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Two business models that companies can follow to map their strategy from concept to implementation.
Avoiding becoming one of the industry's zombies—a company that is neither alive nor dead—requires not only establishing critical organizational systems, the subject of a previous installment in this series, but also making sure that the day-to-day processes that implement those systems contribute to the overall success of the enterprise. Doing so requires a system of business models that focuses strategy and keeps daily performance on track toward fulfilling that strategy.
Joseph J. Villafranca, PhD
Focus means knowing what you are good at and sticking to it. There are many biotech business models, but two proven models—the idea-generation factory and the fully integrated company—stand out. These present such different implementation challenges that they illustrate the imperative need for a comprehensive system for mapping strategy onto implementation and the perils of foregoing focus to pursue hybrid business models. What many biotechs fail to see is that while you may easily imagine similarities between the two models, implementing a successful blend is extremely difficult, if not impossible. Each entails a different strategy, different implementations, different risks, and different rewards.
The idea factory aims to generate breakthrough therapeutic products, devices, processes, or technology; develop them to a point at which the company can profitably out-license them; and repeat that cycle to grow an annuity stream of royalty payments. Such a strategy requires the agility to continually generate enough new, saleable, and clinically promising ideas to keep the company in business.
Because these operations require fewer resources than those needed to develop the idea into a full commercial product, the risks are lower and so are the rewards. The idea factory need only produce products that show promise, not take them all the way to regulatory approval and use in humans, which is a much longer path that requires far different capabilities and greater financial resources. The idea factory does a wonderful thing: it generates a continual stream of ideas developed up to Phase 1 or 2 clinical trials, making it possible for other companies with other capabilities to eventually bring those products to market. If the idea factory stops to bring one of its own ideas to market, then the ongoing stream of ideas will likely slow down or even dry up completely because the focus has changed. Fully developing and commercializing ideas requires a fully integrated firm.
To take products all the way from initial discovery and development to full commercialization and the market, the fully integrated company needs to make larger investments of financial, human, and infrastructure resources—investments that may never pay off. For example, generally accepted estimates put the probability of an investigational new drug (IND) reaching the market at about 10–15%. The challenge for such companies is to make sure that they have enough potential products in the laboratory and the clinic, and they almost can't get enough to sustain the risk that other products may fail. Certainly, the risks are greater for fully integrated firms, but so are the rewards in the form of the substantial revenue and profits of a commercially successful product.
Success with either of these strategies begins with having a clear idea of precisely which you are pursuing so you can focus the entire company on it. Surprisingly, some companies fail to achieve such clarity at the outset—or, just as importantly, to maintain it throughout. As a result, they drift into a hybrid implementation that is neither one nor the other.
For example, a natural idea generator may become enamored of the potential of one of its ideas and, tantalized by the financial possibilities of full commercialization, it may drift into creating processes and building infrastructure that is more appropriate for a fully integrated company. The impetus to change direction may come from senior executives, boards of directors, or even early investors who want a greater return on their investment, thus allowing greed to overcome the company's driving strategy. Conversely, an integrated company might decide that greater profits depend on seeking innovative new ideas solely within its own four walls and may therefore invest in its own exclusive idea factory. Either lapse recalls the difference between those who have vision and those who see visions.
We have seen life-sciences firms successfully align implementation to strategy using many techniques. The critical thing is to use some systematic approach to link and align strategy with its implementation, whether it is management-by-objective, economic-value-added, the balanced scorecard, or some other approach. But no matter which approach you use, the implementations of the two business models will differ starkly. Table 1 provides a comparison of how a balanced scorecard might look for an idea factory versus a scorecard for a fully integrated firm.
Table 1. An example of the two biotech business models which focus on different roads
In our experience working with lifesciences companies, we have found that the balanced scorecard, aligning and integrating performance across critical areas, provides the two essential ingredients for maintaining strategic focus: mandates and measurement. It focuses on what to do—the mandates—and how to track the results of those mandates—the measurements.
