Managerial cognitions and business model evolution...

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HELSINKI SCHOOL OF ECONOMICS (HSE) Department of Marketing and Management MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION IN THE BIOTECHNOLOGY INDUSTRY Cases Amgen and Genentech Marketing Master´s thesis Paavo Järvensivu, Mikko Laukkanen Fall 2006 Approved by the Council of the Department ____ / ____ 20____ and awarded the grade_______________________________________________________ ______________________________________________________________

Transcript of Managerial cognitions and business model evolution...

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HELSINKI SCHOOL OF ECONOMICS (HSE) Department of Marketing and Management

MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION IN

THE BIOTECHNOLOGY INDUSTRY

Cases Amgen and Genentech

Marketing

Master´s thesis

Paavo Järvensivu, Mikko Laukkanen

Fall 2006

Approved by the Council of the Department ____ / ____ 20____ and awarded

the grade_______________________________________________________

______________________________________________________________

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ABSTRACT

Managerial cognitions and business model evolution in the biotechnology industry –

Cases Amgen and Genentech

Paavo Järvensivu, Mikko Laukkanen

Master’s thesis, marketing

Helsinki School of Economics

Fall 2006

Objectives

The study aims to discover how business models have evolved in the biotechnology

industry by analyzing two US-based case companies, Amgen and Genentech.

Emphasis is put on managerial cognitions and their role in the coevolution of business

models and the business environment. The theoretical goals are to improve the

existing business model framework, which was chosen as a starting-point, and to find

compatible research methods.

Methodology

The study uses an abductive case approach, where theory is developed side-by-side

with empirical analysis. The selected sources of information are the case companies’

annual reports, complemented with specialist interviews and articles from the public

press. The research methodology comprises of mapping all relevant events in

spreadsheets, creating narratives describing the business model evolution of the case

companies, building learning paths consisting of signals, cognitions, strategies and

actions, and finally combining the information under the business model framework.

The framework offers a valuable tool for analyzing business model evolution, making

possible a systematic comparison between different companies.

Results

The improved business model framework and the methodology used are found to

enable the relevant analysis and description of the business model evolution of

biotechnology companies. However, the analysis still requires extensive interpretation

by researchers. Based on the study, researchers and business managers can learn to

better appreciate and understand the role of managerial cognitions and the complex

dynamics in the coevolution of business models and the business environment. The

study identifies, analyzes and presents those factors that have had influence on the

ways the business models of Amgen and Genentech have evolved over time. The

differences discovered in the evolution processes also serve as a foundation for further

research.

Keywords

Business model, managerial cognition, evolution, biotechnology, Amgen, Genentech

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TIIVISTELMÄ

Liikkeenjohdon kognitiot ja liiketoimintamallin evoluutio bioteknologia-alalla –

Tapaustutkimuskohteet Amgen ja Genentech

Paavo Järvensivu, Mikko Laukkanen

Markkinoinnin pro gradu -tutkielma

Helsingin kauppakorkeakoulu

Syksy 2006

Tavoitteet Tutkielman tavoitteena on selvittää kuinka liiketoimintamallit ovat kehittyneet

bioteknologia-alalla. Tapaustutkimuskohteina ovat yhdysvaltalaiset

bioteknologiayritykset Amgen ja Genentech. Tutkimuksessa korostetaan liikkeenjohdon

kognitioita ja niiden roolia liiketoimintamallien ja yritysten toimintaympäristön

yhteiskehityksessä. Teoreettisina tavoitteina on parantaa lähtökohdaksi valittua

liiketoimintamalleja kuvaavaa viitekehystä ja löytää yhteensopivia tutkimusmetodeja.

Metodologia Tutkielmassa käytetään abduktiivista tapaustutkimusmenetelmää, jossa teoriaa kehitetään

empiirisen aineistoanalyysin kanssa samanaikaisesti. Valitut tietolähteet ovat yritysten

vuosikertomukset, joiden antamaa kuvaa täydennetään asiantuntijahaastatteluilla ja

lehtiartikkeleilla. Tutkimusmetodologiana on kartoittaa kaikki oleelliset tapahtumat

taulukoihin, kuvata valittujen yritysten liiketoimintamallien kehittyminen narratiiveilla,

luoda signaaleista, kognitioista, strategioista ja toimenpiteistä koostuvat oppimispolut ja

lopulta yhdistää tiedot liiketoimintamalleja kuvaavaan viitekehykseen. Viitekehys toimii

arvokkaana työkaluna, jolla voidaan analysoida yritysten liiketoimintamallien kehitystä ja

verrata kehityskaaria systemaattisesti eri yritysten välillä.

Tulokset Tutkielmassa osoitetaan, että parannetun liiketoimintamalleja kuvaavan viitekehyksen ja

käytetyn metodologian avulla voidaan analysoida ja kuvata bioteknologia-alalla toimivien

yritysten liiketoimintamallien kehittymistä. Analysointi vaatii kuitenkin tutkijoilta vielä

huomattavissa määrin tulkitsevaa päättelyä. Tutkielman avulla akateemikot ja

yritysjohtajat voivat paremmin ymmärtää ja ottaa huomioon liikkeenjohdon kognitioiden

roolin ja muita kompleksisia piirteitä, joita liiketoimintamallien ja yritysten

toimintaympäristön yhteiskehityksellä on. Tutkielmassa tunnistetaan, analysoidaan ja

kuvataan tekijöitä, jotka ovat ajan myötä vaikuttaneet Amgenin ja Genentechin

liiketoimintamallien kehitykseen. Kehitysprosesseissa havaitut erot antavat myös pohjan

tuleville tutkimuksille.

Avainsanat Liiketoimintamalli, liikkeenjohdon kognitio, evoluutio, biotekniikka, bioteknologia,

Amgen, Genentech

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1 INTRODUCTION ...................................................................................................................................................3

1.1 METHODOLOGY ................................................................................................................................................4

1.2 VALIDITY AND RELIABILITY.............................................................................................................................6

1.3 SCOPE OF THE STUDY........................................................................................................................................7

1.4 THE DEVELOPMENT OF THE BIOTECHNOLOGY INDUSTRY...............................................................................7

1.4.1 The development of the financial markets .................................................................................................8

1.4.2 Partnering in biotechnology.....................................................................................................................10

1.4.3 The development of science......................................................................................................................11

1.4.4 Managing biotechnology companies .......................................................................................................13

2 MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION...............................................16

2.1 MATERIAL ASPECTS........................................................................................................................................17

2.1.1 Business relationships ..............................................................................................................................17

2.1.2 Strategy, structure and governance .........................................................................................................19

2.1.3 Operations and resources ........................................................................................................................20

2.2 MANAGERIAL COGNITION ..............................................................................................................................21

2.3 CORPORATE CULTURE ....................................................................................................................................26

3 AMGEN...................................................................................................................................................................28

3.1 EARLY HISTORY..............................................................................................................................................30

3.2 THE DEVELOPMENT OF AMGEN......................................................................................................................31

3.2.1 Science .......................................................................................................................................................31

3.2.2 Finance and funding .................................................................................................................................34

3.2.3 Partnering .................................................................................................................................................35

3.2.4 People ........................................................................................................................................................38

3.2.5 Political environment................................................................................................................................43

3.2.6 Products, customers and markets ............................................................................................................44

3.3 LEARNING PATH..............................................................................................................................................45

3.4 CONCLUSIONS THROUGH THE BUSINESS MODEL LENS ..................................................................................50

3.4.1 Material aspects ........................................................................................................................................50

3.4.2 Managerial cognition ...............................................................................................................................54

3.4.3 Corporate culture......................................................................................................................................55

4 GENENTECH ........................................................................................................................................................57

4.1 EARLY HISTORY..............................................................................................................................................59

4.2 THE DEVELOPMENT OF GENENTECH..............................................................................................................61

4.2.1 Science .......................................................................................................................................................61

4.2.2 Finance and funding .................................................................................................................................63

4.2.3 Partnering .................................................................................................................................................65

4.2.4 People and culture ....................................................................................................................................68

4.2.5 Political environment................................................................................................................................70

4.2.6 Products, customers and markets ............................................................................................................72

4.3 THE LEARNING PATH OF GENENTECH............................................................................................................74

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4.4 CONCLUSIONS THROUGH THE BUSINESS MODEL LENS ..................................................................................79

4.4.1 Material aspects ........................................................................................................................................79

4.4.2 Managerial cognition ...............................................................................................................................83

4.4.3 Corporate culture......................................................................................................................................84

5 CONCLUSION AND DISCUSSIONS................................................................................................................85

5.1 CONCLUSION...................................................................................................................................................85

5.2 DISCUSSION OF THE CASE ANALYSES.............................................................................................................87

5.3 LIMITATIONS...................................................................................................................................................87

5.4 IMPLICATIONS FOR ACADEMICS AND BUSINESS MANAGERS .........................................................................88

5.5 RECOMMENDATIONS FOR FURTHER RESEARCH.............................................................................................88

6 REFERENCES.......................................................................................................................................................90

6.1 BOOKS AND SCHOLAR ARTICLES....................................................................................................................90

6.2 PUBLIC PRESS AND COMPANY PRESS RELEASES ............................................................................................94

6.3 INTERVIEWS ....................................................................................................................................................96

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1 Introduction

The biotechnology industry was once predicted to be the next major cornerstone for Fin-

land’s national economy (Finnish Pharma Cluster, 2001). This has encouraged Tekes, the

National Technology Agency of Finland, to fund a project called GloStra that studies,

among other issues, the evolution of the industry. One of the aims of the project is to bet-

ter understand the workings of this new industry and to identify some of its factors of

success. This paper participates in the project by analyzing the development of the busi-

ness models used by two large U.S. based biotechnology companies, Amgen and Genen-

tech. Both companies have in excess of a quarter century of history in the industry and

have been leaders in its development. Some industry analysts we interviewed in Finland

estimated that Finnish biotechnology companies are roughly 10-15 years behind their

U.S. counterparts in development. However, the aim of this study is not to provide Fin-

nish companies with concrete guidelines on how to best emulate these successful com-

panies, but rather to increase the general knowledge of business model development and

the impact of managerial cognitions in the biotechnology industry.

The term business model is widely used among industry practitioners to describe the way

businesses are using their resources in order to create profits. Despite the term’s long ex-

istence in the entrepreneurial jargon and the recent enthusiasm of academics in studying

the topic, researchers have not reached a consensus regarding the definition, nature,

structure and evolution of business models. In addition, the dynamics related to the

coevolution of business models and the environments in which they operate have lately

received a lot of attention from scholars. We continue this research and select a promis-

ing business model framework, built by Tikkanen et al. (2005), as a starting-point for

discovering tools to analyze business model evolution. The framework comprises mate-

rial aspects, such as resources and capabilities, and managerial cognitions that alter the

way managers respond to different internal or external signals. We are especially inter-

ested in the impact of those cognitions on business model evolution.

The rapidly developing biotechnology industry offers a fruitful setting for studying busi-

ness models and their evolution. This study aims to provide a useful theoretical frame-

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work and methods, with a special focus on managerial cognition, for describing business

model development in an environment that is underlined by fast-paced technological ad-

vancements. Our specific goals regarding theory are to (i) improve the original frame-

work and (ii) discover compatible research methods, by utilizing the empirical data from

two biotechnology companies. The methodology for meeting our goals and then using

the improved theory in two empirical case analyses is described in Chapter 1.1.

This paper continues with a description of the development of the biotechnology indus-

try, in Chapter 1.4, in order to give the reader minimum background information about

the business model environment. In Chapter 2, a theoretical framework is built and dis-

cussed. The framework is tested in Chapters 3 and 4 by analyzing the business model

evolution of two biotechnology companies. Chapter 5 will discuss the success and us-

ability of the framework and the research methods used.

1.1 Methodology

As we began planning this paper, we could not find studies that would have directly pro-

vided us with proven, suitable methods and frameworks. We concluded that the best data

source in our reach for scrutinizing the changes in the business models, and especially

the mental models of the top managers of our two case companies, Amgen and Genen-

tech, would be the companies’ annual reports. This is supported by Barr et al. (1992),

who studied the cognitive changes in two U.S. based railroad companies by using letters

to stockholders to map the managers’ mental models. Although not ideal, the annual re-

ports still provide a good view of the major actions that have taken place while also re-

flecting some of the prevailing thinking of the top managers. Amgen’s annual reports

were available for all the years 1984-2005 during which its shares have been under pub-

lic trading. Genentech’s annual reports were available only for the years 1982-2005 al-

though it went public already in the year 1980. The missing information for the years

1980 and 1981 was largely covered up in the book ‘From Alchemy to IPO’ by Cynthia

Robbins-Roth (2000). The book, paired with ‘The Amgen Story’ by David Ewing

Duncan (2005), also provided information about the two companies’ development for the

years they were still privately owned and thus not obliged to official, regulated reporting

practices. In addition, we selectively used the companies’ press releases and material

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from their web pages to check factual issues such as dates and figures. To get more

deeply into the analytical discussion surrounding the companies, we scanned through

dozens of articles by such quality papers as the Pharmaceutical Executive; the articles

that we quoted directly are listed in the references. For validating and improving our in-

terpretations, we interviewed seven industry professionals: an executive director of the

health care program of Sitra, an independent public foundation, and five executives from

leading Finnish biotechnology companies, as well as the country manager for Amgen in

Finland. Also two managers from Genentech agreed for telephone interviews, which

were used to tweak and confirm the results of our analysis.

To meet the theoretical goals of this study, improving the original framework and dis-

covering compatible research methods, we used a qualitative, abductive case approach,

which Dubois and Gadde labeled systematic combining (2002). They define it as a proc-

ess where “theoretical framework, empirical fieldwork, and case analysis evolve simul-

taneously.” We started off with a business model framework by Tikkanen et al. (2005)

and as the research process advanced, we developed the model further to better suit the

description of the evolution of the business models in the biotechnology industry. In uni-

son with the empirical data, we also developed methods for analyzing the case compa-

nies. The final process that resulted from the systematic combining approach is depicted

next.

We interpreted and derived the top managers’ cognitions from the source materials by

analyzing what has really happened, what is said about the intentions, strategies and ac-

tual events and then comparing that data against the evolving business environment. We

also interviewed several biotechnology specialists in Finland in order to validate our rea-

soning and then adjusted the interpretations accordingly. To minimize the researchers’

influence and biases, we first systematically registered the events and clues of cognitive

changes from the annual reports in spreadsheets. Then we selected the most meaningful

sets of data to build narratives of the two companies’ business model development.

Based on the narratives and the spreadsheets, we mapped chronological learning paths

for both of the companies that comprise of those signals, cognitions, strategies and ac-

tions that we found to be the most descriptive. These learning paths proved extremely

helpful in uncovering the top managers’ cognitions. To confirm our interpretations, we

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discussed about our findings with two Genentech managers but unfortunately, managers

from Amgen were not available. While the narratives and the learning paths use the lan-

guage of biotechnology, as is proposed by Dubois and Gadde (2002), we provide compa-

rability across different firms and industries by concluding the analysis with a look

through the business model lens.

1.2 Validity and reliability

We believe this study has produced justifiable new knowledge, although we do not agree

with the positivistic notion of objective, knowable reality beyond the human mind. As

Wachterhouser (2002) proposed, we can still “develop, apply and retest criteria of

knowledge that give us enough reliable evidence or rational assurance to claim in multi-

ple cases that we in fact know something and do not just surmise or opine that it is the

case.”

To improve the validity and the reliability of our findings, we have followed the criteria

of justified knowledge in interpretive studies, identified by Sandberg (2005). First, we

have discussed our views with several industry specialists and researchers in order to en-

sure communicative validity, which enables us to check the coherence of our interpreta-

tions. Second, to provide attention to possible discrepancies between what people say

they do and what they actually do, we have tried to ensure pragmatic validity. However,

as our main targets of research, the top management of Amgen and Genentech, were un-

attainable, we had to rely on the dialogues with the Finnish biotechnology managers

about the industry practices. Third, we pursued transgressive validity by challenging

each other with contradicting interpretations to direct enough attention to possible ambi-

guity and complexity in the studied phenomena. Transgressive validity is needed because

communicative and pragmatic validity can mislead research toward falsely coherent in-

terpretations that overlook important but conflicting aspects. Finally, to achieve reliabil-

ity in our procedures, we maintained interpretive awareness by constantly acknowledg-

ing and explicitly dealing with our subjectivity throughout the research process.

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1.3 Scope of the study

As Meindl et al. (1994) point out, we need to consider the level-of-analysis in our cogni-

tive research, i.e. whether we are interested in the cognition of individual managers or

managerial groups, or perhaps in “organizational cognition”. In this study, we are limited

to the data we obtain from annual reports, press releases and articles from public press.

Some cognitions can be pinpointed at an individual level, whereas some can be said to

represent the whole top management. Our theoretical framework focuses on individual

managerial cognition with some notions toward managerial groups.

This paper aims to describe the development of the business models used, reflected with

the prevailing business environment. Although we examine the dynamic evolution proc-

ess of business models in our theoretical part, we are only able to show snapshots of the

two companies’ business models. The more complete description of the cognitive proc-

esses behind the managerial decisions and actions, i.e. what are the mechanisms that alter

the cognitions, remains a topic for further research.

1.4 The development of the biotechnology industry

The biotechnology companies have developed many different value creation models

since the advent of the industry in the 1970s. Our paper focuses on human health care,

but biotechnology companies are involved also in other areas such as enhancing the

characteristics of fibers used in packaging. Luukkonen (2005) divides the health care

biotech firms into segments by their main product offering as follows: drug discovery

firms developing new drugs using the latest biotechnology innovations – this area is

commonly recognized as financially the most promising; diagnostic firms providing test-

ing processes for other pharmaceutical companies; firms developing biomaterials e.g. for

replacing older materials such as metal plates used in surgery; services firms offering

consulting or R&D services for other pharmaceutical companies; other firms developing

functional foods or instruments, or offering genetic protein modification and engineer-

ing, bioinformatics and drug delivery. The diversity of the offerings is constantly in-

creasing as new technologies are being discovered. Although in the times of the initial

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excitement of biotechnology even the smaller players tried to develop and offer many

different product categories, today only the largest companies can successfully engage

on many fronts.

In the following paragraphs, we will describe the development of the biotechnology in-

dustry using four different points of view: financial markets, partnering, science and

management. We have carefully tried to select the content of the description to give the

reader enough information in order to put the evolution of the business models in their

proper context. Naturally, a perfect depiction of the development of the biotechnology

industry is far beyond the scope of this study (for more information, see e.g. Finnish

Pharma Cluster – Vision 2010 by Brännback et al., 2001).

1.4.1 The development of the financial markets

• 1980/1981. Wall Street’s initial attitude to biotechnology has been described as

‘biomania’. During these two years, biotechnology investments in the U.S. at-

tracted nearly $100 million of venture capital, a huge achievement at the time.

(Schweizer, 2002)

• Late 1999/early 2000. The hype about the global Human Genome Project, which

aimed at mapping the entire human genome library, combined with the high-

technology boom in the financial markets, made the capital inputs to biotechnol-

ogy reach unforeseen levels in 2000: 32 billion dollars raised in the U.S. sector

alone (Williams, 2005). 2000 was such a boom year partly because of a downturn

in other industries. Large amounts of capital were pouring in from Internet com-

panies as investors changed their focus (Puisis, 2001). Puisis poses the question

whether this was a case of a "dot-com fizzle" rather that a true "biotech sizzle."

