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Chris Viehbacher’s Two Billion Dollars

Chris Viehbacher, ex-Sanofi, has reappeared at a $2 billion dollar biotech fund.

Viehbacher is clear, though, that Gurnet will be founding companies as well as looking outside the red-hot fields like oncology. To find value these days, you have to look outside of the trendiest fields, he says. And you’re also not going to find much in the way of innovation at huge companies like Sanofi.
“My conclusion is that you can’t have truly disruptive thinking inside big organizations,” says Viehbacher. “Everything about the way a big organization is designed is about eliminating disruption.”
In Viehbacher’s view, Big Pharma is still trying to act in the way the old movie studios once operated in Hollywood, with everyone from the stars to writers and stunt men all roped into one big group. Today, he says, movie studios move from project to project, and virtually everyone is a freelancer. In biopharma, he adds, value is found in specializing, and “fixed costs are your enemy.”

He’s right about that disruption problem at big companies, although he raised eyebrows when he said something similar while still employed at a big company. (Sanofi tried to put those comments in the ever-present “broader context” here). A large organization has its own momentum, but even if its magnitude is decent, its vector is pointed in the direction of keeping things the way that they are now. To be sure, that requires finding new drugs – it’s a bit of a Red Queen’s race in this business – but a lot of people would be fine if things just sort of rolled along without too many surprises or changes.

If that was ever a good fit for this industry, it isn’t now. That makes it nerve-wracking to work in it, for sure, because if you feel that your job is really, truly safe then you’re wrong. There are too many unpredictable events for that. I was involved in an interesting conversation the other day about investors in biopharma (and how passionately irrational some of the smaller ones can be), and we agreed that one reason for this is the large number of binary events: the clinical trial worked, or it didn’t. The FDA approved your drug, or it didn’t. You made your expected sales figures, or you didn’t. And those are the expected ones, with dates on the calendar. There are plenty of what’s-that-breaking-out-of-the-cloud-cover events, too. Trial stopped for efficacy! Trial stopped for tox! Early approval! Drug pulled from the market! It’s like playing a board game with piles of real money (and with your career).

So Viehbacher’s right on that point. But I part company with him on his earlier comments (basically, that if he was going to get anything innovative done at Sanofi, that he was going to have to go outside, because no one who wanted to innovate was working at a company like that in the first place). Even large companies have good people working at them – believe it or not! And some of them even have good ideas, too. But it can be harder for them to make headway in a large organization, he is right about that.

38 comments on “Chris Viehbacher’s Two Billion Dollars”

  1. Am I Lloyd says:

    “My conclusion is that you can’t have truly disruptive thinking inside big organizations”
    I think irony just reinvented itself.

  2. Hap says:

    I thought the problem was that he was holding organizational politics responsible for things over which he had control. If the organization doesn’t work, and you run it and choose the people who choose the employees and their targets, blaming the employees and the system is at least somewhat dishonest.
    Big bureaucracies all have problems, but it’s hard to achieve long-term goals in an organization that lasts like grass in the summer sun.

  3. Magrinho says:

    “fixed costs are your enemy”.
    Way too simplistic but that phrase is the current mantra and mindset in the C suites of big pharma.

  4. johnnyboy says:

    This issue is at the center of our business’ problems and success, and like everyone who cares about it I grapple with it. The usual idea is that big pharma is a lumbering behemoth that is too big and slow and concerned about process, and biotechs are small and nimble and more focussed on results (the idea that biotech can be ‘disruptive’ is just fad-of-the-year gobbledygook, you can disrupt all you like but at the end of the day you still need to jump through the FDA’s hoops, so everyone playing has to toe the same lines). But is it really true that biotech is so much more efficient ? How can you tell ? It’s not enough to point to a couple of biotechs with successful drugs. You would need to basically add up the budgets and staff of every single biotech in the world, look at how many successful products the group as a whole has come up with (and the time it took), and compare THAT to big pharma’s output. I think if anyone accomplished that, there would be some big surprises. I’m not saying that big pharmas are working great, as obviously they are not, and their big structures does mean they’re slow, over-managed and risk-averse. But in the rush to biotech, I think people are forgetting that for every successful biotech there are probably 20, or 100 (or more) that tank completely. And this also means a massive waste of efforts, resources and money. And I have yet to be convinced that this model is more efficient at producing drugs than big pharma’s is.

