Pfizer Channels Economist E.F. Schumacher

Okay so how 'bout that for an esoteric title?

Permit IN VIVO to flash back to the 1970s for a few minutes. In 1973, British economist EF Schumacher published his landmark series of essays Small Is Beautiful during the midst of an energy crisis and a raging debate about the risks of nuclear power. Among the many notable passages in the treatise is this gem:

“Even today, we are generally told that gigantic organizations are inescapably necessary; but when we look closely we can notice that as soon as great size has been created there is often a strenuous attempt to attain smallness within bigness.”

Schumacher, who worked with John Maynard Keynes and John Kenneth Galbraith, didn’t aim his book specifically at biopharma, but it’s striking how relevant the concepts proposed – especially the notion that “the fundamental task is to achieve smallness within the large organization” – are to our industry. As it faces its great R&D stagnation, Big Pharma is on the undeniable quest to manage size, creating smallness within the bigness in hopes of improving upon its innovation track record.

In their R&D strategies, GlaxoSmithKline, AstraZeneca, and Sanofi Aventis are all at different places in terms of promoting the small is the new big concept, with GSK leading the charge. Years into a radical R&D reorg, Glaxo continues to evolve its model, with the goal of integrating its biotech-like drug units with the respective downstream medicines development centers to create end-to-end business groups.

Beyond R&D, there’s also the raging “focus versus diversification” debate, which gained new significance after Bernstein Research’s Tim Anderson published a March 14 note suggesting the world’s biggest pharma was mulling the heretofore unthinkable: shrinking from its outsize $67 billion revenue base to a much more modest—and manageable—base of $35 to $40 billion. ( For those keeping score –and since March Madness has begun who isn’t?—it’s a question IN VIVO explicitly raised two years ago in “Why Doesn’t Pharma Get Smaller?”)

Say what? Didn’t Pfizer buy Wyeth after jettisoning its own consumer health program in part to lessen its exposure to high risk-- and expensive to develop--innovative therapeutics. Given Pfizer’s lack of immediate success, do we now throw the idea of the industrial pharma out the window?

Maybe not. Just days after the Bernstein note came news that Eli Lilly wanted to bulk up its own animal health division via the acquisition of J&J’s Janssen Animal Health group. And there’s no doubt GSK, Sanofi, and Novartis remain enamored with the diversified approach: each has formidable consumer health care operations and emerging markets strategies relying on selling branded generics. Novartis has of course pushed into commodity generics as well, through Sandoz, and still manages to notch innovative R&D successes: If the launch of the first-in-class oral multiple sclerosis drug Gilenya wasn’t proof enough, look at last week’s announcement that the pharma’s Phase III Janus kinase inhibitor INC424, partnered with Incyte, has wrapped a second pivotal trial and is on track for EU and US regulatory filings by Q2 2011.

Make no mistake. Pfizer’s ruminations on the spin-offs of its four non-traditional pharma businesses – as well as its Established Products Unit – seem unlikely to spark an “hey everybody, let’s get small” moment. That’s because there’s still plenty of risk in the high flying R&D model espoused by companies like BMS (and Amgen). One only has to look at new mechanisms like UnitedHealthcare’s Cancer Care pathway program, which bundles payments to doctors using evidenced-based medicine guidelines, to see how changing reimbursement practices could make new product launches tougher.

So maybe the lesson isn’t that everybody should get small, but some companies definitely ought to get smaller. If the words of one of Pfizer’s top executives, head of R&D Mikael Dolsten are any guide, the big pharma’s management is coming ‘round to this way of thinking. Speaking at Barclay’s Capital investor conference March 17, Dolsten emphasized: “We need...to understand what is the maximum value for those businesses, which of them actually have a higher value by being inside Pfizer…and which would...create more value for shareholders outside the company."

Let’s suppose Schumacher is right and “the large-scale organization is here to stay.” As he points out in Small Is Beautiful that also means “the stronger the current, the greater the need for skillful navigation.” For biopharma this entails managing size appropriately to restore R&D productivity but in such a way that it is possible to mitigate the risks associated with health care reform and payor decisions.

At the end of the day, a behemoth the size of Pfizer may just be too damn big to be flexible enough to pivot in a rapidly changing health care environment.

Is Big Pharma Ready For Minibusters?

Some things are easier said than done.

That’s the opinion of one biotech CEO commenting on claims by some large drug companies that they are moving towards smaller, more targeted drug products. While the strategy may sound good, they can’t do it, he says.

