Preparing for the Future

1. Preparing for the Future • Susan M. Snyder, Hay Group • Marc Wallace, Hay Group November 15, 2011

2. Agenda 1 About Hay Group Increasing R&D effectiveness Sales force compensation 2 3

3. About Hay Group 01

4. Our areas of expertise • We help organizations work.

5. Our global presence and capability 86 7000 Offices in 47 countries International clients 2200 $450 million Employees worldwide Sales

6. Representative life sciences clients

7. Powerful HR tools to help your people flourish • Putting 60 years of Hay Group expertise at your fingertips • Powerful and intuitive tools available online • or electronically • Competitively • priced • Created specifically • for HR professionals • and line managers • Support • recurringprocesses across the • employee lifecycle

8. An invitation for you...http://www.haygroup.com/surveys/Best_Companies_2011/ • 2011 BEST COMPANIES FOR LEADERSHIP SURVEY

9. Increasing R&D effectiveness 02

10. Game-changing times Reduced tolerance for risk Cost to value Generics Greater regulation Cost pressure Pricecontrol Longer lead time for product development Patent expiration Decline in R&D productivity

11. The market share of biotech drugs is continuously increasing 2000 2014E The share of biotech drug sales is expected to reach almost a quarter of total drug consumption by 2014, compared to less than one-tenth in 2000

12. Global biotech sector is getting to stabilize • The industry appears to have turned the corner, though it has not returned to pre-crisis levels of normalcy • Across the established biotech centers, revenues grew by 8% — identical to growth in 2009 after adjusting for the Genentech acquisition, but well below the 12% seen in 2008 or the high double-digit growth rates the industry was able to deliver in many prior years Global Biotechnology Revenues (USD bn) 8% growth Global Biotechnology Employees Note: Figures pertain to 622 public companies Source: Ernst & Young Report 2011

13. Biotech is moving towards profitable business model Global Biotechnology Net Income (USD bn) Global Biotechnology R&D Exp. (USD bn) 30% growth 2% growth • Large numbers of firms undertook drastic cost-cutting measures to survive. These efforts resulted in a much stronger bottom line, propelling a sector that has bled red ink for most of its history to unprecedented levels of aggregate profitability • But while the focus on operating efficiency has its benefits, it has come at a high cost. In an industry where R&D is by far the biggest expenditure, it was inevitable that deep spending cuts would lead companies to slash R&D expenditures • R&D expenses, which had plummeted by 21% in 2009, grew by a modest 2% in 2010 — a positive development, but far below the investments that biotech companies have historically made in innovation. In 2009, 64% of US companies and 55% of European companies decreased their R&D spend; in 2010, those numbers fell to 49% and 45%, respectively Note: Figures pertain to 622 public companies Source: Ernst & Young Report 2011

14. R&D productivity is down… New drug approvals of major players Total R&D spend (USDbn) of major players R&D productivity ratio =

15. ….while R&D expense is up

16. In 2011, we undertook a study to identify causes of R&D underperformance

17. Our diagnosis Organizations aren’t leveraging the human talent that they have Scientists are motivated in unique ways, and must be led accordingly Most R&D leaders do not create engaging climates that energize their teams While R&D leaders must demonstrate technical expertise, many have not expanded their leadership portfolio to include providing alignment, feedback, and collaboration Many R&D professionals do not believe that performance is linked to recognition; instead, they think that mediocrity is tolerated Instead of enabling innovation, organizations are inadvertently putting hurdles in place by allowing slow decision-making, risk-aversion, and lack of collaboration

18. Leading scientists isn’t easy Scientists enjoy solving problems, need recognition, and tend to be loners Avoid anything that puts barriers between scientists, regardless of their title or level of expertise Facilitate free flow of information and iterative feedback loops among scientists Create opportunities for collaboration, both formally and informally Provide rewards in the form of recognition, reputation and respect (including from top management, peers inside and outside the company, and patients) Allow the opportunity to present at conferences and to customers to build their own and the company’s reputation Clarify and celebrate the link between their work and its practical impact on the business and patients