Developed in 1992 by Harvard Business School professor Robert S. Kaplan and management consultant David P. Norton, the balanced scorecard includes "financial measures that tell the results of actions already taken and it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement activities—operational measures that are the drivers of future financial performance."1
A balanced scorecard should be thought of as a thermostat that keeps performance rising among the parameters that you've set in each of four interrelated areas:
Actions that help parameters rise make sense as implementation targets; actions that do not help them rise—while perhaps still necessary—may receive less incremental investment. Further, these four areas are linked from the bottom-up. A well-chosen enabling infrastructure, whether of talent, technology, or facilities, can make operations fly. Great operations serve customers better, and well-served customers support the achievement of financial goals. When the financial goals of a strategy are met, its implementation is a success. Any successful strategic management system should deliver bottom-up alignment between actions and strategic intent. Of course, the linkages summarized here are only a part of any success story, but as far as pointing to any success story where they aren't a part—we cannot.
Setting financial objectives is the first step in implementing a balanced scorecard. For financial objectives, an idea factory typically focuses on earnings and the improvement of earnings. Indeed, the financial objectives of successful idea factories are concerned almost obsessively with accretive earnings. When overdevelopment of an idea in house cuts into earnings, it is time for it to go. As the idea factory matures, its milestone payments and royalty streams increase the earnings base, enabling reinvestment in new ideas with equal or better earnings potential.
Once the financial objectives have been established, you can then determine what key activities and measures are most likely to keep you focused on those objectives and spur progress toward them. If, for example, the objective is accretive earnings, as in Table 1, the appropriate measures might include net earnings as percent-of-sales versus the same period the previous year and percent of forecasted earnings from milestone and royalty stream. The year-on-year comparison and the percent of forecasted earnings are leading indicators that give you a look through the windshield at where you are going. Lagging indicators, by contrast, provide only a look in the rearview mirror at where you've been. By using leading indicators in all your measures throughout the scorecard you can establish management dashboards and alerts to tell you whether you're moving too slowly, veering off course, or underperforming in some activity that is critical to the overall strategy.
The nature and levels of the financial objectives, whether the idea-generating company expresses them in terms of revenue, profit, earnings per share, or some other measure of value, will determine the actions and measures to be implemented in regard to the remaining three areas, beginning with customers, from whom that value will be realized. The nature of the customers will in turn determine what operations are required to serve them, which in turn determines what infrastructure is required for those operations.
In the case of the idea factory, the customers are the Big Pharma companies to whom discoveries will be licensed. Leading indicators of customer performance might include prospects met in the current quarter, future meetings scheduled, prospect visits to the company site, and deals currently in negotiation. Management dashboards and alerts let you know if the company is underperforming by any of these measures and enable you to take corrective action immediately. Such corrective action helps to ensure that you will generate the quantity and quality of customer contacts required to achieve your financial objectives.
The critical operations for serving this customer segment are advantaged discovery and outlicensing. Advantaged discovery is what idea factories are all about. They have knowledge, technology, or exclusive access to areas of discovery that others do not and they are organized to deliver those discoveries economically. Leading indicators here are measures such as the number of new opportunities hosted on the next-generation platform versus earlier technology and rate of new discoveries per period. You must also be able to close mutually advantageous deals with customers. Your outlicensing group should be adept at setting the value of a discovery and determining the most advantageous way to share that value with licensees. Leading indicators of their performance include the number of licensing deals in negotiation.
The key activities of infrastructure required to generate candidates for outlicensing include seeking continued access to the best new research talent. Discovery—new ideas and a significant number of them—is, after all, the lifeblood of the company, and you must fill that need with talent from the best target schools and research departments. Leading indicators of recruiting success include numbers and success of events and publications in those communities.
Thought leadership, measured by the number of scientific publications in a given period or by citations in refereed publications, is important for raising the company's profile among potential customers. And as with the other elements of the scorecard, the infrastructure mandates and measures keep it aligned with those other areas and with the strategy that governs them all.
