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The transition from R&D to a fully integrated stage is a make-or-break scenario for any biotech company. High-quality marketed products alone don’t guarantee a successful transformation—it also requires strategic focus and an organization capable of delivering on that ambition.

• Typically, about 50% of the executive team turns over during the transition from R&D to fully integrated biotech, and about half of the companies that make this move destroy shareholder value during the two years following their first product launch.

• The biggest challenge for most biotech companies is adjusting from being judged on clinical progress to being judged on how they meet the financial expectations of investors. These new expectations have profound implications for strategic choices, program decisions, capital allocation trade-offs, talent choices, and organizational evolution.

• The companies that have successfully navigated these challenges typically mine existing assets to achieve their full potential; they focus on a few disease areas; they build out their licensing and acquisition capabilities; they develop a formal strategy and bring everyone on board; and they rebalance their organizations and retain key talent.

A typical mature biotech company evolves over four discrete stages—from the initial discovery stage through the preclinical and early clinical stage, then to the late clinical trials and commercial build-out—before it becomes a fully integrated biotech company (FIBCO). The final transition to full integration is a particularly critical test for the executive team.

Bain & Co. research, based on the FIBCOs among the top 35 biotech companies, shows that firms replace about 50% of executives during the transition period, defined as two years prior to first drug launch through two years after that launch. For CEOs, the replacement rate is 43%; for CFOs, it is 52%; for CSOs or heads of R&D, it is 41%; and for COOs, it is 75% (though only about one-third of the companies had a COO at the time of transition). While these statistics include both voluntary and involuntary executive departures, they reflect clearly the scope and magnitude of the challenges facing biotech executive teams during the transition to a FIBCO. (The data include biotechs that commercialized at least one drug and either had market caps of more than $3.0 billion as of June 30, 2013, or were acquired at a value of more than $3.0 billion. Executive promotions [e.g., from COO to CEO] were not counted toward the replacement rates for the departing positions.)

Shareholders of new FIBCOs companies have not fared any better. About half of the companies that have made this move destroyed shareholder value during the two years following their first commercial launch. For 21 biotechs that had launched their first drugs from January 2000 through June 2011 (excluding those that had fully partnered out the commercialization), 10 had increased and 11 had decreased shareholder value relative to the S&P 500 Index during the first two years following FDA approval of the drug.

Despite the daunting odds, companies can and do manage the transition successfully. Moreover, making the move to a fully integrated model is often the only way to create substantial value.

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