Thursday, August 25, 2011

Dysfunctional Large Pharma

In the July 28 edition of Fortune magazine online there is a fascinating report by Peter Elkind and Jennifer Reingold with Doris Burke on Jeff Kindler’s rise to power at Pfizer and his subsequent fall from grace.  The reporters spent four months interviewing over 100 people including current and past Pfizer employees as well as colleagues of Kindler from his previous jobs at McDonalds where he rose from General Counsel to President of Partnered Brands. Kindler joined Pfizer at the beginning of its end as the pharmaceutical giant with Lipitor. When Kindler’s predecessor, Hank McKinnell took over as CEO in 2001, Pfizer’s stock price (corrected for splits) was $31. McKinnel was a businessman who took the reins from Bill Steere.  Bill Steere got his degree in biology and worked his way up through the Pfizer sales organization.  Under Steere, Pfizer acquired and marketed Lipitor and marketed azithromycin (Zithromax). Pfizer stock went from $2.00 to over $30.00. Under McKinnel, Pfizer brought in Zyvox through its acquisition of Pharmacia-Upjohn. The Pfizer stock went from $31 to $49 to $20.  Today, six years after Kindler took over, the stock sits at $18.

It is interesting to me that the successful CEO (Steere) was trained in science and worked in sales.  The two successors, neither of whom could be described as having advanced Pfizer from a business perspective, were a businessman and a lawyer – neither with any science background.  While this is not necessarily a detriment, I always worry about that in the key leadership position of a science driven business like pharmaceuticals.  My pharmaceutical CEO idol is Roy Vagelos the ex-CEO and chairman of Merck – a trained physician scientist.

The Fortune article goes into great detail exploring the political machinations behind the replacement of Steere by McKinnel and then McKinnel by Kindler.  Steere is characterized as the Wizard of Oz pulling strings behind the curtain to manipulate the characters involved and get the result he wanted.  These sorts of politics seem rampant in large corporations where the powerful frequently have large egos that overmatch their abilities.

One counter-example is Iain Buchanan.  Iain is still one of the best CEOs with whom I have had the pleasure of working.  He led a small biotech, Novexel.  Iain learned the science enough to make key strategic decisions and, more importantly, he understood his limits and listened to the advice of the experts he brought in for that very purpose.  Listening is frequently not a characteristic of heads of large corporations and was certainly not among the descriptions of Jeff Kindler in the Fortune article. I am sure there are also people like Iain in key positions in less dysfunctional large corporations.

Of course, we can’t blame the CEOs for the failings of an entire industry.  The large pharma model just seems to be outmoded.  Blockbuster drugs are now coming too infrequently to support the bottom lines of any of these behemoths.  Most of these giants are making their numbers by slicing divisions, including large segments of R&D, and even by selling off large parts of their business.  Pfizer, for example, now plans to sell off a number of non-pharma businesses like animal health and consumer health to bring down their bottom line and concentrate on ethical pharmaceuticals.  Whether this will be enough remains to be seen.  But clearly, shrinking is, from my viewpoint, the only positive way forward for these large companies.  If they shrink enough, maybe antibiotics will be an attractive business for them again.  Getting small might also help avoid the kinds of political shenanigans and manipulative behavior that apparently went on at Pfizer and was reported in such detail by Fortune.

Looking at all this from where I sit, in order for us to think small about antibiotics, we still need to solve the phase III problem.  Outside of mid-size companies (Cubist, Shire) with the cash on hand to support phase III trials, the smaller, private companies are still stuck having to partner with a larger company or with going to the public markets to fund these trials. A number of new and valuable antibiotics are being discovered and developed at such small companies. I don’t think we should count on large pharma to pull us out of this hole.

Pictured below are Jeff Kindler, Hank McKinnell and Bill Steere.

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