Right now, enthusiasm in the pharma and biopharma markets seems to be running high. My colleague Rob Wright, chief editor of Life Science Leader, recently returned from the JP Morgan Conference in San Francisco. One of his takeaways was the current level of excitement in the industry. Several sources, he says, noted we can expect to see major biotech deals inked in 2015. Biosimilars? Declining revenue? Recession? Patent cliff? Damn the torpedoes! Full speed ahead!
But while enthusiasm is good, we must be careful not to let it cloud our business decisions. One of the best articles I read last year was from the July 2003 Harvard Business Review, titled “Delusions of Success: How Optimism Undermines Executives’ Decisions.” The advice is valuable and timeless. Simply put, overconfidence can often lead to poor decision-making.
This problem is more common than you might think. The authors note that 70 percent of new manufacturing plants in North America close within a decade, and 75 percent of mergers and acquisitions never pay off. Even efforts to enter new markets, a growth strategy for many pharmaceutical firms, end up largely unsuccessful.
A key observation in this article was the role of flawed decision making. In the grip of what the authors call the planning fallacy, managers base decisions on “delusional optimism” — overestimating benefits and underestimating costs. Consequently, they have an attraction to initiatives that are unlikely to satisfy the budget or realize expected returns. For example, the article discusses how a new computer adopted by Oxford Health Plans to better process paperwork ultimately resulted in problems that caused a 63 percent drop in the company’s stock price. Another example was Union Pacific Railroad’s purchase of Southern Pacific, which resulted in traffic issues, lost cargo, and massive delays.
Of course the life sciences industry is not immune to the concept of delusional optimism. I’m sure most of you can cite your own examples of when this affected a previous project you were working on. And as the amount of outsourcing in the industry increases, so too does the potential for flawed decision making. After executing an outsourcing model for a long period of time, overconfidence could seep into a sponsor company’s leadership. Hubris could blind the company, causing it to pay less attention to the quality, reliability, and regulatory knowledge of it partners. The results, of course, could be disastrous.
Helping you avoid any disasters due to overconfidence with outsourcing is one of the purposes of this CMO Supplement. We want to help you make the right decisions by keeping you informed of best practices and giving you access to insights from experienced industry experts. For instance, in the pages that follow, you’ll find informative articles giving you advice on choosing a CDMO and finding capital funding.
Beyond this supplement, we’re endeavoring to continue to bring you exclusive and impactful outsourcing content via our Outsourced Pharma West Conference & Exhibition. The standing-room only sessions at our 2014 event prompted us to schedule two of these conferences this year, one in San Diego in August and a return engagement in San Francisco in November.
No matter what stage you’re at with adopting an outsourcing model, it’s always good to occasionally take a step back and reevaluate your status quo. Hopefully, this supplement and our conference can help you with that process.