The Expense of Vision in Outsourcing

Vision is one of the most sought-after and admired qualities of a corporate executive. The Oxford Dictionary (online edition) defines vision as “the ability to think about or plan the future with imagination or wisdom;” and as “a mental image of what the future will or could be like” (1).

When a CEO’s vision is aligned with what really happens in the business environment, it can bring great corporate success and great admiration for the CEO. The classic example in recent times of a corporate leader with a spot-on vision is Steve Jobs, whose understanding of the promise of mobile technology yielded some of the most successful product launches of all time.

Vision has become such an admired quality in corporate leadership that it has come to overshadow other qualities, including operating skill. The excitement generated by a corporate vision can drive up the valuation of a company (i.e., its stock price) even when operating results are poor; just look at the performance of Amazon’s stock, which has rocketed up despite marginal earnings.

With technology companies, the story often trumps the actual performance. That point was driven home when Microsoft CEO Steve Ballmer announced his retirement. Ballmer delivered enormous profits over a 12-year period and successfully positioned the company in some key businesses such as databases, gaming, and Skype. Despite that performance, Ballmer was widely criticized for Microsoft’s late and troubled response to mobile technology, and the company’s stock went up when his retirement was announced.

The bio/pharmaceutical contract services business has had its share of visionaries, but their track record has not been good. Their efforts to respond to clear trends in the bio/pharmaceutical industry such as the re-engineering of R&D, the growing role of biopharmaceuticals, and the expanding role of emerging markets in the supply chain have often come to naught, overwhelmed by the realities of profitability and cash flow.

Lonza’s vision
The practical difficulties of realizing a vision were evident when Lonza announced a series of retrenchment moves, most notably its withdrawal from its biosimilar joint venture with Teva, and the restructuring of its microbial fermentation business. Those initiatives were originally set in motion by Lonza’s previous CEO, Stefan Borgas, who clearly had a vision to position Lonza in the forefront of the major biotechnology trends sweeping over the bio/pharmaceutical industry. Borgas engineered the acquisition of Cambrex’s biologics assets in 2006, which gave Lonza significant positions in bioscience-based research tools, microbial fermentation, and cell therapy. Another acquisition gave Lonza capabilities in virus-based products. Borgas established the biosimilars joint venture with Teva, which linked Lonza’s large, mammalian cell-culture capacity with Teva’s experience in developing and marketing generic injectables. He also established Lonza’s presence in China by building a small-molecule manufacturing facility in Nanjing and added capabilities for antibody-drug conjugates at the company’s main manufacturing site in Visp, Switzerland.

Borgas’s strategic moves undoubtedly positioned Lonza directly in the path of major trends driving the bio/pharmaceutical industry, but they were expensive, requiring extensive capital expenditures and investments in R&D and acquisitions. Whatever their long-term promise, the initiatives hurt Lonza’s near-term profitability and the heavy reliance on contract manufacturing made it difficult to hit stated earnings targets. When the EU debt crisis struck and the Swiss franc shot up in value, Lonza’s profitability was severely hurt, and Borgas was replaced. The new executive team has focused on restoring predictable, near-term profitability and retreated from some of those strategic initiatives.

Lessons learned
In hindsight, Borgas’ vision for Lonza seems well founded: the trends it was based on are in fact reshaping the bio/pharmaceutical industry. The Lonza experience, however, shows that reality has a habit of impinging on the vision, and that pursuing a vision is inherently risky. Reality struck in the form of the European financial crisis and the longer-than-expected time it has taken to clarify a path for biosimilars in the US.

The risk comes in part because pursuing a vision by definition means being ahead of the market and giving people what they want before they know they want it. Stockholders and investors may run out of patience waiting for the corner to be turned, and the business might actually run out of cash before the vision is realized. Taking those kinds of risks will generally be unpalatable and unwise for otherwise successful businesses.

Other examples of failed visions in the contract services industry point to the fact that customer behavior often takes much longer to change than the visionary expects. This situation has been especially true for the integrated services model, often referred to as the “one-stop shop.” Companies that have pursued this model did so with the understanding that small companies lacked the sophistication to buy services individually, and that bio/pharmaceutical companies of all sizes are looking to shorten development times and reduce costs.  Those visionaries, however, underestimated the reluctance of the large bio/pharmaceutical companies to change the way they do things, and their reliance on smaller bio/pharmaceutical companies made them vulnerable to the volatility of venture funding and capital markets.

Many CMO and CRO executives have seen the contract services business model as one that can transform the bio/pharmaceutical industry and help it adapt to new market realities. In the clinical research sector, that has indeed been the case, especially as CROs have leveraged the power of information technology to streamline clinical trials. CROs have been able to make the investment in information technology without undermining their near-term profitability and performance. CMO and CDMO executives will be well served to follow that more incremental approach to pursuing their long-term visions.

Reference
1.Oxford Dictionaries, “Definition of vision in English,” (Oxford University Press), online, http://oxforddictionaries.com/us/definition/american_english/vision, accessed Sept. 17, 2013.

About the Author
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource, info@pharmsource.com,www.pharmsource.com.