The Fall of Pfizer: How Big is Too Big for Pharma Innovation?

8/29/11Follow @xconomy

There are big companies out there—Apple, Google, Amazon—that most people today would consider innovative developers of new products. But can a company that seeks to create new drugs get too big to innovate? Is there something about life sciences that requires it to stay small if it wants to create?

The question has been on my mind for a while, but especially over the past few weeks since I read a riveting piece of journalism called “Inside Pfizer’s Palace Coup” by Fortune. This is basically a Shakespearean tragedy of mismanagement at the world’s biggest drug company. Some of these insights have been reported before in other places. But if you care about innovation in life sciences, and wonder why it’s been stagnant despite billions and billions in investment, this is a must-read.

Fortune‘s August cover story describes in detail how former CEO Jeff Kindler was under enormous pressure to lift the company’s earnings and stock price. When the company failed to come up with a follow-on hit to its $10 billion a year cholesterol-lowering drug, and the R&D pipeline didn’t deliver another option, Kindler felt compelled to grow top-line quarterly revenues through the $68 billion acquisition of Wyeth. That created huge organizational headaches that go with integrating teams of more than 100,000 employees around the world. Then there was what Fortune called “micro-micro management,” combined with crippling indecisiveness, second-guessing, messy office politics, and on and on.

There were so many layers of dysfunction in this story, I decided to ask a couple of biotech leaders for their own take on what was wrong. I got some fast, and eager replies when seeking comment, so this story clearly hit a nerve. Josh Boger, the founder and former CEO of Cambridge, MA-based Vertex Pharmaceuticals (NASDAQ: VRTX), tapped out a lengthy reply on his iPad while he was apparently relaxing in the South Pacific.

Here’s what he wrote, when asked if Pfizer got too big to innovate:

“I am a devout believer that size per se has nothing to do with innovation or its absence. Bell Labs was highly innovative for decades as part of one of the world’s largest companies. Merck was highly innovative from about 1950-1990. The key is culture, and you can throw away an innovative culture when you are small or you can drive it away when big. There are certain well-greased decline paths that larger companies often take that lead to stifling of innovation, but these are not inevitable. What the excellent and groundbreaking Pfizer article makes clear is that the arrogant and ignorant mismanagement of the motivations and rewards of the top leadership was at the core of Pfizer’s decline. It wasn’t about the failure of thousands but the failure of a few. Once low emotional intelligence takes hold in the executive suite, value destruction follows. Too often shareholders and advisors ignore or deprioritize the kind of values-based culture in which innovation thrives. They over-control and over-measure and reward the wrong behaviors in favor of short-term objectives. This is the cause of innovation decline, not bigness.”

Kleanthis Xanthopoulos, the CEO of San Diego-based Regulus Therapeutics, and an Xconomist, brought up some similar themes about the cultural problems at Pfizer when we spoke by phone last Friday. He has as good a perspective anybody, since his company is attempting some innovative work on microRNA drugs in collaboration with a couple of pharma giants—GlaxoSmithKline and Sanofi.

Regulus is still a small company, with 52 employees, seeking to grow to 60 by year’s end, Xanothopoulos says. The company clearly needs quite a bit of brainpower and financial horsepower for such a complex and demanding task, but after seeing what happens at so many big companies, he’s thinking carefully about how to grow the right way. Bigger certainly isn’t better when it comes to R&D productivity, and it might actually be counter-productive, based partly on some crunching Xanthopoulos says he did of Ernst & Young data on R&D budgets and drug approvals back in 2007.

“Clearly, you can’t industrialize innovation,” Xanthopoulos says. “You can’t do a linear increase of annual R&D spending, or throw a larger and larger number of bodies at a problem and expect to see higher productivity and better outcomes. It simply doesn’t work.”

The really big problem Xanthopoulos says he saw in the Pfizer story was one of constantly shifting gears to meet short-term financial goals. Life sciences experiments, by their very nature, take months and sometimes years to generate meaningful answers. It isn’t like a software version 2.0 that can be cranked out in a matter of months, or a couple of years. You can’t just say cancer drugs are hot one year and cold the next, and expect to get anywhere.

“Somebody with a bold vision would have to say ‘Here’s what we’re going to do, and we won’t deviate from it. We need five years or more for this to work out,” Xanothopoulos says. But that’s almost impossible, he adds, given the short-term earnings pressures, and short average tenures of Fortune 500 CEOs. “They don’t care or don’t have the time to care,” he says.

Regulus has its own belief, which says that the ideal R&D team should have about 60 to 80 members, capable of running six to eight projects simultaneously, with the support of 10 to 15 people in administration, and a network of outside contractors, Xanthopoulos says. It’s based partly on his own analysis of drug R&D productivity, but also on the concept from ancient Rome, in which small teams of centurions were effective in battle. If a team is smaller, it doesn’t quite have the resources needed to develop a new drug. Anything much bigger would be too unwieldy, he says.

Big Pharma, given that it’s already big, would be wise to follow this model, essentially having lots of lots of small, highly autonomous teams that operate with a light touch of coordination from headquarters, Xanthopoulos says.

I can imagine a system like that working at Pfizer, or any of the Big Pharma companies.

Jean Cui, medicinal chemist, and Martin Edwards, VP of oncology medicinal chemistry, Pfizer La Jolla

The latest headline out of Pfizer offers some support for this idea. Pfizer won FDA approval on Friday for crizotinib (Xalkori) for certain forms of lung cancer. By all accounts, this is an outstanding new advancement for cancer patients. On a recent trip to Pfizer’s La Jolla, CA research center, I met Jean Cui, one of the low-level medicinal chemists who did some of the critical early work on crizotinib. She started work on this project at a small team more than a decade ago at a little Bay Area biotech company called Sugen, which got swallowed up by Pharmacia in a merger, which was later swallowed up by Pfizer. Through all the various portfolio reviews and internal reorganizations, she fought for this program. She and the rest of her team stuck it out long enough to get a bit lucky, as researchers realized that this molecule was likely going to much more effective than originally thought.

It’s a story of clever science, perseverance, and a bit of luck. It all happened far away from Pfizer headquarters, and way, way below Jeff Kindler’s pay grade. The challenge for the next generation of Big Pharma leaders will be to build small, talented teams with people like Cui, give them the resources and time they need, plus some clear and ambitious goals, and get out the way.

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