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BioPharm Executive: Too Big to Succeed?

9/26/2011 3:36:23 PM

Too Big to Succeed?

There's an interesting editorial in Pharmalot this week, by Pharmaceutical Business Research Associates president Daniel Hoffman. In it, he suggests that mass layoffs have changed pharma companies for the worse...perhaps depriving them of their most flexible and creative employees.

As he puts it, "the dishonest and unfair approaches the industry has taken to downsizing have left it with many people who are small-minded, politically savvy and safe playing....

"Many of the people remaining in operations deliberately choose not to ask big or important questions, lest their colleagues perceive any fundamental doubt as a threat. The truly adept manage to avoid taking a position on even the most mundane matters, lest someone else equate perceptive questions with disloyalty. Some even find it wise to feign ignorance concerning the elephants in various rooms. The combination of such simulated ignorance, together with the genuine version among the inexperienced survivors, makes the task of determining the smartest guy in the room a purely theoretical exercise."

Harsh. But with all due respect to the considerable skills of those who've managed to hold onto their jobs at pharma companies, there's probably a little something to this. One could reasonably argue that a first round of layoffs will disproportionately capture mediocre employees. But as rounds advance, that's no longer the case. And, of course, some of a company's very best employees may jump at a chance to take a generous severance package early on if they think they can do better elsewhere or are eager to launch out on their own. While the current economic climate probably means very few people are looking to grab some cash and launch their own biotech start-up, many of these talented employees have been shown the door nonetheless. Those skilled at survival are, by definition, probably not the biggest risk-takers.

The question is whether this will show up in a sycophantic corporate culture that favors little risk-taking or real independence of thought. It will likely take years before there is any definitive evidence. But we have a few interesting tidbits in the news this month that are worth pointing out.

Take the case of Merck. It is accelerating its planned layoffs, saying that eliminating vacant positions won't be enough. It's new plan will bring the total number of job cuts since its 2009 merger with Schering-Plough to 30,000. Yet at the same time, the company is putting $500 million behind two new venture capital arms. Now, it's tempting to view these as zero-sum decisions--when the company looks for early innovation, it looks not to its own people and institutions, but to outsiders with creative ideas. Surely this is a sign of a company that has lost its best people and can no longer innovate from within?

Perhaps. But consider a few other points. The R&D budget at Merck hit a record high in 2010, at $8.1 billion, and has only recently begun to come down. Merck's problem--one it shares with essentially every other pharma company--is that its R&D has become increasingly unproductive. The optimist in me believes that that trend may finally be reversing itself, but in the absence of clear evidence, management has to deal with the issues now before them.

The real problem may simply be that large organizations of all stripes tend to stifle rather than encourage innovation, and Big Pharma has gotten bigger over the last decade. Part of the challenge to innovation may come down to the changing mix of employees who have been spared the axe in multiple rounds of layoff. But much of it is just the inevitable aftermath of mega-mergers. As Sen. Eugene McCarthy once put it, "The only thing that saves us from the bureaucracy is inefficiency." Pharma companies are the opposite of our largest banking institutions--they have become too big to succeed. Fortunately, they have a good deal more incentive than our banks to fix the problem.

-Karl Thiel

Read the BioPharm Executive online newsletter September 2011.

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