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The Issue: More Effective Pharmaceutical Research

To improve the poor rate by which drugs it has developed make it to market, Pfizer is looking to build an entrepreneurial R&D model

When Pfizer CEO Jeffrey B. Kindler first tried to recruit Corey Goodman to lead the company's San Francisco-based Biotherapeutics and Bioinnovations Center in the summer of 2007, the pharmaceutical industry was struggling to develop drugs efficiently—and so was Pfizer (PFE). In the previous decade, the proportion of drugs developed by the pharmaceutical industry that actually made it to market had dropped from 10% to a mere 5%. In 2007, Pfizer's profits plummeted to $8 billion, down from $19 billion, a 58% drop from 2006. Pfizer needed to get more drugs for patients into the marketplace to bring in more revenues—and fast.

Kindler challenged Goodman to figure out how better to develop major new drugs. Goodman believed Pfizer could achieve superior results by creating an environment that would nurture the type of innovative spirit that exists in biotech companies. The only trouble was that Goodman needed to instill entrepreneurial spirit inside a pharmaceutical Goliath. This would require a radical shake-up.

Pfizer became even bigger when it acquired rival Wyeth for $68 billion in January. But Goodman remains persuaded that Pfizer has no better option than to conduct research in smaller teams that resemble those at biotech startups. Transforming into more of a biotech is "the right model for Pfizer and for the industry," he insists.

The old research assembly line

While Pfizer's attempted metamorphosis is little more than a year old, Goodman says he's beginning to see signs of progress in his division. "The degree of productivity is high. It's higher than what you've seen in the pharmaceutical industry. We're very excited about some of the new drugs. And the best is yet to come," he says.

The changes necessary for the transition to get this far have been dramatic. Before Goodman joined Pfizer, researchers in his center were part of a very large research and development group that left them limited ownership of their discoveries. Researchers would hand their early research over to others when their drugs were first tested in humans. After a drug went through clinical trials, it was handed off to yet another group.

When Goodman took control of research at Pfizer's Biotherapeutics and Bioinnovations Center, he broke his researchers into more focused teams. At the same time, he made scientists accountable for overseeing drug candidates when they went into clinical trials. Goodman believes scientists should be conscious of whether or not their discoveries work in humans. "People have more accountability and more ownership if they're working in small groups," he says. "It allows you to keep your eye on innovation and drug discovery."

Marketers are following suit

Recently, Pfizer reorganized its entire research group and even its business units around the same principle as Goodman's center. Groups that market drugs have been broken into smaller business units, each of which is focused on certain types of patients and diseases. They're involved with drugs from the beginning of pivotal clinical trials and they work with doctors to figure out what patents need. The hope is that their increased involvement will help Pfizer identify which types of drugs address the greatest medical needs and the largest market opportunities.

Goodman acknowledges that Pfizer is far from reaching its ultimate goal of having an entrepreneurial biotech research culture. And some aspects of the restructuring have been painful. In January, Pfizer announced plans to lay off 800 of its approximately 10,000 researchers. "We've got to save costs and get more drugs to the market," says Goodman. "We have to be smarter about how we do that."

Indeed, with the company spending billions of dollars to bring just a handful of drugs to market, it is wise to reorganize R&D

With the cost of drug development steadily increasing, Pfizer's decision to look to a biotech model for research is probably a good one, says Frank R. Lichtenberg, Courtney C. Brown professor of business at Columbia Business School, who teaches a course on the economics of health care and pharmaceuticals. As the FDA has required larger clinical trials, the cost of getting a new drug approved has climbed to $1 billion. However, Pfizer's spending appears to have been even higher. Pfizer sunk nearly $35 billion into research and development from 2004 through 2007, during which time it introduced four major new drugs. "The recent record suggests that they really do need to try a different approach," Lichtenberg says.

Shifting toward a biotech model in research could be a shrewd move. Big pharmaceutical companies have increasingly relied on small biotech companies for drug discoveries because the startups appear to have a comparative advantage. "Rather than outsourcing all of the research and development, Pfizer is trying to do research internally, using an organizational form that has proven to be less expensive and more efficient," says Lichtenberg. "I think that's appropriate."

Conducting such research in-house could also enable Pfizer to develop drugs more attuned to market opportunities. Outsourcing research and development is risky because other companies may not pay close attention to a drug's market potential. If that's the case, Pfizer could end up with drugs that are technologically successful but not economically successful.

If Pfizer carries out its shake-up wisely, the company has an opportunity to marry the best biotech practices with its own comparative advantages in drug approval and marketing. Pfizer has proven itself to be better than biotechs at getting new drugs accepted by insurance companies, Medicare, and Medicaid at prices that make a drug's development worthwhile.

While the plan sounds sensible enough, it will be unclear for years whether or not the company has succeeded. Moreover, Pfizer just added yet another potential layer of complexity to its experiment by buying Wyeth. Past promises of pharmaceutical mergers delivering economies of scale in research have rarely panned out, in large part because they pose significant integration problems. After GlaxoWellcome merged with SmithKline Beecham in 2000 to form the world's second-largest pharmaceutical company, GlaxoSmithKline, "the rate of drug approval was lower than the years leading up to the merger," Lichtenberg points out.

Nevertheless, Lichtenberg believes Pfizer's restructuring of research is necessary. "Trying to conduct research in smaller, leaner organizations is probably a good idea," he says.

Thornton is a senior writer for BusinessWeek.

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