  5. Hap says:

    Except fixed costs aren’t the enemy – it’s the costs of trials that fail that is the enemy, and fixed costs (having enough people and technology to fully interrogate a potential drug) are the only real way people have of trying to hedge them. The refusal to ask hard questions of a program is a problem of big organizations, and people probably can’t know enough to avoid failure completely, but having the means to do so (or to find cheaper means to do so) is the only viable strategy to prevent having to spend lots of money in Phase 3 testing drugs that won’t work.
    Going cheap and short-term in a business that is expensive and long-term is not a recipe for success.

  6. steve says:

    @4, I think you’re missing the point. Sure, most biotechs fail but that doesn’t matter as it doesn’t affect pharma’s bottom line. The idea is to have a selection process that weeds out the winners from the losers. Again, the old Microsoft vs Apple model is illustrative. Lots of PC makers failed but Microsoft won out and Windows dominated over Apple because the winners went on to dominate the market. Similarly, Android now has 90% of the market over iPhone even though most Android makers don’t succeed. These both work because it uses they use a distributive model that depends on lots of competition between manufacturers. Large pharma can win by letting lots of innovative biotechs compete and picking out the top of the line ones as well. However, they need to do so intelligently, which unfortunately often isn’t the case.

  7. Biotech Capitalist says:

    re binary events: Derek, you have a good treatment of a peculiar problem to this industry. But, I would also consider this perspective: while binary events produce binary reactions, by consolidating geographically (into Boston) and increasing deal/trial/startup/investment/fundraise/etc throughput then the aggregate of these binary events can be continuous for the industry, just as say many many discrete quantum events can be well modeled with continuum mechanics.

  8. johnnyboy says:

    @6: we are talking about 2 different things. I am talking about how to develop drugs, you are talking about how to invest funds. I hope to think that big pharma’s purpose is still to develop its own drugs, not just be glorified venture funds.

  9. Vern says:

    I’m with Hap on this issue. My 20 years in big Pharma followed by almost 10 years now in academia (including starting a new co) suggest that leaders in Pharma have mistaken fiddling with the org chart for innovation. My university has a department of pharmacology and one of biochemistry. Their research interests overlap and they share a lot of equipment and student training, NO ONE asks, “should we merge them?”. As long as they do innovative science as measured by publications, funding and successful students, the structure stays the same. There is not a pot of gold hidden behind the org chart and innovation is not driven by wasting everyone’s time learning a ‘new’ system. Focus on important, disruptive science and just pick a structure that supports that and stick with it.
    Of course, a reorg is a great opportunity to fire people – which is also a gutless management tool.

  10. annonie says:

    I really don’t like the concept of being able to plan for disruptive technology. If it was obvious from the get go, then how is it necessarily disruptive? To be disruptive, it needs to be innovative, novel, and somewhat out of the box surprising. To get there means to have a different insight, to take chances. Things that are tough to accept in big pharma.

  11. Cellbio says:

    Can you really separate the funding question from drug development? Isn’t every decision about entering or proceeding with clinical development an investment decision? Sure, based on data, one hopes, but a question about whether the cash is best spent here or there.
    For start-ups, that question is often first asked based upon potential, then not asked again with great scrutiny until one arrives at a point of clinical clarity, driving the binary outcomes, or really never as the start-up simply heightens a buyers interest by moving down the path toward a critical measure. This last prospect drives value for investors, but is most often not associated with ultimate success in drug development.
    Was once looking for funds, the team all new to start-ups. We were not successful, and one bit of advice was that we were not serial entrepreneurs, so no track record (despite aggregate decades of real drug development, discovery, clinical development, launch). The model of a serial entrepreneur offered was someone who sold hype and promise with no drugs coming out of prior ventures. However, billions came out of prior investments. This clouds, in my opinion, the analysis of start-up success as I would measure it, real drug development.

