Tuesday, April 08, 2008

Why Pharma Can't Get Out of the 1990s

In the two-plus decades we’ve been covering the drug industry we’ve been through two cycles of Big Pharma strategy.

The first (1985-2001) we’ll call Big Management. Give a set of smart managers lots more R&D resources and bigger commercial forces and they’d be able to outstrip their more frugal competitors, providing shareholders outsized returns because each new investment dollar would yield an incrementally greater relative return. Improved drugs, created on an industrial basis, would provide medical or convenience advantages which, aggressively explained to physicians and consumers, should uncover the untreated and convince the treated to switch or more consistently follow the medical regimen. There was also a managed-care angle to all this: McKinsey back in 1995 predicted in IN VIVO that a formulary could meet 95% of drug needs with just 247 products, 90% of which would be generic by 1998. Implication: consolidate and reduce redundant industry infrastructure…without reducing your own.

Model company: 1990s Pfizer: productive pipeline of primary-care follow-ons marketed by ever increasing numbers of reps hammering away with a simple message about a drug’s advantage.

Model drug: Norvasc, a me-too calcium channel blocker out of Pfizer’s own labs that replaced its in-licensed, genericizing Procardia XL.

Corollaries: the death of the mid-sized company (no way to compete in R&D or marketing); the land grab for genes and targets (since R&D can be industrialized, he who owns the biological substrate will dominate the new-product landscape).

Let’s briefly catalog why all that turned out wrong.

First, R&D couldn’t be industrialized. Too many miners broke their picks on the rockface of biology.

Second, while noisier marketing increased sales, it also meant doctors stoppered their ears more effectively (or simply closed their doors), dramatically reducing incremental sales from incrementally added sales reps. Worse, side-effects now evident in larger populations of pill-takers--implicitly assured in DTC ads of risk-free medicine--increased FDA’s trials and safety requirements and thus the cost and risk of clinical and regulatory efforts.

Now we’ve entered the era of Splinter Theory. Successful companies will shun simple-message primary-care programs and focus on products for smaller patient populations, recognizing the multiform nature of disease, with consultative selling efforts around complex medicines and treatment regimens. Any attempt at industrializing R&D will destroy the a-ha moments of discovery and, increasingly, development (identifying the right disease and the right subpopulation). Large sets of biological IP are far less important than pathway and medical understanding.

Model company: Genentech: productive pipeline of high-cost specialist drugs marketed by relatively small numbers of reps supported by major reimbursement effort).

Model drug: Herceptin, a therapy out of Genentech’s own labs only for breast-cancer patients with a specific tumor type.

Corollaries: Mid-size spec pharmas without research can profitably soak up the niche markets too small for Pharma. Big Pharma should break-up into smaller, independently traded units, to sink or swim on their own.

It is now nearly as common to hear from the prophets of Splinter Theory as it was to hear about Big Management in 1995. The latest variation comes from Deloitte Consulting (whose report you can get here). They identify – surprise! – a productivity crisis in the drug industry and go on to predict the rise of a new set of smaller, focused players who will beat the crap out of the nearsighted and flabby Pharmas who have shackled themselves with infrastructure to yesteryear’s failed blockbuster, primary-care strategies.

We too have been on the Splinter side of the argument for the last several years – see, for example, such past disquisitions on industry disaggregation here or here).

But unlike Big Management, Splinter Theory is getting damned little traction among the large drug companies. Big Management was easy for consultants and bankers to sell. “Spend more” is a nice way of saying “do more of what you’re already doing – but give yourselves bigger jobs and the salaries that go with them.” And as for acquisitions: they’re exciting, with a huge existing machinery to push them along.

Splinter Theory, on the other hand, is definitely unattractive. What CEO wants to run a smaller company (with a presumably smaller comp package)? Is there a head of R&D willing to cut his budget by, say, 75%, -- and then – depending on the variation of Splinter Theory in effect, either let external companies take on development responsibilities for key projects or spin them off entirely to separately traded specialty units? Meanwhile, what marketing boss will have the fortitude to start gutting his primary-care sales force in favor of a Genentech-style specialty model?

