This case describes the reorganization of drug discovery at GlaxoSmithKline (GSK) following the formation of GSK from the merger of Glaxo Wellcome and SmithKline Beecham. This reorganization placed nearly 2,000 research scientists into six centers of excellence in drug discovery (CEDD). Each CEDD focused on a small set of therapeutic areas and possessed decision rights over the progression of pharmaceutical compounds through the early stages of development. It addresses issues about the benefits of focus vs. diversification in R&D, the role of decentralized vs. coordinated decision making, and the importance of alignment between the structural and infrastructural (e.g., performance incentives) aspects of an operating model.
Economies in drug R&D process
In this session we have analyzed the economies of scale, scope and learning in the drug R&D process. The drug discovery process can be divided into several steps: Research activities (including Target biology, Chemical design & synthesis and Lead optimization), preclinical development and clinical development.
As shown in the figure below, this process takes several years and encompasses a wide range of expertise and skills. Economies of Scale:
Among the factors we have identified to increase scale and reduce R&D average costs, the use of new technologies is at the top of the list. By investing in capital intensive technological advances screening rates are increased and unit costs lowered. All the R&D processes are today carried via personal computers and software developer skills are a key requirement for scientists. The improved efficiency is due to the use of computer based programming for target diseases that have speeds up use of existing “keys & locks” in database to find match. The increased scale of production is associated with innovative changes in the R&D. Large firms are using their capital to acquire small companies which have innovative ideas and interesting portfolios. Moreover larger firms have access to more capital to fund R&D; the bigger is the firm, the more they can invest in innovation at a lower cost than smaller firms. For example, clinical trials are extremely expensive and consequently only larger firms could afford to take multiple products through the process. On the other hand, well established firms seek mergers and alliances with smaller specialist firms due to access to capital and sales resources and capabilities. Larger firms are attractive partners for alliances since they could provide smaller firms with resources and validation. They have better capabilities for running large clinical trials and they are better at managing the Food and Drug Administration (FDA) approval process. Economies of Scope:
Whereas economies of scale primarily refer to efficiencies associated with R&D changes, such as increasing or decreasing the scale of production, of a single product, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of distribution, of different types of products.
Smaller firms have specialist competencies in new technology including genetics, molecular biology, chemistry and computer sciences. The shared knowledge in an alliance with a larger firm is economy of scope. “It is found that larger research efforts are more productive, not only because they enjoy economies of scale, but also because they realize economies of scope by sustaining diverse portfolios of research projects that capture internal and external knowledge spillovers” When merger or alliances are made, the R&D process is boosted, the existing knowledge base is transferred between the companies, the research findings are shared and new compounds can be tested against larger library of existing keys. Screening technology and organizational processes can be used across multiple areas.
In the case of GSK, there are three new strategic priorities that aim to increase...
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