  12. Anonymous says:

    “My conclusion is that you can’t have truly disruptive thinking inside big organizations”
    Certainly not unless the CEO himself makes it a requirement to take risks and threatens to fire any conservative risk-averse naysayers. I guess he missed that small leadership detail.

  13. Anonymous says:

    @6: Steve – sorry, but that’s complete bollocks! If Pharma would only have to let biotech take all the risks and then buy out the winners, then pharma would have to pay a lot more and would still only get what it pays for. So pharma wouldn’t be adding any value, and there would still no reason for it to exist. Either way, with or without biotech, Pharma is dead!

  14. Hap says:

    Pharma would have to get less than it pays for – if the intermediate doesn’t make a profit, there’s no point for them to be spending their (or someone else’s) money.
    If there’s no hope of biotech pushing through drugs themselves (and getting all the profits), then there’s only the hope of a lucrative exit to keep them going, and eventually the ecosystem will change to fit that reality – they won’t be concerned with whether something might work, only whether they can convince others in pharma that it does. Even if people maintain focus and honesty, there will be enough hucksters jumping in to make drugs from small pharma cost more than they’re worth.
    Big organizations have an incentive to maintain themselves, and so I can see that it would be hard to make truly disruptive ideas work there. I’m just not sure that big pharma needs to disrupt everything to be okay – they just need to find new and better things, and they are better equipped than most to do it, if management lets them, perhaps.

  15. biotechie says:

    @6 As a biotech booster, you should also recognize that attrition in clinical trials is historically worse for biotechs as a group than pharma companies as a group (there was a NRDD study about this a few years ago; perhaps attrition is worse because biotech assets are more innovative OR because biotech leadership cannot kill programs when the data say they should…the problem of having all their livelihood/eggs in one basket/asset). Most biotechs are insufficiently funded to carry out the entire drug development path, particularly late-stage clinical development; that is why pharma continues to be necessary for bring innovation to market. Derek is also right that there is some great expertise buried within pharma R&D. The problem is not peronnel but dysfunctional size: large companies just take far too long to do anything lithely and have too many tiers of management/committees to function as effectively as small companies. But negotiating the entire complex path of drug development with an under-capitalized (capital-efficient) startup biotech means so many more challenges than for a large company that has an established pipeline relationships with regulators and reimbursers, and has the financial resources.

  16. Anonymous says:

    @15: Do you have the reference for that NRDD article, please, I would love to see it, thanks!

  17. Anonymous says:

    Inefficiency in biotech is already happening: ‘Don’t run that study cos it will de-value the product if/when it fails’

  18. steve says:

    @13, you’ve made that argument before and it still doesn’t make sense. Your assumptions of pricing certainly don’t reflect the valuations that most biotechs receive. Generally pharma pays little up front and backloads things so they can see results. The value that pharma brings is in being able to run large Ph3 trials that are difficult or impossible for small biotech and then to use its marketing machine to sell products. The idea that they can’t do a licensing deal that makes sense and still make a profit is what’s truly “bollocks”.

  19. steve says:

    @13, you’ve made that argument before and it still doesn’t make sense. Your assumptions of pricing certainly don’t reflect the valuations that most biotechs receive. Generally pharma pays little up front and backloads things so they can see results. The value that pharma brings is in being able to run large Ph3 trials that are difficult or impossible for small biotech and then to use its marketing machine to sell products. The idea that they can’t do a licensing deal that makes sense and still make a profit is what’s truly “bollocks”.

  20. steve says:

    Sorry for the repeated posting, it’s the website. @15, thanks for making my point. The value that pharma brings is its ability to run large trials and then commercialize.

  21. Anonymous says:

    @20: Steve – “The value that pharma brings is its ability to run large trials and then commercialize.”
    …which is why their share prices have remained flat for 15 years? Remember: the cost of trials, chances of success, and probability-adjusted value of commercialization are *already* factored into the valuation (eNPV) which they pay full price for. Don’t you get it? Pharma adds no value!

