The pharma industry is facing increasing political pressure. The wise CMO will use this time to blend strategies and reposition.
It was a single tweet last September, aimed squarely at an HIV drug producer which had raised prices 5,000 percent on an HIV drug, overnight. Hillary Clinton’s remark was a political bull’s-eye. She made national headlines by attacking an event so callous even the drug industry wouldn’t defend it. It was a well-calculated move, to be sure. But what came as a surprise to many was the secondary consequence: a twenty percent tumble in biotech indexes the following business day.
Why did this happen? It happened because we’re in a tremendously vulnerable place right now. Pharma’s current business model is yawning and creaking as the winds of the coming storm buffet it. Today’s big CMOs live and prosper almost entirely at the whim of the large pharma companies. If those CMOs don’t disrupt their current business model soon, outside forces will do it for them.
CMO growth of late is anemic. The big companies aren’t growing. But this isn’t the case throughout the entire industry. CROs, for example, have been busy these past years creating strategic partnerships with large pharma. They’ve obtained security of supply through frequent flyer program types of arrangements. They’ve formed symbiotic relationships. Think of them as a clever little plover bird feeding on the food stuck in the cracks of the crocodile’s teeth. They make a living while performing an appreciated service. That’s good business.
CMOs Will Be the First Casualties When the Storm Hits
CMO’s enjoy no special privileges. They are too much of a commodity. They aren’t strategically important. Until now, this minor fact seemed relatively unimportant. Pharma has been doing well, and CMOs have been well fed just by hanging around accepting castoffs on the edges of the grand banquet. As long as the large pharma houses are able to continue to increase profits by raising prices, there is no issue.
But the pressure to reduce drug pricing is building to a climax. Mrs. Clinton’s targeted HIV drugmaker was just one more piece of evidence in the public’s perception of the drugmakers as evil, heartless capitalists. Following that tweet, Wall Street blinked. Wall Street knows the storm is coming. That dip in the biotech market was more than likely just a gust of wind.
Large CMOs earn most of their revenue by producing tablets and capsules for pennies a pop. That part of their sales can’t grow more in volume than the general market – which is about four percent per year. It can, however, decline, if and when large pharma decides that it’s time to reduce the price per tablet. How long until that happens? That’s what the people in New Jersey and Toronto are asking themselves right now. Not if, but when. CMOs need a plan.
How to Reposition: Four Strategies
Strategies abound. Which to choose? The classical strategy taught since the 1950’s is simple: target a specific niche, develop a plan for world domination, and implement. Think of Coca Cola, Mars, UPS, and Walmart. But the classic strategy has never been successful in the CMO world. Candy and car companies can scale up indefinitely, and maximize profits by reducing costs and increasing assembly line efficiencies. Other industries can’t do that. Consultant organizations, for example, face huge diseconomies of scale. The logistics of managing 500 consultants overwhelms any savings that might come from volume discounts for coffee or photocopy supplies.
The CMO industry is scalable to a point, but then, somewhere around 300 people, a CMO will begin to feel diseconomies of scale. Too much complexity is introduced into the system. Many players transition into making their own products or becoming a generic company with internal demand when they reach this size.
The Boston Consulting Group (BCG) recently produced a book that argues that the days where a single strategy – be it a classic strategy, a blue ocean strategy, dogs and stars or what have you – is not enough. Businesses buzz through the product lifecycle in record speed.
“Your Stategy Needs a Strategy”, by Martin Reeves, Knut Haanaes and Janmejaya Sinha, argues that there is no single strategy that can do the job anymore. Today, we need to choose from a “strategic palette”; like an artist choosing colors from a palette. The book offers four strategies from which company chiefs are counselled to daub and blend.
The Adaptive Evolutionary Approach
The first strategy to have in your palette, say Reeves, Haanaes and Sinha, is the adaptive, evolutionary approach. Technology firms often choose this path. They back lots of little ideas, and then double, triple and quadruple down on the ones that gain traction, abandoning those that don’t. Fashion retailer Zara exemplifies this model. Amecio Ortego and Rosalia Mera’s business model launches around 12,000 new designs each year, then scales up the designs that sell. The company bucks the trend of taking six months to get a new design into stores, claiming to go from drawing to hanger in a week. Louis Vuitton’s Fashion Director Daniel Piette once called the Zara model “possibly the most innovative and devastating retailer in the world.”
I don’t see this approach being used in the CMO world, but it could work. It would take some gutsy old-school entrepreneurialism, and it would have to be a mid-sized company that takes it on. Xcelience – with a staff of 209 – is too small to risk the fallout from all the failed attempts. The big CMOs, meanwhile, have public shareholders or private equity backers to answer to. Their financial backers would likely view this strategy as wishy-washy. A good CEO, by today’s standards, charts a clear strategic direction and raises confidence in his or her plan. A CEO backing an adaptive approach risks looking weak and indecisive.
The Blue Ocean Approach
In most of the business world, a new product enters a crowded market, and battles it out for position. It’s a bloody battle – a red ocean strategy. But some companies manage to build a product that creates a whole new market – one where no one else competes for market share. Cirque du Soleil is a classic example. This Montreal company translated the circus to an adult audience, without losing the kids. Anna Wojcicki did it with 23andMe, a kit that allows anyone to analyze their susceptibility to various diseases through genome testing. Steve Jobs did it with the iPhone and later the iPad. Competition in a blue ocean is non-existent.