Whatever the reasons behind the increase in investors' willingness to invest in

biotech firms, the amount of capital raised through IPOs in the U.S. more than

tripled from 1999 to 2000 (from $8 billion to $25 billion).

• 2004/2005. The public and private U.S. companies combined raised $14,7 billion

in 2005, slightly less than in 2004, but still the third-largest sum ever. (NY

Times. April 4, 2006: C4)

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In The New York Times (April 4, 2006: C4), Genentech CEO Arthur D. Levinson told

stock analysts: “Investors have been very patient with the biotech industry, which has

been one of the biggest money-losing industries in the history of mankind. The cumula-

tive loss by this industry from its inception in 1976 is nearing $100 billion.” Overall, the

amount of funding available for biotechnology has been highly volatile. Today, investors

often require positive income statements or at least expected profits in the near future,

which has been made possible by the general maturing of the industry. In the same New

York Times article, Donn Szaro from Ernst & Young says: “We still feel pretty bullish

that profitability for the entire industry, at least in the United States, will occur by the

end of this decade.”

Puisis (2001) makes an important point about all financing decisions when he empha-

sizes that all decisions should be aimed mapping a pathway to revenues. A biotech com-

pany will have a number of different kinds of financing options to choose from. The de-

cision should be made by weighing the different options against the company’s plan for

the future. For example, if the aim of a company is to be sold off to big pharma, financ-

ing decisions should be made so that they help build partnerships. On the other hand, if

the end goal is an IPO, then extremely significant amounts of venture capital will be re-

quired to both enable the company to achieve critical mass and to keep itself afloat until

the offering. Strategic planning should be a part of all financing decision. In the begin-

ning stages of development, biotech companies are largely dependant on outside capital.

Puisis makes the observation that in the 1980s biotech companies were able to raise capi-

tal partly on promises alone. In the more contemporary business setting a clearly defined

path to profits must be visible from the beginning.

In the same article by Puisis (2001), Dinu Sen, president and COO of Cubist Pahrmaceu-

ticals, makes the case that poor strategic planning in financing decisions prior to 2001

has led to a situation where big pharma can acquire biotech companies at great discounts.

His thinking behind that argument is that many companies wasted money on technology

that was still a long way from commercialization. Sen believes that those biotech com-

panies that chose the path of an IPO may have done so too soon. His overall assessment

is that it will be more difficult for biotech companies to raise capital from an IPO in the

future.

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1.4.2 Partnering in biotechnology

The need for strategic partnering is often regarded as one of the biggest issues facing the

biotechnology firms. As Williams (2005) points out, only Amgen has arguably reached

FIPCO (Fully Integrated Pharmaceutical Company) status - even Genentech does not

market internationally, relying on its majority equity owner, Roche, for most of its non-

U.S. commercialization effort. According to a recent report from Deloitte & Touche, as

cited in PharmExec (2005, Oct 1), in-licensed products account for 30 percent of pharma

company revenues, and the number of pharma-biotech alliances has risen from just 69 in

1993 to 502 in 2004. Within biotechnology, the predominant strategy has been to de-

velop a single technology platform, develop leads, conduct clinical trials, and finally

partner. Today, however, early start-up companies increasingly license their technologies

from academia for further development.

In their study of external partnering in biotechnology, Greis et al. (1995) assemble the

range of agreements into four general categories: research contracts or minority invest-

ments for the purposes of gaining a window on new technologies; licensing and market-

ing agreements to obtain the use of a particular technology; corporate alliances such as

joint ventures which may or may not involve the transfer of equity: and mergers and ac-

quisitions. As Schweizer (2002) states, the nature of these relationships is, more than in

any other industry, characterized by a social network structure, which exists to ensure the

reliability of scientific information due to well defined and socially enforced norms, re-

ciprocity, respect for individuals’ intellectual property rights and honesty in research.

There are many factors that favor biotechnology companies partnering with large phar-

maceuticals. Williams (2005) has identified, in the areas of research, sales and finance,

the factors to include:

• As a class, biotechnology companies have strengths in research and early stage

development.

• Large pharmaceutical companies seem to be experiencing a research famine de-

spite spending ever more on R&D.

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• Biotechnology companies find it difficult to build marketing and sales operations

except when their products fit into niche areas, which can be reached with com-

paratively few people (as Amgen did).

• Large pharmaceutical companies have massive sales operations with up to 10,000

people on the road in the USA and 30,000 or more worldwide.

• Most biotechnology companies are short of money, often chronically, with a sur-

vival index (cash and short-term instruments divided by burn rate) of, typically,

less than two years.

• At present (though one suspects this might change) large pharmaceutical compa-

nies generate large positive cash flows.

In terms of sheer numbers, it has become increasingly difficult for biotechnology com-

panies to find a partner for manufacturing and distribution. In 1998, there were some

2,500 biotechnology companies and only about 25 large potential partners with near

global reach. By 2004, the ratio had worsened with a total of around 4,500 biotechnology

companies facing up to only around 15 large pharmaceutical companies. In the mid/late

1990s, partnering negotiations were almost always carried out under two constraints:

first, big pharma still largely believed that they could manage to create enough new re-

search findings to support their pipeline, and second, prior to the funding spree of late

1999 and early 2000, almost all biotechnology companies were short of cash and often

needed rapid partnering. Williams (2005) describes this period of negotiations as part-

nering from weakness. However, after the huge input of funding in 2000, the larger bio-

technology companies became financially secure. At the same time, big pharma was

awakening to the reality of the urgent lack of new products. It became possible to talk

about a new model, partnering from strength.

1.4.3 The development of science

This chapter will provide the reader with the historical evolution of research and innova-

tion in the biotechnology industry. It is adapted from the study of Gilsing and Noote-

boom (2006), where they looked at how exploration and exploitation have marked dif-

ferent phases of the industry development.

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Before the biotechnological revolution. From the late 19th century for as long as until the

late 1970s, the core knowledge base of the pharmaceutical industry was formed by or-

ganic chemistry. This knowledge did not provide an understanding of the human body,

but was focused on the properties and effects of chemical entities and producing them re-

liably in large quantities. The discovery of new drugs was a mainly tacit capability that

was highly dependent on the skills of individual chemists, but still the search process of

random screening generated important classes of drugs and eventually made the big

pharmaceuticals very prosperous. In terms of the cycle of discovery model by Noote-

boom (2000), this period focused on incremental innovations and the exploitation of the

existing knowledge base of organic chemistry.

From exploitation to differentiation. The advent of biotechnology, in the 1970s, had an

impact on the pharmaceutical knowledge base as substantial scientific progress was

made in areas such as physiology, pharmacology, enzymology and cell biology. Re-

searchers began to better understand how the human body worked and the causes behind

diseases. All this progress turned random screening of new drugs into a more guided

search process. As a consequence, firms that applied the modern technologies were able

to improve the productivity of their search processes substantially. The use of the novel

elements of molecular biology lead to a phase of differentiation and incremental adapta-

tions to established practices. Although producing multitude of useful new drugs, these

extended efforts of exploitation of the existing organic chemistry knowledge base made

the limitations of the technologies increasingly visible.

Reciprocation and beyond. In the late 1980 and early 1990s, a second wave in the mo-

lecular biology revolution emerged: genetic engineering, which encompasses technolo-

gies such as recombinant DNA, monoclonal antibody technology, gene therapy, and later

combinatorial chemistry and high throughput screening. These techniques enabled the

production of proteins and enhanced the speed and efficiency of the discovery process of

new drugs. The new elements then created novel innovations in reciprocation with the

old knowledge base. However, they also revealed a constraint on realizing this newly

found potential, namely the lack of a fundamental understanding of the engineering of

biotechnology-based processes. The next step beyond reciprocation needs radical

changes in technology. It can be argued that only the organizations embracing real explo-

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ration in the technological field will be able to make the leap, and that this development

requires changes in organizational forms.

1.4.4 Managing biotechnology companies

Managing a biotechnology company successfully requires the acknowledgement of sev-

eral issues characteristic to the industry. In his study of the key drivers and success fac-

tors for mergers and acquisitions in the biotechnology industry, Schweizer (2002) de-

scribes the organizational structures of typical biotech firms in the following way. Inter-

nally, they compose of overlapping interdisciplinary project teams with minimal hierar-

chy. The firms have merged academic practices, and often culture, with the requirements

of a high-tech industry in order to create a lean and effective organization for drug dis-

covery and commercial development. Costa et al. (2003) found that, historically, most of

the new biotechnological innovations have been introduced by young science-based

SMEs. Evidently, the start-ups have lacked the full range of relevant skills needed to de-

velop therapeutic drugs in-house, so they have turned to numerous forms of collabora-

tion such as joint ventures, research agreements or licensing agreements. Costa et al. also

state that these smaller companies often do not possess, and find difficulties in accessing

the necessary skills especially in the strategic management and marketing areas. Few

companies are able to grow enough to manage the whole process of drug development

and marketing, to become a fully integrated pharmaceutical company. Instead, they must

choose to either operate in the supporting sectors or align themselves somewhere within

the drug discovery continuum, depicted below in Chart 1.

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Schweizer (2002) summarized the critical success factors in current pharmaceutical

competition as follows: low R&D costs, finding alternatives to animal studies, effective

combination of enabling technologies, low costs of clinical trials, speed and efficacy rate

of drug discovery, regulatory management, information and knowledge management,

and finally efficient targeted marketing to payers, providers and consumers. He also

identified three recent essential paradigm shifts:

Random screening / serendipity ! Focused screening / science-guided

Hit-or-miss clinical trial programs ! Tailored products to a specific patient subsegment

Mass market -centric paradigm ! Consumer-centric paradigm

Finally, it is apparent that biotechnology companies are almost always located in geo-

graphical clusters. Robbins-Roth (2000) offers one explanation in her book ‘From Al-

chemy to IPO’, where she describes how pivotal it is to be located in the right business

Chart 1. Drug development process (Finnish Pharma Cluster, 2001)

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area in order to get funding from the venture capitalists. As there are only a limited num-

ber of knowledgeable analysts that are able to judge between different biotechnology

companies, they usually focus their attention to companies near the ‘hot-spots’, such as

San Francisco, Boston or Princeton in the U.S.

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2 Managerial cognitions and business model evolution

We are interested in the coevolution of the biotechnology industry and the business

models used by biotechnology companies. Our theoretical framework is based on the

work by the fast-growing school of thought that is interested in managerial cognition and

its impacts on organizational activities (see e.g. Eden and Spender, 1998). While the tra-

ditional research on business strategies assumes rationality, the cognitive school takes

into account the bounded rationality of managers’ decisions and actions, and also the un-

certainty of the environment.

To understand how our two case companies, Amgen and Genentech, have evolved dur-

ing their history, we use a business model framework (see Chart 2 below) that is in most

part built on the research by Tikkanen et al. (2005). It helps researchers to systemically

scrutinize the organizational reality of companies at any given point in time. In addition

to the material aspects of a company, such as business relationships and an organiza-

tional structure, the framework includes managerial cognitions that work as a driver of

managerial decisions. We have added corporate culture as an element that is certainly

present but cannot be easily subordinated to either of the above-mentioned categories.

These three aspects lead to actions and outcomes, which eventually create new signals

for the decision makers. The framework itself has dynamic attributes that enable the ob-

servation of the evolution of the companies; however, considering our research focus on

managerial cognitions, we felt that it was important to elaborate how the cognitions are

related to action and the changes in the companies’ operating environment. In the rest of

this chapter, we will describe in detail the business model framework and look at the es-

sential dynamics between a business model, especially managerial cognition, and the de-

velopment of a business environment.

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2.1 Material aspects

The material aspects describe the objectively existing structures and processes of a firm.

We have divided the aspects into three categories: first, business relationships; second,

strategy, structure and governance; and third, operations and resources. Their contents

and the currently relevant issues for top managers are detailed below.

2.1.1 Business relationships

The contemporary, knowledge-rich business environment requires learning capabilities

beyond any single firm, thus creating the need for business networks. Managing the net-

work of relationships has become a crucial task for companies to succeed. The relation-

ships are further divided into four different categories: customer relationship portfolio,

supplier relationship portfolio, product development network and extra-business rela-

tionships. Next, we provide brief descriptions of the four relationship types and their

typical managerial requirements.

Customer relationship portfolio. Managing the customer base is often recognized as the

most important task of a company. According to Srivastava et al. (1999), this task can be

executed through customer relationship management (CRM) process that addresses all

Actions

and out-

comes

Culture

Material aspects

Business

relation-

ships

Strategy,

structure,

governance

Operations,

resources

Managerial

cognitions

Chart 2. Business model framework

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aspects of identifying customers, creating customer knowledge, building customer

relationships and shaping their perceptions of the organization and its products. Building

on the study of Tikkanen et al. (2005), to understand a company’s customer value

creation and the development of offerings, we will focus our customer relationship

analysis (as well as analyses of the other types of relationship groups) on the following

four attributes:

• State, which defines the structure of the relationship; and

• Nature, which is often the outcome of the state. In terms of state and nature,

business relationships can vary between competitive (market-based), cooperative

(partnership-based) and command (dominance-based or hierarchical) modes.

• Outcomes of business relationships have often been categorized into the more ob-

jective techno-economic outcomes and more subjective psychosocial outcomes.

• Developmental phases of business relationships typically include the pre-

relationship, exploratory, developing, stable (institutionalized) and dissolution

stages.

Supplier relationship portfolio. As Johnsen et al. (2000) recognize, supply networks not

only comprise upstream suppliers but also downstream customers and/or distributors.

They further define supply networks to include those actors, resources and activities that

are involved in the production and delivery of the product. The task of managing a com-

pany’s supplier base is implemented through a supply chain management (SCM) proc-

ess, which, according to Srivastava et al. (1999), is essential for:

• the establishment of a secure basis for operational excellence and thereby lower-

ing operational risk; and

• aligning the inputs for maximized value creation through procurement.

Product development network. Modern product development often includes collabora-

tion between individuals and organizations both inside and outside the focal company,

requiring extensive relationship management. Murray and Chao (2005) have found that

multinational corporations pursue competitive advantage through acquiring capabilities

that range from improving product quality to increasing the speed to market, and that

they increasingly rely on global and virtual teams for new product development. We fol-

low the definition of Tikkanen et al. (2005) that the key sub-processes of product devel-

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opment management (PDM) include ascertaining customer needs and value creation, of-

fering development and testing, identifying and managing internal relationships and de-

veloping and maintaining linkages with external co-operators.

Extra-business relationships. In addition to the already mentioned three relationship

groups, other stakeholders can also have a major impact on the evolution of a business

model. Tikkanen et al. (2005) have, from existing literature, identified at least relation-

ships to competitors, relationships to debtors and equity-holders, and mega relationships

as crucial to any company’s operations. Contrary to the definition of Tikkanen et al., in

our business model framework, all financial relationships are dealt within extra-business

relationships. Although we acknowledge that for example financial relations can hugely

affect company share price and other performance indicators as well, they should not be

emphasized over other relationship groups.

2.1.2 Strategy, structure and governance

The strategy of a company serves as a vision for the company’s long-term development.

This however, does not exclude strategy from playing a significant role in every-day de-

cision-making and the shaping of short-term targets. More specifically, we see strategy

the same way as Mintzberg and Waters (1982), as something that binds together the

various components of the business model. This is achieved by creating a common

mindset and sense of direction for the company. We see this as a part of strategy,

whereas Tikkanen et al. (2005) refer to this as being “strategic intent.” It can be argued

that strategy itself exists as a result of intent.

Burgelman (1991) successfully illustrates the role of strategy in all of stages of decision

making by splitting the strategy process concept into autonomous and induced processes.

Autonomous processes are more long-term and made by top management. In these deci-

sion making processes strategy is present in a rational and explicit way. In induced deci-

sion making processes, decisions are commonly made by middle management and strat-

egy is in a more implicit role.

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When discussing strategic planning, it is important to distinguish the dichotomous nature

of strategy and planning. Strategy is a vision, whereas planning is related to the materi-

alization of concepts from the vision. Brock and Barry (2003) accurately point out that

strategic planning has overwhelmingly been read incorrectly as the ‘planning of strategy’

when in fact the term has to do mostly with the operation of planning. A more literal

reading brings the term back to the more ’mintzbergian’ view that planning should

merely reflect the visions set out in the strategy.

Organizational structure and governance can both be seen as being in a subordinate role

to strategy. Changes in the organizational structure occur as a result of the strategy of the

firm changing. Mintzberg and Water (1982) warn that significant risks are present when-

ever organizations must transform their structures. This happens because of the disrup-

tion in organizational life. Organizational governance is important in the discussion of

the strategy of the firm as it sets limitations and boundaries for the implementation of the

firm’s strategy. Issues such as alignment of incentives, employment relations, ownership,

and contractual questions have to be taken into account in the vision of the firm to ensure

the success of the later stages. The coevolution of organizational structure and govern-

ance with the strategy of the firm is key for the long-term development of the firm.

2.1.3 Operations and resources

In our business model framework, operations and resources constitute the core of every

business, in the sense that they ultimately define what is done and how it is done. Using

the definitions of Tikkanen et al. (2005), this business model component is further di-

vided into process architecture; resource, capability and competence base; and product

and service offerings.

Process architecture. In recent years, firms have been commonly rethinking their opera-

tions and structuring them around processes. They have moved away from strict organi-

zational and functional boundaries toward more flexible use of the scarce resources.

Process architecture is a basis for a designed process portfolio, which illustrates how the

firm can use its assets in creating value for any number of stakeholders. Sanchez and

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Mahoney (1996) discuss the concept of modularity in product and organization design.

They argue that modularity increases the strategic flexibility of firms to respond to envi-

ronmental change by facilitating loose coupling. This enables firms to effectively coor-

dinate their process architecture without the inflexible division of organizational struc-

tures. The emphasis thus moves from efficiency to effectiveness; or as Achrol and Kotler

(1999) state, the critical organizing imperative in turbulent environments is maximizing

organizational learning and adaptive flexibility rather than economizing on transaction

costs.

Resource, capability and competence base. Resources consist of all the tangible and in-

tangible assets that a firm has access to. Barney (1991) argues that organizational re-

sources that are valuable, rare, difficult to imitate and non-substitutable can yield sus-

tained competitive advantage. Capabilities can shortly be defined as the firm’s skills and

routines; then competences are the rarer and more valuable skill-sets that differentiate

competing firms. Day (1994) finds that the most distinctive features of the market-driven

organizations operating in the knowledge intensive network economy are their mastery

of the market sensing and customer linking capabilities.

Product and service offerings. Firms use their unique resource base and process portfolio

to provide their customers with competitive offerings. It seems evident that rapid adapt-

ability of the offerings is a key issue in meeting the demands of contemporary customers.

This brings major challenge to the effective and efficient management of the firm’s ex-

change, coordination and adaptation processes related to matching the offerings with

customer needs. The boundaries of the end products are often blurred: e.g. does Google

offer Internet search services or advertisement space as its main product? The answer of-

ten lies within the belief systems and paradigms of the top managers.

2.2 Managerial cognition

Organizational decisions are always made by individuals with bounded rationality. Thus,

as Tikkanen et al. (2005) argue in their paper, firm’s actions and finally their outcomes

are first filtered through managerial cognition. When studying the evolution of a busi-

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ness model, it is crucial to recognize the impacts of the organizational belief systems.

