Agents Of Change

IT IS FAIR TO SAY the pharmaceutical industry faces the kind of dilemma that leaves it little choice other than to implement fundamental change. Its reversal of fortune since the 1980s and '90s can be measured in the drop in the number of significant new drugs coming to market, increased threats to profitability, and a nearly heroic fall from grace in public opinion as a result of concerns over the safety and price of drugs.

It is also obvious that big changes are under way, given the raft of plant closures, staff reductions, and top management departures in recent years. It is a familiar scenario. Much of what is taking place is reminiscent of the reengineering wave that hit almost every other major industrial sector, including computers, automotive, and chemicals, about 10 years ago.

"From my point of view, the real world has caught up with the pharmaceutical industry," says Michael Hammer, president of Hammer & Co., a research firm that runs training seminars on reengineering. With James Champy, Hammer coined the term "reengineering" in their 1994 book, "Reengineering the Corporation." He sees the sector as having matured to the point where quotidian business demands no longer allow the extravagance of the corporate model where "you hire geniuses, lock them in the laboratory where they come up with great compounds, and charge whatever you want forever."

The innovation boom in pharmaceuticals of the past two decades, Hammer explains, has spawned a formidable generics industry as well as increased competition among big drug companies. Meanwhile, a complex customer base consisting of individual patients, health care providers, and government programs—each with a different set of demands&mdashis gaining strength. "As industries mature, this is what happens," Hammer says. Now the drug companies are scrambling, he says.

Leadership is essential at this juncture, according to Hammer, and it is not surprising that, in a significant break from tradition, it is coming from people with experience outside of the drug industry's mainstream. He points to Richard T. Clark, who was appointed chief executive officer of Merck & Co. last year. Clark, Hammer notes, has experience in manufacturing and in running Medco, the distribution business Merck spun off in 2003. "He has managed a low-margin business," Hammer says. "That has a lot to do with his prospects for success."

New blood is coming in at other levels of management as well. One of Clark's first moves was to appoint procurement manager Willie Deese, who joined Merck in 2004, as president of Merck's manufacturing division. "Willie Deese is a professional manager," Hammer says, noting that Deese had materials management experience and managed a plant at Digital Equipment Corp. before starting work in the drug industry 15 years ago at SmithKline Beecham. "He's not a drugs guy," Hammer says. "He's an operations guy. He transformed procurement at Merck, where he instituted real discipline."

Deese is an advocate of lean manufacturing and of Six Sigma, practices widely used across multiple industries to reduce waste, cut operating costs, and ensure quality. He is looking to do the same in drug manufacturing, where he is currently overseeing a significant downsizing of Merck's plant operations.

By 2008, the company will have closed five of its facilities in the U.S., Canada, and Japan, scaling back operations by nearly 20% and leaving the company with 26 plants worldwide. The plan calls for the elimination of 7,000 manufacturing positions.

Deese agrees with Hammer's assessment of the industry. "I saw the computer industry move from systems that were closed to systems that were open. Everything became very competitive," he says. "The external environment and the customer base dictated the need to be more competitive and cost-conscious. That's what's happening in pharma. All industries evolve to being more competitive."

And more efficient. Under a program called the Merck Supply Strategy, Deese is working to hit a set of targets that include reductions in the cost of goods, services, and inventory.

A key means of downsizing global operations, according to Deese, is simply the rightsizing of individual plant operations, making them what he calls fit for purpose. "At Merck," Deese says, "we bought the equipment that tended to have the greatest capability. We now are seeking to determine what is needed to achieve the quality level that we need." He says the company is evaluating production technology alternatives including continuous, rather than batch, processing.

Merck also plans to increase outsourcing. Deese emphasizes, however, that the company will take a long-sighted approach, working with partners with which it has a track record of 10 years or so. "If you look at us and most of our competitors, outsourcing has been serendipitous if you are charitable, and reactive if you're not. Going forward, our approach will be structured and planned." Third-party sourcing will be figured into a life-cycle value equation for each product.