“Once you’re invested in a big model, you’re invested in it,” the biotech CEO maintains. The biotech CEO based his arguments on two key points:

1) The enormous scale of large pharmaceutical companies invested in R&D through to sales and marketing dictates they must sell large products aimed at broad patient populations.

2) The long and established blockbuster culture of large pharmaceutical companies creates an imposing hurdle to retooling business strategy to focus on smaller, niche products.

On the first point, the biotech CEO compared the total size of an average biotech company to just one product sales force of a big pharma company. On the second point, he said size impedes agility. “Big companies move slowly.”

In addition, he says a culture of assumed successorship—“my father worked there, I work there, my son will work there”—is a challenge to creative thinking and leads to complacency.

We’ve argued that the creation and implementation of FDA’s postmarket powers in the form of risk evaluation and mitigation strategies (REMS) means companies will be pushed more towards well-defined, marketable populations as a result of tighter controls. To read more, click here.

It’s not that the blockbuster drug, one with a billion dollars in annual sales, is dead, but those products will become increasingly rare and will be found in more specialty markets as opposed to primary care.

That means more products with annual sales in the $200 million to $500 million range, or minibusters.

So who is ready for the move towards more targeted, minibuster products? Well, biotech, of course.

The biotech CEO says the size and culture of biotech companies allow them to be more focused and reshape their strategies without scrapping the overall framework of their businesses. In other words, more agile and less exposed to complacency.

That leaves a conundrum for large pharmaceutical companies. It’s not enough to downsize and shed jobs, he maintains. That just reduces your size and cuts costs. The expectations from shareholders will remain the same. The question, he says, is “now what do you do?”

He highlighted blockbuster products as the great “gift” and “curse” of Big Pharma. It brings great long-term success to a company but also conditions management to overly rely on that product, focusing little attention anywhere else.

Can pharma companies make the minibuster model work? The jury is still out, and will be for quite some time. But at least one executive is skeptical.

GE's Abbott Indigestion

Now that GE has pulled out of its proposed $8.13 billion all-cash deal for Abbott Diagnostics (ADD) and Abbott’s point-of-care testing business, will anyone else step up to the plate?

Perhaps the logical suitor is P&G, because from what we hear, only the makers of Pepto-Bismol could have treated the massive indigestion the parties were experiencing.

We believe the explanation that it fell apart because of the complexities involved in prying them—ADD, specifically—out of Abbott.

Some analysts have suggested that compliance issues and issues over the transfer of licenses also helped scotch the deal. But while there were literally thousands of transition services agreements that the parties were going to have to enter into, in the end, it appears that the degree to which ADD is integrated into the rest of Abbott, and how difficult it would therefore be to deliver it to a company that perhaps has a different culture, very much surprised both sides. And that pain was going to persist over a protracted integration period—“a lot longer than three years,” according to one insider.

What’s puzzling is that this would not be the first time such a diagnostics business was sold lock-stock-and-barrel to a health care generalist (Siemens, for example, managed to buy Bayer Diagnostics and immunoassay player Diagnostic Products last year). Nor is GE inexperienced at handling such moves (there's too many potential links to choose from for this one to even begin to know where to start).

So we have to ask: Were the cultures an obviously terrible mix? That’s very possible, and yes, it'd be interesting to contemplate what those differences may say about each company. We’ve also heard that the first marching order for Abbott now will be to improve the level of service to its diagnostics customers, which of course suggests GE may have uncovered something specifically troubling during its preparations.

In any event, the take-home is it’s unlikely that Abbott will be looking for another buyer for those businesses. And with the exception of Roche, which unlike Abbott, views diagnostics as intimately connected with its drug development ambitions and personalized medicine, there aren’t really any very large in vitro diagnostics (IVD) players left from whom GE could wring out efficiencies, exploit scale, and improve productivity in the IVD market the way it expected to with Abbott.

It may continue pursuing smaller, more targeted acquisitions in IVD and, like Abbott, certainly in molecular diagnostics. And with some of the premiums companies offered recently to companies with molecular content, like Biosite (63%, measured from the time of Beckman-Coulter’s initial offer for it before Inverness finally landed it), TriPath (58%, from Becton Dickinson), and Ventana (43% at the time of Roche’s recent hostile tender offer of $75 per share), an exit via acquisition is nearly impossible for those companies to resist at today’s prices, leading to a wave of consolidation that might only pick up more steam, now.