The last five years have not been great ones for the large-cap pharmaceutical space. Not only has the industry been tainted by high-profile safety scandals, but many would-be blockbuster drugs have failed late stage trials. While that has been going on, generic companies have constantly chewed at the rich profit margins of branded drugs. Making matters even worse, the industry's leaders apparently decided to play things safe; launching huge intra-industry mergers and waves of cost-cutting in favor of funding innovative and far-sighted R&D.
What is striking, though, is how relatively short the tenures of Big Pharma's current crop of CEOs are. Five years' experience on the job qualifies one as a "veteran", and many major firms have switched leadership relatively recently. While it has been quite a long time since Big Pharma has produced a CEO on par with Steve Jobs, Larry Ellison or John Chambers, imagine the buzz in the tech-world if these major top kicks all left in relatively close succession.
Pfizer is the Latest ...The most recent major drug company to see a change at the top is Pfizer (NYSE:PFE), as the company announced Monday morning that Jeffrey Kindler was resigning/retiring and that Ian Read would take over the position of CEO.
This move was not part of a formal succession plan and comes as something of a surprise. Mr. Kindler was not necessarily widely-loved by Pfizer's analysts (or long-term shareholders), but it is not as though this resignation was a response to a collection of torch-wielding mobs outside Pfizer's corporate headquarters. Still, for a company that once produced double-digit returns on capital, the performance under Kindler's watch was not exemplary and the company has been slow to recharge its pipeline with promising compounds to mitigate oncoming patent expirations.
... But Not Nearly the Only OnePfizer's change comes fairly quickly on the heels of Merck's (NYSE:MRK) announcement at the end of November that Kenneth Frazier would replace Richard Clark in the role of CEO. Here too is another example where change may be due - Merck has actually done rather well in relation to the industry (and the S&P 500) over the last five years, but returns have been flagging and near-term growth prospects are not great.
The Rest of the FieldLooking around the rest of Big Pharma, there not a lot of long-term CEOs to be found. Novartis (NYSE:NVS) changed its CEO at the beginning of 2010, while Glaxo SmithKline (NYSE:GSK), Sanofi-aventis (NYSE:SNY) and Lilly (NYSE:LLY) are all led by men who took the helm in 2008. That makes AstraZeneca's (NYSE:AZN) David Brennan something of a greybeard at roughly five years' tenure in the big chair.
Time for Big-Thinking or Penny-Pinching?One of the biggest failings of Big Pharma would seem to be its rejection of scientists as prime leadership material. Of the 10 largest drug companies, exactly two are run by people with a background in science (and one of those has a BA in biology, not a doctorate). The lone exception is Lilly's Lechleiter, with a PhD in organic chemistry (though Pfizer's new CEO has some background in chemical engineering). Is it really shocking, then, that lawyers, accountants and MBAs have struggled to lead companies that are so critically dependent on cutting-edge biological research?
It is fair to wonder how much any CEO can change the fortunes of a major pharmaceutical company. After all, it is not poor leadership skills that make a compound ineffective against cancer or rheumatoid arthritis, and viruses are notoriously unphased by sharp suits and fiery PowerPoint presentations.
Still, there is a lot that a pharmaceutical CEO can do that matters. These companies have clearly prioritized cost-cutting over R&D spending in recent years, and that is a decision that comes from the top. There is no one-to-one relationship between R&D spending and clinical success, but there is a pretty clear link between failing to spend and having nothing in the pipeline. Moreover, good CEOs can clean up, reorganize and reestablish the priorities of an organization - in the case of Sanofi-aventis, for instance, the current leadership gets high marks for being more dynamic and pragmatic than prior leadership.
The Bottom LinePerhaps these changes at the top can give new hope to long-suffering investors. What the industry really needs, though, is vision and innovation, not new ways of firing people, closing plants or buying other companies. That is really what shareholders should be looking for and expecting from this still-new crop of Big Pharma leadership - proof that Big Pharma is once again willing to be a leader in research and reestablish foundations for future growth.
By Stephen Simpson
Stephen Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