Life-cycle planning is also reflected in a new Merck organizational structure aimed at increasing communication between drug development and manufacturing. "We took the novel approach two years ago of bringing those two organizations together," Deese says. "Now, from Phase III clinical trials to launch, they are the same organization under the umbrella of manufacturing." The group is called Global Pharmaceutical Commercialization.

Merck is also striving for greater communication between manufacturing and early-stage development in what Deese describes as an "end-to-end process" of product life-cycle planning. "We are defining the goals and objectives for each product early on and working in an innovative, collaborative way," he says.

Deese estimates the changes in production processes have cut the manufacturing investment required to bring a product to market by at least 20%.

Merck, he adds, is trying to implement permanent change by instilling a culture receptive to work-process redesign. "We have approached this from the perspective of understanding the human dynamics of change," he says. "This is what allows change to be sustainable over time."

RATHER THAN modifying how it manufactures, Novartis set out to change its discovery and development process when it opened its headquarters for the Novartis Institutes for BioMedical Research in Cambridge, Mass., in 2003. NIBR, housed in the former New England Confectionary Co. candy factory, was established to boost R&D innovation in a location where it could tap the brainpower of one of the world's most thriving science and health care hubs. The company then hired Mark Fishman, a physician and a professor from Harvard Medical School, as president of NIBR.

Fishman says he's learned a lot over the past three years. "Mostly, I learned how to make drugs," he says. "I came from a background where I had no explicit knowledge of it. And I came with a strategy that I held to, which is to choose projects on the basis of critical unmet medical need and around scientifically tractable mechanisms."

Key to Fishman's strategy is knowing, based on familiarity with disease mechanisms, how to design clinical trials that target particular patient populations early in the drug development process. NIBR launches projects intentionally targeting niche diseases, with the intent of discovering other therapeutic applications as the process advances.

"That, by the way, is the opposite of the traditional pharmaceutical model," Fishman says, "where you go only for big diseases and then, if you're lucky enough, find some niches that can be treated with it."

NIBR has started work in underserved therapeutic areas such as Huntington's disease, cystic fibrosis, Rhett's syndrome, interstitial pulmonary fibrosis, and some rare cancers, Fishman says. These research projects got started by killing several ongoing projects in the traditional vein and redeploying the resources.

"Year-on-year, the evidence is increasing that the quality of the compounds is good," he says. "I learned to start some of the tests we do in development earlier on. We can now bring many more compounds through with multiple chemotypes, test those early for pharmacokinetics and toxicology in smaller scale, and choose compounds that look like compounds cells will acquire."

Although Fishman says NIBR has succeeded in increasing the number of biotech drugs in Novartis' pipeline, that has not necessarily been his goal. "I basically believe we will go where the best opportunities are," he says. "If the biologicals and antibodies work better, we are happy to expand that." He says biologics now account for 25% of NIBR's pipeline.

Acknowledging the collegiate feeling of the NIBR building, Fishman notes that being where the brains are hasn't hurt. "Cambridge has mattered a lot, especially for talent," he says. Not all of that talent has a background in pharmaceuticals, either. Physicians work beside chemists in research, and one-third of new employees come from academia, Fishman says. "It's proved to be a wonderful mutual education, and the energy level—the intensity and passion level—is high. This is because many of the folks coming in are naive. They have no standard way of doing things, and they are unwilling to accept standard impediments."

One of the ways Fishman says he is steering clear of the blockbuster approach to R&D is by keeping the marketing mentality away from the research bench. "I believe firmly that if we make drugs that are good, markets will follow," he says. "I do not believe there is any sensible way to put a value on a drug candidate."

Consequently, he forbids estimates of a drug's sales potential before the drug has been proven in clinical trials. "Any time you have a quantitative metric, it drives out any kind of nonquantitative metric, so you run the risk of using artificial and highly inaccurate information to guide your early process. For us, it's simply patient need and scientific tractability. If those two coincide, we have a drug, given some luck."