  22. Anonymous says:

    PS. The only chance investors have to make mone from Pharma these days is to hope the company gets bought at a premium and ripped apart by the likes of Pfizer or Valeant so they stop wasting money on R&D and bad licensing deals.

  23. Hap says:

    And then what are they going to sell? Bogus management advice?
    It’s like an MBA fairy tale. “Psst, you know, you could make more money by selling the seed corn. No, really, it’ll work out. I promise.”

  24. steve says:

    @21 – The reason share prices are flat is because pharma keeps growing. They’ve become such behemoth structures that only blockbusters can move the share price. I agree with @8. Pharma needs to get back to the business of producing drugs. The experiment has been tried multiple time and distributive models always win over monopolies. The problem is that you can’t let the marketing guys do to the licensing model what they do to internal innovation – stop trying to predict the market value (which is like throwing darts, c.f., Cook et al, Nature Drug Discovery 2014).
    The trick is to pick licensing deals on probability of success, not market size and work with biotech early on. Biotechs are more innovative and take bigger risks by nature; conversely, they often don’t have the expertise or depth of experience to conduct clinical trials appropriately.
    There are a lot of new partnering models being developed and pharma is now willing to look at earlier stage companies than they used to. The question is whether they’ll be able to let the science drive the value and not the marketing models.

  25. Anonymous says:

    @24 Steve – Whichever way you look at it, no increase in share price means no value creation, period. The fact that they are growing without increasing share price just means that they are buying more assets with more money from more investors, or taking on more debt. In fact tgeir share prices have grown slower than inflation over the past 15 years so they are actually destroying value, because its business model has run out of steam and is now broken. The sooner this industry is put to sleep the better.

  26. Hap says:

    I guess you’ll have to use someone else’s drugs to put it to sleep. Good luck guessing what’s in the vial.
    If you pay for stock price increases, you’ll get stock price increases. It’s just that you can’t eat stock or take it when you’re sick, (I guess you can burn it to keep warm though. Yay!), and I wouldn’t hold on to it for long if I were you. The economy’ll be like making sausage, except at least you can eat sausage.

  27. Anonymous says:

    @23 Hap – Pharma just needs to sell what it has left (i.e., liquidate its assets), but as long as returns on R&D are negative then it had better stop investing any more because the business model is broken. Either fix R&D, or close shop and get out.

  28. steve says:

    Kind of silly to say we’re going to shut down the entire pharma industry. I’m not sure where you’re getting your numbers but in fact the PE ratio for global big pharma increased from 14.9x in 2011 to 26x in 2014. If that’s your interest, rather than drug discovery, then you should be happy. What’s needed to improve the drug discovery situation is to broaden the research base to cover biotech in an effective manner. There is no way any single pharma R&D organization can possibly cover the breadth that is included in the biotech industry. What’s needed is an adjustment of criteria, investing earlier and waiting longer for returns rather than only trying to license blockbusters that will move the stock price. Collecting lots of small gold nuggets is a better bet than constantly digging to find a huge one. Let the scientists determine the value, not the marketing guys.

  29. Anonymous says:

    The PE ratio has increased only because share prices have remained flat while earnings have gone down.

  30. Anonymous says:

    And you need to look at the past 15 years, not just cherry pick the last 3 years which barely make up for the prior losses.

  31. steve says:

    During the past 15 years there was one of the biggest recessions in US history. I’d rather look at the present. An increase in PE from 14.5 to 26 in the past few years is pretty impressive. With an aging population pharma profits are only going to continue to increase. However, I agree with @8 johnnyboy – I’m not so concerned about share price but rather how to improve drug discovery.

