We have been ranting on about how Big Pharma should disaggregrate—split into smaller, biotech-like units that are perhaps even separately listed—for at least a year now. Refresh your memory here, or here, or here.
So imagine our surprise—and delight—when Mike Owen, SVP of GlaxoSmithKline’s Biopharmaceuticals Center of Excellence for Drug Discovery, this morning put up a slide during The Economist’s Pharma 2020 conference in London calling for ‘separately listed therapy/technology areas’.
And that wasn’t all: Owen highlighted several other actions that Big Pharma could take in order to produce significant shareholder return, including dividing R&D businesses based on risk (so for example, in GSK’s case, splitting out vaccines, or consumer health), operating R&D funding like a VC firm, and generally allowing investors to choose which disease franchises to back.
Had we heard right? Was Big Pharma’s ubiquitous ‘need for change’ rhetoric about to become reality? Not quite. Owen clearly prefaced his remarks as his own views, not a corporate line, and the slide’s title—“R&D Models—Blue Sky” reflected his skepticism as to whether spinning out TA-focused biotech-like units would actually happen. “I don’t think it will,” Owen told IN VIVO Blog afterwards, “which is why I said it was a personal view.” In fact, to his knowledge, “these ideas haven’t been discussed [seriously] within GSK management.”
Now granted, GSK took what was seen as a fairly radical step in 2001 when it created its TA-focused Centers of Excellence for Drug Discovery (CEDDs), which supposedly operate as quasi-autonomous units and compete with one another for research and downstream resources. (See here for an early account of the CEDDs, and here for their offspring.) But that was seven years ago. And although the CEDDs “did work,” according to Owen, pointing to “a good pipeline,” he’s quick to admit that the proof will lie in whether any of the programs get to market. Meantime, “we need to move to the next stage,” he opines. It’s time to refresh the CEDD structure and to do more, in other words.
In Owen’s 2020 world—strongly inspired by GSK’s own experience with its Belgium-based biologicals business, which reports directly to the CEO, not to R&D, and whose decision-making is relatively unfettered--separately listed TA focused units would have more autonomy and thus be more accountable than divisions of a large corporate. Scientists would see their innovation quickly and clearly rewarded if their programs made it to market; likewise investors would be able to pick and choose the risk-profile and timeframe of their investment based on that business’ particular focus and pipeline.
Would this be practical? A similar tracking stock experiment that Genzyme tried in the 1990s didn’t work out (although we discussed at the end of this feature how the drivers were different and thus why that mightn’t be a useful precedent). There are certainly unanswered questions: who would market the units’ drug output, and how would they be compensated by, say, a corporate commercial arm? How would cross-TA ideas be fertilized between these units, and how would they efficiently share common R&D tools, as GSK’s CEDDs currently do?
Indeed, these are just the issues that put most other Big Pharma executives right off the idea of disaggregation. “I simply don’t agree with Mike [Owen] about breaking out into TA-focused units,” asserted AstraZeneca’s Executive Director, Development John Patterson in response to a question from IN VIVO Blog. “The viability of those units would thereby be called into question,” he continued, and areas likely to deliver value in the future, rather than today, might be overlooked and lack support. “I don’t think the break up model works if you think that the strength of an organization is what matters.”
That, surely, is the question: Is the Big Pharma organization, as it currently stands, adding enough value? Are common development organizations delivering economic value; are these giants combining the best of both large and small? Big Pharma PE ratios—down from the heady mid-twenties fifteen years ago to just 8 or 9 now—suggest investors don’t think they are.
Patterson acknowledged that “we’ve got to change,” and that “our investors are telling us as much with these PE ratios.” But granted, disaggregation isn’t the only (or necessarily the best) route to change; it’s just an attractive one given the talk about “learning from biotech” and given that it’s effectively the antidote to mega-mergers, now widely, if not always explicitly, categorized as value-destroying.
Patterson went on to argue that change is happening, but (at AZ at least) it’s happening from inside. “It may look like a swan on the surface, but there’s a lot of paddling going on underneath,” he told the audience in London. And although this transformation is relatively fast —“the atmosphere within Big Pharma management has changed hugely from three years ago”—it’s not happening overnight. If it did, “R&D productivity would disappear," Patterson declared.
But, with Mike Owen, let's not hold our breath for disaggregated pharma.