Surviving Adverse Events (of the Corporate Kind)
The waning of the Blockbuster Era has brought massive restructuring, challenging drug makers to foster innovation, teamwork and morale. Merck serves as an example of what can be done.
By Angelo De Palma, Ph.D., Contributing Editor
Adverse events are becoming as common in the pharmaceutical business as they are during clinical trials. Recently, companies large and small have been reorganizing, due to patent expirations, late-stage product failures and competition from generic drugs. These massive changes can spell trouble or opportunity.
In January, Pfizer’s announcement of 10% job cuts and plant closings may not have been unexpected, but the ongoing consolidation will force the company to face problems it has not experienced in the past — at least not to this degree.
“Now that the giant has blinked, others will follow suit,” predicts Steve Wunker, a partner at management consulting firm Innosight (Watertown, Mass.), who calls Pfizer’s move “long overdue.”
Sales positions were the hardest hit at Pfizer, an outward sign that the old blockbuster model is waning. Consider statins. Formularies are beginning to eliminate high-cost branded cholesterol-busting medicines in favor of generic simvastatin (Zocor). “And they probably would not carry the next blockbuster statin either. Generics are good enough,” Wunker says. Similarly, the days of “me-too” drugs may be ending, in a trend that resembles what’s happening in the computer industry where users aren’t willing to pay a premium for the latest microprocessors or chips, Wunker says.
Hard times make it challenging to innovate, and severely test any organization’s creativity and collaborative capabilities. Fostering an innovative culture requires supporting process, training and organization. “Companies will need to start doing unfamiliar things in unfamiliar ways,” Wunker says, if they are to retain their innovative edge and prevent cynicism from taking root within their workforces.
Merck (Whitehouse Station, N.J.) had been the first to announce a major restructuring (at the end of 2005), disclosing plans to eliminate 10% of its workforce and close five of its 31 manufacturing plants. Immediately, pundits and analysts predicted doom and gloom for the company, including further layoffs, flat increases in R&D spending and decreased morale. Merck had already been out of favor with Wall Street before the problems with Vioxx. Its share prices tumbled from $63 in mid-2003 to a low of about $26 in early November 2005. However, by late 2005, the stock price rebounded and Merck appeared to be turning things around.
Even though the patent for Merck’s blockbuster cholesterol drug Zocor has expired, the company’s share prices have risen to about $45, reflecting optimism about five significant product launches:
- Gardasil, a vaccine against human papillomavirus believed to cause cervical cancer;
- Januvia, a Type 2 diabetes drug with a novel mechanism of action;
- Zostovax, the first vaccine to prevent shingles;
- Rotateq, a vaccine against rotavirus, which kills 600,000 children and infants per year (mostly in the developing world);
- Zolinza, for treating the disfiguring disease, cutaneous T-cell lymphoma.
True, these medicines entered Merck’s development pipeline long before the company’s self-described “Plan to Win” initiative from late 2005. Nevertheless, launching so many first-in-class products in one year is no easy feat under any circumstances.
“It really speaks to the morale and dedication of our employees that despite the turmoil, and in the midst of it, we launched five new medicines in 2006,” says company spokesman Pat Witmer. None of the dire predictions of 2005 came true. Now, 16 months into “Plan to Win,” an effort that included the piloting of a new Operational Excellence Program, the Merck Production System (MPS), at the company’s Arecibo, Puerto Rico drug manufacturing facility (Pharmaceutical Manufacturing, April 2006, p. 19), Merck’s pipeline is stronger than ever and the company continues to invest in new technologies, companies and people.
As part of MPS, Merck created a series of six high-quality videos, distributed globally, that informed and educated employees on the company’s new supply strategy — a multi-faceted plan ranging from the implementation of Lean manufacturing to the company’s new network (site) strategy. Employees were encouraged to provide feedback after viewing the videos on the corporate computer network.
“The videos have been getting a huge amount of attention,” says spokesman Witmer. “Management, especially in our manufacturing division, took a very aggressive, head-on approach to addressing our deficiencies… to maintain morale while educating workers on the finer points of re-making one of the most successful enterprises on earth.”
Despite closing five plants, Merck continued to invest in its remaining facilities, and purchased new companies and expanded or upgraded facilities in Durham, N.C., Elkton, Va. and Ballydine, Ireland. “Our employees get it,” Witmer states. “They understand our new supply strategy, and they know we’re moving in the right direction. They can see it working.”
Merck’s Program Realization Office leader Randy Hall used to manage Merck’s Flint River (Albany, Ga.) manufacturing facility, which will close this quarter. After the company announced its re-organization in November 2005, Hall undertook phase-out operations for the Albany plant as well as the Danville, Pa. “Cherokee” site. Hall, now working at Merck’s headquarters, quickly saw his responsibilities change from running production facilities to implementing Merck’s new manufacturing supply strategy, which included plant closings and “the more forward-looking initiatives.”
Part of Merck’s new business model involved transforming the Rahway, N.J. manufacturing facility from a traditional, long-term “chemical” manufacturing plant to what the company terms a “commercialization” facility, a lean, nimble site that manages all aspects of supply from approximately the Phase IIb clinical stage until up to two years post-launch. This strategy was part of Merck’s original plan, mentioned in company literature in late 2005 as the “integrated commercialization model.”