Firms operate in a certain context, and managerial decisions can only be understood by

taking into account not only the related environment but also the effects of managerial

cognition. Tikkanen et al. (2005) used the study of Porac et al. (2002) as a basis for their

framework. We will describe their views shortly, and then elaborate more on the dynam-

ics between cognition, action and business model evolution.

Porac et al. (2002) have identified four conceptual levels of managerial cognition that af-

fect the behavior of the firm: product ontologies, boundary beliefs, industry recipes and

reputational rankings. The levels are ordered from the most volatile to the most stable.

Product ontologies are defined as cognitive representations that link product attributes,

usage conditions and buyer characteristics into a definition of a product or service. When

these ontologies are collectively accepted and cognitively “closed”, they are used to form

boundary beliefs about the competitive structure of the producers on a certain market. By

identifying the competitors and focusing attention specifically to them, managers de-

velop common industry-specific logics for action regarding competitors, suppliers,

customers, the capital markets and regulatory agencies. The above-described

mechanisms eventually create the conditions for measuring and evaluating the

performance of firms within an industry, leading to reputational rankings. The effects of

these managerial cognitions are various and we will next go through some of the most

essential ones.

To start with, we find it useful to describe some of the basic assumptions that the studies

on managerial cognition include. Based on earlier studies, Lindell et al. (1998) summa-

rized the assumptions tentatively:

• Thinking and acting are mutual and intertwined processes;

• Experienced top managers develop rather stable belief structures or strategic

ways-of-thinking regarding how to develop, manage and lead an organization;

• Mental structures function in a holistic mode and are a mix of cognition, values

and emotions, an assumption which means that this perspective might be labeled

‘socio-cognitive’.

“Organizations cannot think, but they do act”, is an assertion that the scholars have lately

been studying (see e.g. Hellgren and Löwstedt, 1998). Individuals do the thinking, but

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they are affected by issues such as a collective mind (Spender, 1998). Gilsing and Note-

boom (2004) discuss the concept of “cognitive distance” in organizational learning. To

comprehend each other, individuals in an organization need to reduce cognitive distance,

i.e. achieve a sufficient alignment of mental frames, to understand each other, utilize

complementary capabilities, achieve a common goal and have trust. However, cognitive

distance is needed for variety and novelty in thought. We also find useful the term ‘top

management cognitive heterogeneity’, which deals with managerial background charac-

teristics.

To limit the scope of our theoretical framework, we will focus on issues that deal more

with managerial than organizational cognition. In his work Theory of Cognitive Disso-

nance (1957), Leon Festinger tackles the questions of change and persistence in an indi-

vidual’s attitudes and beliefs. These attitudes and belief of oneself or of one‘s environ-

ment, along with opinions and knowledge, are what Festinger sees as being human cog-

nitions. When these cognitions are inconsistent with one another, inner conflict will arise

and this conflict will lead to action. Festinger refers to this inconsistence as dissonance

and to its opposite as consonance. The theory is best summarized by its two hypotheses:

1) The existence of dissonance, being psychologically uncomfortable, will motivate

the person to try to reduce the dissonance and achieve consonance

2) When dissonance is present, in addition to trying to reduce it, the person will ac-

tively avoid situations and information that would likely increase the dissonance.

Cognitive dissonance theory is applicable to the discussion of business model evolution

as it helps to explain the connections between the business environment, managerial

cognitions and actions taken by a firm. Changes in the business environment of a com-

pany will lead to a situation where the realities, which were accurate in a previous situa-

tion, become inaccurate. For example, a manager’s understanding of the business envi-

ronment in which his firm operates in may become outdated when new and stronger

competition enters the market. When this understanding changes to accommodate the

new realities of the market, the new understanding may be in disharmony with other

cognitions, such as the way the manager views the need for advertising. According to

Festinger’s above-stated hypotheses, the manager would take action to reduce this disso-

nance. In this case, that may mean changing the perception about the need for advertis-

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ing. Alternatively, the manager may refuse to change and only be concerned with reduc-

ing the existing dissonance. This would happen by avoiding any information that would

strengthen the belief that the business environment has changed drastically.

In their discussion of organizational renewal, Barr, Stimpert, and Huff (1992) use the

concept of mental models to refer to the tools that managers use to interpret and make

sense of the information they receive. They argue that as these models are based on lim-

ited managerial cognitions, they will be incomplete and their inaccuracy will increase as

their environment changes. As the basis of cognitive research, Barr et al. introduce three

ways in which mental models cause a mismatch between the available data and the proc-

essing of information:

1) Managers will tend to focus on the data that most supports their current views

and may, therefore miss vital new data.

2) Data will be interpreted according to the manager’s current mental model, lead-

ing to a failure to see the need for change.

3) The manager will have a limited scope of alternatives as they are in part, blinded

by the boundaries of their current mental model.

Organizational renewal is essentially about being able to reform the mental models to the

changed environment. Barr et al. split this change into three phases:

1) During the unfreezing/unlearning phase old models are identified as faulty and

discarded.

2) New understanding of concepts is acquired and understood.

3) Changes become solidified as belief structures are frozen after new concepts lead

to anticipated results.

It is not unusual to see companies imitating each other in somewhat irrational ways.

Greve (1998) offers a cognitive-school explanation for this phenomenon as he found ear-

lier research of managerial cognition to show that managers create models of the indus-

try by grouping together organizations that are similar on important characteristics, and

that these mental models are to some degree shared by managers in different firms in the

industry. The mental models then cause regularities in the choices of individual organi-

zations and the evolution of industries. He argues that organizations use other organiza-

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tions as reference groups when abandoning their market positions, and a firm searching

for new market positions is likely to adopt an existing rather than create a new position.

In this study, we are not particularly interested in top manager cognitions per se, but

rather in the ways they affect organizational action. According to our search on earlier

studies and the paper by Hellgren and Löwstedt (1998), scholars have not reached a con-

sensus on the attributes of the relationship between thought and action. Hellgren and

Löwstedt report two opposite views: first, “mental structures are thought driven in the

sense that they are the result of thinking processes that precede and thereby rule the ac-

tion, that is, actions undertaken are determined by these mental structures”; second,

“mental structures are predominately action driven and so not a determining force on ac-

tion, in fact, thinking and acting are simultaneous and interrelated processes”. There

have been some empirical studies on the linkages between cognition and action, and

even performance, but the results are not unequivocal. For example, Thomas et al.

(1993) hypothesized that top managers’ labeling of strategic issues in positive-gain

terms, and as controllable, would lead to product and service changes (instead of actions

such as cost cutting and restriction of activities). They found significant links between

controllability and action but none between labeling the issues as positive and conse-

quently introducing product changes.

An important tool for us in analyzing the business model evolution of our two case

companies is based on the Kolb’s learning cycle model (Kolb and Rubin, 1991, see

Chart 3). As van der Heijden and Eden (1998) interpreted the model, it highlights the

need for action to create experiences and learning for the top managers. The concrete

experiences (in our tool, we have labeled them as signals) provide data for a process of

reflection (leading to a cognition), where managers create mental models of such issues

as who is a customer, what kind of products should be offered, what kind of relationships

are beneficial etc. The managers then develop theories of what the organization should

do (strategies) and finally implement the strategies by changing the processes of the

organization (action). The actions, be they successful or not, generate new signals for

further reflection. Naturally, these signals may also originate from external sources.

We use this tool to map a chronological path of signals, cognitions, strategies and actions

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that best describe the evolution of business models. However, the lines between the dif-

ferent steps in the path are not always clear-cut. Unlike signals, which are directly de-

rived from concrete events, cognitions require interpretations by the researchers and are

as a result more debatable. The goal here is to describe the prevailing mental models of

the top management. It would be practically impossible to retrospectively pinpoint any

single cognition to an individual actor. In addition, the distinction between cognition and

strategy is not necessarily unequivocal. Strategy in this tool refer to either explicitly

stated directions for changes in the business operations or in some cases to a set of ac-

tions that the researchers have concluded to collectively form these directions. Finally,

actions represent concrete events in the same way as signals and are not the results of ex-

tensive interpretation.

2.3 Corporate culture

We find the concept of corporate culture highly significant in our areas of research. It

was greatly overlooked in the original framework by Tikkanen et al. (2005). Here we de-

fine corporate culture to comprise of the shared set of values, norms and beliefs among

the individuals working in an organization. Intuitively, it is clear that corporate culture

and the earlier defined material and cognitive aspects of a business model are densely in-

Concrete experiences

(signals)

Observation and reflection

(cognition)

Formation of abstract concepts and theories

(strategy)

Testing implications of theory in new situations

(action)

Chart 3. Kolb’s learning cycle model

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tertwined and affect each other in many ways. Corporate culture has both material and

cognitive attributes; we approach it as an agent between all the other components of a

business model. As with all the components, corporate culture needs to be well-aligned

with the firm’s strategic vision. In the pursuit of competitive value creation, organiza-

tional culture can act as a catalyst and a guide - or it can slow down the process and fi-

nally derail it into failure.

The link between corporate culture and the firm performance has not been clearly estab-

lished in the academic research. Flamholtz and Rangapriya (2005), however, found early

empirical evidence that some elements of an organization’s culture have a differential

impact on the financial performance of a firm. They found four primary factors, cus-

tomer focus, corporate citizenship, performance standards, and identification with the

company, to directly influence the financial performance. In addition, they acknowl-

edged two factors, human resource practices and organizational communication, to have

a significant influence upon the primary cultural factors. We have used these six corpo-

rate culture components as a starting point in applying our business model framework in

the case analyses.

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3 Amgen

Our first case company, Amgen, was the first biotechnology company to develop huge

profits from its own product sales. Even today, its only true competitor in size is Genen-

tech. Some essential financial figures - share prices, product sales and number of em-

ployees - are provided below to facilitate the business model analysis and also compari-

son with Genentech.

Chart 4. Amgen share prices

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Chart 6. Number of Amgen employees

Chart 5. Amgen’s total product sales

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3.1 Early history

The following information has been collected from the book The Amgen Story- 25 Years

of Visionary Science and Powerful Medicine (Duncan, 2005) commemorating Amgen’s

first quarter-century of operations. On April 8th 1980, Applied Molecular Genetics Inc.

was established as a corporation in California by two venture capitalists. The two vision-

aries were William K. Bowes and Sam Wohlstadter. While working at the investment

bank BLYTH & CO. Inc., Bowes had been a witness to the founding and instant success

Genentech from 1976 onwards. He felt that Genentech’s model for the starting of a “sci-

ence-first” biotechnology company could be successfully copied. In the late 1970s, the

two had started searching for leading scientists and had eventually hired Winston Salser,

a professor of molecular genetics at the University of California. Salser’s job became to

find and recruit the best scientists available in the fields of molecular biology and genet-

ics. Bowes set out to find the best possible managers, investors and business advisors.

It was clear to all at the time that the success of the new start-up depended on the quality

of the people they could hire. Bowes recruited an investment and management team

made up of pharmaceutical industry insiders like Joseph Rubinfield, formerly of Bristol-

Myers, academic heavyweights like Raymond Baddour, from the School of Chemical

Engineering at MIT, and experienced investors like Franklin Johnson, founder of Draper

and Johnson Investment Company. Salser brought together Amgen’s first Scientific Ad-

visory Board (SAB). The SAB consisted of leading professors, scientists and researchers,

with five of the eleven members holding memberships to the National Academy of Sci-

ences at the time. The SAB brainstormed new ideas, interviewed and recruited new sci-

entists and evaluated research projects. The company needed a CEO who understood the

business issues relating to a biotech startup, as well as the science that was intended to

provide the lifeblood of the company. George B. Rathmann was a division vice-president

at Abbott Laboratories with a Ph.D. in physical chemistry from Princeton University. He

had become convinced of the potential of recombinant DNA, but his plans to start a unit

at Abbott for research using the new science were shot down as being too costly. Rath-

mann appealed to the investors instantly and after much convincing, he was willing to re-

locate from Chicago to Thousand Oaks, California.

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At the beginning it was important to hire the best scientists for new research projects.

Research teams and projects required substantial amounts of capital and Amgen was

struggling to avoid financial collapse. During 1981, now under the management of

George Rathmann, Amgen raised $19 million in funding from investors. In 1983, the

CFO Gordon Binder (who would become CEO in 1988) oversaw the company’s initial

public offering (IPO). The IPO raised $40 million. During this time, Amgen’s scientists

conducted research in a variety of fields, but failed to come up with products viable for

markets. Amgen’s fortunes took a turn for the better in late 1983 when Fu-Kuen Lin, a

young researcher at the company, successfully cloned the erythropoietin gene. This dis-

covery would eventually lead to the development a recombinant protein that stimulates

the production of red blood cells in bone marrow. The market would come to know the

discovery by its product name EPOGEN. Less than three years later, a team of scientists

led by researcher Larry Souza cloned the granulocyte-colony stimulating factor (G-CSF)

gene. The G-CSF gene would later be the basis for the product NEUPOGEN. The point

at which the two products had been introduced to the market can be seen as the end of

Amgen as a promising research company and start of Amgen as a fully-fledged human

therapeutics company.

3.2 The development of Amgen

3.2.1 Science

Success in the biotechnology sector is based, at least to some extent, on a company’s

ability to conduct superior scientific research. The commercialization of scientific dis-

coveries is, naturally, a prerequisite for continued financial health of a company, but

without making scientific discoveries and being able to develop them further, a biotech

company will not be able to succeed. However, separating the science from the business

parts of the company, when discussing the company’s business model evolution, would

be a mistake. That kind of dichotomous thinking would falsely lessen the importance

given to the decisions of the company’s management and disregard the interdependen-

cies between the two parts. The following is a run-through of Amgen’s scientific devel-

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opment with an emphasis on how the company’s strategy regarding research has trans-

formed over time.

In the years following its founding in 1980, Amgen’s scope of scientific research was ex-

tremely broad. The company’s scientists conducted research in a variety of fields, not

limiting the research to therapeutic areas, but also conducting research into specialty

chemicals. Products in development in 1984 ranged from ones relating the interferon

gene, which is normally produced by the human immune system, to biologically-

produced indigo, which it was hoped would provide the manufacturers of denim with a

more cost-effective dye. It was the decision of the management to maintain a broad

scope of research in order to increase the changes of finding product candidates with true

potential to become blockbusters. This was, of course, extremely costly, but it was

deemed necessary and funding was organized through corporate partnerships.

The early scientific research being conducted by Amgen paid off in 1983 when a team

led by Fu-Kuen Lin was the first in the world to successfully clone the human gene re-

sponsible for the production of erythropoietin. As a result, they were able to produce re-

combinant EPO. This, in-turn, was patented and later named EPOGEN. The second ma-

jor success of Amgen’s scientists took place two years later, when a research team led by

Larry M. Souza was able clone the gene for human granulocyte colony-stimulating fac-

tor (G-CSF). From this, recombinant G-CSF was produced. This would later be patented

and named NEUPOGEN.

The success in the research regarding erythropoietin and G-CSF, led to a change in the

strategy undertaken by the company concerning its research. Developing the two discov-

eries further and, eventually, taking them to the market, would require extensive funds.

The scope of scientific research would have to be limited. Amgen scrapped some its re-

search project, for example the entire specialty chemicals and animal products research

sectors were ended. Human therapeutics was the only sector that the company decided to

keep. Research projects in the human therapeutics sector were allowed to continue, but

were under strict scrutiny.

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By the mid 1980s, the company had stated its intention of becoming a fully integrated

pharmaceutical company. The management continued to emphasize the importance of

not losing its world-class research and development abilities, amid a shift of focus to the

market end of the business processes. To increase the company’s capabilities in the ap-

plication of biotechnology to human therapeutics, the company started work on an addi-

tional research facility in 1990. Two years later, investment in research and development

was increased by 50%. In 1993, four areas of research remained: 1) haematopoiesis 2)

neurobiology 3) inflammation 4) human tissue repair and regeneration.

The company’s more contemporary strategy towards research can be seen as being two-

pronged. On one hand, the company’s scientists were looking for alternative uses for its

established products, EPOGEN and NEUPOGEN. On the other, completely new product

candidates were being researched. The management’s thinking behind each is quite ob-

vious. There are clear benefits to finding alternative uses for the company’s existing

product line. For one, the patent protection of the two products is in place and they are

well protected until 2013. Some of the patents only cover use for certain cases, but it is

possible to file for extensions for patents to cover new areas. Similarly, new Food and

Drug Administration (FDA) approval is required for use of a product for an alternative

cause, but as the product has already been deemed safe, this process is easier. From a

purely scientific point of view, the company’s research staff has acquired extensive ex-

pertise in research relating to the two areas, erythropoietin and G-CSF). Also, a manufac-

turing capability for the two products is in existence, so increase in deemed brought by

the discovery of alternative uses for the products, could be met by extending these capa-

bilities instead of having to construct new manufacturing facilities. The other part of

Amgen’s two-pronged approach is the research into completely new products. Even as

EPOGEN and NEUPOGEN won awards (Fortune magazine named EPOGEN Product of

the Year in 1989 and NEUPOGEN was awarded the same title in 1991) and increased

sales from year to year, the management of the company maintained a strong commit-

ment to research. The scientific discoveries behind new products have either come from

the company’s own research or, alternatively, it has been acquired from outside sources

through in-licensing or by corporate takeover. INFERGEN, which was launched in the

U.S. in 1996 for treatment of chronic hepatitis C, was a result of the company’s own re-

search and development. ENBREL, on the other had, was added to the company’s prod-

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uct offering as a result of the 2002 acquisition of Immunex Corporation. With the con-

tinued investment into its product pipeline, the company hopes to secure its continued

success in the future, even after the patent protection of its current products runs out.

3.2.2 Finance and funding

Amgen’s financial history can be divided into sections by date. The time before 1991

was about securing the financial resources required for the implementation of growth

strategies. The post-1991 years have been more about maintaining financial stability

amid massive growth and significant new investments.

Before the initial public offering (IPO) in 1983, the company had been in existence for

three years. During this time, the company’s income came from research and develop-

ment contracts done with larger corporations. In these agreements, Amgen would be re-

sponsible for providing scientific research know-how in exchange for financial rewards

and covering of expenses. The company had a significant research and development with

Abbott Laboratories. Political support also helped to finance the early days of the com-

pany’s development. For example, the city of Chicago backed a $10 million loan to the

company for the construction of a production facility in the city. The IPO netted $40 mil-

lion, but the financial situation of the company still remained dire. Amgen entered into a

joint venture with Kirin Breweries of Japan to develop EPO. The deal secured $12 mil-

lion in much-needed funding. In 1986, the company’s operations were profitable for the

first year. The management of the company set Amgen the target of breaking even every

year and maintaining a strong balance sheet in its transition to a fully integrated pharma-

ceutical company. That same year, the company issued 2.3 million of common stock,

which brought $75 million. That capital was much needed for the further development

and commercialization of EPOGEN. In anticipation of the launch of EPOGEN, in 1990

the company issued $50 million worth of convertible subordinated debentures outside

the U.S., to ensure that Amgen had sufficient funds.