19. Measuring engagement: climate Climate indicates how energizing the work environment is for employees It accounts for up to 30 percent of the variance in key performance measures Up to 70 percent of the variance in climate is driven by how leaders behave Fully engaged employees are 2.5 times more likelyto exceed performance expectations than their ‘disengaged’ colleagues Leadership styles Organizational climate Aligned and motivated employees Results 50-70% of variance in organizational climate can be explained by differences in leadership style Up to 30% of variance in results can be explained by differences in organizational climate

20. The climate gap in R&D How does it feel to be in R&D in large life science organizations? 67% report that their current environment is tolerable (15%) or de-motivating (52%) These results are worse than those reported by other LS functions except Manufacturing Research is worse off than Development, and when compared to other industries, ranks at the bottom of the list

21. Digging deeper: organizational climate • Organizational climate drives performance • Good working environments – or climates – energize and focus people to do their best. Mediocre climates dampen motivation and diminish performance • Research shows that these aspects of climate have the biggest impact on performance: … and of all the things that influence climate, leaders have the biggest influence

22. Digging deeper: climate 16% are in Energizing situations, but they are lacking the Clarity that drives business results Only 17% are in High Performance climates and firing on all cylinders 15% are getting by in Tolerable climates, but Flexibility (innovation) drops along with Clarity and Team Commitment (collaboration) 52% of the sample are disengaged, struggling across all dimensions, and De-Motivated

23. Comparing two organizations: climate Company 2 Company 1 Products approved, 2007 – July 2011: 4 Products approved, 2007 – July 2011: 9 More leaders creating positive climate correlates with R&D productivity

24. Leadership styles drive much of climate Leadership strength is defined by flexibility Leaders who can tailor their behavior, or leadership styles, to a situation create positive climates Those who do not create negative climates Our research database, containing assessments on over 550,000 individuals from over 4,900 organizations, shows that the following styles have the biggest impact on climate Coercive Authoritative Affiliative Democratic Pacesetting Coaching • Achieving immediate compliance • Providing long term direction and vision • Creating harmony and avoiding conflict • Building commitment and encouraging new ideas • Accomplishing tasks to high standards • Supporting long term development …

25. Leadership drives engagement Leadership differences in R&D • Outstanding R&D leaders maintain their technical credibility and go beyond it • Provide direction and feedback • Engage their teams in problem-solving and collaboration Leadership Styles in De-Motivating Climates (feedback from 453 direct reports on 77 leaders) Leadership Styles in High Performance Climates (feedback from 124 direct reports on 26 leaders)

26. Comparing two organizations: style Company 2 Company 1 Products approved, 2007 – July 2011: 4 Products approved, 2007 – July 2011: 9 Leaders who use a broad range of styles create more positive climate…. which correlates with R&D productivity

27. Engagement alone is insufficient Work environments have to turn motivation into productivity Engagement Employee effectiveness Strategic intent Business results Enablement

28. The business case for engaging and enabling employees Employee performance Employee retention Customer satisfaction Financial success Increase in employees above performance expectations Reduction in turnover rates Customer satisfaction rates Revenue growth High engagement only 10% -40% 71% x2.5 High engagement + high enablement 50% -54% 89% x4.5 Based on linkage case studies using Hay Group’s global normative database

29. Issue #1 Life Science Norm R&D Norm Lack of feedback and development I have a good idea of the possible career paths available to me Rate your opportunities for learning and development Rate your immediate supervisor on providing you with clear and regular feedback Rate your immediate supervisor on coaching you in your development Training is available on an ongoing basis so that I can continue my learning and development Rate your company on providing training so that you can do your present job well % Favorable

30. Issue #2 Life Science Norm R&D Norm Lack of focus on – and recognition for – outstanding performance The better my performance, the better my opportunity for career advancement The better my performance, the better my pay will be Poor performance is usually not tolerated at the company % Favorable