Instead, we have the odd situation of managers recognizing the failings of Big Management and the attractiveness of Splinter Theory – and trying to compromise between them. Take AstraZeneca. MedImmune has been left to manage itself independently. But not too independently – it ain’t trading independently, for example. “I don’t think the break up model works if you think that the strength of an organization is what matters,” AZ’s executive director of development John Patterson told our Melanie Senior, after hearing a discussion from a GlaxoSmithKline research executive on the virtues of disaggregation. Then again, if the strength of the organization matters – why manage the company independently?

We’re increasingly afraid that Splinter Theory will only reify itself into a real Big Pharma strategy only upon the catalysis of some sudden, exogenous event. We’d originally assumed that said event would be a private-equity attack on a drug company, with subsequent force majeur break-up. But the credit crisis put the kybosh on that one – acquisition debt costs too much. Also unlikely: activist shareholders. Instead, it looks like Big Pharma’s top brass will only move when Wall Street en masse abandons them for the “New PharmCos” imagined by Deloitte’s creative consultants.

But don’t hold your breath.


Industry Vet said...

There is nothing revolutionary or insightful in this observational "paper" by DC. What is NOT addressed is how do you stimulate innovation. There is basically one way and that is through incenting bright scientists to do so. Current R&D models in all companies do not reward real innovation. They reward "output" (e.g., # NCE's/year), which has been defined, ironically enough by consultants, as innovation. That is not innovation. Genentech, along with all other "specialty biopharms", will go the way of Big Pharma (just see Amgen) in due time as their internal ops are organized by big pharma refugees who have/cannot/will not address the fundamental issues of innovation. EVERYTHING else is a fundamental downstream organizational cascade of the innovation itself. Another way to think about it: whoever comes up with a way to effectively cure a specific disease/condition 90%+, regardless of how it is defined (phenotype and/or genotype) as long as it IS well-defined , will prosper. And they can sell it with 10 reps or 1000 reps, it won't matter for if it does truly work, word will get out and it will sell itself. The rest is cost and efficiency management.

a said...

I tend to agree with industry vet. If anyone out there happens across this post and has some ideas on how this will play out, let me know. I want to do a paper on it for a class I am taking. Thanks.

Dr. No said...

The issue is that the absolute size of the market per new drug is shrinking by one to tow orders of magnitude. All of a sudden your average peak sales volume is not anymore 600 million but 60 million. How will the current pharma org process manage that ?
As a consequence one will have to make clinical development WAY more cost effective than it is, change the way we do clinical trials. But also change the way how portfolios are managed, i.e. introduce diversification in the portfolio at the level of the managers so that they do not depend with their career on the one project they work one and thus can make honest kill decisions.
There is plenty of room for a large organization if organized well, monolithic it will fail though. Pharma needs to be a manager of development assets and apply modern portfolio theory as developed in the financial markets.

cyclepedia said...

The supposition in many articles and comments is that there is a lack of innovation in "big-pharma" which is the root cause of problem of reshaping and renewing the industry. In addition, as previously mentioned, many of the opportunities one could concieve are a log order of sales revenue below the level pharma is accustomed to. The result is that the considerable innovative talent within "big-pharma is held in check by prospect of lower inherent revenues from the niche opportunites. Profitability on some of these opportunities can be high if one can avoid the conventional development paths. How to release the latent innovation of the pharma industry and streamline development is a thorny problem, when often the value of an opportunity is determined by predicted peak year sales and a fully loaded development / marketing plan. Numerous examples can be cited of big companies having taken a risk on niche products, hoping to expand the market post-launch and been saddled with perennial duds. The splinter approach is all well and good if the design is to force new ways of discovering and developing drugs. If the quasi-independent units eventually feed back into the same late stage decision making bureaucracy, one will have sacrificed the efficiencies of size for nothing. An additional impediment to success for big pharma is the notion that there is a simple, quick and highly profitable way to move from high volume sales to niche markets. The typical replacement of senior R&D managers with the attendent ego-centric redesign of R&D systems to "turn around" failing companies, invariably leads to discarding dozens of promising early pipeline opportunities, delay for continuing programmes and a loss of expertise. Given the timeline for drug development I liken this to a long drive to the beach during which, there are a number of changes of driver and each new driver is allowed to chose an entirely new course. Independently each driver may have a considered and practicable solution to reach the beach, but together they fall far short. We may all eventually grow tired of the ride.