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Summit News

New headaches humble healthcare CEOs

NEW YORK (Reuters) - A new generation of healthcare industry chiefs, faced with 21st century headaches, can’t afford to get too comfortable.

Chairman and CEO of Medco Inc. David Snow speaks during the Reuters Health Summit in New York May 10, 2011. REUTERS/Mike Segar

The power of running a company responsible for developing lifesaving treatments that regularly accounted for annual double-digit sales growth once allowed them a measure of imperious rule and years of job security.

But a more humbled class of executives must now address government and payor efforts to rein in healthcare costs, activist investors challenging their strategies, slowing demand, and increased use of cheap generic medicines.

"The world is getting harder; competing is getting harder; health care is becoming a more regulated business than it was in the past and that adds another dimension of complexity and risk to running a company," David Snow, chief executive of pharmacy benefit manager Medco Health Solutions Inc MHS.N, told the Reuters Health Summit this week.

“These things weigh on a CEO’s mind, but for now I think I can handle it,” Snow said.

Other CEOs have found the additional weight more daunting.

In December, Pfizer Inc's PFE.N Jeffrey Kindler abruptly walked away from the helm of the world's biggest drugmaker at the age of 55, citing a need to recharge his batteries.

Raymond Elliott, chief executive of Boston Scientific Corp BSX.N, shocked investors on Tuesday by quitting after less than two years of running the large heart device maker whose share price is languishing in a neighborhood typically inhabited by tiny biotechs with no products.

Medtronic Inc MDT.N on Wednesday named Omar Ishrak, a top executive of General Electric Co's GE.N healthcare division, as its new CEO. He replaces William Hawkins, who lasted less than four years in the top spot.

Drugmakers Merck & Co MRK.N and Bristol-Myers Squibb Co BMY.N have also seen recent leadership changes, though those successions were planned well in advance.

What all of the pharmaceutical executives face is an unprecedented era of stagnation for the one industry that had never seen one. Tim van Biesen, head of Bain & Co’s North American healthcare practice, is forecasting annual sales growth of 0 percent to 1 percent for the top 25 pharmaceutical companies through 2016.

“That’s a tough challenge for CEOs to deal with. How do you move a company that’s never built the muscle for a market slowdown?” van Biesen said at the Reuters Health Summit.

Enormous salaries and hefty departure packages still allow these business leaders a rich and comfortable lifestyle. But the top job now involves a far tougher environment and less security than five or six years ago.

SWIFT JUDGMENT

AstraZeneca Chief Executive David Brennan has gone through a wave of massive cost cutting, shedding thousands of jobs, as he braces for the loss of patent protection on key drugs.

“We understand we need to be doing more to deliver on the promise of research and development,” said Brennan, whose company is expected to suffer a decline in overall sales over the next five years.

“I’m not struck by the amount of change or the number of (CEO) changes,” Brennan said. But he admitted that “every now and then you lose somebody you think was going to be around for a while.”

Debbie Wang, a medical technology analyst for Morningstar, said the executive shakeups may reflect pressure on CEOs to deliver immediate results at a time when significant growth drivers are years away.

“It’s a really challenging time (given) the near-term pressure, the short window folks have to prove themselves in the eyes of investors,” Wang said. “It says more about how CEOs are judged right now.”

Boards of directors that traditionally provided long-term security blankets and rubber stamp approvals for CEOs are becoming more independent and less patient. Some also have attracted activist investors looking to shake things up.

One weekend last September, biomedical testing company Beckman Coulter BEC.N fired its CEO Scott Garrett, with no hint that a leadership change was in the offing.

Ed Ludwig, longtime CEO of medical device maker Becton Dickinson BDX.N, told the Reuters Health Summit that that change "came out of nowhere."

“I’ve known Scott for 20 years and I can tell you he was surprised too,” Ludwig said. “There is a short attention span on Wall Street and if you have a succession of misses the board gets a little trigger-happy.”

Ludwig counts himself lucky to have what he called a stable board, but said there are other keys to his longevity.

“You have to have sets of people scanning the horizon and if they bring you bad news you have to be willing to listen and deal with it,” he said.

Reporting by Bill Berkrot; additional reporting by Susan Kelly; Editing by Michele Gershner and Matthew Lewis

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