Products committed to a commercialization site have demonstrated safety and efficacy in small patient populations, but have not yet passed through the critical Phase III testing. Drugs remain at these facilities long enough for Merck to determine their market potential and capacity requirements, at which point the drug transfers to more traditional long-term manufacturing and, it is hoped, a new compound takes its place.
In the standard drug development model, pre-Phase IIb drugs are handled by what is essentially a research team, then handed off to cvproduct development, which holds onto it until launch. A separate team of divisional, site and research employees launch the product, at which point a manufacturing group takes ownership.
Throughout these hand-offs and tech transfers, everyone crosses their fingers that facility and capacity decisions made years earlier turn out right. As these events unfold, engineering and construction teams retrofit a facility designed for some other product to take on the new compound. “There were many, many more people involved under the old model, and more risks too,” says Hall.
Put simply, the commercialization site approach compresses time, effort and number of discrete steps at the most critical time in a product’s life cycle. “Commercialization centers have been a very positive change for us,” says Hall, “because they eliminate the numerous handoffs between research and manufacturing during that critical period of product launch.”
Hall anticipates shorter development times as well, since all competencies and activities critical to product launch reside at the same location, and continue working together for a time post-launch. “It’s a fairly new model for the pharmaceutical industry, and one that puts us at the cutting edge for drug commercialization.” Merck is planning to convert its Ballydine, Ireland facility to a commercialization center as part of upgrades to that plant.
New business, operational and manufacturing technologies play a huge role in Merck’s Plan to Win strategy, as outlined by Chairman Richard Clark. The company has adopted an end-to-end “franchise” model that manages products from discovery through patent expiration. Within the larger plan are separate, ongoing initiatives and sub-initiatives within each operational and business area, each with their own specific goals. For example, streamlining drug discovery to deliver more targets faster and more cost-effectively is one initiative.
The new Merck supply strategy, which focuses on manufacturing, consists of individual plans related to commercialization centers, optimizing facilities and production capacity, and positioning facilities where they need to be to support Merck’s worldwide markets. Within each site, Merck is implementing Lean and Six Sigma techniques to eliminate waste and maximize value.
All these efforts will be supported by new information technology systems, and driven by changes in corporate culture that emphasize performance. Merck is currently in the middle of a five-year plan “that will completely change the way that we run the business,” according to Hall.
Going with the change is the best way to adapt to restructuring. Margareta Barchan, a founder and strategic change consultant at Celemi (Malmö, Sweden) an international learning- design consultancy, recommends that employees embrace corporate transformations and look for ways to excel within the new culture. “If you don’t like or agree with the changes, consider leaving the company,” she says.
During trying times, employees often err by purposely remaining in the dark rather than facing bad news, by talking and behaving negatively – taking the “death watch” approach – or by engaging in power plays in an effort to appear in the best light to managers or colleagues. In the case of mergers and acquisitions, existing workers may alienate new workers by adopting, even unconsciously, an “us vs. them” mentality.
The most successful companies going through adverse changes are those that foster an environment of informationsharing regarding the reasons for the upheaval, new policies and expectations. “Simulation exercises are an efficient and effective way to share information because they bring people together in discussion about changes in a very controlled and organized way,” says Barchan.
Maintaining sanity requires recognizing the fact that the pharmaceutical business relies on long-term strategies and commitments. Dan Coughlin of the management consulting firm Coughlin Co. (St. Louis, Mo.), cautions against riding the highs of successes – the “gold rush” mentality – or its opposite, caused by unsettling corporate events. “Mergers, acquisitions and sell-offs involve a lot of lawyers and financial people,” Coughlin notes, “but after they leave the scene, those who remain behind must still generate value.” Coughlin’s book, Accelerate: 20 Practical Lessons to Boost Business Momentum will hit bookstores in June 2007.
Communication is critical after any adverse corporate event. Coughlin urges managers who are guiding companies through difficult times to define, articulate and convey to employees what the company is changing from and why, what they are changing to and why, and – in as much detail as possible – how the transformations will take effect. “When employees don’t know why these things occur, anxiety becomes the prevailing emotion. Workers are apprehensive, not only about what they know but about what they don’t know. In a culture of anxiety, teamwork and innovation are the first casualties.”
Coughlin’s suggestions hold for less-traumatizing corporate events as well, such as restructuring without layoffs, mergers and acquisitions. In each case, he says, managers should treat the resulting division or corporate unit as a brand new entity. “Start from scratch, and move forward as one single group.”
Leslie Restaiono, a pharmaceutical industry attorney with Cummis Epstein & Gross (New York, N.Y.), acknowledges that “touchy-feely” approaches to improving employee morale have benefits, but that harder-core methods like awarding stock options to every worker might be more productive in the long run. “Options tend to give employees incentives to perform, even in adverse conditions,” she observes.
Restaiono urges employees to learn how to survive and thrive in the industry by upgrading their skills and cozying up to key managers, especially during and after an acquisition. Workers in constant improvement mode make better workers as long as the company exists in its current form, but also are better able to showcase themselves to new managers. “And if your company is acquired, the best way to keep your job is to figure out quickly who on the acquired company side will be central to the new merged entity, and who will wind up in the inner circles. Stay close to those people,” she advises.