By 1991, the company’s financial situation had started to look better. In 1991, its stock

was split three to one and the company had product sales of $682 million. In order to in-

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crease the benefit’s the company would reap from the commercialization of its product

candidates, some of its revenues were used to buy out future royalties. The following

year, Amgen became the first biotech company to have product sales in the excess of $1

billion. In 1993, as the company’s revenues continued to rise, it repurchased some its

stock. The following year Amgen acquired Synergen for a one-time charge of $1.16 mil-

lion. In the years since then, the company continued their stock-repurchase programs. In

2002, the poorly performing stock market dragged down all stocks, and Amgen’s share

price fell 14%. That year the company decided to sell Leukine, which it had acquired as

part of the Immunex deal, to Schering Pharmaceutical for $390 million. The company

received an additional $2.8 billion from the issuance of 30-year zero-coupon senior con-

vertible notes.

3.2.3 Partnering

The nature of partnering has transformed drastically as Amgen has grown and devel-

oped. This is a result of a change in the reasons why the company seeks out corporate

partners. In the early days of the company’s development, corporate cooperation was a

necessity simply due to a lack of financial resources available to Amgen. Along with

capital, these partnerships provided the company with knowledge of specific markets and

extensive experience of sales and marketing processes. As the company developed, it en-

tered into more 50-50 partnerships, where both parties brought roughly the same amount

of expertise to the deal. More recently, the nature of partnering has changed to become

two-fold: In the first case, Amgen licenses its research or product for use in specific

markets or in-licenses research from external sources. In the second case, the company

enters into collaboration agreements with smaller institutions or companies in order to

get access to potentially groundbreaking technological advances. Some examples are

given to illustrate the different kinds of partnerships, after which a discussion of the

transformation will follow.

• In 1984, the company established important new partnerships and joint ventures.

The scope of research being conducted by Amgen was very broad at the time,

and the areas of study in the partnerships reflect this: Amgen’s partnership with

Abbott Laboratories concentrated on research relating to infectious disease and

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cancer, whereas its partnership with The Upjohn Company studied bovine growth

hormones. An important note regarding the Upjohn agreement is that it was spe-

cial in the industry at the time, as Amgen’s rewards would not be limited to roy-

alties, but instead would consist of profit-sharing and an option to manufacture

any potential products independently. Ultimately, Amgen would scrap animal

health care as a business segment, but the lessons learned from partnering with

The Upjohn Company. The partnership with Abbott Laboratories would eventu-

ally also come to an end, but cooperation with a major health care company (Ab-

bot Laboratories’ history dates back to 19th century) had given the company the

possibility of furthering its research without massive financial commitments and

risks, as well as a wealth of experience and know-how. In the search for its

blockbuster drugs, Amgen entered into similar partnerships, in which established

corporations would carry much of the financial burden and Amgen would pro-

vide research skills. One such partnership was with Texaco Inc. in 1984, to con-

duct exploratory research and development into specialty chemicals (a business

segment later abandoned by Amgen).

• 1984 also marked the most significant corporate partnership in the history of

Amgen. The company’s scientists had successfully cloned the erythropoietin

gene, which would be used to make EPOGEN. The financial situation of the

company was dire. In a 1995 article in Business Week (Sept. 19th), the current

CEO Kevin Sharer says of the situation back then: “We could see our last dollar.”

The CEO in 1984 was George Rathmann and he would make a deal Sharer calls

the “key to our history.” Japanese beermaker Kirin Breweries Co. had substantial

expertise in fermentation and was willing to share it with Amgen, if Amgen

would share the commercialization rights to EPOGEN with Kirin. Amgen needed

fermentation expertise for its manufacturing process. Rathmann made a deal with

the brewery for the expertise and $12 million in funding. As a result of the 50-50

joint venture, the company’s financial doom was avoided and the manufacture of

one of the most successful drugs to come out of the biotech sector could begin, as

a result of a deal between a biotech company and beer brewer.

• In 1996, the company was still awaiting approval by regulatory authorities in

Canada and the U.S. for the use of its consensus interferon product INFERGEN

in hepatitis C treatment. The market it was about to enter was significantly more

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competitive than those the company usually operated on. Launching the product

in North America required establishing a new sales force and infrastructure. The

task of commercializing INFERGEN on a global scale would have been too

much of a stretch for the company’s financial and personnel resources. As a re-

sult, Amgen licensed the rights to develop, manufacture, and commercialize its

consensus interferon products in all markets, except in the U.S. and Canada, to

Japan’s third largest pharmaceutical manufacturer Yamanouchi Pharmaceutical

Co., Ltd. The partnership was constructed in such a way that it included a co-

promotion of interferon products in the Japanese markets between Yamanouchi

and Amgen K.K. (the company’s Japanese subsidiary). This gave Amgen K.K. a

selling presence in the lucrative Japanese interferon markets.

• The company continues to search for new breakthrough products. As a part of

this search, Amgen strategically evaluates research being conducted externally.

For example in 1997, this kind of collaboration was taking place with over 200

companies and institutions. Potentially lucrative research is then in-licensed,

partnerships are entered into or Amgen will acquire the company. Examples for

each method are as follows:

o In 1997, the company in-licensed worldwide rights to FKPB neuroimuno-

philin ligand program from Guilford Pharmaceuticals. The program may

lead to treatments for several neurodegenerative disorders, like Parkin-

son’s disease.

o In 1999, Amgen entered into a partnership with Praecis Pharmaceuticals

to develop and commercialize abarelix-depot. Potential uses for end prod-

ucts are for treatment of prostate cancer and endometriosis.

o In 2002, Amgen acquired Immunex Corporation for the approximate price

of $17.8 billion. At the time, Immunex was the third largest biotech com-

pany in the world. The acquisition bolstered Amgen's presence in the in-

flammation field, gave it significant new research abilities, and new pipe-

line drugs. Most importantly, it added ENBREL to Amgen's drug roster, a

ground-breaking new anti-inflammation drug.

The transformation in the kinds of partnerships favored by the company, has taken place

in unison with the changes in the kinds of strategies applied by Amgen. In the beginning,

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partnerships were marriages of necessity. Without the backing of established companies,

the research and discovery conducted by Amgen’s scientists may not have taken place.

As the company grew, it was possible for it to make partnerships in which the risks and

rewards were more equally balanced. Having become a ‘heavy-weight’ in the biotech in-

dustry, Amgen was in the position of being able to acquire smaller companies and in-

license research from exterior sources. This development is quite simple to understand,

however, the strategies and actions that facilitated this development will be looked at in

more depth.

In the early 1980s, Amgen set its-self the goal of developing commercial relations that

reserve a larger participation in the downstream profit potential of products than a stan-

dard royalty agreement. The management set out to achieve this goal by moving back the

stage at which partnerships would be entered into. This meant developing the product

candidates further on their own. It was the belief of the management that if the company

could defer commercial collaboration until the technical feasibility of the research had

been established, it could enter into more beneficial partnerships. A shift in the com-

pany’s internal resources was required. Personnel were moved around and more staff

was hired to facilitate the transition from a situation where the emphasis was on research

and development to one that concentrated on processes further along in the product de-

velopment chain, like efficacy testing, winning FDA approval for products, and process

development. The change in its policy regarding corporate partnerships and the success-

ful completion of the restructuring required as a part of that change, can be seen as some

of the key factors in Amgen’s transformation firstly into an independent commercial en-

terprise and eventually into a fully integrated pharmaceutical company.

3.2.4 People

Amgen’s staff policy has been a combination of bringing up employees from its own

ranks into leadership and management positions as well as hiring people with the re-

quired kinds of skills from outside the company. The prior has been seen as an important

part in maintaining Amgen’s valued culture. The latter, on the other had, can be seen as

an example of how the company has initiated the required changes in the company’s

business model by making changes in its staff.

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The changes that have taken place in Amgen’s staff reflect the growth and development

of the company and its transition into a fully integrated pharmaceutical company. Over

time the company has been required to change its focus as it has continued to expand

into new markets and segments. By bringing in new staff with the required kinds of ca-

pabilities and expertise, Amgen has been able to cope with changes in the skills de-

manded for success at each stage of its development. This has been the case at all levels

of the company, from research scientists to the top management. The following are some

examples of how the hiring policy of the company has reflected its development:

" In 1984, Amgen was still mainly a research company (49 of 133 staff had PhD’s).

In the following two years, as the research went forward, more scientists were

hired to ensure that all clinical testing on therapeutic products could be com-

pleted. In 1987, the company hired more staff for downstream processes like

manufacturing, process development and fermentation. These processes are vital

for the transfer of products from the laboratory to the market. Two years later, the

company built a sales force of experienced pharmaceutical professionals in an-

ticipation of the launch of EPOGEN in the US market. These changes clearly re-

flect the change of focus of the company towards the market end of the business

processes chain.

" The company’s management realized at an early stage, that the protection of its

intellectual property rights is vital for the continued success of Amgen. The chal-

lenges posed by legal issues have grown as company has broadened its product

base and global reach. In 1991, the legal department was significantly expanded

to meet the growing needs. The following year Thomas E. Workman Jr., a former

partner at a leading California law firm, was named Vice President, Secretary and

General Counsel. In 1995, George Vandeman was brought in as Senior Vice

President from Latham & Watkins to add needed legal experience. The manage-

ment of the company saw that the legal department had to be strengthened and

that is was necessary to hire experts from outside the company.

" As the company transitioned from a research and development company into a

fully integrated pharmaceutical, the skill and expertise required from it manage-

ment also changed. The biotech business remains, to a large extent, a science-

driven industry and, therefore, the scientific expertise of the management team

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has been invaluable. However, in order to change the business model of the com-

pany so that it better meets the needs of a more “traditional” company, Amgen

has hired managers from well established companies and institutions. For exam-

ple in 1993, in order to have an voice in the discussion regarding health care re-

form in the US, the company appointed former US ambassador to Canada and

Amgen public policy consultant Peter B. Teeley as Vice President, Government

and Public Relations. This can be seen as an example of how the company’s

management is in-tune with the changes taking place in its business environment

and aware of the kinds of skills the company requires. Two years later, Stan Ben-

son, formerly of Pfizer, was appointed Senior Vice President to further deal with

the cost containment issues relating to health care reform. In 2000, as the com-

pany continued its transition and growth, it sought to further increase the talent

and experience in its scientific and leadership staff by hiring from Big Pharma:

Roger Perlmuter from Merck named Vice President, Research and Development,

George Morrow from GlaxoWellcome named Executive Vice President, World-

wide Sales and Marketing.

" The Board of Directors reflects a similar development as the management team.

In order to broaden the skills and expertise of the Board, individuals with varied

industrial and scientific backgrounds have been brought in. For example in 2000,

Dr. Donald B. Rice and Admiral J. Paul Reason, United States Navy (retired)

joined the board bringing with the a wealth of industry and government expertise.

The prior is the President and CEO of Agensys, Inc., a private biotechnology

company, and the former President and CEO of Teledyne, Inc., a diversified

technology-based manufacturing company. The latter, having been a Four Star

Admiral and Commander-in-Chief of the US Atlantic Fleet of the US Navy and

being currently a director of Walmart Stores, Inc. has substantial experience with

both government policy and consumer markets.

This ability to change the makeup of the company’s staff at all levels to fit the changing

needs has been one of the most substantial factors in the successful growth and develop-

ment of the company.

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Over its 26-year run, the position of Chief Executive Officer and President at Amgen has

been held by three different individuals. The management styles of each CEO have been

different, as have the issues they have chosen to focus their attention on. Then again, the

company they have been in charge of has looked unique to each simply due to its growth

and development. Basing our assessment simply on the undeniable financial success of

the company under the management of each of CEO, the conclusion would have to

made, that each man has been the right the person at the right time for the company. The

following is short description of each CEO and President, along with some key decisions

and their impact on the evolution of the company’s business model.

George B. Rathmann (CEO 1980-1988) is one of the co-founders of Amgen, Inc. (origi-

nally founded as Applied Molecular Genetics, Inc.). Rathmann, who earned a PhD in

physical chemistry from Princeton University, was working for Abbott Laboratories

when the technique of splicing DNA was mastered by scientists and the biotech field was

ready to take off. According to a Business Week article aptly named “George Rathmann:

Amgen’s Giant” (9/2005), Rathmann, was put off by what he saw as being a fearful and

suffocative laboratory setting at Abbott and was looking for a chance to take a more

risky approach to scientific research. When approach about leaving Abbott to start a new

company, Rathmann agreed. At Amgen, one of Rathmann’s most significant achieve-

ments was making a deal with Kirin Brewery Co. of Japan for the commercialization of

EPOGEN. The deal gave Amgen its first product and included funding that effectively

saved the company from bankruptcy. Other key achievements include leading the com-

pany through its IPO and being able to combine the science and business sides of the

start-up company. During Rathmann’s term, the focus of the company was strongly on

the scientific research and the discovery of product candidates. On the business side, the

challenges facing the company had to do with securing financing to cover the research

expenses. Rathmann made successful deals with larger corporation for partnering. These

deals helped to secure the early stages of development of the company. Being a chemist,

Rathmann possessed the necessary expertise in scientific research to run a research and

discovery company.

Gordon M. Binder (CEO 1988-2000) took over the posts of CEO and President of the

Board shortly before the market launch on Amgen’s first product EPOGEN. The Har-

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vard MBA, with an electrical engineering degree from Purdue University, brought with

him a strong understanding of the business side of the company. Not having a scientific

background, Binder relayed on his staff for assistance. In an interview by the industry’s

lobbying organization BIO, of which he was the chairman of for two years starting in

1997, Binder explains: “Scientists love to talk about their work, and if you’re willing to

spend time to talk to scientists, they’re willing to teach you what you need to know.”

Lobbying would become an important part of Binder’s time as CEO. There were at-

tempts to weaken the Orphan Drug Act by competitors, and for the continued success of

Amgen, it was vital that these changes were lobbied against. Binder was also instrumen-

tal in the shaping of the FDA Modernization Act of 1997. Gordon Binder’s expertise in

business and politics helped to successfully transform the company into a fully integrated

pharmaceutical. His leadership shaped the company and its business environment in a

substantial way.

Kevin Sharer (CEO 2000- ) joined Amgen in 1992 as Chief Operating Officer and Presi-

dent. At the time, he was already the heir-apparent to Gordon Binder. Sharer’s business

background included the position of president of the business markets division at MCI

Communications and several senior positions at General Electric, including staff assis-

tant to Jack Welch. Prior to his career in business, Sharer had earned a master’s degree in

aeronautical engineering the U.S. Naval Postgraduate School and an MBA from Univer-

sity of Pittsburgh, as well as served on two nuclear attack submarines. Just as Binder had

taken over the CEO post just before the launch of EPOGEN and NEUPOGEN, Sharer

got the top job ahead of the next big round of product launches, namely those of

ARANESP, NEULASTA and ENBREL. However, Sharer’s biggest challenge as CEO

has, arguably, been the task of keeping an expanding company of considerable size from

becoming stagnant and, thereby, killing off its ability to be innovative. Sharer has em-

phasized the values and openness of the company in an attempt to keep the company

“nimble”, as Sharer refers to it in his communications to the shareholders of the com-

pany. Honesty and the willingness to take risks are, according to Sharer, keys to securing

continued growth. As for the role and responsibility of the CEO, Sharer says in a Har-

vard Business Review article titled A Time For Growth (July-August, 2004): “you have

to be willing to bet your job if you’re going to move an enterprise forward.” So far,

Sharers bets seem to have paid off.

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3.2.5 Political environment

In an industry as regulated as the biotechnology industry, changes in the political envi-

ronment are of massive importance. Reimbursement policies of different governments,

U.S. healthcare reform, the Orphan Drug Act, price controls through government im-

posed restraints, and the growing emphasis given to managed healthcare have all shaped

Amgen’s past and will surely have an impact on its future. Of these, the Orphan Drug

Act impacted the early development of the company most significantly.

The Orphan Drug Act of 1983 is designed to give companies reason to invest funds into

the research of drugs for rare diseases. As the discovery of drugs for these orphan dis-

eases may otherwise be financially disadvantageous, producers are granted tax reduc-

tions and a seven-year patent for their products. In the European Union, an almost identi-

cal system is in place in the form of the Committee on Orphan Medicinal Products,

which is part of the European Medicines Agency (see e.g. FDA and EMEA online publi-

cations). To date, the leading orphan drug worldwide has been Amgen’s EPOGEN. The

significance of the Act on Amgen’s success is undeniable. Over the years, competitors

have attempted to weaken the act, but Amgen has successfully lobbied against any

changes. Luckily for the company, as Gordon Binder puts it in the interview mentioned

in the previous section, “it was far easier to defeat something in Washington than to get

something passed.” Amid these challenges and the intensifying debate about healthcare

reform in the U.S., the company felt it needed to participate more in political issues. This

required a concentrated effort by the company to increase its share-of-voice in Washing-

ton. In 1993, as mentioned in the section titled People, Peter B. Teeley was named Vice

President, Government and Public Relations and he set up an office in Washington.

Another political issue that has impacted the company, and which will most likely be of

growing importance in the future, is that of reimbursement policies for different drugs.

The changes in policies can impact sales and limit the prices at which products can be

sold. For example in 1997, the U.S. Health Care Financing Administration changed its

reimbursement policy for EPOGEN treatment. It would only reimburse treatment for pa-

tients whose hematocrit (the portion of blood consisting of red blood cells) was under

36.5%. This, naturally, impacted the sales of the product negatively. The following year,

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after the company had presented data arguing that hematocrit levels above 36.5% may

also require treatment, the Health Care Financing Administration revised its policy to-

wards its initial form.

As the company expands into new countries, the importance of understanding the differ-

ent political environments and being able to work in them has increased. The company

has undertaken a proactive approach to political issues, hoping to be able to shape future

legislation in cooperation with government officials, instead of being just impacted by it.

Amgen has realized that its size and the medical benefits brought by its products mean

that it can make a difference in public policy.

3.2.6 Products, customers and markets

The products, customers and markets of Amgen have coevolved with the company. The

initial target customers and markets were based on assessments of the perceived potential

of future products. As the perceived potential of the future products failed to be fully ac-

curate, the targeted customers and markets had to change. The following is a tracking of

these changes in anticipated and actual products, customers and markets.

• In the early 1980s, the company was pursuing a strategy that targets a variety of

different markets, each with unique customers: specialty chemicals, farming (in

the form of improved chicken feed and bovine growth hormone), and human

therapeutics. Its plans for the U.S. markets were to market some products inde-

pendently and others in partnerships. Markets outside the U.S. would be entered

by working in conjunction with local operators. At this time the company’s

products were still in the lab. Management of the company states that the strat-

egy of the company is to establish numerous products on different markets and

then shift emphasis to those that Amgen can produce on its own.

• From the late 1980s to the early 1990s the success of EPOGEN and NEUPO-

GEN meant that the specialty chemical and farming markets were no longer in

the plans of the company. The future products would come from the human

therapeutics sector. EPOGEN was used for treating anemia. One of the causes

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of anemia is cancer-related chemotherapy treatment, so chemo patients became

a significant customer group. NEUPOGEN was used to treat neutropenia (a low

number of a certain kind white blood cell). Neutropenia is can also result from

cancer treatments. In accordance with the company’s strategy to become a mul-

tinational pharmaceutical, it expanded sales and marketing operations in

Europe. The most significant developments were the establishment of a Euro-

pean headquarters in Lucerne, Switzerland and operating subsidiaries in 6 other

European countries in 1990.

• Inspired by the successful launches of EPOGEN and NEUPOGEN, the com-

pany sought to expand the markets of each product by discovering and gaining

approval for alternative uses of the products. This helped to maintain growth in

sales of the company’s only products. International operations were continu-

ously expanded as foreign staff was substantially increased. The global markets,

it was hoped, would not only help to add to sales, but also help to offset possi-

ble problems in the U.S. markets.

