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.