For the fully integrated company, the principles of the scorecard remain the same as those for the idea factory: cascade a clear, well articulated strategy down through the financials, customer considerations, operations, and enabling infrastructure in order to drive the strategy deep into the organization and ensure that all parts of the organization work together to realize it. The principles should be incorporated while using appropriate leading indicators to measure performance and keep it on track.
The great difference lies in the specific practices mandated by the respective strategies in each of the areas encompassed by the scorecard. The financial objectives of the fully integrated company may be expressed in terms of revenue targets, profitability, earnings per share, or some other value terms. Because those revenues or profits result from the sale of fully commercialized products, the leading indicators are likely to be measures such as market share in a particular therapeutic area, through a profit and loss for each major product, or through quarterly earnings reports. And, as we've seen, management dashboards and alerts provide an early warning system of underperformance and indicate the need to dig down into the other areas of the organization to discover the source of the problem and correct it.
The customers through whom the integrated company's financial objectives are realized are pharmacy benefit managers, hospitals, physicians, and consumers. Those financial objectives will form and shape the decisions you make from a customer perspective. Knowledge of reimbursement opportunities for your portfolio of drug products is essential for profitability and can be a critical driver of strategy. The challenge is to service your customers in a way that most effectively achieves the financial objectives. If an overriding financial objective is profitability, you might choose to concentrate only on the most profitable customers. If financial objectives are to maximize share in an attractive and growing therapeutic area, then maximum margins may be sacrificed for the sake of greater share. The leading indicators should measure the actions necessary to win the particular customers you are targeting. Depending on this customer strategy, indicators might include:
A falling off in any of these efforts could foretell a possible shortfall in financial goals, which timely management action could prevent.
The critical operational activity for the fully integrated company lies in sales—the mix, the effectiveness, and the magnitude. Leading indicators of sales effectiveness include: the number of blockbuster products; the percentage mix of sales from blockbusters, tier 1, and tier 2 products; and the percentage of sales from new customers. Underperformance along any of those dimensions should send a wake-up call to management to correct imbalances in the portfolio, step up sales efforts, or inlicense additional products.
Further, in tough markets, product availability plays an increasingly important role. An example would be the sales effectiveness of the first influenza vaccine manufacturer to release its product into the market each year versus the lagging competitors who have difficulty selling out their production. Reduced availability and delayed availability are equal problems. To increase the resilience of its manufacturing operation in the face of critical raw materials shortages, many fully integrated firms are scrubbing their raw material, spare parts, and service vendor lists to target sole-sourced items and long lead-time items for interventions. Disruptive threats to material availability such as SARS, avian flu, and rising transportation costs have accelerated this campaign to enhance continuity of production.
The magnitude of sales required to sustain a fully integrated company requires a major infrastructure investment in the sales force. Unlike the idea factory, which requires only a highly focused, small number of people devoted to securing outlicensing deals, the integrated company needs feet on the street to cover the enormous number of potential customers for the company's products. Problems that show up in sales operations may have their ultimate source in sales force problems. Leading indicators of the effectiveness of the actions that the sales force must undertake or that management must execute to help the sales force fulfill company strategy might include rate of retention of top salespeople, number of first calls with joint venture partners, and number of new joint venture deals identified.
As with the idea factory, the comprehensive scorecard translates a clear strategy into implementation for the integrated company. But as Table 1 shows, the particulars of the implementation of the two strategies couldn't look more different. And what this stark contrast further suggests is that even a slight blurring of the two strategies is likely to result in catastrophic mistakes that—if they don't kill your company outright—could certainly relegate it to the ranks of the industry zombies.
Joseph J. Villafranca, PhD, is senior vice president of operations and James E. Bonine is managing consultant, both at Tunnell Consulting, King of Prussia, PA, 610.337.0820, email@example.com
1. Kaplan RS, Norton DP. The balanced scorecard: measures that drive performance. Harvard Business Rev. 1992 Jan/Feb.