• After the dawn of the new millennium, the company has expanded its product

offering, thereby entering new markets. ENBREL (initially launched in 1999)

entered the market of treatments for inflammatory diseases like rheumatoid ar-

thritis. NEULASTA and ARANESP are, in effect, better alternatives for NE-

UPOGEN and EPOGEN, respectively. Therefore the markets they enter are not

new and customers of the older products may shift to the newer alternatives.

3.3 Learning path

To uncover the managerial cognitions of Amgen, we used Kolb’s learning cycle model

(Kolb and Rubin, 1991) as a basis for our learning path analysis. The resulting chart be-

low provides a chronological path of either internal or external signals that have lead to

managerial cognitions, followed by strategies and ultimately actions that have taken

place during the history of Amgen. Although the chart is useful also independently, the

learning path is primarily a method for the researchers to systematically scrutinize the

business model evolution. It represents a path of actual events complemented with re-

searchers’ deductions from the empirical data.

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Time Signal Cognition Strategy Action

pre-

launch

Technique of DNA splicing

mastered by scientists; opens

new possibilities

George Rathman finds Abbott’s

approach to research to be

fearful and suffocative

Join a smaller research

company with more risk-taking

and openness

Rathman leaves Abbott to start

Applied Molecular Genetics

pre-IPO The biotech field is broad and

unchartered

Impossible to determine what

kinds of scientific discoveries

will yield to commercial success

Keep scope of scientific

research broad

Company conducted research in

a variety of fields ranging from

human therapeutics to specialty

chemical to animal products

pre-IPO Maintaining many research

projects requires more capital

than company has available

Must change the way company

is rewarded for successful

research

Move the point at which money

comes in closer to the start of

the process chain

Entered into corporate

partnerships with larger

companies at an early stage in

research

Pre-IPO Partnerships seen as not giving

company the rewards it feels it

deserves for its scientific input

The nature of partnerships

agreements has to be changed

Favor partnerships where

rewards consists of profit-

sharing and option for

independent manufacture, not

only royalties

Company entered into

successful partnerships, with

good rewards, with Upjohn and

Abbott

1983 Company’s scientists

successfully clone genes

responsible for production of

erythropoietin and G-CSF

These two discoveries could

lead blockbusters, but first they

have to developed further -

need funds

In order to make available the

necessary funds, scientific scope

will have to be narrowed

Scrapped everything else except

human therapeutics form

research

1984 Development of EPOGEN

desperately lacking in funds and

manufacturing know-how

Must find a way to insure

funding and expertise

Enter into partnership with a

larger company

Started 50-50 partnership with

Kirin Breweries for the

development, manufacture and

marketing of EPOGEN

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Time Signal Cognition Strategy Action

1985 Company pressured into

partnerships with less then ideal

reward schemes and terms due

to lack of funds

Company needs get more out of

its corporate partnerships

Develop products further before

entering into partnerships;

Amgen will have more

bargaining power

Hired more staff for efficacy

testing, process development,

acquiring FDA approval, to shift

emphasis from initial stage R&D

1987 Shortage of staff in the market

end of the business processes

chain

Focus of business process chain

must be shifted to successfully

move products from lab to

market

Add skills and capabilities to the

market end

Company hires more staff for

fermentation, process

development, manufacture

1987 Partnerships only yield limited

financial returns

Independent manufacture and

marketing of products would be

more financially rewarding

Emphasis will be given to

products that can later be

developed and marketed

independently

Favored research partnerships

in which company had good

terms and evaluated

development projects

continuously

1988 Research into completely new

areas is time-consuming and

risky

The know-how stemming from

the development of EPOGEN

and NEUPOGEN should be taken

advantage of more intensely

Find ways to apply learned skills

and techniques

Many projects were initiated to

find alternative uses for

EPOGEN and NEUPOGEN

1990 Amid the a shift of focus toward

the market, R&D receive less

focus

Maintaining world-class R&D

capabilities is necessary for

long-term success

Continue to increase investment

in R&D

Started work on new research

facility and added to R&D

investments

1991-2 An increase in the number of

IPR concerns resulting from

global participation

The successful defense of IPR

vital for continued to growth

and development

Increase the legal capabilities of

the company

Expanded legal department and

hired esteemed General Council

(Thomas E. Workman, Jr.)

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Time Signal Cognition Strategy Action

1993 Discussion regarding health

care reform heating up in the

U.S.

Future may be significantly

effected by any changes in

health care

Amgen must have a voice in

Washington and bring forth its

points of view

Hired ambassador Teeley to

head up new Washington office

for government relations

1994 Health care providers worldwide

emphasize ensuring cost-

effective provision of

therapeutic treatments

Developing products for unmet

medical needs that significantly

improve treatment outcomes,

thereby focus will shift from just

cost-cutting to product-benefits

Focus on developing products

for unmet medical needs

Scientific focus is tightened on

truly potential breakthrough

therapeutics with huge

improvement potential in

patients well-being

1995 The hiring of a large volume of

new staff and rapid growth

challenge company culture

Maintaining company’s culture

is important for keeping

innovative atmosphere

Favor in-house candidates for

new places in management

team and continue to

emphasize values

Three long-term managers

promoted to vice-presidents

1996 Diversity and broadness of

company’s pipeline valued by

shareholders and management

A strong and varied pipeline

requires discovery and in-

licensing

Maintain strong research

capability and look for in-

licensing opportunities

elsewhere

Company continued to invest

into own research facilities, staff

and projects while looking for

and conducting in-licensing

1997 Combined sales growth of

EPOGEN and NEUPOGEN slowed

Rapid growth is only wise when

revenues are growing at same

pace

Limited and controlled growth

during a stage of slower sales

growth

Pace of hiring was limited

significantly and a partner was

sought for inflammation

treatment program

1998 Research in biotech being

conducted in a variety of places

Need to be aware of the newest

discoveries in order to be able

to take advantage of them

commercially

Improve ability to strategically

evaluate external research

Ongoing research collaboration

with over 200 institutions and

companies

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Time Signal Cognition Strategy Action

1999 Product pipeline anticipated to

facilitate launch of three new products in 2001

Company must get ready for

new products and new markets

Increase business capabilities of

company to facilitate product launches

Gordon Binder announces that

the company needs to add 700 people to sales and marketing

2000 Manufacturing capacity at limit Manufacture of complex products can not be outsourced,

must increase own capacity

Construct facilities to meet demand of new and growing

markets

Opened facility in Colorado, made plans to grow facility in

Puerto Rico

2002 Company needs to bring new

products to market, but ones in pipeline not ready

Acquisition is a fast way of

getting new products

Add ENBREL to its product

offering by acquiring Immunex

Acquired Immunex for $17.8

billion and started to sell ENBREL

2003 Competition for the best people

in science and business intensifies

Continued success requires the

best people in the industry; salary alone does not drive these people

Remain a desired employer by

keep an open and freethinking atmosphere

Informality stressed to new

staff, company values emphasized through community projects and activities

2004 Acquisition targets are present and company has funds

Immunex deal taught Amgen about synergies and the

benefits of acquisitions

Pursue a strategy of acquisition of smaller biotech companies

Company acquires Tularik, Inc. and (the following year)

Abgenix, Inc.

2005 The company has become so

large that new risks have arisen

A big company runs risk of

becoming stagnant and bureaucratic; values and culture can keep it unique and fresh

Stress the values of the

company to the to management team; they will trickle down

Sharer tells managers they

must sustain company’s unifying social architecture

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3.4 Conclusions through the business model lens

In this chapter, the business model framework introduced earlier will be used in a discus-

sion about the evolution Amgen’s business model. The discussion will be structured

around the key segments of the framework, which are: material aspects, managerial cog-

nition and corporate culture. The aim of the analysis is to enable the comparison of the

company in question with other biotech companies as well as with companies in differ-

ent industries.

3.4.1 Material aspects

Business relationships. Amgen’s customer base consists of health care providers around

the world. Through its customer relationship management (CRM) processes, Amgen

aims to build and maintain positive relations to these institutes. It also hopes to serve the

end-user, the patient receiving the drug, through programs like telephone help-lines and

financial assistance for those unable to afford the drugs. The state of the relationship be-

tween health care providers and Amgen has been strained by cost-cutting needs faced by

health care providers in many countries. Amgen has sought to lift this strain by empha-

sizing the significant improvements its products can bring to patients’ lives. Srivastava et

al. (1999) see this kind of shaping of the perception of a company’s products as a vital

part of efficient CRM processes. Amgen hopes to change the subjective psychosocial

outcomes of this relationship.

The efficient manufacture of complex biomedical products is costly, highly regulated

and requires expertise in a variety of fields. Amgen has steered away form outsourcing

the manufacture of its products, choosing instead to construct and develop its own manu-

facturing facilities and processes. Risto Holma, country manager for Amgen in Finland,

said in an interview done for this study that the company is not against the notion of us-

ing partners in the manufacturing process, but that at the current time, partners with suf-

ficient capabilities are not available. The company has gained only limited experience in

supply chain management (SCM) processes. Therefore, according to theory by Srivas-

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tava et al. (1999), were Amgen to start outsourcing parts of its operations, value creation

may not be maximized and operational risk would be high.

The product development network at Amgen has changed significantly as the company

has transformed from a research company into a fully integrated pharmaceutical. The na-

ture of the relationships in the beginning stages of the company’s development was such

that Amgen provided research know-how and expertise in biosciences, whereas the part-

ner supplied the financial backing and industrial experience. This cooperation was vital

for the enablement of research projects at the young company, but the management was

unsatisfied with the reward structure and growth potential offered by these partnerships.

A change in partnering strategy was needed.

As Amgen continued to look for candidates for corporate cooperation, a decision was

made to favor projects that would give the company a better share of rewards, both short-

and long-term, as well as possibilities for independent development of the products in the

future. Amgen’s strategy was to develop its product candidates further along before

looking for partners, thereby making better deals possible. A new focus on relationship

management helped to make this possible.

The product development network of Amgen changed during its years of fast growth (af-

ter the successful launches of EPOGEN and NEUPOGEN, before more products came to

market). The nature of the relationships changed from being dominance-based to being

more partnership-based. The established biotech company was by then a desired partner

for cooperation. Partnering was no-longer a necessity from a financial point of view. The

management decided to use corporate cooperation as way of making up for a lack of ex-

perience in certain markets. Joint-venture agreements made the sharing of research and

development costs possible, while giving both parties exclusive access to selected mar-

kets. This was a way for Amgen to, on one hand, limit some of the massive development

costs of new products, while on the hand, secured the potential financial rewards associ-

ated with the monopolistic markets of new pharmaceutical products. Later, serious chal-

lenges would arise from parties no-longer wanting to be limited by these agreements and

the relationship would dissolve.

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The more contemporary strategy for corporate partnerships makes use of Amgen’s posi-

tion as a biotech heavyweight with experience to give and capital to spend. Acquisitions

have become a possibility and the successful takeovers of Synergen, Kinetix, Immunex

and Tularik (1994, 2000, 2002 and 2004, respectively) have helped to strengthen acquisi-

tions as a part of Amgen’s growth strategy. Realizing that the company must have access

to new discoveries and that these discoveries can take place in variety of places, Amgen

has developed partnerships with over 200 universities and other institutes. The develop-

ment and testing offered by Amgen is one of the key sub-processes of product develop-

ment management (PDM), as defined by Tikkanen et al. (2005).

Amgen’s extra-business relationships, more specifically those to competitors and equity-

holders, have remained fairly unchanged over the years. Relationships to competitors

have been strained by court cases relating to patent infringements and agreement viola-

tions. Also, the hiring of top staff from competitors has created some tension. Amgen

states that one of its values is to “Compete intensely and win”, and the intensity some-

times causes friction. Patience was required form the equity-holders of the early years,

but the continued financial success of the company after the launch of EPOGEN has

meant that this relationship has been rather simple to manage.

Strategy, structure and governance. Amgen’s structure and governance have reflected

both the emphasis of the company and its strategy at any given time. When the company

was a tiny research lab with ambitions of scientific breakthroughs, but very little in the

form of real product candidates, the structure of the company was simple: the scientists

researched topics on a wide scope and the rest of the company tried to keep the company

afloat through venture capital and cooperation agreements. The first CEO, George

Rathmann, was something of hybrid between business manager and scientist. The Scien-

tific Advisory Board (SAB) consisted of acknowledged professors and researchers in

molecular biology and genetics. They were the most significant part of the governance at

the time. The SAB would evaluate research projects and decide whether to continue or

discontinue projects. This was vital for keeping Amgen on track in its early years. The

lack of governance and oversight has led two of Amgen’s largest failures. The first was

when, in the mid-1990s, the company misestimated the market potential and medicinal

abilities of their new product for rheumatoid arthritis, KINERET. In an interview in the

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Harvard Business Review (July-August, 2004), then President and COO Kevin Sharer

admits that the top management failed to listen to more objective sales estimates and

wait for more conclusive test results. Similarly around that same time, a product called

LEPTIN showed massive potential as a possible cure for obesity. Objectivity was lost

amid all the hype and investing was continued despite some negative initial test results.

Millions were spent on the two failed projects.

The strategy of the company has been formed around the vision of transforming from a

research company into a fully integrated pharmaceutical. Growth strategies have in-

cluded partnering, international expansions, product extensions and acquisitions.

Through all this, the structure of the company has in part transformed, but also remained

much the same. The innovation required to keep a biotech company moving forward,

flourishes in open and dynamic environments. Therefore, the management has tried to

keep the structure from becoming too much like that of more traditional companies, of

similar size. The notion being, that bureaucracy and a stiffly hierarchical structure would

stifle innovation. Naturally, a company with its operations spread around the world needs

to have a clear structure for its global processes, but as Amgen has shown size is not a

deterrent for innovation.

Operations and resources. When Amgen was founded, its main resource was the scien-

tists it had working in its lab and those sitting on the Scientific Advisory Board. The

company’s scientists are still a major asset to the Amgen, as are the skills it has acquired

as a company through its growth and development in the biotech industry. Few compa-

nies have played a larger role in the development of the industry, and none have had

more successful products. This skill and experience has become a significant resource as

the biotech industry grows and new scientific possibilities arise. Amgen is poised better

than most of its competitors to take advantage of new breakthroughs.

Having been responsible for all stages of business operations, from initial scientific re-

search to selling products to end-users, Amgen has been able to learn the various opera-

tions associated with its business environment. By focusing on developing its business

operations, the company has been able to increase the efficiency at which it operates. Be-

ing able to conduct R&D that leads to real product candidates is one of the biggest chal-

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lenges facing all biotech companies. Those with experience in conducting product-driven

R&D can use that know-how to bring more products to the market. As a result, Amgen is

desired partner for collaboration for companies with scientific discoveries that lack abili-

ties in development and commercialization.

3.4.2 Managerial cognition

The sciences that led to the start of the biotechnology industry, novel elements of mo-

lecular biology and recombinant-DNA, were distinctly different in nature from the sci-

ence that preceded them. Similarly, the ways in which the managers of new biotech

companies approached research and saw the pharmaceutical markets were different to

those of big pharma.

The technology of recombinant-DNA allows for extensive customization of proteins. In

much the same way, Amgen’s early managers felt that the business models used by tradi-

tional pharmaceuticals (which had been the previous of employers of many of them)

could be tweaked or changed to better enable the benefiting from this new science. The

early business models were built around daring science that believed in the new possi-

bilities and was not afraid to fail. Risk averseness was replaced by sheer drive. The ex-

citement experienced and exuded by the management led to a dynamic research com-

pany with a determination to grow to become a significant player in the pharmaceutical

industry.

The research and development done by traditional pharmaceuticals tends to be market

driven. This means that their aim is to develop products that can be sold to the largest

possible markets; thereby excluding many segments with smaller sales potential. The ap-

proach taken by Amgen’s management was more science driven. The belief was that

world-class scientists doing cutting-edge research will come up with such breakthroughs,

that even if they are sold only to markets of limited size, financial rewards will be sub-

stantial. By not limiting their scientists’ research to developing better painkillers and po-

tency drugs, the management allowed the science to take the lead. The result was the de-

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velopment of two drugs, namely EPOGEN and NEUPOGEN that, especially at first,

served only narrow market segments, but were still true blockbuster drugs.

The success of Amgen is undeniable, as is its reshaping of the industry’s practices and

beliefs. We believe that had Amgen applied the business models commonly used by the

pharmaceutical industry at the beginning of its development or failed to have its business

models evolve with the changes in its surroundings, the success of the company and its

role as one of the leaders of the industry today, would not have been possible. Further-

more, we argue that this is a result of the managerial cognitions of the company’s top

management.

3.4.3 Corporate culture

Corporate culture has been seen as being a vital factor for Amgen’s continued success by

the management. Maintaining a certain kind of corporate culture has been seen as a way

to emphasize the positive aspects of the company as well as a way to keep the company

from changing in ways that may be harmful for its growth. In the very beginning of Am-

gen’s development it was important that the best scientists could be recruited to conduct

groundbreaking research into the possibilities associated with biomedicine. These scien-

tists were drawn to the company partly for the freedom and capabilities related to the re-

search. There was a culture of openness and a toleration of failure that made the discov-

ery of scientific breakthroughs not only possible but very likely.

As Amgen grew in both staff size and global reach, maintaining the company’s culture

became important for a different reason. The top management feared that the company

may become stagnant and bureaucratic. Culture was seen as the key keeping the com-

pany innovative and ready for changes in its operating environment. One of the ways the

top management went about achieving this, was to emphasize the importance of values

to its upper management, with the intention that they would serve as role-models for

their staff. Participation in social outreach programs like Habitat for Humanity is seen a

concrete way of managers serving as role-models. The company also aims to do its part

by, for example, providing patients with limited financial resources with products

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through a program called Reimbursement Connection. Having become a massive com-

pany, with revenues resembling those of big pharmaceutical companies, Amgen’s man-

agers consciously differentiate between themselves and traditional pharmaceutical com-

panies. By stressing the points that Amgen is still a biotech company and that its main

objective is to improve the lives of its patients, the management hopes to be able to

maintain the kind of corporate culture that made the success of Amgen possible in the

first place.

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4 Genentech

Our second case company, Genentech, is often characterized in the public press as the

pioneering biotechnology company that has achieved huge success while remaining true

to its scientific origins. Today, its market capitalization is almost equal with that of Am-

gen’s. Some essential financial figures - share prices, product sales and number of em-

ployees - are provided below to facilitate the business model analysis and also compari-

son with Amgen.

Chart 7. Genentech share prices

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Chart 8. Number of Genentech employees

Chart 9. Genentech’s total product sales

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This chapter continues with a short description of how Genentech was founded (details

mainly from Robbins-Roth, 2000, and the company’s web site), following with a more

thorough narrative of the evolution of the company’s business model (data from annual

reports and press releases). The topics, or points of view, of the narrative have been se-

lected on the basis of descriptiveness in order to highlight the most important aspects.

They are thus derived from the data, not from our business model framework. Next, the

narrative is used to build a chronological path of signals, cognitions, strategies and ac-

tions. Finally, the evolution of Genentech’s business model is analyzed through our

framework.

