Warning: Don't Let Bio-Euphoria Distract You From Being Disciplined

By Allan L. Shaw, a five-time public company CFO (e.g., Serono & Syndax) and has served on five public boards, which included the chairing of two audit and two compensation committees.

“Innovation should go well beyond the science and apply to all aspects of an organization’s operations.”

It has been a record-breaking period for the industry in almost every category, characterized by robust performance, exciting growth prospects, and hope for the patient community. In the backdrop, the shift in Big Pharma’s resource allocation has fueled hundreds of billions of transactions, driven by its desire to improve operational and capital efficiency, reflecting:

• increased emphasis on external collaborations and a de-emphasis on internal research, as illustrated by the dramatic downsizing of Big Pharma research centers such as Roche’s Nutley facility and the increasing presence of Big Pharma in research centers aligned with universities, such as in Kendall Square and the Upper East Side of New York City.
• changing focus on depth (e.g., what a company is especially good at) as opposed to breadth (e.g., “jack of all trades, master of none”) as illustrated by the GSK-Novartis business exchange of their respective oncology and vaccine portfolios.

Essentially, this shift recognizes that smaller, more nimble biopharma companies are more efficient in the research and development of innovative medicines. Collaboration is also key to this shift; alliances play an important role in enabling capital/time-efficient development that leverages core technologies/ competencies while allowing for the prospect of developmental synergies. And finally, scale (e.g., the wherewithal to enable and facilitate more studies, indications, combinations, and headto- head comparisons) will be a key success factor to achieving an advantage in less-differentiated markets, particularly from clinical, regulatory, and patient-access/payer perspectives.

In such a “land-grab environment” where everyone is a target and capital access is easy, there is an inherent risk that complacency will set in. This is particularly problematic, as it is always important to remain strategically and operationally focused and financially disciplined, especially in an environment where performance is not the only factor that could attract the attention of activist investors (e.g., Allergan vs. Pershing Square/Valeant). Given the increased scrutiny on resource allocation as a driver of value, I would like to offer some suggestions concerning several high-impact focus areas that require continual assessment and recalibration:

• Portfolio management: optimization and prioritization are critical as portfolio activities fundamentally transcend capital allocation decisions across an organization.
  • Differentiation is critical for success in a changing commercial landscape. This necessitates emphasis on innovative targets for unmet patient needs. At the top of the consideration hierarchy for all developmental candidates are fundamental questions, such as “What is its comparative effectiveness to the standard of care?” and “Is there a strategy for developing the value proposition for new drugs?” Given the correlation to long-term value creation, it is imperative to assess a product’s commercial viability and ensure the target product profile (TPP) is compatible with these objectives.
    • As part of the portfolio assessment, it is important to consider potential indications and regulatory pathways, views of KOLs and patient advocacy groups, and the methods that managed care will employ to evaluate and reimburse for the product. These activities provide decision support. They facilitate a better understanding of the value proposition and/ or identify issues and potential pitfalls (before significant investments are made).
  • We must remain mindful of the very fluid competitive landscape, particularly with respect to development efforts. There is an increasing prevalence and clustering of innovative activities concentrated on common targets, reflecting capital inefficiency. This dynamic is best illustrated by the recent ASCO 2015 conference that highlighted the industry’s focused developmental efforts on a limited number of cancer targets. This “lemming mentality” will inevitably create self-inflicted wounds as the innovative premium is cannibalized by alternative products that may even be perceived as inferior. Solvaldi and Viekira Pak are classic examples, highlighting the pharmacy benefit managers’ (PBMs) emerging purchasing power and emphasis on minimizing current-period costs over healthcare system costs. This underscores the need to better correlate resource allocation to market forces (e.g., competitive landscape and patient needs) to better inform and optimize drug development activities. Otherwise, we are sowing the seeds to accelerate the commercial marginalization of truly innovative science.
  • Addition by subtraction: capital-efficient organizations “kill” programs early and establish pipeline decision mile markers along with ROI metrics. There are too many instances of developmental programs being maintained as well as rationalized for the wrong reasons (e.g., emotional attachment, cajoling to the investment community). Unfortunately, this does not change reality or the underlying fundamentals and will only result in value destruction and lost credibility.
• Cost structure can be a lightning rod for self-inflicted wounds, and it needs to be proactively challenged.
  • Innovation should go well beyond the science and apply to all aspects of an organization’s operations. Besides the obvious need to continually benchmark operational performance against your peer group to identify areas for improvement, there are inevitably other cost-effective ways to achieve business objectives. Simply put, it is about working smarter, not harder, and overcoming institutional bias to effectuate change. This is obviously much easier said than done and best exemplified by a riddle I often tell my staff (in my life as a CFO) before embarking on a project: “Why did the auditor cross the road? Because he did it last year.” In a fast-moving, evolving environment, it is important to challenge the status quo and encourage out-of-the-box thinking.
  • In my opinion, commercial operations provide an area of lowhanging fruit that could benefit from resource optimization, particularly in an environment where detailing is going the way of the dinosaur, as physicians become less responsive to expensive field sales forces and a regulated marketing environment. Recognizing and embracing this paradigm shift will yield costeffective solutions to engage stakeholders, such as innovative marketing programs including digitization strategies (e.g. edugaming) to reach physicians and patients.
• The balance sheet is a strategic tool, not a scorecard. Continue to improve capital allocation and leverage the ecosystem to stretch capital and unlock value.
  • Retain discipline with capital deployment. Organizations are generally more effective with capital deployment when they have less as opposed to more. Do not fall into this trap; it is critical to remain strategic and smart about resource allocation because your “pot” may not be as large in the future. It is foolhardy to take things for granted, such as easy capital access, and assume the party will continue.
  • Maintain alignment of operating activities with strategic objectives:
    • Stay focused and committed to your core expertise, and understand your differentiation.
    • Leverage the vast capabilities of the ecosystem, and avoid recreating the wheel. Remember, the shortest distance between two points is a shortcut — collaborate, collaborate, and collaborate whenever possible.
  • For public entities, consider utilizing your stock or “second currency,” particularly at prevailing valuations, to build upon your capabilities and mitigate risk.

The bottom line is that it is important to run your business unbridled by the industry hubris. At the same time, remember it is impossible to determine — much less control — how long the capital market spigot will remain open or if the parade of M&A transactions will continue at its frenetic pace. While there are no guarantees, particularly given inherent industry risks, capital-efficient organizations and stakeholders (including patients) will be rewarded for cost-effective development/accelerated time to market. Remember how you got here, and do not lose your focus or discipline during this period of “bioeuphoria.” Stay true to your principles, and do not succumb to temptation; there are already too many people drinking from the punch bowl. The optimal deployment of organizational resources will inevitably become an increasingly important metric in differentiating management’s performance when the music stops.