Structural design practiced at Pharchem: a matter of structure

following strategy

J. Tibau & J. Maes

PART TWO – A globally established pharmaceutical company

(2004)

A globally established pharmaceutical company (2004)

In this second part we discuss the organization of Pharchem, when it became an established
pharmaceutical company, after the firm divested all other activities (chemicals and packaging)
in 2004. The strategy of the long serving CEO allowed Pharchem to confine itself at the right
moment to its most lucrative and promising activity: pharmacy. The divestment of the
chemical activities had been a success and the considerable proceeds thus obtained could be
used to address the crisis in the industry. The established pharmaceutical company
(pharmaceutics based on organic chemistry research) was thus no longer part of a
conglomerate combining diverse activities (chemicals, packaging and pharmaceuticals).
Organizational challenges in restructuring the firm, however, lay ahead now that the other
activities had been abandoned.

As mentioned above, although small compared to its competitors, Pharchem had developed
and marketed two blockbusters drugs (the tranquilizer Uturux and the treatment for
memory/balance disorders Southantartic) in two therapeutic areas on which it focused. One
of the blockbusters generated 44% of the firm’s turnover, the other one 35% (so in total 79%
of the overall turnover). Although Pharchem was a research driven pharmaceutical firm, the
later stages of the value chain beyond research - such as development1, production, marketing

1
The process of bringing a new drug to the market once a lead compound has been identified through the process of drug
discovery. It includes pre-clinical research (microorganisms/animals) and clinical trials (on humans) and may include the step
of obtaining regulatory approval to market the drug.

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and sales - were shared among the various drugs. Moreover, the patent life of both
blockbuster drugs differed a lot. The drug that generated 44% of the turnover was already out
of patent in most European countries. The US would follow soon. The drug was so efficient
that successors could only be incrementally more efficacious. Nonetheless, the overall
turnover of the drug and its successor still grew with 15% in 2004. The second blockbuster
that generated 35% of the turnover grew with no less than 25% and, more importantly,
researchers had developed a rich pipeline of extensions and follow up compounds. In the
mid-term Pharchem could therefore become a ‘one variety of drugs’ company, which would
make it very vulnerable because of the attrition rate in its costly R&D, stern regulatory
requirements and an industry wide decline in R&D productivity (Garnier, 2008). Pharchem’s
strategic intent communicated to insiders at that moment was that it aimed at reinvigorating
its research pipeline while maximizing the profits that could be generated by the marketing of
its current blockbusters, over the longest possible period of time. Two functional activities,
R&D and Global Operations were key to achieving Pharchem’s strategy. R&D felt
considerable pressure. Its head, an American, former owner of a small company located in
Cambridge (Massachusetts, USA), acquired by Pharchem, was put under considerable
pressure to deliver results. In recent years before, his two predecessors had been dismissed
since no major drug in the R&D pipeline reached the market. Among other achievements, the
CEO stated that he expected his head of R&D to make considerable progress in the process
that would bring to the market a potential drug that was in the pipeline of the acquired New
England Company. That potential drug was the main reason for the acquisition by Pharchem
of the New England Company. In order to have sufficient space to allow R&D to bring a new
drug to market profits generated by the sales of current drugs needed to be maximized and
extended. The role of sales and marketing (Global Operations) was therefore also crucial. In
2004, the US and Europe were on a par with each other in terms of turnover, each generating
40% of the worldwide sales. The third in rank was Japan with 12% of sales while the
remaining 9% were achieved in the rest of the world. The US operations moreover generated
most profit since the prices of drugs were much less regulated than in Europe. In sales and
marketing as well as in development, however, a common worldwide policy or approach
could not be developed for two reasons.

The first reason was related to the development of drugs in an early stage of the
pharmaceutical value chain. The regulation of drugs and other therapeutic devices varies by
jurisdiction. In order to bring drugs to the market in the US branch of Pharchem needed to

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meet the stringent requirements of the well-known Food and Drug Administration (FDA). In
Europe, in the early two thousands the approval of the European Medicines Agency and some
of some national regulators needed to be obtained. On both continents the approval process
differed, and distinct networks needed to be built and activated. Physical and intellectual
proximity with key members of the agencies was a major asset. Executives who had built
their experience in Europe would have had a hard time getting the approval of the FDA for
marketing Pharchem’s drugs in the US. Doing it the other way around, US executives
operating in Europe, would have experienced this process as difficult too. But the latter was
less probable since Pharchem’s headquarters and roots were European.

The second reason was pricing and drug reimbursement policies that differ a lot across
continents and countries. Once a regulatory agency has ascertained the clinical benefit and
safety of a product, pharmaceutical firms needed to submit the drug for evaluation by a payer
of some sort, since in most countries the patient only pays a fraction of the drug’s price. As
payer relationships became more important than ever, most companies were keen to recruit or
develop executives who were talented in communicating pharmaco-economic benefits to
payers. Yet, these executives could only operate effectively in a particular health system.
Indeed, most Americans under the age of 65 receive their health insurance coverage through
an employer, whereas in Europe the system is primarily publicly funded. Except for research
that was mostly done in one major facility located in Europe and the manufacturing of drugs
that was done in two European sites, the development of the drugs and their marketing
required executives to use specific approaches acquired through their experience in the
specific health system.

Discussion question:

Which structural design (functional structure, the divisional structure (product, market and
geographical; with centralized or decentralized staff functions), or the matrix structure)
would you suggest Pharchem to adopt now as a globally established pharmaceutical
company? How would you address the differences in the USA, Europe and the rest of the
world in terms of development (regulatory agencies) and sales/marketing (pharmaco-
economics)?