4.1 Early history

Genentech was founded in 1976 by venture capitalist Robert A. Swanson and biochemist

Dr. Herbert W. Boyer. Swanson brought with him the entrepreneurial spirit generated in

Silicon Valley, which enabled them to focus on productivity, not on established corpo-

rate behavior. Boyer, then, was one of the first to perfect the technology of recombinant

DNA, a major milestone in the relatively short history of biotechnology. The new ven-

ture got initial funding of $100,000 from the investment group Kleiner & Perkins (K&P),

where Swanson was employed before his new position. He started Genentech as a virtual

company out of the K&P offices and put together the first contract research deal, assisted

by an intellectual property law specialist, with an academic group that gave the biotech

company product rights. The initial experiments to generate proof-of-concept data for the

technology were conducted in the labs of Boyer at the University of California at San

Francisco and Keichi Itakura and Art Riggs at City of Hope National Medical Center in

Duarte, California.

When this first project showed that in fact genetic engineering could induce microbes to

make foreign proteins, the founders and their financial backers moved the company into

its own labs in a South San Francisco warehouse. The scientists, most employed right out

of academia, worked in a very ascetic environment. They were all driven by science and

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were extremely motivated on achieving results that would make a profound difference to

patients. Early on, the employees still got their own free time for doing off-project re-

search or simply partying. The atmosphere combined business instincts with cutting edge

science but left no room for the big pharma mentality of enjoying the benefits of the past

block-buster drugs.

Then, on October 14, 1980, Genentech Inc. was taken public. It was stated to be the first

company to focus all of its attention on using the tools of the new biology to create prod-

ucts, and it was the first to successfully scale up protein manufacturing to support large

quantities needed for clinical trials and marketing. At the time, the general press focused

mainly on Genentech’s interferon and its cancer-fighting properties, which naturally

caused much investment interest and even hype. The initial public offering raised $35

million, an incredible amount for a company with no products on the horizon until 1984.

By 1983, approximately dozen companies had followed the same route until the IPO

window closed for a few years.

Many of the early biotech firms were, in their excitement about the potential applications

of the new technologies, unable to focus their development efforts. Genentech’s 1981

annual report shows interest in three different product categories: industrial chemicals,

animal health and human health care. It was not until after 1983 that the company fo-

cused exclusively on human health – pharmaceuticals clearly had the best potential for

return on investment. Genentech was innovative also in partnering, which was not, back

then, as common as it is today. They sold worldwide rights to their recombinant human

insulin to Eli Lilly & Co, a deal that spawned the very first biotech therapeutics to reach

the marketplace, and rights to their human growth hormone to AB Kabi. Hoffmann-La

Roche, who completed a merger with Genentech in 1990, also bought the marketing

rights to its interferons in 1980. The deals gave the young biotech firm cash to support its

growth, and assurance to the investors that biotechnology indeed was real and valuable.

They also enabled the firm to show net income already in 1979, and it has continued to

do so ever since.

Finally, in 1985, it was time for Genentech to advance from an R&D boutique to a real

pharma company – to sell drugs. It retrieved the U.S. marketing rights to human growth

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hormone in 1983 and obtained approval from the Food and Drug Administration in late

1985. That year they also hired their first 75 sales representatives.

4.2 The development of Genentech

This chapter uses a narrative approach to highlight the essential aspects and changes in

the business model of Genentech throughout its history.

4.2.1 Science

During its history, Genentech has discovered and produced a multitude of original new

drugs. For the purpose of this study, it is not necessary to go through the development of

all the drugs. Instead, we will here describe the processes and top-level decisions that we

believe are behind the success of the company’s scientific efforts. The capability of the

top management to constantly scrutinize the ongoing scientific processes, to pick only

the best ones for continuation, and then to give them adequate amount of resources, is

frequently included among Genentech’s core competencies in the public press. Few oth-

ers have been able to do it with an equally good track record. Genentech has organized

this process around their Research Review Committee, where staff scientists and re-

searchers must defend their work once or twice a year. Managing the projects in biotech-

nology requires, on one hand, extended scientific knowledge and, on the other hand, a

solid understanding of marketing and business. One has to understand the scientific and

the business potential a line of research may or may not have.

The following example of a highly influential R&D decision will unfold some critical is-

sues Genentech has faced. Back in 1997, when Sarah Desmond-Hellmann became

Genentech’s chief medical officer, she envisioned cancer as a disease that might be

treated satisfactorily within perhaps a decade, a clearly different view from the industry

norm. According to PharmExec (2006, April 1), she pressed oncology towards becoming

the main health care area the company should focus on. They started clinical trials of

Avastin in the same year, and after some difficulties (in September 2002, when Genen-

tech had invested more than $100 million in the drug, phase III clinical trials results

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turned out negative, depressing the stock 10 percent in one day), it is now predicted to

become the most profitable drug in the company history.

Having no previous presence in the market for cancer treatment, the company had to ac-

quire considerable amounts of new knowledge. In biotechnology, scientific break-

throughs usually require years and years of expensive research before any real signs of a

possible new drug emerge. Thus, moving to a new pharmaceutical area ties up huge

amounts of scarce resources. When Sarah Desmond-Hellmann decided to forcefully push

oncology projects forward, she was not following the industry recipe, which generally

considered the area of treating cancer unfeasible. The decision to support this controver-

sial line of research reinforced Genentech’s culture of innovativeness that is not limited

just to pursuing obvious targets. It acted as an example that the top management really

stands behind even the most ambitious research, often carried out in the approximately

20 percent of working time the scientists have for their own, individual efforts.

Gilsing and Nooteboom (2006) argue that, in terms of their model of cycle of discovery,

the biotechnology industry is now in a phase of reciprocation. Research and development

constantly creates incremental improvements for marketed products but the process of

customer relationship management also sets new targets for innovation. The most ambi-

tious targets cannot be reached without radical innovations, which in turn cannot be dis-

covered without enough resources in real scientific exploration. Sarah Desmond-

Hellmann’s actions towards exploring the possibilities for fighting cancer show that she

recognized the prerequisites for radical innovation. In 1997, Genentech launched an ini-

tiative called BioOncology. It gathers together patients, researchers and business profes-

sionals to create loose networks in order to generate open information from diverse

sources. They experiment with novel combinations of knowledge and aim for new tech-

nologies that would substantially improve cancer treatment. And the program has been

highly successful: during its short history it has helped launching four different products:

Avastin, Herceptin, Rituxan and Tarceva. In the U.S., Genentech’s revenues from oncol-

ogy products have risen from $5,5 million in 1997 to nearly $4 billion in 2005.

Genentech has had and also currently holds major advantages in its research and devel-

opment. Because it perfected some of the most important techniques on its own, such as

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producing useful proteins in recombinant cells (U.S. and European patents received in

1987), it has been able to leverage this knowledge throughout the whole development

process from early research to manufacturing. Genentech also immediately acknowl-

edged that in order to ensure the industry’s wide technological exploration, it must li-

cense these techniques to other firms for reasonable royalties. Throughout the company’s

history, the percentage of revenues spent on R&D has been extremely high, topping at

almost 50% in 1996. But after CEO Arthur Levinson’s strong commercialization efforts,

the percentage finally began to lower in the end of the 1990s to less than 20% in 2005

(still very high compared to other pharmaceutical companies). In absolute terms, the

spending has risen from $490 million in 2000 to $1262 million in 2005. Research analyst

of Frost & Sullivan, Jason McKinnie explained the logics of Genentech’s smart and effi-

cient development (PharmExec, 2005, Oct 1) as follows. Genentech has brought to mar-

ket new FDA approved platform drugs, such as Avastin, which are already known safe

and tolerable. They can avoid doing a phase I and even a phase II study, and thus quickly

move into other indications with less money spent on R&D. The trials are further eased

by routinely using so-called biomarkers, which help determine how a drug actually

works and which patients are the most appropriate. PharmExec (2005, Oct 1) reports that

because of its successful long-term R&D spending, Genentech “won’t face patent issues

on any of its products in the next five to ten years at least”.

4.2.2 Finance and funding

Some of the biotechnology managers we interviewed relate the term ‘biotech business

model’ mainly to the new financing model it offered in the pharmaceutical industry. Tra-

ditionally nearly all the drug discovery research was done by the company that would

eventually market them. Now that the new technologies enabled the early phases of drug

discovery to be made with less resource, many advanced scientists preferred working in

a small, dedicated company. The academics in Genentech brought the mental model of

acquiring external research funding from the universities to the pharmaceutical business.

Naturally, the model had to be modified to account for the business realities such as aim-

ing the research at certain areas that would interest the big pharma or other established

companies in somehow related industries. In the beginning, the core competencies com-

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prised of making advanced scientific research, managing investor relationships and pro-

tecting intellectual property in the form of contracts and patents.

Small biotechnology firms in the drug discovery business are always in the need of capi-

tal long before their products can reach the marketplace. Because Genentech was one of

the first in utilizing the new technologies, it had to gain access to major funding even be-

fore it was able to present that the technologies worked in practice, let alone that the end

products functioned as planned. As put in an article by Puisis (2001), “their only revenue

was the hope of curing some of the world’s ills.” During Genentech’s first years, it could

be said that their products were mere promises to investors who had no way of judging

whether the product attributes were sensible. However, the top management succeeded

to show profits already in 1979 through licensing fees and milestone payments that pro-

vided them with cash early in the long development projects. The company finally re-

corded its first profits from its own product sales in 1985. (Protropin was the first recom-

binant pharmaceutical product to be developed, manufactured and marketed by a bio-

technology company. It achieved over $5 million in sales, but in the same year the com-

pany raised an additional $90 million in equity funding.)

In 1990, Roche Holding Inc, the Swiss pharmaceutical company, invested more than $2

billion in Genentech. From the financial point of view, the deal gave Genentech tremen-

dous security. As indicated by several specialists we interviewed for this paper, the

pharmaceutical business is essentially about taking and managing calculated risks. The

company has since spent record shares of its revenue in long-term R&D projects, which

was in major part enabled by the Roche arrangement. As an example, Genentech de-

signed its oncology clinical trials to prove that its drugs could prolong life, which is con-

sidered a very high bar for an experimental cancer treatment to reach; most companies

seek only to prove their drugs can shrink the size of a tumor. These kind of advanced tri-

als are very long and costly. In an interview of BusinessWeek (2005, May 17), CEO Ar-

thur Levinson confirms that, in the 1990s, the funding by Roche indeed provided Genen-

tech cushion to take risks.

After the hype around biotechnology in late 1999 and early 2000, the management’s fo-

cus of sight for funding changed once again, as the company began generating huge

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profits from its own product sales (in 2005, almost $5,5 billion of the total operating

revenue of over $6,6 billion came from product sales). It is no longer necessary for the

top management to pursue external funding for the scientists that ask for approval of

their research ideas. Instead, they will need to make sure the organization is fit for fight-

ing over the customers, who today are often represented by the specialists in health in-

surance companies. The management is now responsible for generating growth in profits

by the successful execution of the CRM process. In conclusion, the innovativeness of to-

day’s Genentech is no longer related to finding alternative financing models for its busi-

ness. Like the traditional pharmaceutical companies, Genentech now receives most of its

profits by selling the drugs it has discovered.

4.2.3 Partnering

The basic assumption behind Genentech’s partnering efforts is naturally to gain access to

resources it does not possess in-house. When the company’s management decided to fo-

cus exclusively on human health care in the early 1980s, the main reason for the external

collaborations and agreements was to enable the researchers’ full attention to the projects

critical for the company’s overall success. The responsibility for the development of the

product categories that did not fit into the priority list, such as industrial chemicals and

animal health, was given forward to joint ventures with other companies (e.g. Genencor

was formed in 1982 with Corning Glass Works to produce enzymes for food processing).

During the following years, these non-related joint ventures were either given much less

importance or even totally dropped. A more focused business development strategy was

gradually formulated, which resulted Genentech to buyout two R&D partnerships which

had funded the development of three important products: Protropin, Activase and gamma

interferon. From the very beginning, Genentech’s vision was to become a leading phar-

maceutical player that manufactures and markets its own products. When the top man-

agement (the original CEO, Bob Swanson, was still in charge) began to realize that these

three products in fact showed huge potential for sales growth, they decided to continue

the commercialization in the U.S. on their own.

In the next phase of organizational growth, Genentech collaborated with other, both

smaller and bigger, pharmaceutical firms to complement their competencies. The com-

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pany set a few targets in health care areas and drug development processes that guided

the selection of research projects. Although the targets varied over time (e.g. in 1986 the

company concentrated on molecular immunology, cardiovascular and developmental bi-

ology; and in 1991 they had added endocrine research and neurobiology to the list; cur-

rent priority is oncology), two main strategies persisted: 1) in priority product areas,

complement own research with the technology of others’; 2) in other areas, license own

innovations to other companies to develop further. Through organizational learning and

growth, and all these collaborations, Genentech acquired knowledge in multiple fronts.

In addition to basic drug discovery, they learned to excel in working with the FDA when

executing clinical trials, protecting intellectual property, manufacturing large molecule

drugs, influencing health care decision makers and finally marketing the products effi-

ciently without a massive sales force.

Currently, Genentech is engaged in several collaborations with universities, other bio-

technology companies and big pharma companies. As similar agreements are widely

used among different actors in the industry, there is no noticeable difference in the pur-

sued outcomes of Genentech’s product development relationships in comparison to those

of other companies’. Among smaller biotech firms, the company is often considered as

the number one option when they are on the lookout for a partner with whom to develop

their innovations further. When PharmExec (2003, Feb 1) studied the best practices in

pharmaceutical product launches, it found that “Genentech’s ability to come through

with a thorough and flexible offer shows the licensor they genuinely care for mutual suc-

cess and rapid commercialization”. Naturally Genentech has failed with some agree-

ments, but it has earned a good reputation with others that have served as role-model

partnerships for the industry. A venture capital partner of J.P. Morgan Partners, Rodney

Ferguson, describes one such deal in a PharmExec article (2005, April 1): “Idec had a

great cancer product (Rituxan) with early but compelling clinical data. It needed money

and manufacturing help to get its recombinant molecule antibody to market. Genentech

was the premier manufacturer of recombinant proteins, and it needed revenues in com-

mercial products. Genentech took a hands-off approach; both companies sold and pro-

moted the product, built a joint sales force, and commercialized the product together. It

was a win-win for both.”

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Looking at the cognitions behind Genentech’s history of partnering, the transition has

been enormous. In the beginning, the top management had a hard time convincing the

traditional pharmaceutical industry players that their new technologies worked in prac-

tice. In essence, the managers’ role was to act as sellers of somewhat abstract scientific

promises. When the company grew in size and complexity, their relationships with dif-

ferent partners obviously became multiple and more difficult to manage. To the direction

of universities and other early research institutions, they had to show a face of scientific

credibility, openness and cooperativeness, and to the direction of big pharma, they had to

be product (customer) oriented and operationally efficient. At the time of this evolution,

there were no industry recipes for the growing biotechnology firms on how to manage

the developing industry relationships. Although Genentech currently operates in the

same league with the more traditional big pharma, and thus the cognitive reality of the

top management has become more alike, there are also profound differences. Because of

its extremely fast growth process, Genentech was, just a few years ago, a direct competi-

tor but also an equal collaborator with the smaller drug discovery companies. Its manag-

ers have a deep understanding of the grass-root level biotechnology business, and they

also have retained strong relationships with those actors. A key question is how long

they can exploit this special industry position without becoming cognitively and cultur-

ally “big pharma”.

Still, the most influential partnership has arguably been the one with the Swiss pharma-

ceutical company, Roche. The two companies have worked together in some research

projects already in the early 1980s, and in 1990, Roche Holdings invested more than $2

billion in Genentech. As noted by Fortune (2006, Jan 23), Genentech had lost focus and

stopped introducing new drugs in the late 1980s, sending the stock price down and mak-

ing the company a takeover target. This deal gave Genentech, which was then being lead

by a newly appointed CEO Kirk Raab, cushion to once again take on long-term R&D

projects without constant fear of running out of funding. In the 1992 annual report Raab

admitted that they did not exactly know what the relationship would bring forth, but by

that time they had developed “meaningful mutual respect and productive relationships.”

The arrangement was said to provide opportunities in “marketing of each other’s prod-

ucts, international cooperation, product development and/or manufacturing support and

significant research collaborations”. Right before Arthur Levinson took over Kirk Raab

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as CEO in 1995, Roche negotiated a five-year extension on its option to purchase the

balance of the company. According to an article by Daniel Levine in Sun Francisco

Business Times (2004, December 17), Raab was pushed out of the company after it was

discovered that while in negotiations with Roche over its option, he sought a guarantee

for a $2 million personal bank loan from them. Levine also argues that the Roche exten-

sion also gave Levinson unusual freedom to invest in the company’s pipeline, because

the terms put a floor and a ceiling on where Genentech’s stock could go in the next five

years. This meant that Levinson could aggressively spend on R&D without fear that it

would depress the stock’s price.

Then in June 1999, Roche exercised its option that caused Genentech to redeem all of its

outstanding stock not owned by Roche. In July, 44 million shares were offered under the

new trading symbol “DNA” in the largest initial public offering of its kind in the U.S.

healthcare industry history. These arrangements created Roche billions in profits, and to-

day, Roche Holdings still owns 56 percent of Genentech. The partnership with Roche

has given Genentech financial security and access to international product development

and marketing resources. Probably the most crucial decision for the success of the part-

nership was that Genentech was left operationally independent. It has enjoyed full-scale

resources without losing the innovation capabilities of a flexible organization.

4.2.4 People and culture

When Fortune’s (2006, Jan 23) writers went over to Genentech, they were told that the

company’s secret is its culture, which has propelled Genentech to the top of Fortune’s

“The best place to work now” list. All the specialists we interviewed for this study

agreed that the success of a biotechnology firm depends on the qualities of the people it

manages to hire and keep satisfied. The top management of Genentech acknowledged, at

least on some level, the importance of culture right from the beginning. They did not try

to imitate big pharma; instead they created a college campus -like atmosphere that lured

many highly skilled scientists straight from universities where, at that time, business cor-

porations in general were frowned upon because they were not viewed as venues for se-

rious research. Although Genentech has always recognized the importance of people, it

was emphasized even more after Arthur Levinson became CEO in 1995. They started to

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introduce new employee programs such as a backup day care for school-age children and

an on-site general store. In 1998, a fifth point that concerned investing in employees was

added to Genentech’s highest-level strategy.

Next we will look into the factors that have contributed to creating a culture that has at-

tracted so many top scientists and other experts.

• Perhaps the most compelling argument for doing research in Genentech is that

you get the chance to work with other extremely talented people. As Ellen Filva-

roff, a senior scientist in molecular oncology, puts it in Fortune (2006, Jan 23):

“The biggest kick [I get from working here], by far, is having colleagues who can

help you crack the science more quickly. The company, along with its scientists,

is the brightest star in a promising industry that has chronically underdelivered.”

• Genentech encourages publishing of its pioneering research in scientific journals.

According to the 1990 annual report, its scientists have released 718 papers dur-

ing the years 1981-1988, while Chiron placed second with 207 papers. By pub-

lishing research papers, scientists can achieve respect and a higher status in the

academic community, which concurrently increases Genentech’s reputation

among the same people. Many high-technology companies fear that these kind of

open publications might leak important information to outsiders.

• The researchers are encouraged to spend fully 20 percent of their working-time to

pet projects that are not directly involved with the business development strategy.

