Four New Pharmaceutical Chief Executives Speak Out

The CEOs of Pfizer, Roche, Eli Lilly, and Bristol-Myers Squibb address topics from dealmaking to the pharmaceutical industry's image problems

Seven new CEOs have taken the helm at major pharmaceutical companies since 2006. Such high-level turnover in less than two years is rare in any industry—but for the pharmaceutical industry, it's a complete management overhaul that's already changing how the sector manages research and development, controls its image, and approaches dealmaking. Among the new CEOs are Jeffrey Kindler of Pfizer (PFE), which is under pressure to make wise use of its enormous $26 billion cash hoard, and Severin Schwan of Roche (RHHBY), which recently made a $43.7 billion bid to buy out the 44% of Genentech (DNA) shares it didn't already own. There is also James Cornelius of Bristol Myers-Squibb (BMY), who tried to buy cancer drugmaker ImClone (IMCL), but was outbid by Eli Lilly's (LLY) new CEO John Lechleiter. In interviews with BusinessWeek writers Arlene Weintraub and Kerry Capell, the four new CEOs weighed in on some of the most pressing issues facing their industry. Following are edited excerpts from those interviews.

Is the pharmaceutical industry primed for consolidation—perhaps even megamergers?

Schwan: I am not in favor of megamergers at all. You end up with huge overlaps and you destroy a lot of value. If you look at Genentech, even though it is a sizeable transaction in terms of financials, the two organizations are very complementary to each other. Genentech's activities are centered in the U.S., whereas Roche is active on an international basis. And within the U.S., the commercial focus of Genentech is on oncology, whilst Roche is selling medicines in other diseases such as virology, transplantation, or osteoporosis. Importantly, Genentech's research will continue to operate as an independent center to preserve the unique culture at Genentech and to maintain the innovation momentum.

Lechleiter: Acquiring ImClone fits right in with our strategy of growing our presence in oncology. It is an opportunity to build critical mass. It's difficult to imagine megamergers. We have not seen any create really significant sustained value. If there is one, it will be about someone getting bought from a position of weakness.

Kindler: We never say never. We are constantly engaged in a very robust process of reviewing every imaginable opportunity. Having said that, our criteria [for choosing acquisitions] hasn't changed: It has to be complementary to our strategies. It has to have the right price relative to the value it creates. It has to be one where we feel we can manage the inevitable destruction that deals create.

What's the solution to the lack of productivity in drug research?

Cornelius: It's troubling in that the Food & Drug Administration is approving 18 to 20 [new drugs a year], but we're spending about $60 billion on research. That equation doesn't work. Something has to give. We'll have to be selective in the R&D bets we make. We're going to see companies working together more to address that R&D productivity issue.

Kindler: The expression I use here a lot is: "the spirit of small, the power of scale." I want our business units to be small enough that they can get all the benefits of an entrepreneurial organization. They can do what needs to be done to meet their customers' needs on the one hand, but on the other hand get the benefits where scale does help. Scale helps in late-stage clinical development trials that are very expensive; scale helps commercialization in large markets. If we can get the balance between those two things right, we are going to effectively grow the business.

Schwan: Our philosophy is that people need enough freedom to make decisions in a decentralized manner. One thing we have done in the last 18 months is to further decentralize our management model in pharma by creating five "disease biology areas." DBAs set priorities and make portfolio decisions for their specific diseases. An interesting thing happened when we implemented this new structure: We saw them streamlining certain projects. Previously the portfolio decisions were made high up in the organization, so everyone was fighting for their own portfolios—they wanted to get as many of their projects financed as possible. Now these decisions are made a level down in the organization. That means decisions are made by people who are closer to the projects, so they are willing to invest more in what they believe in, and remove money from those less likely to succeed.

Is it better for a drug company to diversify into other endeavors, such as devices or consumer health, or is staying focused on prescription drugs the way to go?

Cornelius: We see companies moving towards the diversification model. We're diversified now and moving the other way. We sold medical imaging, we sold ConvaTec [wound care]. Assuming there will be capital markets next year, we'll try to take a piece of our nutritional business, Mead Johnson, public in the first quarter. Our guess is it's worth $8 billion. This strategy is built on a strong belief that there are still very serious unmet medical needs out there and that the Bristol-Myers scientific group can bring us enough products and subsequent revenue to have [drug research] as our main strategy.

Lechleiter: There was a time when many of us couldn't shed our non-core assets fast enough. Lilly built up in medical devices in the late 1970s, but ultimately split off that business, Guidant. Now we're pretty much a pure-play drug company with the exception of our animal health business, Elanco. I think some diversification is necessary and prudent. Now, we look at Elanco and ask: How can we build it up? Being in biotech is a form of diversification, too. But our diversification strategy is going to be very thoughtful. We don't intend to build a devices business or anything like it again.

How will the economic crisis affect the pharmaceutical industry?

Cornelius: We're somewhat immune from the cycles that will play out for the remainder of this year, early next year. We have money in the bank, cash flow is strong, earnings are improving. The only disappointment has been the darn stock price. I watch the stock and I think we're worth much, much more. It brings tears to my eyes.

Kindler: Nobody is immune. One can expect to see some impact across the industry. As we sit here today, it's probably a little bit early to give any kind of prognostications. The market is still settling out. I do think in any economy, unfortunately, people continue to need medicines and treatments. They will value those that provide good medical benefits. I don't see that changing.

The public has a poor image of drug companies. What can be done to improve that trust?

Lechleiter: Winning back the confidence of people across the spectrum is going to require us to show we can be trusted. The scientific insights we have now are equivalent to being on the road with the lights on rather than trying to feel our way in the dark. We need to show we can translate the revolution in biology to products. And we need to make a lot more moves to restore transparency. Starting in 2009, we're going to make public our payments to physicians. Frankly, we can all do better.

Kindler: What you have seen from many companies is a willingness to make changes in response to some of the criticism the industry has. We've made commitments about posting our clinical trials, we have supported some legislation that Senator {Charles] Grassley [R-Iowa] has proposed regarding disclosure of certain payments [to doctors]. This is not about words, it's about actions. I like to tell people our business is asking people to put our products in their body. The people we ask to do that are entitled to demand that they [can] trust us. Every day we need to earn that trust.

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