big academic institutions (MIT, Harvard, Cambridge - to cite but a few), closer to where innovative scientists arise year-on-year and, importantly, closer to talent.
The Game Changer
What started as a centralisation exercise, has been brought up to the next level. In the past three years, more big-pharma companies have started alliances with start-ups, moving from simple centralised research centres, to real Innovation Clusters. From 2013, Johnson & Johnson Innovation launched its asset-centric strategy, entering in partnerships with promising small enterprises and bio-techs (WuXi AppTech, Toronto-based MaRS Innovation, HiFiBiO and others) across the globe. In doing so, it consolidated its innovation units and set up four key offices in Shanghai, London, Boston and San Francisco. Furthermore, in June 2015, it announced the opening of a new innovation hub at the Karolinska Institutet in Sweden looking for new technology and new drugs.
In 2013, GlaxoSmithKline partnered with global investors AvalonVenture to create an Innovation Park in San Diego, where 10 new companies are funded to carry out vanguard research in a strongly collaborative environment. Eli Lilly followed in 2015, announcing expansion of its New York site, with the aim of creating an immuno-oncology hub, driven by collaborations with local academic institutions and start-ups. These are just a few examples, which highlight a consistent trend in the industry. What has historically been an isolated business model made of global silos, conservative behaviours and hard IP protection, is now transforming into a collaborative operational environment, with centralised parks and a real call for innovation. This model could prove game-changing, but it begs an overarching question: Can the pharmaceutical industry really adapt to the change?
Centralised collaborative units: the big questions
The shift to a centralised operational model is indicative of big pharma’s need to reinvent itself. Why is this the case?
The patent-cliff period (2011-2016) has put a lot of pressure on many pharmaceutical companies, which have lost or are losing billions of dollars in revenue from their blockbuster drugs. This industry relies upon the discovery and marketing of new drugs; however the timescale for realisation can be as long as 15 years from finding an active principle to launching a new medicine to the market and there are many casualties along the route, with potential drugs failing FDA and EMA approval at the advanced stage of Phase III trials.
M&A has been a strong response over the years, with many companies trying to buy time and late-stage research to overcome the upcoming threat of patent loss. Acquiring a new company, however, brings several issues related to management of new, often surplus, assets, cultural integrations and financial debt. As a result, big pharma has had to re-think its approach and find new ways to enhance its R&D productivity, looking at its global portfolio and at ways to boost its innovation pipelines.
Centralisation and Investment seemed to be the right answer. Out with the old conservative model and in with the new, open centralised decision-making and collaborative environment, with CEOs, CFOs, COOs and CSOs all campaigning for the need to remove the detrimental layers between management and lab benches and open up the doors to academia and small start-ups.
There is no doubt that this strategy could change the landscape of the industry, but how can big pharma ensure the model is a success?
Transforming a business is not as simple as closing disperse sites and opening a new Innovation Park. Alignment between corporate strategy and delivery functions is key to success. Consistency of vision, governance, accountability, performance measures and capabilities needs to be embedded across the organisation to drive change. This often means deploying full-time resources to mobilise and align all employees towards the benefits of the change and enable a smooth transition to new ways of working. However, with a policy of “doing more for less” and cost-cuts, are big-pharma companies prepared to invest in resources to drive the change?
Tackling the risks
The “Innovation-clusters” model is also driving a new change, as big pharma companies are opening their funds and databases to third parties, thus disclosing research information that, if misplaced, could potentially jeopardise their successful access to the market. Opening up to start-ups and academia is a high-risk investment, which can have a remarkable impact on the financial and strategic direction of a company, due to the uncertainty of the final outcome, which is inherent in the world of research.
However, R&D is at the core of every pharma company. Success in pharma is highly dependent on the skills of the researchers who drive the projects and the quality of new discoveries. The best Capital Delivery and Marketing strategies may fail if new competitive drugs are not discovered. Centralising research units in close proximity to academic centres of excellence and new small companies has two clear positives: (i) the ability to attract and fund new talent who can add immediate value; and (ii) the creation of a collaborative environment where scientists with different backgrounds and experience can brainstorm, talk, think and create together on a daily basis.
The inherent incentive is to drive knowledge sharing and accelerate drug discovery; but how can pharma companies protect the IP of their scientists; where do accountability and the glory of the discovery sit in an open environment?
The answer needs to take into account the personal drive of the talented teams and individuals that have worked on researching new drugs and the need for recognition and ownership at the right level.
There is no one-size-fits all answer, but a winning new operational model will need to design ways to align the leadership’s vision to the needs of the people on the ground, to make researchers feel part of a big change, free to openly collaborate with their peers and, at the same time, empowered, protected and recognised for their daily job. The right answer to this question could ultimately be the real innovation.
The past few years have created new, unprecedented challenges for big pharmaceutical companies, which are facing potential revenue falls driven by patent loss and generics competition. Whilst the traditional business model has started to show signs of decay and M&A strategy is generating more issues than solutions, pharmaceutical companies have turned to a new operational model, moving from disperse spokes to “Innovation Clusters” and opening up the doors to academia and new small companies. The model has the potential to change the market landscape, but, to be successful, it will need to consider and answer big questions that move away from the “profit and loss” argument, and drive towards a collaborative, outcome-led and, most of all, people-driven solution.
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