Healthy Skepticism Library item: 8991

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Publication type: news

Steyer R.
Finding Chiefs Among Drugmakers
TheStreet.com 2007 Mar 22
http://www.thestreet.com/_yahoo/newsanalysis/pharmaceuticals/10345775.html

Full text:

Big Pharma has undergone big changes in less than two years as five new CEOs have taken charge — some via smooth transitions and others after earlier-than-expected departures of predecessors.
The next 12 months should bring more action as Bristol-Myers Squibb’s (BMY – Cramer’s Take – Stockpickr – Rating) directors continue their search for a permanent replacement for Peter Dolan, who was pushed out in September, and GlaxoSmithKline’s (GSK – Cramer’s Take – Stockpickr – Rating) board replaces Jean-Pierre Garnier, who will retire in May 2008.

For circumstances less dramatic than at Bristol-Myers, management experts say finding a new CEO requires a mixture of timing, temperament and skills, whether a company designates an heir, runs a contest among several executives or selects an outsider.

Choosing a CEO “depends on the company’s needs at the time,” says Will Mitchell, professor of strategy at Duke University’s Fuqua School of Business. “As in any industry, it’s important that a leader have a set of basic skills and the ability to pull together a diverse set of skills.”

Business professor Cliff Cramer says tomorrow’s CEO requires different skills than drug company executives of the 1980s and early 1990s. The modern CEO must cope with the power of managed care organizations, the rise of generic-drug competition, a more cautious Food and Drug Administration and consumers who want a lot more answers.

“You need someone who is more externally focused and who has more interpersonal skills,” says Cramer, director of the health care management program at the Columbia Business School. “They must put themselves in the shoes of different constituents,” and they must motivate people at a time when jobs are being cut and sales growth is slowing.
Troubled companies such as Schering-Plough (SGP – Cramer’s Take – Stockpickr – Rating), which brought in Fred Hassan four years ago, select outsiders not only to repair major problems but also to tell Wall Street that the old way of doing business has been terminated.

Healthier companies, such as Sanofi-Aventis (SNY – Cramer’s Take – Stockpickr – Rating), usually take the heir-apparent route, or they can conduct a managerial bake-off like Pfizer’s (PFE – Cramer’s Take – Stockpickr – Rating) or GlaxoSmithKline’s.

The Executive Bake-Off
Pfizer had three contestants — all vice chairmen — to succeed Hank McKinnell, who was eased out of office in July, 12 months before reaching retirement age.

GlaxoSmithKline appears to be considering four insiders to replace Garnier; he was scheduled to retire in October when he reached the mandatory retirement age of 60, but his contract was extended so he could preside over the expected launching of several big drugs.

At Pfizer, the winner was Jeffrey Kindler, who had been there five years, a virtual rookie compared with his two competitors. His promotion in July illustrates a healthy company trying to shake things up from within, says Mitchell, adding that a contest enables a board to measure executives’ different visions.

“The board had enough insight that it wanted to make changes” in Pfizer’s strategy, says Mitchell, noting that Kindler has reorganized top management and revised the way Pfizer develops and markets drugs.
Although Kindler’s style is an improvement over McKinnell’s, Columbia’s Cramer says, Cramer isn’t a fan of the CEO bake-off. “It can be a very disruptive process at a company,” he says. “I’m not sure what that accomplishes.”

The Planned Succession Approach
The designated-heir is the easiest policy, and Duke’s Mitchell says this approach is used by a company seeking to “incrementally build on its strengths.”

At Sanofi-Aventis, Jean-Francois Dehecq made it emphatically clear that he wanted Gerard Le Fur to succeed him as chief executive. Le Fur, who had supervised research and development for 11 years, became CEO in January, and Dehecq remains as chairman.

Succession planning went smoothly at AstraZeneca (AZN – Cramer’s Take – Stockpickr – Rating), which announced in July 2005 that David Brennan would succeed Sir Tom McKillop. Brennan had been in charge of U.S. operations since Sweden’s Astra and Britain’s Zeneca Group merged in 1999.

Two other drugmakers are signaling successors to CEOs who are in their late 50s. At Eli Lilly (LLY – Cramer’s Take – Stockpickr – Rating), Sidney Taurel, 58, a 36-year veteran, became CEO in July 1998 and chairman in January 1999. His heir apparent is John Lechleiter, 53, who was appointed president and chief operating officer in October 2005. Lechleiter, who also is a director, joined Lilly in 1979.

At Wyeth (WYE – Cramer’s Take – Stockpickr – Rating), Robert Essner, 59, who joined the company in 1989, has been CEO since 2001 and chairman since 2003. Eleven months ago, Wyeth appointed Bernard Poussot, 55, president and vice chairman. In January, Poussot was named chief operating officer and a director. He has been with Wyeth since 1986.
“These companies have very solid CEOs who are well-liked,” says Cramer. “The two people behind them are well-regarded. There’s no reason to shake things up.”

The New Blood Method
Sometimes, a healthy company will shake things up by hiring an outsider. That’s what Merck did when it hired Raymond Gilmartin in 1994. Gilmartin had been chairman and CEO of Becton Dickinson (BDX – Cramer’s Take – Stockpickr – Rating).

Although Merck looked at insiders, it chose Gilmartin because of his CEO experience, his background in organizational development and the board’s belief he was well-equipped to deal with issues such as the rising power of pharmacy benefit management firms, says Cramer, a former vice president for corporate planning and development at Merck.

After a string of research failures and the burgeoning Vioxx legal problems, Gilmartin was replaced in May 2005, 10 months earlier than his official retirement date. Board members, who said they didn’t push out Gilmartin, said they looked at insiders and outsiders before choosing longtime Merck executive Richard Clark.

No Smooth Sailing for Bristol Chief
As for Bristol-Myers Squibb, many analysts say the company appears to be marking time, waiting for a takeover, even though interim CEO James Cornelius told analysts in October that “we’re not for sale.” Since then, several press accounts, citing no sources, reported that Sanofi-Aventis had discussed — and then broken off talks about — a merger.

Analysts predict Bristol-Myers Squibb will be acquired once prospective suitors are more confident about patent litigation involving its biggest drug, the anticoagulant Plavix. A ruling on a patent-infringement suit vs. a Canadian company is due later this year, but there’s still a Justice Department investigation of Bristol-Myers Squibb’s effort to protect the Plavix patent.

With such uncertainty, says Columbia’s Cramer, it would be difficult to attract a “top-flight” outsider as permanent CEO.