Like Deese, Fishman is trying to foster better communication between research and production. To that end, he is cochair of a committee that determines which drug candidates advance into the clinic. The group includes drug development chemists and process engineers who will scale up processes for clinical production. "That is all new for Novartis. This committee has facilitated interaction between what had been separate groups," Fishman says.

NOT EVERY agent of change at a large pharmaceutical company brings an outside-the-industry résumé. At Pfizer, Robin W. Spencer, senior research fellow for idea management and innovation, is employing a knowledge management tool that works similarly to a research technique he helped develop at the company in the 1980s: high-throughput screening.

Spencer is using software supplied by Boston-based Imaginatik to implement what he describes as a cross between e-Bay, the popular online auction website, and Innocentive, an Internet-based service in which clients post problems and scientists in the network compete to solve them.

At first, Spencer acknowledges, the program met with a typical level of corporate skepticism. "Two years ago, management came along and said we were going to do something about innovation," he says. "I say that with a little sigh because that's a common thing in any organization-it's this year's program."

However, Stephen Street, vice president for chemistry and worldwide discovery at Pfizer, and Alex Polinsky, chief operating officer of the Pfizer Incubator, an R&D subsidiary in La Jolla, Calif., made it clear that this push would stick, Spencer says. Polinsky then pointed him toward Imaginatik.

The basic goal of his system is to make connections within a large global company—to find intramural know-how for solving particular problems and move it where it is needed. "In a world where complexity, speed, and financial imperatives drive us to be ever more focused and deliberate in everything we do," Spencer says, "my job is to provide an easy-to-use, low-barrier-to-entry, zero-permission-needed way to make as many of these connections as we possibly can."

Spencer's enthusiasm for the software is palpable as he runs through a demonstration on his laptop at Pfizer's R&D headquarters in New London, Conn. He illustrates how employees can post a "challenge"—anything from a chemistry problem that surfaces in a laboratory to an inquiry about where someone with two big dogs can find housing near a Pfizer facility in the U.K.—and check back for answers from other Pfizer employees. Using the software, the person posing the challenge can steer input into categories that aid in the vetting of responses.

Buy-in is mounting as the system settles into work processes at Pfizer and employees see it in action, Spencer contends. For example, it proved highly useful to researchers in Ann Arbor, Mich., where Pfizer closed facilities several months ago, who are looking at the prospect of moving to Connecticut. It is also gaining traction in the laboratory.

"It is helping us discover medicines," Spencer says. For example, he says, it has helped design better clinical trials. It is also bringing more brains into the brainstorming process than can get to any one room with a whiteboard—a great benefit in a widely dispersed company performing very difficult tasks.

"Our problems are unbelievably complicated and interconnected," he explains. "Put a methyl group here and you've improved the potency, but now you've made it prone to P450 oxidation. There are layers and layers and layers of that kind of difficulty."

Spencer contends that a kind of reward system is amassing as people gain recognition for their expertise. An "illuminati" is emerging, he says, as the most capable and engaged people go after tough problems. This recognition tends to accelerate buy-in and increase the efficacy of the system. "If you want to get something done, ask a busy person," Spencer quips. "This system identifies that person."

Deese, Fishman, and Spencer tend not to think of their work as reengineering per se. But they subscribe to Hammer's basic principle that large companies need to operate like small companies by avoiding the structural fragmentation that increases cost and complexity.

They also agree that there is much happening outside the industry that is of great use to drugmakers. Spencer, for example, networks with Imaginatik users from companies like Hewlett-Packard and Cargill. "What I learned about from Cargill was not about making more interesting road salt," he says. "We don't talk about making drugs and HP doesn't talk about making computers cheaper in Singapore. We talk about process engagement—about getting people to put review teams together."

Spencer says he is learning about what Merck's Deese calls the "human dynamics of change." He's also learning about what Hammer calls reengineering, a word that is unlikely to go away even after the pharmaceutical industry breaks down its functional silos, just as so many other industries have done.

But business reengineering is not a one-time event, nor is it one that most industries have successfully completed. "It's not as if this thing has run its course in the chemical industry," Hammer says.