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Biotechnology
Management Practices Landmark new study identifies successful management practices in Biotech companies
May 24, 2004 Most business executives would argue that companies lacking basic management skills are unlikely to succeed in the marketplace or generate significant returns for shareholders. Nevertheless, both managers and investors in numerous biotechnology firms seem to believe that this standard wisdom does not hold true for them. Research completed last year by Mardis, Aibel & Associates shows that a substantial portion of biotech executives view “achieving operational excellence” as a secondary concern. Many report that a significantly higher priority is “validating the scientific concept”, “searching for funding” or “publicizing the work of the firm”. Similarly, many biotech investors quietly acknowledge that they care less about creating firms with viable management models than in pushing firms to the next news announcement that will drive a jump in valuation. The all-too-common belief for many in the industry is that, for biotech's, first-class management is not needed to achieve world-class returns. They are wrong. New analysis by Mardis, Aibel & Associates conclusively demonstrates that there is a direct linkage between operational excellence in biotech's and the creation of shareholder value. In fact, the correlation between the two is so strong that biotech executives or investors who fail to recognize it must realize that they are putting their careers and fortunes at serious risk. These new findings in no way suggest that good science, sound funding, or effective promotion are not important. They do show that management excellence is just as critical to success as these other factors and cannot be given a lower priority. These conclusions are based on a Mardis, Aibel analysis of data from dozens of firms and hundreds of executives, collected as part of our study of biotech management practices conducted in the summer and fall of 2003. The study determined that a surprisingly high proportion of biotech’s fall short of meeting even minimum standards of management. In fact, the analysis found that only five percent of the almost 60 firms in the study database achieve truly high standards of management excellence. Even more surprising is the fact that the majority of CEO’s in the study acknowledged that creating world-class management models is not a high priority for them. Fortunately, however, the study found that there are an increasing number of biotech firms that are beginning to adopt “best management practices” and that are acquiring the knowledge, tools and processes to create sustainable operational models capable of meeting the complex needs of these rapidly growing firms. Using publicly available financial data, Mardis, Aibel researchers have now assessed how the better managed firms in the study fared compared to the not-so-well managed firms. Specifically, for the publicly-traded companies that participated in the study, we compared both growth in market capitalization and change in stock price over time with how the firms stacked up against standards of good management. The results are startling. In terms of market capitalization we found that during the years between their IPO and the end of the first quarter of 2004, the better managed firms grew in market value by an average rate of 30.4% per year; while the firms that ranked in the lower half on management performance grew at 10.9% per year. Simply put, a firm that primarily focused on demonstrating a scientific principle or on meeting the next funding milestone was likely to create less than one-quarter the shareholder value of a better managed firm over ten years. Those that, in addition to meeting their scientific and technical goals, gave attention to building viable management models, that emphasized operational excellence, and that rewarded day-to-day performance against a defined business strategy, prospered. Similarly, we found that the stock prices of the firms in the analysis behaved in virtually the same ways. Exhibit 2 demonstrates that the stock prices for the biotech’s that we identified as being in the top half of companies in terms of their use of best management practices significantly outperformed those in the bottom half. Despite the difficult economic conditions facing nearly all biotech’s during the last several years, the firms in the top category averaged more than a 100% increase in stock price from the date of their initial IPO to the present. Conversely, those in the bottom half saw their stock prices fall by more than half. The average firm in the first group started with shares priced at just over $8 and today the average value is almost $20. Their peers in the bottom group started, on average, at close to $20 and ended up with shares priced, on average at just over $8. In fact, only three firms out of the sixteen in group that were weakest in management showed a positive change in stock price during the period studied while only one-quarter of the sixteen better managed companies had a decline. In truth, these findings should come as no surprise. As a recent study by McKinsey and Company found, shortcomings in managing clinical development can lead to value-robbing outcomes in biopharmaceutical companies. For example, each day of delay in introducing even a niche medicine can easily result in $800,000 in lost sales (and multiples of that for blockbusters,) much of which may never be recovered. And, as the study notes, delays in bringing drugs to market can affect a firm’s valuation since investors closely watch the progress of new drugs and the effectiveness of clinical processes. This is a serious problem--over 40 percent of drugs in the clinic experience delays of between one and six months and one in eight has a delay of more than six months.5 Most importantly, Mardis, Aibel research has shown that many of these delays are attributable to shortcomings in management practice as opposed to technical or scientific failures. What this means for biotech managers and biotech investors is simple in concept, but not so simple in execution. Our