While this might have been the norm 20 years ago, in today’s economy of effi-

ciency it is a great way to differentiate from other research venues. Academics

have long argued that in order to achieve radical innovations in the spirit of ex-

ploration, researchers must be allowed some freedom to be creative. However,

doing research in Genentech is anything but relaxed; the environment is very in-

tensive as everyone thrives to take science further.

• While not doing science because of philanthropy, Genentech tries to create an

environment for the scientists where achieving maximum profits is not the first

thing in their minds. For example, the company has a policy of fining people if

they are caught following the stock price during work-time. The approval to con-

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tinue a certain project is still, of course, very much dependent on its end product

potential.

Highly skilled and knowledgeable individuals, many of whom have PhD’s, arguably re-

quire different kind of leadership and motivation than less academically oriented work-

ers. As CEO Arthur Levinson describes in San Francisco Business Times (2004, Dec

17): “While mediocre scientists will follow the orders, good scientists tend to be recalci-

trant.” There was a time when it was trendy to bring experienced business managers

from other industries to help biotechnology companies grow, but they often failed to be

visionary leaders and to light up the passion in their employees. Managing director of

Clarus Ventures, Nick Simon, picks out CEO Bob Swanson, one of the founders of

Genentech, as an example of a leader with a compelling vision (PharmExec, 2005, Aug

1). Simon explains how Bob Swanson saw the commercial possibilities of gene splicing

when everyone else doubted it, and then managed to inspire talented people to realize the

vision. The situation is not any worse today, as can be seen from the multitude of awards

Genentech has received for being an excellent place to work. In a survey by Ratings Re-

search LLC that measured company reputations in the pharmaceutical industry in 2004

(see PharmExec, 2005, Feb 1), Genentech placed first in “leadership”, which encom-

passes issues like effective CEOs, a talented management team, clear strategic direction

and strong corporate governance.

Is it possible to maintain the inspired and innovative culture despite the fast growth? A

hopeful answer was given in an interview with senior director of market development,

Jennifer Cook, as she recalled: “I was in the house when there were 1200 people, and

now when there are 11000, not much has changed in the way things work.” Growing or-

ganization brings more bureaucracy, and the so important decision making process usu-

ally slows down. It will be a true challenge to successfully manage the inevitable organi-

zational transformation into a more mature stage.

4.2.5 Political environment

The pharmaceutical industry is without doubt one of the most regulated industries. Still,

there are surprisingly few studies concerning the effects that the constantly changing po-

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litical environment has on the pharmaceutical or biotechnology business. We found that

it was not until the year 1992 when Genentech began to comment on the contemporary

political issues, such as the economic health care crisis in the U.S., in its annual reports.

Next year, CEO Kirk Raab shared his critical thoughts on the planned price controls on

drugs and their effects on pharmaceutical innovations: “Consider that very few drugs

have ever been discovered and developed in communist countries.” In 1995, when Ar-

thur Levinson became CEO, he showed that Genentech recognized the importance of in-

fluencing - not just reacting to - public policies, by adding more than 20 managed care

specialists to its field sales organization. Their goal was to “help medical providers rec-

ognize the benefits of Genentech products for their patients.” The company also began to

work with the U.S. government to advise on legislation affecting the biotechnology in-

dustry.

The year 1992 was also the first year Genentech listed corporate responsibility projects

and actions in its annual report. Since then, it has emphasized responsible corporate be-

havior; the company slogan stands: “In business for life.” When Genentech got its first

product to market in 1985, its representatives announced that no patients should ever be

denied of the company’s products because of an inability to pay. This conviction has

been questioned lately, as their newest cancer drug Avastin is being priced at about

$100,000 a year for the treatment of breast and lung cancer. According to an article in

The New York Times (2006, Feb 15), Genentech is now citing the inherent value of life-

sustaining therapies as their primary argument for the high price. Traditionally, they have

appealed to their Access to Care Foundation, which donates drugs to selected uninsured

patients, and also to the industry’s mantra of the high costs of drug development. In the

same article, Geoffrey C. Porges, an industry analyst at Sanford C. Bernstein & Co, says

that Genentech has always been aggressive in pricing its therapies but insurers and gov-

ernment agencies have eventually accepted Genentech’s terms, because its treatments

have been shown to prolong life. The company needs to balance between augmenting its

profits and maintaining good relationships to all its stakeholders, while at the same time,

its bargaining power continues to rise.

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4.2.6 Products, customers and markets

Genentech has transformed from a small drug discovery start-up into a full-fledged

pharmaceutical company in just 30 years. The founders’ original vision included that the

company would market its own products; today, the industry recipe dictates that the

smaller biotechnology firms do not go beyond clinical trials. Although Genentech’s

overall vision has persisted, its customers, product offerings and markets have dramati-

cally varied and changed over time.

Genentech’s first customers were other pharmaceutical companies that bought mere

promises of new, advanced technologies. During those days, it was common to talk

about up-coming breakthrough anti-cancer drugs, which added to the hype and made it

easier to justify the lack of concrete proof. It was not certain whether the new technolo-

gies would really be commercially feasible much until the first biotech-based product,

human insulin, marketed by Eli Lilly & Co, reached the market in 1982. Genentech be-

gan building its sales force in the same year, to focus on hospital-based specialist mar-

kets. The company intended to develop products that would benefit a relatively small pa-

tient population that could be reached with a compact but well-equipped (utilizing port-

able computers already in the mid-1980s) sales force. CEO Bob Swanson outlined the

marketing strategy in 1986 as follows: first, Genentech would bring products to market

in the U.S. under its own label; second, it would market those same products overseas

through agreements; third, other products that did not fit the core categories would be

capitalized on by licensing them to key partners. Although ambitious, this strategy did

not directly attack the long-established pharma corporations who where mostly after the

so-called blockbusters that required huge marketing resources aimed largely to consum-

ers.

When Kirk Raab took over Bob Swanson as CEO in 1989, Genentech began looking

also outside the U.S. markets: Canada, Europe and Japan. By 1993, the outside-focus

was narrowed down to Europe, as he commented: “While Genentech benefited from li-

censing its first products in Europe, licensing opportunities can never substitute for a

physical presence and marketed products. Expansion into Europe of both marketing and

development capabilities is a key strategy for growth.” The reasoning continued: “The

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incremental development costs for entering that market are not dramatic, yet doing so

expands the sales horizons dramatically.” Genentech had retained European rights to

most of its products in clinical trials, and began sales of Pulmozyme under the newly

founded company, Genentech Europe Limited. In addition to the changes in targeted

markets, the company modified its customer audience to include formulary managers

and health benefits directors who were increasingly important in determining which

drugs were chosen available to patients. The sales representatives had to demonstrate the

drugs’ value by utilizing the methods of health economics. This was mostly a reaction to

the increase in political pressure over controlling drug prices, not an independent, strate-

gic move.

Then, in 1995, the new CEO Arthur Levinson backed out from the intended conquest of

Europe. Genentech was not competitive enough in the highly fragmented market, and the

new owner Roche already had a global distribution network. Genentech began receiving

royalties rather than sales revenues on European sales of Pulmozyme as Roche assumed

responsibility for them. This did not mean giving up on marketing, on the contrary, the

business end was given more focus and effort. As PharmExec (2005, Oct 1) put it in a

recent article: “If the first act of Genentech’s story was mostly about the science, act two

will be focused on business.” While this comment refers more to the current issues, the

seeds were planted in the beginning of Levinson’s CEO post. Levinson broadened the

commercialization strategy: first, Genentech would grow current products by additional

claims [for new indications] and by increasing customer base; second, they would

maximize new product launches and reduce time to peak market share; third, they would

expand product offerings and increase the depth of each of their therapeutic area; and

fourth, they would further align discovery and development with evolving market needs.

Genentech started to become a credible and skilled marketer in the U.S.; Roche agreed to

have its Roferon-A promoted by Genentech in the U.S. in 1996.

While not abandoning the targeted therapies strategy completely, Genentech’s new R&D

innovations are now aimed at much broader patient populations than before. They are

moving into the big players’ blockbuster arena with their newest oncology product,

Avastin. It has been described as a platform drug (see PharmExec, 2005, Oct 1) because

it uses a method [suppressing angiogenesis by directing an antibody at vascular-

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endothelial growth factor, slowing down tumor growth] that is not limited to just a cer-

tain type of a cancer. It was first approved in February 2004 to treat patients with first-

line metastatic colon or rectum cancer, but studies have shown that it is efficient against

other types of cancer as well. From a commercial point of view, these different tumor

types may seem like new markets, but it allows a drug with several indications to be sold

by the same representatives, potentially offering a major saving. In addition to the plat-

form method, PharmExec (2003, Feb 1) raised a certain sense of urgency as Genentech’s

top competitive advantage in launching new drugs, meaning that its medical/scientific

excellence, aggressive commercial execution and seamless organizational alignment to-

gether enable the company to quickly focus on developing a product’s potential. Genen-

tech’s commercialization capabilities are becoming comparable to those of traditional

big pharma, but with a sales force of less than 1000 employees, the efficiency of their fo-

cused efforts is still remarkably better. As an example of the different approach, they re-

gard commercials to end users with discomfort (BusinessWeek, 2003, Oct 6). This is

well in line with the values of Genentech, as the advertising of prescription drugs to end-

users is a highly controversial issue.

4.3 The learning path of Genentech

To uncover the managerial cognitions of Genentech, we used Kolb’s learning cycle

model (Kolb and Rubin, 1991) as a basis for our learning path analysis. The resulting

chart below provides a chronological path of either internal or external signals that have

lead to managerial cognitions, followed by strategies and ultimately actions that have

taken place during the history of Genentech. Although the chart is useful also independ-

ently, the learning path is primarily a method for the researchers to systematically scruti-

nize the business model evolution. It represents a path of actual events complemented

with researchers’ deductions from the empirical data.

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Time Signal Cognition Strategy Action

pre-IPO New biotechnologies emerge in

the most advanced labs

It is possible to develop the new

biotechnologies using small

research groups

Develop commercially feasible

technologies

Build a small, ascetic research

facility and recruit scientists

from academia

pre-IPO Researchers in academia have

different working habits than

those in big pharma

In order to lure advanced

scientists, the corporate culture

must be suitable

Create a campus-like

environment for the scientists

Give the scientists advanced

labs and enough freedom, avoid

hierarchy and strict working

policies

pre-IPO Small research groups prove

efficient and scientist-friendly

Small research groups work,

but the resources do not allow

for advanced clinical tests

Pursue revenues from other

sources than end products

(drugs)

Out-license technologies that

promise to advance the drug

discovery process

pre-IPO Genentech has groundbreaking

process technologies that are

widely applicable (e.g. protein

production in recombinant cells)

To ensure the industry's wide

technological development and

exploration, Genentech's

proprietary technologies must

be licensed to others

Out-license process

technologies that are vital to

the industry's development

License process technologies to

other companies for reasonable

royalties

pre-IPO Money is received from

operations, in addition to equity

funding

Genentech is profitable and thus

able to refine its products

further without constant need of

external funding

Move forward in the

pharmaceutical supply chain

toward the end products

Start doing clinical tests

pre-IPO Clinical tests are costly and

need specific process knowledge

in addition to the pure discovery

capabilities

Clinical testing requires

additional resources from

partners

Cooperate with others in order

to compensate resources and

capabilities, and to enhance

organizational learning

Negotiate partnerships with

universities, other biofirms and

big pharma

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Time Signal Cognition Strategy Action

pre-IPO Big pharma companies need

early phase drug innovations to

supplement their pipeline

Genentech's early phase drug

discovery is competitive; big

pharma has better resources for

the later phases

Before Genentech can become a

fully integrated pharmaceutical

company, acquire additional

knowledge and funding from big

pharma via agreements

Out-license early phase drug

discoveries and cooperate with

big pharma in their further

development

pre-IPO Genentech has achieved enough

resources to do Phase III

clinical trials and some

manufacturing; proprietary

technologies enable advanced

commercial-scale manufacturing

Genentech can leverage its

competitive advantage by

scaling-up commercial biotech-

originated drug manufacturing

with proprietary technologies

Build in-house manufacturing

capabilities instead of relying on

external partners

Build own, advanced

manufacturing facilities for

biotech-originated, large-

molecule drugs

1980 Genentech now has the

capabilities to develop drugs all

the way from discovery to

manufacturing; big pharma still

does nearly all the marketing

External partners are not

necessarily needed to develop a

drug, but they still have useful

technology and innovations; big

pharma excels in marketing

Develop own drugs Build and develop the full chain

of processes from discovery to

manufacturing

1980 Biotechnologies enable more

accurate targeting of drugs; big

pharma needs blockbusters and

ignores smaller patient

populations

Genentech does not have the

resources for competing in the

blockbuster arena, however,

targeted therapies fit well with

its technological and marketing

capabilities

Focus on targeted therapies Guide R&D resources toward

targeted therapies

1984 The first product (Protropin) is

nearing its FDA approval

In order to take full advantage

of the first product, Genentech

needs to market it on its own

Begin own targeted marketing

efforts

Build a small but efficient sales

force, targeting to hospital

specialists

1985 First own product sales show

signs of huge profit increases

Marketing can be effectively

done without a big pharma

sales force

Develop commercialization

processes

Continue to increase sales

force, decrease time-to-market

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Time Signal Cognition Strategy Action

1986 Targeted therapies to small patient populations create

sufficient profits

Genentech can market targeted therapies on its own to compete

with big pharma

Increase the number of own, targeted therapies products

Buy-out two R&D partnerships that have shown large

commercial potential; market

them oneself

1987 Self-marketed products,

Protropin and Activase, have succeeded well

Genentech has achieved a

reputation of being a good drug marketer in the US, and its

marketing capabilities provide

competitive advantage

Develop marketing

competitiveness further

Refine the commercialization

strategy, and communicate the capabilities to potential partners

1990 Genentech's R&D pipeline has

become too hollow, which has sent the stock price down

Corporate restructurings (such

as a merger) might be inevitable

In case of corporate

restructuring, aim to be as independent as possible

Roche bought the majority of

Genentech with more than $2 billion

1991 Roche is willing to let Genentech operate independently,

providing financial cushion to take risks

Genentech needs to use the financial cushion to focus on its

core competitiveness, which still is drug development

Allocate high percentage of revenues to long-term, possibly

high-risk R&D projects

Allocate as much as 50% of revenues to R&D projects;

design clinical trials to prove end-goals such as prolonging a

patient's life (considered

difficult but advantageous to prove)

1993 The companies that market drugs get the most profits

In order to take full advantage of the R&D investments,

markets have to be extended;

At the same time, the costs of developing a drug do not rise

significantly

Extend operations to European markets

Keep European rights for marketing the drugs; establish

Genentech Europe Limited

1995 Profits in Europe never took off; regulations and approval programs vary greatly between

different European countries;

Roche has a global distribution network

Genentech's marketing capabilities are not competitive in the European markets

Focus marketing efforts to the US

Withdraw from Europe; hand-over European operations and rights to Roche

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Time Signal Cognition Strategy Action

1996 Roche offers marketing rights of

its Roferon-A to Genentech

Genentech has the capabilities

to market others' discoveries

successfully in the US

In-license others' discoveries Market Roche's Roferon-A in the

US; negotiate other in-licensing

agreements

1997 Genentech has competitive

advantages in certain product

areas such as cardiovascular

medicine and endocrinology

The priority product categories

must be emphasized, not only

to guide R&D resources but also

to set a competitive marketing

strategy; Cancer can be made a

treatable disease in a decade

Set a competitive product

strategy that focuses on a few

key health care areas

Set oncology as the next first-

priority health care area; Start

the BioOncology initiative

1999 In 1999, Roche bought all

outstanding shares of

Genentech and then arranged

two public offerings, retaining a

56% ownership

The public offerings brought

Genentech to the investors'

spotlight, and their expectations

for growth increased

dramatically

Pursue rapid growth, especially

through partnerships

Form partnerships to acquire

products and technology, and to

collaborate on product

development

2000 Almost all pharmaceutical

companies concentrate on

partnering, competition to

collaborate is fierce

Corporate branding is essential

for the success of the partnering

process

Aim to be the most wanted

pharmaceutical partner

Bring to partnerships: financial

resources, expertise in product

development, regulatory

support, process science,

manufacturing, and a

marketing/sales organization

that recognizes the importance

of demonstrating product value

to customers

2004 A new so called platform

product, Avastin, impacts on

the process of tumor growth

rather than on specific cancer

symptoms

Platform drugs are potential

blockbusters that still originate

from the scientific background

of targeted therapies

Take full commercial advantage

of the platform drugs

Use clinical testing, regulatory

and marketing expertise to get

FDA approvals for Avastin for as

wide commercial usage as

possible

2006 Growth has been phenomenal;

in 2005, Genentech's sales grew

the most among the 50 biggest

pharmaceutical companies:

46.39%

Balancing organizational growth

and the scientific origins of the

company is essential for the

success of the future

Remain true to the original

ideals of 'in business for life'

Support the campus-like, high-

tech, scientifically intensive

corporate culture, while aiming

to continuously grow profits by

developing the

commercialization process

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4.4 Conclusions through the business model lens

This chapter analyzes the business model evolution of Genentech through our business

model framework, which includes material aspects, managerial cognitions and corporate

culture. The analysis provides comparability across different firms and even different in-

dustries.

4.4.1 Material aspects

Business relationships. In the last 30 years, Genentech’s business relationship portfolio

has undergone several major changes. Its first customers were other pharmaceutical

companies that wanted to license new technologies. The nature of these relationships

was often cooperative as both parties sought out to improve their capabilities. Later,

when Genentech began selling its own drugs, the sales representatives targeted hospital

specialists and doctors that could be reached with a reasonable effort, as the patient

populations were small enough. The sales reps were able to keep tight connections with

the few specialists, making individual relationships highly important. After the company

grew larger, the number of patients using its products had to increase as well, making it

impossible to stay in close contact with the specialists who were responsible for prescrib-

ing the drugs. At the same time, the political environment had become more aware of the

ever-rising health care costs and the politicians started to introduce reforms that empha-

sized the role of institutional actors in making the drug buying decisions. These two fac-

tors have led to a situation where Genentech now directs a major part of its marketing ef-

forts toward managed-care organizations. These relationships are formal, at least in the

sense that the ones responsible for the buying decisions have to follow strict rules and

thus cannot be easily influenced by traditional marketing methods.

On the one hand, because of the nature of the biotechnology business, Genentech has had

little need for external upstream supplier relationships. It has always recognized the im-

portance of running its own manufacturing plants. The drug production process, espe-

cially for the large-molecule drugs typical for biotechnology, requires very sophisticated

facilities and know-how that cannot be easily copied. However, the company has, from

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time to time, had to rely on external partners to scale up manufacturing fast enough in

order to take full advantage of the short periods of exclusive markets. The downstream

supplier relationships, on the other hand, are carefully regulated by governmental institu-

tions. While the distribution network offers limited opportunities for competitive advan-

tage, managing the whole supply chain effectively and keeping it flexible ensures

Genentech a secure basis for its operational excellence.

