Drug and Device Combinations - The Leadership Challenge

by Dr. Richard M. Arons and Robert Ferguson

KORN/FERRY INTERNATIONAL

Over a decade ago, many major medical device companies were divisions of broad life sci-ence companies having both pharmaceutical and medical device product offerings. To cite

a few examples, Pfizer owned Valley Lab, Schneider and Howmedica. Eli Lilly's assets includ-ed ACS, Physiocontrol, IVAC, and Cardiac Pacemakers Inc. IMED and Reichert were part ofWarner Lambert, and Squibb counted Edward Weck and Zimmer among its holdings.

These medical device divisions, in general, operated autonomously. Little synergy or interac-tion with the parent company occurred, as the parent's business strategy primarily focused onthe development of blockbuster drugs.

Consequently, career opportunities for executives at medical device divisions were usually lim-ited to those within the division. Talent within the pharmaceutical divisions pursued a track spe-cific to the pharmaceutical industry.

Segregation of the pharmaceutical and device entities eventually leant support to the conven-tional wisdom of the day: device companies were a drag on earnings and a distraction from themore lucrative pharmaceutical side of the business. Most pharmaceuticals sold their medicaldevice divisions or spun them off into separate organizations like Guidant. Only a handful ofdiversified life science companies kept their device entities, the most notable being Johnson &Johnson.

Current Strategy - Drug/Device Combinations

Fast forward to 2003. Business strategies of select life sciences companies have shifted froman exclusive focus on creation of blockbuster drugs to development of products combiningpharmaceuticals and devices. Why the shift now? The boom in the drug-coated stent markethas drawn attention to drug infused medical devices and the tremendous growth potential forsuch products.

Never before has there been such great interest in the synergies offered by combining phar-maceuticals and devices. Witness the unprecedented impact of a single type of product, J&J'sdrug-eluting Cypher stent and the soon-to-follow TAXUS stent from Boston Scientific.Combined revenue forecasts for these two products exceed a stunning $4 billion. This recep-tion signifies not only the tremendous clinical importance of bundling active molecules andmedical devices into a single product, but the market influence on organizational strategy andthe need for effective execution.

Other combination products in various stages of development include orthopedics such asbone morphogenic growth factors coated onto implants and in spinal stabilization devices (i.e.Medtronic's BMP II); surgical devices for use in infection control, adhesion protection, and tis-sue growth; and "site-specific" drug delivery, including drugs delivered directly to the centralnervous system and locally implanted chemotherapeutic drugs.

The Human Capital Dimension of Strategic Execution

How do life science companies with combination products position themselves to executestrategy effectively? In the face of unique market demands, the most critical factor to strategicsuccess for these organizations is the collaboration and integration of key functional areas todrive execution. Ideally, the functions must possess the ability to excel in the dual realms ofdevices and pharmaceuticals.

Examples of key functional areas include Regulatory Affairs, Quality Assurance, Research &Development and Manufacturing. With respect to drug and device products, these functionsshould have the specific knowledge, competencies and experience vital to business executionacross the two dimensions of the organization.

Especially imperative is Regulatory Affairs, where governmental and consumer pressure toauthorize effective and new modalities of treatment is strongly felt. Regulators, however, arecautious to initiate new products particularly when drugs from reputable pharmaceutical com-panies fail in the market place.

The drug-device combinations create new regulatory challenges, causing Regulators to alignwith R&D for assistance. The result is a great demand for senior regulatory professionals withthe wisdom and experience to work in partnership with governmental bodies such as the FDA(Food and Drug Administration), EMEA (European Agency for the Evaluation of MedicinalProducts), CDRH (Center for Devices and Radiological Health, CDER (Center for DrugEvaluation and Research), and CBER (Center for Biologics Evaluation and Research) toestablish a proper regulatory framework.

At an equal premium is the executive's ability to coordinate vastly different project groups.More often than not the head of the R&D group may come from device or drugs, but rarelyhave experience in both. For an R&D executive to effectively create a strategic research plat-form, they must understand what drugs are available to treat unmet needs in the market andalso the devices available that can serve as the delivery method for these drugs. R&D is thecombination of product development, business strategies and corporate alliances all unified into one key role. In addition to their technical expertise, R&D executives also must possesssuperb project management and leadership skills in order to guide functions that may not havefallen under their management at traditional drug or device companies. Additional functionsinclude device design, formulations, pharmacology, drug delivery, analytical chemistry, poly-mers, and materials to name a few.

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The ability to function in both the device and pharmaceutical environments is less critical toother roles. Certain functions such as Legal, Information Technology and Human Resourcescan execute their general responsibilities without regard to the complexities imposed by adrug-device combination.

While the knowledge to operate in the duality of drugs/devices is at a high premium, the talentthat actually possesses this competency is in severely short supply. Today, few organizationshave both drug and device businesses under one umbrella, and those that do often have eachside operating disparately. The challenge to leadership is to bridge the gap between the cul-tures and knowledge requirements, to foster and secure individuals with both halves of thepuzzle and to supply the talent necessary to drive strategy going forward.

Meeting Leadership Challenges

Companies dedicated to becoming major players in the drug-device market have severaloptions for meeting leadership challenges. First, they can recruit experienced individuals fromthe limited number of organizations having successfully produced drug-device products.These organizations have already dealt with the specific issues of regulation, product develop-ment, and manufacturing in a mixed environment. Examples of such recruitment targets aredrug delivery systems companies, or some of the leaders of this new trend in orthopedics, car-diology, or chemotherapy.

A second strategy is to recruit individuals who have lived in both, albeit separate, worlds ofpharmaceuticals and devices; people who have "crossed over" between drugs and devices.Such individuals are rare by virtue of the historic separation and decentralization of these enti-ties.

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Talent Requirements for Drug/Device Strategy Execution

Ava

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Criticality for Execution

Finance

CIOMfr.

Quality

R&D/Clin./Med.Reg.

Gen. Mgmt.

Sales

Marketing

Bus. Dev.

Tech.Service

HR

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About Korn/Ferry International

Korn/Ferry International (NYSE:KFY), with over 70 offices in 36 countries, is the world’s leading provider of executive human capital solutions. Based in Los Angeles, the firm works closely with clients worldwide todeliver customized executive search, management assessment and mid-level search services, including theidentification of CEOs, COOs, CFOs, board members and other senior-level executives; the formal evaluationof senior management teams; and the recruitment of middle managers through its Futurestep subsidiary.

For more information, visit the Korn/Ferry International Web site at www.kornferry.com or the Futurestep Web site at www.futurestep.com

© Copyright 2003 Korn/Ferry International

A third strategy is to create a dyad of leaders who share responsibility for specific project func-tions, such as the research or manufacturing organizations. Initially, this option may be viewedas a costly and inefficient overlap. However, companies choosing this approach find the solu-tion to be pragmatic and expedient.

Regardless of the option a company selects to meet the leadership challenges of developing,manufacturing and selling products that incorporate active chemical entities into therapeuticmedical devices, one thing is indisputable. There will be unprecedented competition for the fewpeople in the industry having the demonstrated competency that can unleash the full potentialof drug-device products!

Dr. Richard M. Arons is Global Leader of the Medical Device Sector at Korn/Ferry International.

Robert Ferguson is Global Leader of the Life Sciences Contract Services Sector.