research shows, for example, that having a highly pedigreed senior management team in and of itself is not sufficient for operational success. In fact, the big name executives who are often sought by biotech firms can lack the specific skills and experience that are necessary in a lean, fast moving, entrepreneurial environment. Their prior successes usually have not involved the difficult spade work of building organizational capabilities and capacity in a resource constrained, green field enterprise. What is needed is a management team that is able to create and implement appropriate systems and processes. Establishing a management model that balances the need for discipline with the need for creativity and innovation, in addition to having strong skills in raising capital and attracting the right scientific talent. This is especially true in biotech firms, where the long time horizon. Often 12 to 15 years. Between start-up and positive cash flow puts an extra premium on having sound, disciplined, management practices. During these years, it can be particularly difficult for managers and staff to stay focused on mundane day-to-day concerns such as process efficiency, cost effectiveness, or milestone management. Even more importantly, during this gestation period biotech’s have to anticipate, plan for and successfully implement multiple organization transitions. From discovery to development to commercialization to maturity. Each transition is inherently disruptive and inevitably challenges the management skills of even the best leadership teams. Mishandling these transitions can cost the investor tens, if not hundreds, of millions of dollars in market value. The basic business practices that work in other industries must be applied with equal vigor in biotech companies. At the highest level, our research coupled with the research of other academics and business experts, concludes that this means performing well against five critical attributes of business success. They include: 1) Defining and adhering to a focused business strategy -- linking all aspects of the business to achieving the strategic goals of the firm. 2) Rigorously focusing on execution; with a day-to-day, disciplined emphasis on meeting and exceeding performance goals and on finding ways to continuously improve operations. 3) Creating and maintaining a performance driven culture within the firm; making sure every employee fully understands the strategy and is committed to doing his or her part to achieve it. 4) Building a flat, flexible, and responsive organizational structure that facilitates communication, speeds up decision-making, and focuses accountability for performance. 5) Delivering real leadership; executives (and board members) who understand that the primary role of top managers is to lead. In more practical terms, this involves applying the specific management tools and practices that our study identified as contributing to better performance in small and mid-size biotech and biopharmaceutical firms. And for most, this means effectively dealing with the basics; and not, as one biotech CEO put it, .allowing things to fall through the cracks. The companies that achieved superior financial results and which we determined were performing well against the five critical attributes tended to make use of a number of time-tested management strategies that have proven successful in numerous other industries. For example, we found that the best managed firms structure the business around cross functional processes and programs, with a well established process for killing ineffective projects. Further, they typically rely extensively on budgeting as a strategic tool to plan for, manage, and measure the ongoing work of the firm, rather than viewing it as a perfunctory accounting exercise. Similarly, they pay attention to performance metrics for virtually all of the business processes conducted in the firm and reward managers and teams for achieving aggressive objectives. They define recruitment criteria for prospective business and technical executives that emphasize leadership and people management skills, and worry less about hiring candidates who have “marquee” status in the industry. Most importantly, they stress accountability management -- setting clear, measurable, goals; ensuring that the right person is empowered to make decisions; rewarding performance for real results; and making it clear to employees at all levels that the firm will sink or swim based on how well every individual does his or her job. In short, they treat management as a professional discipline, not a part-time job. Management must build a business environment where operational excellence is seen, along with great science and strong funding, as critical to success and worthy of the time and attention of top management. The firms we studied that have recognized this truth are bringing their products to market more quickly, are facing fewer surprises, and are managing at sustainable burn rates. And, along the way, they are rewarding their investors with better returns. Numerous recent studies of companies in multiple industries, have reinforced our finding that good management leads to good financial results. We now have conclusive evidence that this is equally true for biotechnology firms, and we are even more convinced that success in this industry will flow to those who recognize that operational excellence is the key to success. Leaders who can bring the skills and techniques of professional management to an industry where “lip-service” to the need for operational excellence has unfortunately too often been the norm, will be the ones who create viable, sustainable businesses and who, in the end, will reap the financial rewards for themselves and their investors.
For more information contact peter.barfoot@bioportfolio.com BioPortfolio offers organizations the unique opportunity to promote their products and services to a specialized life science audience. Advertisers can select a combination of promotional tools - from advertorials to text ads and email circulars. For further information click advertising options! |
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