Pharma Company Turns to Cognitus and iThink to Plan a High-Value Future

interesting case study on pharma strategy – can be found on the iseesystems.com blog:

Pharma Company Turns to Cognitus and iThink to Plan a High-Value Future



Richard Stevenson,
Cognitus
(Note to reader: VetCo is a fictional name for a real company. Names of VetCo executives are also fictionalized as is VetCo’s parent company ChemCo at the request of the companies.)

When Jurgen Schmidt became Strategy Planning Director of VetCo, a $2 billion per annum veterinary pharmaceutical company, he quickly assessed its current operations and the research and development efforts that would fuel its future. While the business numbers described a healthy five-year future, Jurgen sensed that something wasn’t quite right.

It wasn’t an unreasonable feeling. All pharmaceutical companies face the same challenge: product development pipelines must include future winners that will support revenue growth as current patents retire and revenue streams are cannibalized by generic competitors.

Developing new drugs is risky business: testing cycles are long and complex, the approval process is increasingly rigorous and failure rates are rising. That all adds up to huge expense and risk that can be somewhat mitigated by strong branding and distribution channels that increase a viable product’s market potential.

VetCo had the additional challenge of being a relatively small subsidiary of ChemCo, a huge European conglomerate.

Having heard of Barry Richmond and read some of Peter Senge’s work, Jurgen was hopeful that Systems Thinking could give him a way to explore VetCo’s future and to plan product strategy. He found his way to Cognitus, a consultancy that specializes in applying Systems Thinking to support strategic thinking and value analysis.

Jurgen attended a Cognitus training workshop where hands-on work with Systems Thinking and iThink convinced him that both could help him explore how to position VetCo for continued growth. “Jurgen then invited me to spend a day on-site with him to understand the situation,” says Richard Stevenson, Cognitus Managing Director. “We concluded that that best way to move forward was to engage VetCo’s directors of marketing, R&D and finance. Together we’d first articulate the specific problem — then simulate the viability and potential value of candidate strategies.”

Richard points out that “as a strategy consultant it’s critical to quickly gain the hearts and minds of senior managers. They have big problems to solve and just don’t want unnecessary technical overhead. iThink is a powerful bridge that allows them to build simple models quickly. It makes it easy to learn and apply the concepts of stocks, flows, and feedback loops — and iThink’s underlying simulation engine is as powerful as any business manager needs or wants it to be.”

Aside from Jurgen, none of the other VetCo managers had any background in Systems Thinking. “There was initially some skepticism and arms folded across chests,” remembers Richard.

VetCo Revenue Richard guided the group through problem definition. While VetCo’s five-year plan looked strong, product development efforts were weak. It takes 8-12 years to bring a veterinary product to market and VetCo’s existing product portfolio was old and already in decline. Consequently, older products needed to be quickly replaced by new ones, simply for VetCo to stand still.

The parent ChemCo was demanding long-term revenue growth of 5% per annum. But beyond just growing revenue, products at market would have to add value by supporting the product development process itself. VetCo was caught in the classic “limits to growth” archetype now confronting all pharmaceutical companies — the bigger you grow, the harder it is to continue to grow and to create value at the same time.

With the problem defined, the next step was to express it in simple stock/flow and feedback structures in iThink. The group began to build a model to help them simulate possible solutions. “The initial model was small and very transparent,” says Richard. “It helped VetCo develop a new way of thinking about the product pipeline. There was a lot of feedback to consider.” The group fleshed out the model progressively over a couple of months, using VetCo’s internal business data.

The model was applied to test three product portfolio development strategies: internally developed products, licensed/acquired products, and generic products. Scenarios were based on each strategy in isolation and in combinations – and tested for operational reality, growth potential and financial value creation.

“The model followed individual projects and products over the complete 20-year product life cycle,” says Richard. “It included probability success rates and timings of each development stage under available resource constraints.” The model also included marketing, distribution, and government approval processes and costs. All scenarios were tested at extreme limits of controllable variables”.

Each director’s operational perspectives were progressively built into the model, with vigorous cross-boundary discussion. As the group tested the three basic development strategies they gradually developed and “bought into” the conclusions. “There was a great deal of heat generated in the process, but ultimately no major conflicts remained,” reports Richard.

This was particularly impressive given their conclusion. None of three strategies was likely to work. To meet the growth targets, VetCo would have to invest massively in speculative programs that would actually destroy financial value. Instead, what the company needed was to be acquired itself. “VetCo needed a larger partner with an established product development pipeline to fit VetCo’s established distribution and marketing infrastructure. “ChemCo was just not the right fit. Veterinary pharmaceuticals wasn’t part of its core business,” explains Richard.

It’s difficult to realize and accept that your company should be sold. But having come to this undeniable conclusion the VetCo directors were then able to use the iThink model and simulations to present their ideas to the VetCo Board (including ChemCo), to test the potential suitability of prospective acquirers — and then to support the negotiation process itself.

The ultimate result was a deal that provided a three-way win. “ChemCo got more value from the sale than it would have gained from keeping VetCo long-term,” reports Richard. “The acquiring company got existing products and infrastructure that fit its own strategy and added value to its business. And most VetCo managers and employees emerged with more secure jobs.”

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