Pharma Better Off Ignoring Some Biz-School Gurus

When Roche CEO Severin Schwan spoke at a London conference last week about the industry's "perfect storm," his comments contained no news or insight beyond what is already well known.  He merely recited a list of familiar factors such as the dearth of compelling new products, expiring patents, payers that demand better outcomes, and regulators erecting higher standards for registration.

Likewise, Schwan's vision of pharma's future is also familiar.  He sees only two ways for companies to survive.  Either they must be able to differentiate their products on the basis of substantially superior outcomes or, alternatively, operate as large generic companies that compete on price.

Perhaps the only news consisted of a pharma CEO publicly acknowledging the industry's problems instead of repeating the unrealistically optimistic platitudes that his colleagues peddle to investors.  But Schwan's comments about pharma's dichotomous paths forward were self-serving and diversionary.

Self-serving yarns are the lifeblood of incumbent CEOs and political office-holders, so Schwan deserves no special admonition.  He merely reaffirmed a decision made during the 1990s by his predecessors, Franz Humer and Bill Burns, where Roche committed itself to developing well-differentiated products in oncology and other specialty areas.  The company reached many successful milestones in pursuing that goal over the past dozen years, so some tooting of their own horn seems understandable.

The misdirection in his comments, however, comes from the notion that all pharmas must either develop intrinsically differentiated products or compete on price.  Here he was essentially just providing a gloss on the notions of Michael Porter, the Harvard business professor whose notions of competitive advantage were all the rage in the '80s.

After propounding his different-or-cheaper dichotomy, Porter went on to co-found the Monitor Group, an international consultancy.  When Ray Gilmartin was Merck's CEO, he relied on Monitor to guide an enormous range of that company's operations.  Some observers claim Monitor's efforts helped reduce Merck's capitalization by 30% under Gilmartin's reign.

Monitor then proceeded to higher and better venues, such as a $3 million engagement between 2006 and 2008 with Muammar Gaddafi to obtain favorable publicity for the Libyan dictator.  As an essential part of its task, Monitor passed along part of Gaddafi's money to various academics and policy analysts and did so while failing to register under the Foreign Agents Registration Act.

For his part Porter also expanded his horizon.  He now seeks to influence the health care systems of entire nations.  Alas, after many years of pontificating on health care systems and other matters, the essential problem with Porter's differentially better-or-cheaper notion is that it betrays the very essence of marketing.  In pharma as in other industries, neither differentially better or demonstrably cheaper products necessarily win because some of them serve customer needs that determine success, even though such desires lie outside the ostensible features/benefits that compel the use of those products.

Consider just two examples in pharma, one from the 1980s and another from the present.

Twenty-five years ago, the leading oral contraceptives belonged to Johnson & Johnson's Ortho subsidiary.  In those days OCs competed on the basis of their respective progestin compounds.  Ortho's progestin, at the time, was no better than those of its competitors and, in fact, it was even available generically.  Yet the feature that hugely contributed to the market leading position of  Ortho's brands was packaging.  Ortho held exclusive rights to a clever "Dialpak" that dispensed the requisite one pill each day from a container that resembled a telephone dial.  Essentially the Ortho product designers tapped into the power of design that Steve Jobs so successfully exploited two decades later.  Despite the fact that Ortho's birth control pills were neither better nor cheaper, their packaging helped them lead the category.

Many health care observers would disagree with the relevance of this example by claiming that now, and increasingly in the future, payers will determine product selection and usage by numerically measuring outcomes and price.  In the emerging environment, they would argue, "insanely great" design, as Jobs would call it, will count for naught.

While rigorously quantified data on outcomes and pricing will provide the top criteria, differentiating drugs with either measure will become increasingly rare.  Until such time as new paradigms of drug discovery lead to regular breakthroughs, most therapeutic classes will more closely resemble commodity categories.  Given comparable outcomes and pricing, design and the marketing that provides a perceptual framing for it can still be decisive.

An example of the power of design exists today in the dual-component inhalers for asthma.  These widely promoted products contain both a beta agonist and a corticosteroid.  The long-time market leader in the category is GSK's Advair.  The product does not stand out from its competitors on efficacy, safety-tolerability or price.  In fact, patent exclusivity on both the beta agonist and the corticosteroid has expired.  What does effectively differentiate Advair is a cleverly designed, seventy-nine cent delivery device known as the Diskus.  Regular users and their physicians maintain a loyalty to it that compares with the devotion of Mac supporters.  Given that insurers and other, third-party payers need not pay more for Advair than its competitors, they remain indifferent to this preference among users and physicians.

But design offers only one illustration of a non-essential feature/benefit that can determine product success within the strict constraints of outcomes and price.  In fact, as good statisticians and economists will attest, even these supposedly hard and fast criteria of outcomes and price are themselves frequently open to various interpretations.

So the Porter-Monitor notions of competitive advantage represent an approach that largely distracts pharma from its mandatory tasks of drug discovery and innovative marketing.  That remains especially true when 30-year old, Ivy League MBAs try to implement tactics as intrusive consultants without the benefit of industry experience.

Here as in some other cases, pharma might do better by letting the B-school fashion parades just pass by.

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