Business Organization of R&D Activities in Big Pharma Companies - Essay Example

BUSINESS Business Organization of R&D Activities in Big Pharma Companies ______________ ___________ _______________________ Business Organization of R&D Activities in Big Pharma Companies Introduction As an organization grows in size and scale it is generally observed that it reaps economies of scale and improves its bottom line. In fact some organizations resorted to growth option with the sole objective of reaping such economies of scale. An exception to the principle of economies of scale has been presented recently in the R&D activities of large sized pharmaceutical companies where a large and growing size did not result in economies of scale and forced the concerned corporates to restructure their R&D operations. We examine the business organizations of the R&D activities of Glaxo Smith Kline and Astra Zeneca and see the differences in their emerging organizational structures. Drawing from the organization theory we present opinion on the adopted organizational structure by these two pharmaceutical giants. Case of Glaxo Smith Kline Glaxo Smith Kline (GSK) has the strongest pipeline in pharmaceutical industry the globe over. This pipeline is achieved when out of millions of compounds screened about 250 make it to pre-clinical testing, 10 make it to clinical testing and only one gets approved for patient use. With these astronomical trial efforts involved, R&D activity needs to be brisk and fast at all stages to keep the pipeline growing. GSK's recent robust performance is threatened substantially by this very patent and pipeline uncertainties. Therefore the period 2004-06 will require the company to devise methods to emerge out of these uncertainties as competition mounts pressure throughout this period. In order to resolve its diseconomies of scale on formal innovation(each commercially released drug is equivalent to an innovation), GSK has restructured the company's R&D functions into strategic business units, styled Centre of Excellence for Drug Discovery(CEDD), breaking from an organic and holistic structure in order to hasten process of innovation. GSK appears to be attempting to keep its pipeline filled via this method.GSK followed this restructuring with another round when it introduced Medicine Development centers (MDCs).The main task of MDCs is to streamline decision making and maximize the global development opportunities for each product. The MDCs are responsible for product development from concept stage to manufacturing and marketing stages.MDCs enter into collaborations with CEDDs at an early stage thus integrating R&D, manufacturing and marketing functions. Because of the smaller scale of these units the decision layers in each activity has not only been reduced but has also become transparent and accountable.Intra organization communication is now specialized in competence functions and thus is quick and decisive. A web site on company information describes the organization structure and R& D activity at GSK to fit in the above description almost exactly "The organizational structure of GSK is designed to make our company a model for excellence in the pharmaceutical industry - a new company that represents best practice in every way. GSK is a company with the size and scale to invest in the tools we need to succeed, and to drive that success going forward. To achieve that goal, GSK is organized as a flexible company, capable of responding quickly to a rapidly changing marketplace. Organized globally to coordinate activities and gain the benefits of size and scale, the company is built on smaller, customer-focused units, dedicated to delivering medicines that relieve the suffering of patients around the world. The new and innovative model for R&D, the focused structure of our pharmaceutical business throughout the world and the organization of our global services such as IT and Procurement are some of the highlights in the approach which will lead our success. At GSK, scientists in Research and Development are committed to capturing this moment. They bring to it their own very considerable abilities, the resources of a parent company devoted to the scientific enterprise, and the urgency of knowing that their highest purpose is the relief of human suffering. In pursuit of this purpose, they desire to make of GSK a magnet for others who share their talents, whether as prospective corporate colleagues or as collaborators in industry, academe, and government. Creating a new medicine is a complex business, costing over $324 million and typically taking between 12 and 15 years. Regulatory hurdles are increasingly stringent, yet escalating costs, medical need and the pressure of competition demand that the whole process is condensed into as short a time as possible. GSK uses the scale of a huge company to reach its goal of applying science to improve patient health. Equally important is its flexibility, allowing teams of scientists the freedom to take an entrepreneurial approach, and enabling them to move quickly, on the basis of informed decisions"(Glaxo,2006). A growing pipeline is an indication that this integrated flatter organizational structure is yielding positive results for GSK. In management terminology the organization structure of GSK R&D seems to follow a flat ecological structure on the lines of total GSK organization structure.This type of organization has intense competition. Bad parts of the organization starve or are even sliced out after death . Good ones get more work and continue to grow. Everybody gets paid for what they actually do, and essentially run an independent tiny business that has to necessarily show a profit, or they get fired. Companies who utilize this organization type reflect a rather one-sided view of what happens in