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Back to School 2007: Innovation & leadership

Back to School Issue

Over the past two years, Back to School has been exploring the relationship between innovation and the economic returns from drug development and the creation of patient value.

These discussions have argued that as pricing power wanes, a broader definition of “innovation” is required to manage economics throughout the value chain, from discovery to clinical development and into the marketplace, along with regulatory transformations, so that true innovation results in the kinds of returns commensurate with the risk involved.

This year, the Back to School Commentary expands the discussion to explore the relationship between leadership and innovation. This 15th edition proposes to raise some issues about the leadership required in the drug industry - which now arguably combines biotech and pharma - in order to reclaim the mantle of innovation and be paid for it.

This discussion assumes leadership in science and technology is not sufficient. Indeed, one can argue that self-congratulation about innovation cannot be justified unless it extends to corporate management, governance, communications and public policy.

Moreover, Back to School will argue that innovation in the biopharma space will not ultimately be measured by the new scientific knowledge embedded in pills and biologics. Instead, innovation will be measured as the creation of “New Value” that the marketplace understands and recognizes.

To start the discussion, Back to School offers an initial agenda for biopharma’s leadership - small and large.

First is to face the marketplace, and understand the nature of New Value.

Second is to rehabilitate the industry’s public face to make the marketplace more receptive to biopharma’s creation of New Value.

Third is to disrupt the industry’s thinking as needed to create New Value.

In aggregate, Back to School would argue that innovator leadership must be measured by their success in directing their companies to create New Value, in their making a powerful public case in the marketplace for the authorship of New Value, and, ultimately, being paid for the patient value they have created.

For the most part, Back to School does not name names. This year, all of BioCentury’s interviews were off the record, as the goal is not to point fingers, or to help others point fingers. It also would be wrong not to acknowledge that many individuals in management, science, finance and public policy are searching for ways to keep innovation at the forefront of the biopharma enterprise. The objective here is to provoke discussion about the nature of value created in the biopharma space, and how leadership is a complex enabler or disabler of this effort.

As part of this discussion, Back to School will entertain the question of whether the drug industry has reached an inflection point where the presence or absence of management innovation must inexorably have a knock-on effect on biopharma’s appetite for innovation in science and technology.

This is not too impertinent an idea in 2007, which may be seen as a transformational year in which both pharma and biotech now are looking for new bellwethers to set the industry’s agenda going forward.

The situation

In the beginning, biotechnology thrived on an idea: take brilliant science and combine it with risk-taking investors and managers to solve important unmet medical needs. This was certainly the case when biotech lived apart from big pharma in the 1980s and 1990s, and basked in the spotlight of the genomics bubble.

Now the media portrays biotech as the source of expensive drugs that no one can afford. And the public’s image of the drivers in solving the world’s pressing healthcare problems resides in the faces of Bill Gates and Michael J. Fox. There is something profoundly wrong with this picture.

For starters, the malaise of big pharma has finally extended into the biotech space.

In biotech’s early years, its problems revolved around lack of money and lack of infrastructure. Now big biotech companies are buying back shares to prop up EPS and returning to shareholders money that they can’t profitably invest in R&D. In the public’s eye, the bellwethers increasingly look just like big pharma, where leadership conventionally boiled down to who had the biggest market cap or the most recent blockbuster.

Leadership defined in this way brings the catchall problems that come with scale. One is the trap of fixation on immediate EPS. Second, the thrill of the chase that characterizes startups has been replaced by a kind of dull caution and PR-speak that only confirms just how far adrift these companies and managers are from their roots.

Amgen Inc.’s restructuring in the face of restrictions on the use of erythropoiesis-stimulating agents - cutting headcount, infrastructure and R&D while promising to maintain EPS of at least $4 - looks like the cookie-cutter remedy for companies that have put a little fat on their bones (see BioCentury, Aug. 20).

Meanwhile, bellwether pipelines are coming to resemble those of big pharma, as they spend more time protecting and extending existing franchises. About one-third of the pipelines at Amgen and Genentech Inc. are line extensions of marketed products - not a bad thing, but by definition not cutting edge.

More important, one doesn’t discern that biotechnology now gets any particular credit for being the source of new treatments for unmet needs; rather, it is the source of “expensive biotech drugs.”

Thus, the biggest names are embroiled in pharma-like problems - protecting their franchises in biologics, under fire over reimbursement issues, and fighting tooth and nail to prevent their own products from being compared with each other. Once these players became big commercial enterprises, it is hard to see how they would feel obligated to be the standard bearer for embracing risk.

This has caused dismay among many long-timers in the industry, who recall when the larger biotechs were the drivers of new scientific approaches and were widely regarded as the antithesis of the faceless and heartless corporatism of big pharma. By definition, these bellwethers were the ones looked up to for both scientific and moral leadership. Indeed, it’s easy to forget that it was not so long ago that biotech companies wore the white hats in Washington.

Arguably, neither is any longer the case. Investors have been selling AMGN and DNA, while the larger cohort of biotech names are seen as collectively holding more potential value than the pipelines of the two biggest names in the biotech landscape.

At the same time, the mantle of moral leadership has been lost, as big biotech’s interactions with the public are undifferentiable from those of big pharma.

Disintermediation

One sign of this malaise is that the “drug industry” has no public face. It is unclear who will pick up the mantle of a Roy Vagelos, a Bob Swanson or a George Rathmann, who were able to articulate vision and values while keeping an eye on shareholder interests.

And although it was built on the fount of entrepreneurism, the biotechnology industry has no Google of its own, which creates a dynamic image for the public while forcing its peers to respond to its efforts to disrupt the competitive landscape.

The pharma world mostly has anti-Googles - diminished franchises where some of the world’s once most respected household names now are excoriated and brands are all too often built around a product and not its creator.

Meanwhile, the biopharma world has been disintermediated from the public. As the drug industry has defined its market as regulators, payers and financiers, it has left a vacuum for others who would speak to, and claim to speak for, the marketplace of patients.

Currently, the vacuum is the playground of the likes of Iowa Sen. Chuck Grassley, Cleveland Clinic cardiologist Steven Nissen, FDA gadfly David Graham, and every other self-styled consumer advocate and trial lawyer in the U.S. They now are being joined by a host of Democratic Party presidential candidates who are voicing simple nostrums about universal healthcare.

It is these other voices setting the agenda, leaving the media awash in accusations about affordability, access, conflicts of interest and safety.

In this setting, it is not surprising the public’s image

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