This is my favorite of the four strategies. Pharma in general is a very red ocean business. We tweak medications to extend patents. We combine medications, we extend release and we offer maximum strength. In drug development, we fine tune our equipment lists, trying to offer the best and the latest, adjusting capacity to maximize revenue and flexibility.
But blue ocean moments can arise in drug development. When Fleming discovered penicillin, that was a classic blue ocean moment. The little blue pill, Viagra, is another. Latisse, the popular cosmetic that causes extra growth and thickening of the eyelashes, was the first of its kind.
Blue oceans aren’t unattainable in your company. While the textbooks focus on the vast untapped oceans, I think there are many small blue oceans that are relatively easy to find if you are vigilant in their pursuit. These little oceans are blue when you find them, but they often turn red quickly. They are a limited-time-only opportunity that you have to maximize.
Ten years ago, I came across a little-known company called Meridica. They had invented a capsule-filling machine that claimed to bypass steps of the formulation process, getting products to market faster. This was their blue ocean – not ours – but they were going about it wrong. They were marketing these machines to big pharma, thinking that at $500K a pop, only large pharma could afford them. In fact, $500K is a hefty price even for large pharma, all the more so for a machine that’s destined to be mothballed for months or years at a time. The Xcelodose was perfect, however, for a service provider that could push dozens of products through it a year. Xcelience was the first CDMO to bring an Xcelodose to America and for a short time, the ocean was ours. Today that ocean is red, but our legacy as the first helped our fledgling organization earn its first reputational leg up in the market.
We have enjoyed other blue markets since then. In 2012, we became the first company of our size to offer clinical supply solutions; providing flexibility and agility to a market where demand is often hard to predict both in terms of size and location. We still hold this ocean today, but I expect competition won’t be long in coming now. Similarly, we were the first CDMO of our size to go global; opening a facility in the UK in 2013. Obtaining MHRA approval is a process, so we have a buffer before others are able to follow us here. Most recently, this year we began offering dedicated shops. A dedicated shop is space within our facility that is designed, built and dedicated to a particular long-term project. Our client and our company work side by side in this shop day in and day out. Our first one was in bioprocessing, an unrelated field - but one that makes use of our company’s two strengths – quality and regulatory excellence. Two more, very different shops are in the pipeline.
The Shaping Approach
This approach involves working with partners to finesse and grow new markets. Diabetes was underdiagnosed in China, so Novo Nordisk, worked closely with Chinese doctors and health authorities to raise awareness. The result catapulted Novo Nordisk to a sixty percent market share.
This is an approach that can definitely work in our industry. I once tried to setup an ecosystem with API producers and consultants. These partnerships make more sense to me than buying the API producers. From the 30,000 foot level, buying API producers seems like a good idea. But when you zoom in and look at what your customers really want, that’s probably not the best way to spend your money. For us, buying Powdersize made more sense, since offering micronization in house was a better value proposition for our clients; enabling them to meet more if not all of their drug development needs in one place. Buying an API producer would have been of no benefit whatsoever to our clients. And yet, many CMOs continue to opt to buy API producers instead, largely because CEOs who do this generally look good, and it’s a lot easier than trying to form an ecosystem.
Renewal
BCG portrays this as a desperate, last-ditch option for companies looking over the edge of the cliff. Sell off what isn’t working, and shift capital into what is. AIG, the giant insurance conglomerate, took this drastic approach after the government bailout.
Ultimately, this might be what the big CMOs have to do. Unfortunately, companies rarely undertake this willingly. In times like this, it should be part of any large CMOs active palette. Shifting resources into a less vulnerable, higher growth part of the business is going to take a lot of capital. Sacrificing the weaker parts of the business is – well, it’s just good business. Every CEO knows that doing what’s right for the overall organization often hurts.
Mixing Your Strategic Palette
Being able to use a little of all of these strategies may seem like an acrobatic feat worthy of Cirque du Soleil. How can you actively promote different, often contradictory strategies within the same organization? A classical strategy minimizes variation; an adaptive strategy maximizes it. A shaping strategy makes the most of a community of partners, a classic strategy closes others out. Much of the criticism of the BCG approach worries that it will confuse managers, making a Jackson Pollack of strategy, where a Chuck Close was intended.
For the most part, I don’t see a problem. Painting with just one color makes no sense to me. If I were to adopt a Blue Ocean Approach in my business and a Blue Ocean Approach only, I would’ve missed all the benefit I derived from creating an ecosystem of partners through the Shaping Approach, which not only led to direct business leads and our Powdersize merger, but also to a healthy cross-pollination of ideas – such as the dedicated shop idea – which turned out to be another blue ocean.
Some companies can combine strategies like a master. I stand in awe of PepsiCo, the Mondrian of strategic harmonization. PepsiCo literally has two separate groups of people in each division; one tries to maximize efficiencies while the other actively looks for ways to disrupt the current business model, essentially beating the competition to the punch.
Being as structurally flexible as PepsiCo may not be possible for the rest of us mere mortals, with our leaner, meaner and smaller companies, but I’m not ruling it out. There may be ways of entrenching and encouraging different simultaneous approaches in my organization too.
The important thing is that today’s CMOs are looking at all the strategic tools at their disposal, mixing, blending, and actively, even urgently, preparing for what may come.