ecology. It is as much the case that a natural ecosystem has a natural border - ecoregions do not normally compete with one another in any manner, but remain very autonomous. Case of Astra Zeneca Astra Zeneca (AZ), the Swedish pharmaceutical firm that merged with UK-based Zeneca to form one of the major players in the pharmaceutical industry. It has 10 R&D Centers around the world, focused on developing innovative new therapies within chosen disease areas. AZ is one of the top investors in pharmaceutical research and development in the world. Last year, AZ spent $3.4 billion on R&D. AZ's Global R&D organization is headquartered in Sodertalje, Sweden. R&D "Centers of Excellence" for discovery, development, and operations functions are distributed among 11 R&D sites in France, India, North America, Sweden, Japan and the United Kingdom. AZ's R&D organization is disease therapy area-led and project-driven. This R&D organization has generated a consistent flow of new prescription medicines to the market and as well as worked in preserving and enhancing existing market products. AZ development resources and capabilities are aligned with disease therapy areas to move candidate drugs through the pharmaceutical development process. External collaborations with biotech companies and academic institutions also complement AZ's R&D organization. Within North America, such collaborations broaden the range of exploratory research and allow access to a wider base of scientists, technologies and other resources. Thus R&D in AZ is integrated and project-driven. Their approach is therapy area-led with scientific, medical, technical and ethical input and control being provided by large, multi-skilled Discovery and Development organizations. In Discovery, AZ scientists focus on maximizing the output of high quality candidate drugs (CDs) with a lower probability of failure in development. Theywork across functional and regional boundaries to exchange ideas and best practice so as to make best use of the efficiencies that global scale offers. AZ believes that in today's world of rapid scientific and technological advance, no company can rely exclusively on its own discovery and development. In consonance with this belief AZ has collaborated with leading academic centers and biotechnology companies with skills that complemented their own capabilities. Thus it can be seen that AZ has also broken its R&D organization structure into centers of excellence based on therapy areas. Each center concentrates on specific set of diseases. It has spread them globally. It makes available all other inputs required for drug development rights along side its R&D facilities. In addition it is entering into R&D collaborations with other research organizations and biotechnology companies. Its annual report for the year 2004 says in respect of its pipeline: "> Successful delivery to market of the next wave of differentiated products currently in development. > Rigorous management of our portfolio of products in development, to mitigate risks associated with new innovative products and make future growth more robust. > Expansion of the development pipeline through continuously improved in-house discovery processes, complemented by external collaborations and partnerships. > Pursuit of value-creating investment in significant targeted licensing and acquisition opportunities. R&D remains an integrated, project-driven organization. Our approach is therapy area led with scientific, medical, technical and ethical input and control being provided by large, multi-skilled Discovery and Development organizations. This offers a number of advantages including sharing of best practice in terms of science and technology and efficient use of resources across a multi-site, global organization. Global knowledge expertise is recognized as a key competitive advantage for AZ. An R&D information and knowledge management initiative has introduced a knowledge sharing system, initially directed towards supporting our global R&D staff and their internal partners. Collaborations with leading academic centers and biotechnology companies, and the in-licensing of innovative products and technologies, complement our in-house capabilities and play a key role in strengthening our portfolio "(Annual, 2004). AZ Germany has used new techniques of organizing business using new management concept and utilizing the services of its software consulting partners.AZ Germany is meeting the challenges initiated by the restructuring of the health service and the resulting demands for greater efficiency in pharmaceutical operations with innovative best practice solutions in Supply Chain Management. A new Demand Flow SCM Concept has been implemented with the help of consulting partner Camelot IDPro. AZ is setting a new benchmark in pharmaceutical production with a new planning concept based on the SAP SCM component APO PP/DS 3.1. This is calling for partnership in capital and resources and thus is an innovative risk in sharing risk particularly in venture areas where innovation risks are high. Thus this has also resulted in a flatter organization structure for R&D. An Opinion based on Theory Galbraith has stated that, there is no standard and best way to organize, and no structure that fits all the requirements of all organizations (Galbraith, 1977). This presents managers and change agents with a unique problem viz.to tailor make an organizational structure to suit specific need of a particular organization taking the overall context of the organization into account. "Traditionally, large sized pharmaceutical companies had separate functional units for each stage of the product development (including R&D) and marketing process. It is time that the industry drew inspiration from companies such as Dell and General Electric to assess the