Pharma Strategies: Some Old, Some New, Some Borrowed, Some Untrue
Perhaps Novartis CEO Joe Jiminez relied on his PR consultants to impress investors by sitting for an interview with the Wall Street Journal. Truly effective strategies for an industry with a broken business model did not readily emerge.
Pharma Strategies: Some Old, Some New, Some Borrowed, Some Untrue
Many pharma CEOs think of themselves as either oracles or rock stars. Those in the former group give vent to blatantly self-serving ideas that they label as bold approaches to health care reform. The second bunch seeks even more publicity, but they do so in the manner of celebrities. Their promotional announcements emphasize putatively "courageous" or "boldly innovative" plans they're pursuing for their companies, along with their personal habits and histories.
In this regard it's probably sensible to give Novartis CEO, Joe Jiminez, the benefit of the doubt and assume he's not necessarily enamored with himself but that, instead, he relied on his PR consultants to impress investors by sitting for an interview with the Wall Street Journal.
Some of the approaches Mr. Jiminez sketched for his company are matters of longstanding practice and conventional wisdom across the industry, although their usefulness remains open to question. His stated preference for "bolt-on" acquisitions falls within this category. The reference here is to companies he can buy for $1 billion or less that won't require any alteration to Norvartis' current business operations. Basically, such moves couldn't hurt, as wags in the investment community might put it, but the likelihood that such acquisitions can appreciably reverse pharma's long slide in share prices appears slight. Pharma is inherently a high-risk industry, so by placing enough bets on enough bolt-ons, a company may hit the jackpot, although the odds are long.
Another of Mr. Jiminez's conventional ideas involves "value-based pricing." This involves a scheme whereby a pharma company prices its drugs on the basis of a retrospective assessment of patient outcomes versus alternatives. Here the idea is not only conventional but seeks to make a virtue out of necessity, because many countries in Europe and elsewhere demand that if premium priced brands fail to show better results than cheaper generics, the companies must rebate a healthy chunk of the cost differentials.
So if what's arguably useful among Mr. Jiminez's plans is not new, what he proffers as new holds an even more tenuous claim on being true. The centerpiece of the interview deals with Jiminez's intention to aggressively cut costs. "Historically, the pharmaceuticals industry hasn't focused as much on cost reduction," he pronounced. By contrast, Jiminez claims he will cut expenses at Novartis by relying on his competitive abilities, originally developed as a top breaststroke swimmer at Stanford and subsequently honed with regular gym workouts and Alpine hiking. One can only wonder if he also posed for the Journal's reporter in Speedos.
Now in pharma, unlike consumer packaged goods where Jiminez was president of HJ Heinz in the US, companies cannot save their way to prosperity. The major difference lies in the distinctive roles of R&D in the two industries. Heinz, for example, proudly proclaims itself as an adept marketing company, not as a manufacturing or a research entity. Branded pharma, on the other hand, requires R&D for its continuing existence.
Even companies such as Pfizer, GlaxoSmithKline and Sanofi-Aventis that are committed to reducing R&D expenses will face limits to those initiatives because pharma has to pay third parties, such as contract research organizations and independent investigators, to perform their research. Those parties run a seller's market and they will not accede to pharma's demands for lower fees. In oncology, for example, approximately 70% of trials that obtain positive results are conducted by some subset of approximately 20 research centers. Those centers turn down at least four studies that pharma sponsors propose to them for every one they accept. Squeezing them won't work.
But pharma companies spend more on SG&A than on research and Jiminez says he wants to cut these marketing-selling costs and plow the savings back into R&D. That sounds superficially appealing, especially because highly aggressive selling efforts sometimes create additional costs in the form of large fines, while they also tarnish the industry's public image. Yet here too, Jiminez will find limits in saving his way to success.
Jiminez claims that already he conducts 40% of his outsourcing by reverse auctions, nasty affairs where he makes suppliers competitively bid against one another to reach the lowest price on a particular contract. Demanding bargain basement prices can work in some cases, and Wal-Mart has successfully used the approach to reverse the power relationship between manufacturers and retailers in many product areas. But the manufacturing of health care products is regulated and bargain basement purchasing inevitably causes quality standards to fall below acceptable levels. As a current example, the unprecedented recalls across numerous Johnson & Johnson operating companies, including pharmaceuticals, devices-diagnostics and consumer products, stems in part from the bottom cost constraints placed company-wide on purchasing and quality assurance.
There are also cost-cutting limitations relative to the business-side services that Jiminez seeks to commodify and, thereby, to buy on the cheap. As the strategic planner John Singer writes, pharma's entire customer base is proactively working to shut down the industry's promotional channels. For example, medical societies are looking to ban pharma funding of continuing medical education, while medical schools and their clinical centers are increasingly banning drug reps and tightening the conflict-of-interest rules for faculty and staff. The medical journals, recently embarrassed by ghostwriting scandals and deceptive articles, are also limiting pharma involvement. More ominous yet for pharma, the FDA is developing its Sentinal Initiative that will combine electronic databases of insurers and providers, covering 100 million patients. With this national registry of drug cost-effectiveness, promoting the intrinsic benefits of a product becomes a daunting task. Instead of looking for the cheapest market that presumes an ad is an ad, pharma needs to find more insightful and more innovative approaches. The industry will no longer be able to rely on an asymmetry of information, its own trial data and its own marketing communication channels to have its way with individual, overwhelmed prescribers. Pharma must find alternatives for the influence that ex-cheerleaders in short skirts and ex-jocks bearing Mets tickets once exerted on therapeutic decision making.
On R&D strategy, Jiminez's approach amplifies his subordinate, Mark Fishman, the head of Novartis' biomedical research. Basically it calls for abjuring the development of compounds targeted to specific, financially projectable diseases or conditions and, instead, developing compounds that work through innovative means, regardless of the insignificant revenues they may initially generate. Novartis was able to do that with Gleevec, the cancer drug they originally developed for a niche condition. Gleevec became a multi-billion dollar brand when subsequent research found it to be effective for treating leukemia. That approach also sounds initially attractive, but relying on serendipity as a research strategy just raises the risk level for an enterprise that is already quite risky.
Truly effective strategies for an industry with a broken business model will not readily emerge. In any case, vanity profiles are not places to look for them, whether they appear in People magazine or the Wall Street Journal.
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