  32. Hap says:

    The focus on pharma yields is at least one part of the problem. It is analogous to a wealthy family deciding that they don’t have enough income and starting to snack on the principal. When they do that, the yields on the rest of their money have to increase to sustain their income; since they probably aren’t competent enough to do that consistently, they keep pulling the principal and thus require even higher yields and….
    Pharma made lots of money, but it wasn’t enough. So, merging and purging took over – since people don’t know or care who is useful, they purge for politics and to free up cash, decreasing their ability to find drugs. Since they don’t have enough drugs to sustain them, they buy drugs and merge again to keep the stock price up and to get the drugs they can no longer make, the consequence of eating their principal. Rinse and repeat…
    You ate the principal by cashing out the people who found the drugs, and now complain that productivity is low because you can’t find drugs. I wonder why. It’s hard to make money without products, and the stock measures that. It’s just a question of whether the diminished drug production capability is at fault for not finding more drugs or whether nuking it was a bad idea (that can only be solved by doing it again).
    If you’re going to liquidate pharma, then get it over with, because the merge and purge method seems to ensure a few get rich and the rest get screwed. I don’t think it’ll turn out like you planned, though, unless the plan is to liquidate useful industries for the benefit of a few and hope the rest of us can eat static. I can’t see how not producing useful things and hoping to make money doing so will end well. It’s like evolving ourselves into the appendix of the global economy, and considering our predilection for violence and the presence of nukes, one that is likely to get angry and infected once it realizes what it is.

  33. Lighterfluid says:

    @30 Anon. At the 15 year horizon you are comparing to the peak of the tech bubble – the S&P500 has only appreciated ~40% since then. Intel hit $75 per share 15 years ago and is now only $30. Is Intel really less than half the company they were then, or were prices unreasonably high in 2000? I don’t have access to PE ratios for pharma back then, but I’d be surprised if today’s elevated PEs aren’t substantially lower than they were in 2000.
    Sure, big pharma may have lagged the index over this time period (not all did though), but they were over-valued in the boom just like many other tech stocks. Their share price performance should therefore be viewed in that context.
    Simple share price comparisons also don’t incorporate buybacks, stock-splits, dividends, spin-offs or other returns to shareholders over the period. As an example, the much despised Pfizer has returned a total of ~$12 a share in dividends since 2000, and if they were re-invested at the time they were issued, you’d have earned a 24% total return despite the share price dropping about 25% in that time. Not a return worth boasting about, but share price alone doesn’t tell the whole story.

  34. Anonymous says:

    Yes I forgot about all those billions in buybacks, which show that the industry has nothing better to do with its cash other than return it to shareholders.
    15 years ago may have been the peak of the tech bubble, but it also represents the end of steady share price growth of big pharma over the previous 15 years. Since then stock prices have grown 1% per year while share buybacks and job cuts have increased exponentially, and growth in pharma revenues and R&D has slowed to almost zero, propped up only by unsustainable increases in drug prices. That surely tells you that pharma’s days are numbered.

  35. Anonymous says:

    @32 Hap – Focus on fixing pharma’s yields is not the problem as the low yields themselves are the problem. But I agree that how pharma is trying to fix those yields in the short term is only making matters worse.
    One thing I think we can all agree on: Fix drug discovery and overall R&D productivity/ROI, then all the industry’s other problems will simply disappear. Otherwise the industry is dead. But the R&D engine is already dead, and beating it harder won’t help. The industry needs a fundamentally new and different scientific approach to drug discovery which does NOT depend on our limited and often misguided understanding of human biology and disease. Time to throw away all our notions of drug discovery and start with a blank sheet of paper, just as ford did with the concept of a horse. He certainly understood that beating the horse harder couldn’t make it run much faster…

  36. steve says:

    You sound like Republicans about Obamacare. Rather than just keep on saying that you need to throw everything out, give us your replacement and explain how it would be better.

  37. Anonymous says:

    @36 Steve: I do have very specific ideas which I believe could work, but let me get on and test those ideas while everyone else can develop their own. That way we have more ideas and spread the risk. But in any case I would rather just get on and test whether they work rather than trying to argue the case. All I’m saying at this point is that it’s amazing what one can come up with when you throw out all preconceived ideas and start with a blank sheet of paper. Try it! 🙂

  38. steve says:

    Um, OK. Looking forward to the launch of Anonymous Pharma, Inc.!

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