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Feb 1, 2009 (Vol. 29, No. 3)

GEN’s Annual Wall Street Roundup

Experts Agree that Adaptability Is the Key to Long-Term Survival, Especially in Difficult Times

  • GEN: What does a company need to do to survive the current economic turmoil?

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    Benjamin J. Conway

    Conway: Above all else, pragmatic leadership—this plus strategic agility and dexterous implementation capabilities. Companies caught dwelling on scenarios of the past, hoping for a near-term return to the previous status quo will likely be the first to succumb to the current economic maladies.

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    Nola E. Masterson

    Masterson: For companies to survive the current recession they should take a tip from Charles Darwin who wrote in The Origin of Species: “It is not the strongest species that survive or the most intelligent, but the ones who are most responsive to change.” Adverse macroeconomic conditions reduce the survival chances of businesses in the same way that bad weather limits biodiversity. Darwin, who cleared a patch of soil to observe its colonization by native plants, wrote: “Periodic seasons of extreme cold or drought seem to be the most effective of all checks on the number of species.”

    Biotech companies will be caught up in similar circumstances because many are in a weakened state to begin with. The weakest will succumb first. Many companies that have weak balance sheets, poor patent positions, and few products will be forced to close their doors and sell their assets at fire-sale prices. Government grant money may help some companies maintain their science-based endeavors at a crawl, and a reduced head-count will certainly be seen in many companies.

    A conscious strategy will win the day as companies learn to adapt and provide innovations that give them dominance within their environment. In Darwin’s book, he writes of the relative profitability of adaptations while describing habitats as economies.

    Darwin’s great insight was that species retain randomly occurring new features that improve their survival—hence, evolution.

    The biotech community was birthed in the late 70s on the back of several very important breakthroughs in biological tools. Thirty years later, the tools needed to provide new evolutionary breakthroughs were most likely sitting in the minds of computer scientists who understand genetics. We need a quantum leap now to create products and services that don’t exist.

    Traditional sales and marketing approaches will need to be modified to focus on the healthcare consumer.  Personalized medicine is now embraced as significant by pharma, but it does not support the blockbuster model of the last 25 years. If the industry fails to change, it will become history and will be absorbed into the larger companies that have the staying power to withstand the worst markets in several decades. Innovation will be necessary to attract capital, partnerships, and create products.

    Novartis (NVS) and Roche (ROG) exemplify the resilience of the European pharmaceutical sector in turbulent times. Pricing, product, and patents remain three very relevant issues, which will be watched carefully by analysts. Their appeal comes from their strong product pipelines, cost controls, and cuts that were necessary. Of course, Novartis has the Chiron pipeline and Roche will likely soon have the Genentech (DNA) cancer franchise—evolution again.

  • Mehta: Get closer to one’s knitting behind a clear management vision and best people, including a recognition that we will get paid a fair price for the value our products add and no longer just any price that the market has borne to date! 

    At the same time, management teams need to develop globally integrated strategies with a more complete and perhaps a bit bolder vision of the way the world may evolve over the horizon when a company’s products mature. For example, a typical collaboration or partnership should not underestimate the potential opportunities outside the U.S., including the emerging markets. Similarly, cost structures should be refined with a fuller understanding of the benefits to be derived from global R&D, as well as manufacturing resources.  Such insights can redefine the company strategy and improve the probability of success. 

    Last, but perhaps most important, is the need for a renewed focus on truly new scientific opportunities for sustainable value creation. Though near-term life-cycle management opportunities should not be overlooked, they should be understood as such for their one-time and limited value creation potential and the greater risk they face from external value-police.

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    John L. Sullivan

    Sullivan: Remember, large life science tools companies like lab suppliers have reasonably stable revenue bases and usually carry little financial leverage. For them, survival is not an issue in today’s economy, it’s just a matter of how to best weather this storm. Size is an advantage; customers will often decide to consolidate their business with large vendors who can still afford to develop new products and service their clients.

    We’d advise these larger tools companies to stick to their long-term growth plans, but take care to be sufficiently conservative in projecting their business and in  controlling their discretionary costs. We would also encourage these companies to be prepared to take advantage of acquisition opportunities that may present themselves as their smaller competitors are pressured.

    Finally, those life science tools companies that sell capital equipment are naturally going to have to be more careful and conservative in their spending than companies that sell consumable products; capital equipment is especially difficult to sell in today’s uncertain environment.

      For small and unprofitable life sciences companies, including those emerging biotechnology companies with their most advanced drug candidates in preclinical or clinical testing, the story is decidedly more challenging. These companies have to cut costs dramatically while looking for opportunities to extend their financial flexibility through licensing or partnering activities.

    Management teams from these companies must make decisions to ensure the survival of the company. Cutting early-stage discovery programs to continue to feed development activities closer to monetization is one likely necessity, and partnering attractive drug candidates to cut financial risk is another.

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