In the beginning, Genentech’s product development network consisted of its own scien-

tists and their contacts in the academia. The psychosocial aspects of the relationships

were extremely important and the research was often carried out without detailed formal

agreements. During the following years, the company learned more about product devel-

opment in cooperation with other pharmaceutical firms. Piece by piece Genentech’s sci-

entists learned and perfected the whole process from early research to bringing the prod-

uct to market. Whereas the company once acted as merely a skilled developer of original

drugs, it now often operates as a hub organization of a larger network of pharmaceutical

companies. By utilizing its advanced commercialization knowledge, it brings to the net-

work knowledge about customer and market needs that give the development efforts a

common direction, such as fighting cancer. Genentech is also responsible for managing

the network’s relationships by luring suitable partners and ensuring that the partners

working in different sub-processes work well together. The relationships are naturally

synergistic: smaller biotech firms need more resources to develop their drugs further and

Genentech uses their innovations to keep its drug pipeline full.

Genentech got its first rounds of venture capital against promises that the technologies it

was developing would greatly advance the biosciences. Because the venture capitalists

were largely in charge of the continuation of the company, these investor relationships

were crucial. Their nature was naturally more cooperative than in the later periods of

public stock trading. The venture capital was also combined with innovative funding al-

ternatives, e.g. milestone payments from big pharma, which were new to the pharmaceu-

tical industry. These arrangements required relationships that produced versatile out-

comes both in techno-economic (e.g. new technologies were exchanged bilaterally) and

psychosocial (e.g. Genentech’s scientists received great respect and approval for their

work from industry veterans) terms. Ten years after Genentech’s IPO, the Swiss pharma-

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ceutical company Roche bought a majority of Genentech’s shares. The deal brought a

new hierarchical aspect to the investor relationships, as Roche was now able to set new

strategies for the company from “outside”. However, Genentech was left operating fairly

independent. The relationship has been extremely beneficial for Roche, who got access

to new cutting-edge biotechnologies and later the huge profits and growth they have pro-

duced, but also to Genentech, who received additional resources to raise its research and

development back to the high level it once was.

Currently, the company’s investor relationships are much like those of any other success-

ful, large and public high-tech company. Because of the biotechnology industry’s dense

product development networks, the roles of cooperators and competitors can change rap-

idly. Genentech still has a major competitive advantage in the industry: because of its

history and its culture, it is able to create democratic relationships with smaller biotech-

nology firms and at the same time credibly compete with big pharma.

Strategy, structure and governance. From very early on, the founders had a vision that

Genentech would eventually be selling its own advanced biotechnology products to end-

users. At the time this was a bold goal but it has since become reality. In other words,

the founders set a strategy that has guided the company for three decades by binding to-

gether all the other aspects of its business model. Genentech did not, however, have a

very focused plan in the beginning. It tried to be everything at once until the top manag-

ers decided to focus exclusively on human health care. Since then, the company’s top-

level strategy has had two failures worth highlighting: The first was in the late 1980s,

when the company had emphasized its commercialization capabilities too much over its

drug discovery processes. This lead to a plummeting share price and the company finally

became a takeover target for Roche. The second failure was in the early 1990s under the

management of CEO Kirk Raab, when Genentech decided to extend its operations into

Europe. After it had became evident that Genentech did not have the capabilities to com-

pete in such a diverse market as Europe, and that the new owner Roche was able to util-

ize its already established global distribution network, the succeeding CEO Art Levinson

backed out from the conquest.

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Genentech’s structure and governance have closely followed its strategy. The manage-

ment has realized that, in order to encourage innovativeness, they have to create a non-

hierarchical working environment and employment relations for the scientists. This envi-

ronment is supported by a flat and transparent decision-making process, which in-turn

benefits from the strong, coherent corporate values among the employees. The flexible

structure has also supported the company’s fast growth and the continuous implementa-

tion of new technologies. What is perhaps the most important, Genentech’s structure and

governance have enabled it to create a corporate culture that has attracted a respectable

number of skillful experts and offered them a good working environment.

Operations and resources. Genentech’s R&D processes that represent the core of the

business process architecture are fairly autonomous, for the researchers are allowed time

and space to move between projects. They are encouraged to cooperate with their col-

leagues also from other departments in order to solve problems and create new kinds of

solutions. Everybody in the pharmaceutical business is aware of the high cost of a failure

in drug discovery, especially at the later stages. Genentech approaches this issue by not

limiting the freedom of the scientists but by ensuring that all the projects go through a

“Research Review Committee”, where the projects are carefully scrutinized and checked

for commercial potential. This emphasis on effectiveness rather than efficiency has

proven to be a good strategy: the company has been enable to expand to new health care

areas, to create solutions beyond traditional drugs and to launch a great array of new

products while avoiding too many late-stage failures.

Even today, the pharmaceutical business is primarily product oriented. The companies

involved in drug discovery live or die with the products they are able or unable to get

discovered and approved. The skillful researchers and the processes related to R&D

could thus easily be designated as the resource that brings Genentech’s main compe-

tence. However, the capabilities the company has developed in commercializing its

products are equally important. The project teams have clinical trials specialists and

those who cooperate with managed care institutions already in the early phases in order

to minimize the time to market and to maximize the product’s usage potential. It is evi-

dent that in the beginning, Genentech was merely an R&D boutique but has since ac-

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quired marketing capabilities that have helped it to launch record-numbers of successful

drugs during a short time-span.

4.4.2 Managerial cognition

Much has changed in the thinking of the pharmaceutical industry because of biotechnol-

ogy, and Genentech has been at the leading edge of this change. We will first highlight

the most important differences between the cognitions of Genentech’s top management

and the prevailing industry recipes (see chapter 3.3. for a more detailed list of the cogni-

tions). Later we will round up the evolution of these cognitions.

Especially in the early days, Genentech’s most notable cognitive innovations were re-

lated to the concept that small can be competitive also in the pharmaceutical industry.

The company founders realized that they could develop new biotechnologies and then

use those technologies to discover drugs in small research groups. They also believed in

the commercial feasibility of targeted therapies to small patient populations and that

these drugs could be marketed without a huge sales force. At the time, the industry was

entirely dominated by big pharma companies that had enormous resources for R&D and

sales. They were content to using the inefficient, traditional random-screening discovery

processes and then marketing the resulting drugs to doctors and distributors with thou-

sands of sales representatives and massive advertisement campaigns. To support the

growth of the already large organizations, they were only interested in finding the next

blockbuster drug or copying the success of others, ignoring potential new treatments

with fewer users. Now that Genentech has reached to the list of the world’s largest

pharmaceutical companies, its top management answers to the stockholders’ ever grow-

ing sales demands with a new solution: platform drugs such as Avastin. Avastin’s re-

search was focused on a very narrow target but as it turned out, it has much wider poten-

tial use because it can be expanded into multiple indications. While big pharma was still

aiming for single-indication blockbusters, Genentech realized that there is this alternative

approach that helps to keep clinical trial costs and sales forces smaller. The approach

also enables Genentech to continue serve patients that carry some other than the most

common diseases.

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As we have noted above, Genentech’s top management has redefined many of the mental

models related to the industry’s product ontologies, boundary beliefs and industry reci-

pes. This has eventually affected to the changes in the reputational rankings between dif-

ferent types of companies: the smaller biotechnology companies are now regarded as a

respectable part of the drug discovery process and the larger ones are regarded as direct

competitors to the traditional pharmaceutical companies. Some of the top managers’

cognitions are clearly reactions to changes in the environment, e.g. Genentech’s market-

ing efforts to managed-care organizations are essentially an answer to the changes in the

U.S. health care regulations. The signals for other cognitions are more internal, often re-

sulting from the interpretations of the outcomes of the company’s previous actions. The

Genentech’s managers have largely avoided the common misperceptions and bounded

views of the industry evolution, which has enabled the company to constantly learn and

renew its business model. We argue that much of Genentech’s success and distinguished

role in the pharmaceutical industry is attributable to the cognitions of its top managers

and their impact on the business model evolution.

4.4.3 Corporate culture

The top management of Genentech has constantly recognized the importance of a fitting

corporate culture. In the beginning, the culture was near to that of top universities, which

was necessary in luring the scientists into the business world. Although the organization

has since witnessed dramatic growth, its non-hierarchical structure, decision-making

processes and governance have enabled the culture to stay innovative and inspiring. We

can see direct correlation between Genentech’s successful culture and the cultural factors

identified to influence financial performance in our framework. Customer focus is pre-

sent already in the early phases of drug discovery as research is directed towards areas

that are likely to have a strong positive impact on patients instead of e.g. areas that have

been proved successful by other companies; other parts of the organization have similar

objectives. Performance standards have been set high, which encourages positive compe-

tition among the employees. Genentech’s recruitment process aims to make certain that

the selected employees are able to execute good corporate citizenship and identify them-

selves with the company. Unsurprisingly, during the last decade, Genentech has received

multiple awards as an excellent place to work.

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5 Conclusion and discussions

In this chapter, we will provide a conclusion inspecting the success of meeting our goals

of (i) improving the original business model framework and (ii) discovering suitable re-

search methods. Next, we will discuss the process of using the framework and the

methodology in our two biotechnology case analyses. The discussion will continue

regarding the limitations of the study and the possible implications for academics and

business managers. The chapter ends with our recommendations for further research.

5.1 Conclusion

The original business model framework by Tikkanen et al. (2005) enables researchers to

systemically scrutinize the evolution of a company’s business model. It offers a way of

depicting the state of an organization and its operations at any given time. We felt it gave

us a good starting-point for analyzing the development of business models in the bio-

technology industry. However, we wanted to improve the theoretical framework through

an abductive approach, which enabled us to use empirical case data in an iterative proc-

ess to find a better fit with the theory and practice.

The iterative process resulted in several improvements in the business model framework.

First, we re-organized some of the material and cognitive aspects to give a more bal-

anced view of the important issues in a knowledge-intensive industry such as biotech-

nology. Second, we added corporate culture as an element that has both material and

cognitive aspects. It plays an essential role in describing how the workers are aligned

with the organizational values, norms and beliefs. In interpreting the essence of a bio-

technology company, corporate culture is too important to be overlooked. Among others,

it has implications for attracting and inspiring skillful scientists, who in turn are perhaps

the most valued source of competitive advantage in the industry. Third, we elaborated

the concept of managerial cognitions. The sources and processes behind the cognitions

of an individual manager can now be taken into account in more detail. We also elabo-

rated the relationship between cognition and action, which is arguably an essential ele-

ment in explaining the evolution process of business models.

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In order to use our improved business model framework to examine the evolution of the

business models of our two case companies, we had to discover suitable methods for

conducting the analysis. The resulting methodology is outlined in Chapter 1.1. The most

important elements of the methodology are the narrative and the learning path. The nar-

rative uses a commonly shared language of an industry under discussion to describe the

historical development of a company. The focus is effortlessly guided toward the most

relevant issues because there is no externally imposed framework that the narrative has

to fit into. The effect of this self-guidance can be seen on the topics of the narrative: they

directly reflect the “hot topics” of an industry. The narrative can also be argued to incor-

porate some of the benefits of storytelling, such as conveying industry- or even corpo-

rate-specific tacit knowledge. Finally, the narrative serves as a basis for the learning

path.

The learning path, building on the Kolb’s learning cycle model (Kolb and Rubin, 1991),

comprises of (1) signals, which shape managers’ (2) cognitions through an interpretation

process. These cognitions then affect forthcoming (3) strategies and finally concrete (4)

actions. Working through the pieces in the learning path proved to be extremely helpful

in discovering the underlying cognitions of the top management. The process requires

researchers to rigorously analyze the links between signals, cognitions, strategies and ac-

tions. It forces focus on correct causalities and chronological orders. Regarding the ways

of getting the right information, signals and actions are mainly outspoken and can be

found from secondary data sources such as annual reports, press releases and public

press articles. Cognitions and in some cases also strategies, however, require consider-

able interpretive effort from the researchers. In addition, the distinction between cogni-

tion and strategy is not necessarily unequivocal. Validity and reliability of the knowledge

must be ensured through effective research strategies and criteria. It is clear that short

written descriptions of the cognitions can never fully represent the managers’ mental

models. Nevertheless, they provide a valuable way of taking managerial cognitions into

consideration when analyzing business model evolution.

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5.2 Discussion of the case analyses

The results of our two case analyses are provided in Chapters 3 and 4, but here we will

discuss some of the issues that arose during the process. Having two researchers simulta-

neously utilizing and developing a framework and research methods improves the ana-

lyzing process in at least three ways. First, the two researchers are able to make their in-

terpretations more coherent by taking into account additional views and information

from the other case. Second, they can prevent “locking” their interpretations too early by

constantly challenging each other’s reasoning. Third, because the cases naturally ad-

vance in slightly different paces, the iterative process of using and improving the frame-

work and the methods becomes faster and less exhausting. The one case benefits from

what has been learned from the other, and then the roles may be different in the next

phase.

The fact that the nature of the two case companies, Amgen and Genentech, differ nota-

bly, led to differences also in the analyzing processes. Due to the small number of mar-

keted products, the data collected of Amgen’s products was relatively detailed. The data

concerning Genentech’s products, however, oriented more towards the decisions and

processes behind selecting health care areas and those products that would be developed

further. Variation was evident also regarding the emphasized topics on other subjects

such as individual managers, culture and intellectual property management. An even

more influential difference was in the companies’ attitudes toward the openness of com-

munication: two managers from Genentech agreed to an interview, none from Amgen.

The above-mentioned issues do not prevent meaningful analysis of the business models.

The business model framework proved to be flexible enough to allow comparison be-

tween companies of different nature.

5.3 Limitations

Overall, the research process of this study proceeded well according to the plans. How-

ever, due to the obvious challenges of persuading top-level managers from our case

companies to agree to interviews, we had to rely mostly on secondary data sources. In an

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optimal situation we would have been able to verify our interpretations directly with the

managers responsible for the business model evolution. Also, the abductive research ap-

proach of using and improving the framework and compatible methods was fed with

empirical data from only one industry. Some modifications to the framework might im-

prove the fit with certain other industries without losing its effectiveness in biotechnol-

ogy, but this remains a topic for further research.

5.4 Implications for academics and business managers

This paper has several implications for both academics and business managers. For peo-

ple in academia, an enhanced framework is provided for analyzing business models and

their evolution. A compatible research methodology is tested and shown successful in

situations where the empirical source material consists mainly of secondary data such as

annual reports and public press articles. The meaning and importance of cognitions in

business model evolution is exemplified through two case analyses. The cases also serve

as base material for selecting more detailed and in-depth future research targets.

Managers in different businesses may find this study interesting to broaden their views

on the dynamics of business model evolution and especially on the implications that

managerial cognition has on decision making and learning. The managers might start to

appreciate the notion of managerial cognition and thus be able to better conceptualize

their continually changing organizational environments. The two cases provide concrete

clues to where and in what ways the cognitions may influence different business actors.

In addition, managers in the biotechnology industry have the possibility to use the find-

ings of this research to elaborate their understanding of the evolution of the industry.

5.5 Recommendations for further research

This study provides new insights into the business model research from the perspective

of the cognitive school of thought. At the same time, it opens paths for further research.

We suggest three closely linked areas worth of studying. First, it would be interesting to

examine what kind of results the improved framework and methodology would bring ap-

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plied in companies and industries that operate very differently from biotechnology. Sec-

ond, while the framework in itself provides ways of comparing different business mod-

els, there is a need for creating more advanced systematical methods for discovering and

highlighting those differences. Third, the future research should give more attention to

detailed, in-depth studies that focus on a business model evolution process spanning for a

maximum of a few years. This paper offers multiple targets suitable for those in-depth

studies.

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6 References

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6.2 Public press and company press releases

Amgen Annual Reports, 1984-2005. Available on the Internet for the years 2000-2005,

http://www.amgen.com

Biotechnology Industry Organization (BIO) website, Milestones Gordon Binder Amgen,

1997-1999, http://bio.org/speeches/pubs/milestone03/binder.asp

BusinessWeek Online by Catherine Arnst, 2005. Genentech’s winning formula. May 17.

Business Week Online by Arnele Weintraub, 2005. George Rathmann: Amgen’s Giant.

September 19

BusinessWeek Online by Arlene Weintraub, 2003. Genentech’s medicine man. October

6.

European Medicines Agency, 2006. Committee for Orphan Medicinal Products.

http://www.emea.europa.eu/htms/human/comp/orphapp.htm

Finnish Pharma Cluster – Vision 2010 by Malin Brännback, Pekka Hyvönen, Hannu

Raunio, Maija Renko, Riitta Sutinen, 2001. Tekes: Technology review 112/2001.

Food and Drug Administration, 2006. The Orphan Drug Act.

http://www.fda.gov/orphan/oda.htm

Fortune by Betsy Morris, Doris Burke, Patricia Neering, 2006. The best place to work

now. January 23.

Genentech Annual Reports, 1982-2005. Available on the Internet for the years 1996-

2005, http://www.gene.com/.

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Harvard Business Review by Paul Hemp, 2004. A Time For Growth- An Interview With

amgen CEO Kevin Sharer. July-August

Industry Week by Tonya Vinas, 2005. CEO of the Year-Medicine Man. January 1.

The New York Times by Andrew Pollack. 2006. Signs that biotech has a healthier fu-

ture. April 4: C4.

Pharmaceutical Executive by Mark Ahn, Fred Vitale, Victor Tong Jr., 2005. It’s all aca-

demic: Biotechs looking to universities. October 1.

Pharmaceutical Executive by Barri Blauvelt, 2003. Benchmarks for blockbuster

launches. February 1.

Pharmaceutical Executive by Joanna Breitstein, 2005. Following Science. October 1.

Pharmaceutical Executive by Joanna Breitstein, 2006. HBA Woman of the Year: Susan

Desmond-Hellmann. April 1.

Pharmaceutical Executive by Michael Curran-Hays, Martin Wing, 2005. Keys to success.

April 1.

Pharmaceutical Executive by J. Kevin Day, 2005. What does it really take? August 1.

Pharmaceutical Executive by Doretta W. Gasorek, Jeffrey T. Resnick, 2005. The rise

and fall of pharma reputations. February 1.

Pharmaceutical Executive by Christopher B. Howard and Daniel Dornbusch, 2004.

Blueprint for a Great Leader. April 1

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Pharmaceutical Executive by John Puisis, 2001. BioTech's New Business Model- Shifting

the Focus From Lab to Leadership. October 1.

Pharmaceutical Executive by L.J. Sellers, 2001- Amgen’s New Dream Team. July 1.

San Francisco Business Times by Daniel S. Levine, 2004. Executive of the year: Arthur

Levinson drives Genentech. December 17.

6.3 Interviews

Cook, Jennifer. Vice president of market development, Genentech, Inc. South San Fran-

cisco, California, USA. July 31, 2006.

Hanhijärvi, Hannu. Executive director of health care programme, Sitra. Helsinki, Fin-

land. April 28, 2006.

Holma, Risto. Chief executive officer, country manager, Amgen Oy. Espoo, Finland.

June 20, 2006.

Knickerbocker, Aron. Senior director of business development, Genentech, Inc. South

San Francisco, California, USA. July 17, 2006.

Lahtonen, Kai. Chief executive officer, Turku Science Park. Turku, Finland. May 8,

2006.

Lammintausta, Risto. Chief executive officer, Hormos Medical. Turku, Finland. May 8,

2006.

Lappalainen, Timo. Senior vice president, Orion Pharma. Espoo, Finland. May 12, 2006.

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Lähdesmäki, Kai. Vice president of business development, Biotie Pharmaceuticals.

Turku, Finland. May 4, 2006.

Savola, Juha-Matti. Chief executive officer, Juvantia Pharma. Turku, Finland. May 4,

2006.