possibilities of organization models based on distinct strategic business units. These companies have improved their profitability by pushing responsibility for profits down to such smaller business units. This implies theoretically that companies have moved from a functional to an integrated business organization model. These business units could be organized around in an integrated manner based on therapeutic, customer or scientific areas of focus, resulting in closer coordination, control and faster decision-making. Integrated business units would also ensure P&L accountability, and put in place new metrics that shift the focus from overall product revenues to business-area profitability, return on investment and functional productivity"(Rebuild,2003). Fulghieri and Sevilir have developed a unified theory of integration, venture capital financing and strategic alliances. According to them, "the organization and financial structure of innovation emerge as the optimal response to the competitive pressures of the R&D race, the stage of the research and product development, and the severity of the financial constraints. They have shown that integrated organization structures are more likely to emerge when the downstream firm is more productive than the research unit, competition in the R&D race is more intense or the R&D cycle involves late-stage research, and when the research unit is financially constrained. Conversely, non-integration and venture capital financing is more likely to emerge when the research unit is more productive than the customer, when competition in the R&D race is less intense or the R&D cycle involves early-stage research, and when the research unit is not financially constrained. Strategic alliances and corporate venture capital financing is more likely to emerge when competition in the R&D race is more intense, the R&D cycle involves late-stage research, and when the productivity of the research unit is higher"(Fulghieri & Sevilir, 2001). Above reported GSK and AZ cases bore full testimony to the above hypothesis as market conditions in respect of R&D race and competition were conducive to flatter and integrated structures. Quinn and Cameron have written about life cycle stages of organizations and policy changes that are required in each stage. They identify four stages in the life of an organization as it grows from a small to large size. These are entrepreneurial, collectivity, formalization and elaboration stages. Each life cycle stage is led by a chief motivation concept. These concepts have been identified as creativity, provision of clear direction, addition of internal systems and development of teamwork in each of the four respective stages identified above. Four crisis resolutions at the end of each stage make the organization pass over to the next stage. These resolutions are need for leadership, need for delegation and control, need to deal with too much red tape and need for revitalization respectively at end of above referred stages (Quinn and Cameron,1983).GSK and AZ appear to be placed at the end of fourth stage in their life cycles where either through strategic business units or through collaborations they have grown to flatter structures their primary needs are revitalization and control through development of teamwork. They would be essentially working through streamlining small company thinking and move forward to maturity. Conclusion GSK and AZ both face a similar challenge viz.to turn in a healthy pipeline of candidate drugs. To enable them to do this their R&D activity needed to be hastened from the slow footed stage.GSK adopted the approach of breaking its R&D operations into strategic smaller off shoots with independent accountability and profit responsibilities thus resulting in a somewhat ecological organization structure where ecoregions coexist in controlled holistic manner but do not disturb or intrude into each other's activities. Advantages were numerous. Decision layers were reduced and accountability and profitability targeted by specialists. This was in fact snapping up of the functional vertical organizational structure into a horizontal, flat and competence/project based structure.AZ was also focused on innovation .Perhaps even more than GSK.It had its core competence areas where in it wanted to concentrate with in house efforts. It sought innovation and entry into several biotechnology potentials with numerous laboratory and venture tie-ups.Advantages were sharing of risk and capital and focusing on competence. Thus AZ structure was also a horizontally spread flat structure however it had more of participation by outside entities.GSK and AZ case studies exhibited clearly the point at which economies of scale cease to accrue in an activity like R&D where intense competence based collaborative efforts are required with ultra high capital investments requiring complex and fast decision making.GSK and AZ were both quick to realize the need for change and tailored organization demands to ensure smooth and better operations. References GlaxoSmithKline-Company Profile Retrieved March 26, 2006 from http://company.monster.com/glaxos. AstraZeneca Annual Report and Form 20-F Information 2004,pp 10., pp Galbraith, J.R. Organization Design.Addison-Wesley.1977. "Rebuilding Big Pharma's Business Model", In Vivo: The Business & Medicine Report, pp 73, 2003. Retrieved March 26, 2006 from http://www.windhover.com/contents/monthly/exex/e_2003800191.htm Fulghieri, Paolo and Sevilir, Merih . The ownership and financing of innovation in R&D races. Seminar paper at INSEAD, HEC at Jouy-en-Josas, in the 5th Conference of the Society for the Advancement of Economic.2001. Quinn ,Robert E. and Cameron ,Kim.Organizational Life Cycles and Shifting Criteria of Effectiveness. Management Science 29.pp 33-51.1983. 1 Read More