Today’s pharma leaders are less experienced in other sectors, but does it matter?

July 13, 2016 | The Pharma Letter

The pharmaceutical industry’s use of directors from outside the sector has fallen from 40% to 26% in the last five years, research from executive search firm DHR International shows.

These findings, based on the main boards of UK-listed pharmaceutical companies from 2010 to 2015, raise the question of whether firms have the right blend of skills at the highest level, and when one considers findings on the number of executive directors in the industry with experience outside pharma, biotech or banking, they are even more startling.

In 2010, some 28% had experience outside those areas, but in 2015, this had dropped to just 15%.

DHR International has asked whether this shift towards inward-focused leadership at some pharma companies might make it harder for firms to overcome challenges facing the industry, as they could struggle to adapt best practice from other sectors.

Alin Popescu, partner at DHR International, says: “By not bringing in as much external talent as they used to, pharma companies inadvertently risk becoming more resistant to change. The decline of sector diversity among the pharmaceutical industry’s main board executive directors does seem to run counter-intuitive to the needs of an industry facing a new set of challenges.

"Leaning towards proven performers in the sector is certainly attractive in uncertain times. However, given the nature of the issues facing the pharma industry, leaders with backgrounds in other areas – fast-moving consumer goods (FMCG) being a great example – may be able to better leverage their experience, having faced similar challenges elsewhere.”

Why would such outside experience be useful in an industry requiring such specialist skills and up-to-the-minute knowledge of everything going on in one or several therapy areas?

One example DHR International raises is that, faced with the competition of generics, there continues to be concern that some pharmaceutical companies retain too high a cost base.

Issues such as overstocking or understocking inventory, low product turnover rates and lengthy manufacturing lead times can lead to significant supply chain costs and negatively impact profitability.

A purely pharma background or experience elsewhere?

Mr Popescu adds: "A lot of leaders from the FMCG sector have experience of achieving substantial cost reductions in recent years by completely overhauling their supply chain models. Pharma companies could well derive significant benefit from that skill set.

“The same applies when hiring for compliance roles, currently a critical area for pharmaceutical companies. Hiring an individual with experience in an already heavily regulated industry with a longer compliance tradition, such as financial services, could be advisable.

“Those companies forward-thinking enough to look beyond their immediate competitors for their next generation of executive leadership may well be the ones that emerge from this period of uncertainty with more robust business models.”

DHR International went as far as to suggest that declining executive experience from outside pharma might explain recent figures published by finance giant Deloitte showing that there had been a decrease in returns on research and development in the sector from 10.1% in 2010 to 4.2% in 2015.

Not everyone would agree with making that connection.

Martin Whitaker, chief executive of thriving UK specialty pharma company Diurnal (AIM: DNL), is among those who believe that pharma experience far outweighs any time spent in other industries.

“If you look at Diurnal, the experience is within the pharmaceutical sector and we’re all very much focused on pharma,” he says. “We’re such a highly regulated industry and you would not have an understanding of if you worked in an area like retail, so that type of experience is of limited benefit.”

Every company is different, of course, be that in size, specialism and or sources of revenue, and dotted around the world of pharma there remain firms with leaders who have had experience elsewhere.

Not a closed shop, but a complex one

The most notable example is perhaps Joseph Jimenez, the chief executive of Swiss pharma giant Novartis (NOVN: VX), who has served on the board of consumer products firm Colgate Palmolive and headed divisions of food processing company Heinz.

France’s Sanofi (Euronext: SAN), Hutchison China MediTech (LSE: HCM) and the UK’s Skyepharma (LSE: SKP) also have bosses or board members with experience of sectors such as consumer goods and finance.

Roche (ROG: SIX), another Swiss pharma giant, hired Stephan Feldhaus, its head of group communications and an executive board member, from Siemens, Europe’s largest engineering company.

Indeed, Roche is more than happy to recruit senior figures from outside pharma when their profile is right, a spokesman for the company tells The Pharma Letter.

“At Roche, we believe that different backgrounds, views and thinking styles are needed in order to be able to discover the best ideas and bring truly innovative solutions to patients around the world,” the spokesman says.

“Therefore, diversity plays a crucial role in Roche’s recruitment processes. Roche seeks to find the best candidates with a diversity of backgrounds, experiences and perspectives.

“The board of directors needs to be able to carry out its control function as well as talk at eye level and work together with the group management. Expertise, experience and diversity, among others, play a vital role in the composition of the board.”

So perhaps membership of pharma boards is not a closed shop – but it is one requiring an in-depth understanding of an industry with hugely complex challenges in which insiders, to a greater extent than previously, are seen by companies as best-placed to overcome.

 

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