31. Issue #3 Life Science Norm R&D Norm Obstacles to innovation and collaboration Employees are encouraged to take reasonable risks (e.g., try new ideas or new ways of doing things) in an attempt to increase the effectiveness of the organization Decisions are made without undue delay Rate cooperation among employees where you work or within your location This company encourages cooperation and sharing of ideas and resources across the company My work group receives high quality support from other units on which we depend % Favorable

32. Things you can do to improve R&D Our prescription Clarify the definition of outstanding performance – for individuals and for the function Determine the critical few metrics that align to that definition of excellence Align recognition and reward to those metrics, and give clear feedback about them on an ongoing basis Build leadership capability to broaden beyond technical excellence, with special focus on developing the ability to provide feedback and to coach Differentiate technical leadership from project / program leadership, and establish / communicate a project leadership career track Develop matrix leadership skills in program management Enable innovation Push decision-making to the lowest capable level Remove obstacles to collaboration, especially across boundaries

33. Sales force compensation 03

34. “I’m from a drugcompany ... and I’m here to help!”

35. Perceived strengths Hay Group Managed Markets SFE research / Pharma Executive article

36. False confidence • Hay Group Managed Markets SFE research / Pharma Executive article

37. Limited coverage across thehealthcare ecosystem • Hay Group Managed Markets SFE research / Pharma Executive article

38. Needed investments • Hay Group Managed Markets SFE research / Pharma Executive article Critical for B2B partnerships and value creation !!

39. Application: a payer’s value-selling process Integrated Indications & Offers Cost and Quality Guarantees Brand Call centersupport Analytic and presentation tools Pricing guardrails and oversight Products Collaborative Research Identify opportunities Developsolution Tailor value proposition Negotiateand close Services People Identify client support team Track ‘promised value’ measures Conduct account reviews Contractrenewal tickler Processes Roles for sales and customer service Measures, reminders and cross sells Integratewith CRM Treatment Compliance Sustain & Grow Mutual Market Share Financials

40. Mutual economic impact of your investments High High Impact Winners $ Difference (from competitors) $ $ Credible Partner $ Door Openers $ Deal Killers Irrelevant Importance(to Customers) Low Low High

41. So, what can a business-savvycommercial team doto create real customer value?

42. Five actions for creating value • Think difference, importance and economic impact • Surprise your customers with openness • Measure your partnership strength • Invest in leadership, teams and processes • Cover the healthcare ecosystem

43. Top challenges • In 2011, Hay Group observed that clients focused on: • Reflecting roles • Reflecting strategy • Linking pay to organizational performance • Streamlining plans for simplicity • We did NOT see: • Routine updates of the plan • Redesigning to better reflect incumbent impact This is reflected in the 2011 results as well.

44. Expectations for 2012 • Based on the 2012 results, we expect that: • Sales compensation cost will be under increasing scrutiny • Trends in solution selling will temper leverage • Reviewing strategy and defining the implications for the sales plan will be emphasized • Traditional challenges will be addressed with broader redesign: • Goal setting • Long sales cycles • Team sales 2012 will focus on the link between growth and incentives

45. Rule #1: If you haven’t defined your sales roles, you can’t design sales incentives Farmer Familiarfriend Trustedadvisor Transactional Consultative Field Rep Dealmaker Hunter

46. Conduct your own sales incentive and effectiveness audit

47. Incentive plans and metrics • Most organizations use 1-3 metrics. • The number of metrics remained consistent from last year 70% to this year 73% • Most organizations have between 1-4 sales incentive plans which are often differentiated by role Number of different sales incentive plans Performance metrics

48. Eligibility and plan type • Eligibility for plans remain high. • Chemicals and Insurance/ Financial Services have the highest predominance of Base Salary with incentives than other sectors. • Plans for Account Managers and Sales Reps were similar in components. • Annual eligibility • Plan type

49. Plan components • We saw a slight dip in Individual prevalence from 82% to 75% though most organizations still make that a majority of their plan. • Other remains low in prevalence but has a high value in the plan assigned to it. • The splits between the organization level have more to do with the specific industry.

50. TTC philosophy and recent payouts • Most organizations target above market performance for sales reps. • The distribution of incentives paid was fairly normal for this past year.