BioWorld Today Columnist
People are still asking about the take-home message from this year's H&Q (known to newbies as the JPMorgan Chase Healthcare Conference).
Here's my take on it: the old H&Q biotech lovefest is gone forever. Investors much prefer high double-digit EPS growth to sexy science. Even powerhouse Genentech knuckled under to that pressure by emphasizing net earning growth for shareholders as the driver behind its aggressive expansion.
The leading light of the industry seems to be chasing after the conventional big pharma model just as many of the big pharma firms are publicly pursuing change.
Pfizer recently announced additional 10 percent cuts of its workforce, closing factories and research centers and reducing its sales force dramatically. Merck, Bayer, and Wyeth are in the same mode, making significant changes in their selling models and how R&D operates. Their goal: to become high-performance machines that can survive and thrive in the increasingly cost-constrained healthcare world.
That's okay-but are they really making significant changes in how they conduct their businesses?
Well, maybe not. They are all still focused on being fully integrated companies, doing everything from discovery through commercialization (though much of that discovery happens in the labs of partners and acquired biotechs). Stock buybacks and layoffs don't indicate a new strategic approach to the drug business.
In the meantime, federal and state legislatures have healthcare costs firmly in their crosshairs, egged on by essentially everyone except PhARMA and BIO.
Perhaps more importantly, big changes are afoot in the global business sector, with entrepreneurial folks using strategies learned in high tech to create new business models in healthcare to compete with our dinosaurs.
The math will get you every time
Of course, when you report a 65 percent increase in earnings to $2.11 billion, you probably feel pretty comfortable that you have the right strategy. But Genentech is not exempt from the mathematical problems that plague its big pharma brothers.
How do you keep growing a big number by high double digits?
Perhaps by having the smartest R&D organization around. But how many truly excellent scientists and managers can you find? How do you run a company with 10,000 people without drowning folks in red tape?
Once your layer of VPs/senior VPs/executive VPs is inundated with people with decades of big pharma experience, how do you maintain that entrepreneurial spark that drives success?
By spending big bucks to acquire innovative companies and product candidates? Okay, now it's starting to sound just like the rest of big pharma.
Are we doomed to follow in the footsteps of our pharma forefathers? Is a fully integrated pharmaceutical company the only way to go?
Feeling fairly cranky about all this, I headed to the Drug Delivery Partnerships Conference. I heard an inspiring talk on how one executive took his team down a completely different path from everyone else in his industry and delivered winning performance.
It was Billy Beane, general manager of the Oakland A's baseball team.
Beane found himself in an established industry with clear measures of success-winning pennant races and the World's Series-and established methods of how to pick the best "assets".
Payroll at the top-spending teams had reached astronomical levels. The Oakland A's were pretty far down the list of big spenders. Beane says, "We were losing $15 million a year. If we kept doing business the old way, we were doomed. We couldn't keep spending to win."
He had to identify undervalued assets that could create wins. Conventional wisdom said that winning was based on the "gut instincts" of scouts and coaches, and the numbers that mattered were home runs and stolen bases. The problem is that market forces pushed up salaries for those players, putting them out of reach.
Beane pulled together a team of Wall Street quantitative analysts, folks with no existing prejudice about which numbers, other than home runs, correlated with success. They set out to find numbers that would predict outcomes in a sport that everyone believed was based on luck and intuition.
Turns out that while stolen bases are exciting to watch, it was "small ball"- getting on base, even just first base, and advancing the other runners one base at a time-that won games. Sacrifice bunts, a mainstay of the old-school "small ball" philosophy? Just wasted motion. The numbers also uncovered new ways of identifying undervalued recruits.
Beane found himself in the unenviable position of trying to change corporate culture drastically, getting existing team players to go against their ingrained instincts to do things no other team was doing.
This new strategy paid off for Oakland. Between 1999 and 2006, Beane's $418 million total payroll during that period produced 751 wins. The New York Yankees and their $100 million-plus annual payroll generated 777 wins. Cost/benefit analysis suggests the A's have hit upon a great way to thrive in a cost-constrained environment.
It's clear that the rest of baseball has paid attention to the A's success. "On base" has become the highest paying statistic, while "bases stolen" now generates the least income for players. Of course, the Red Sox still paid $50 million for "first right to negotiate" with a new pitcher ..
Forget worrying about disruptive technology-think about disruptive business models. Will Merck and Pfizer beat Genentech to the restructuring punch? Is it possible to wean execs away from their singular focus on Wall Street's wishes?
Another thought-we all believe it's not possible to predict product winners and losers. Maybe we should set the quantitative geeks loose in biopharma and see what they find when looking objectively at the numbers.
We've talked a lot about new models for early-stage players. What we really need is a new model for our established companies. Change or die.
For a great story about how Billy Beane and his gang rewrote baseball strategy, read Michael Lewis's "Money Ball." n
Robbins-Roth, Ph.D., founding partner of BioVenture Consultants, can be reached at firstname.lastname@example.org. Her opinions do not necessarily reflect those of BioWorld Today.