Prescription for disaster?


By guest blogger Daniel Hoffman:

With a dearth of new products in the pipeline and numerous blockbusters drugs about to come off patent, many pharmaceutical companies have settled on a plan to solve their current crisis: Put the finance managers in charge.

An old truism of business law is that “when you are bankrupt, you go into the hands of receivers.” A worse fate often befalls industries facing major revenue losses and few new products – they fall into the hands of finance managers. Direction by finance is a growing trend in the pharmaceutical industry, with short- and long-term benefits, risks and consequences.

Branded pharma is an industry that prospers or declines on the basis of whether it can introduce new products that advance the various standards of medical care. During times when new product innovation is low, the industry had historically spent more on R&D.

The industry’s current finance managers now think this pattern should no longer apply.  Finance influenced decisions actually reduce R&D spending below the absolute level of the year before.  According to Andrew Jack of The Economist,  "Perhaps the biggest trend in recent months has been removing a taboo on cutbacks in R&D."

Marketing is another tool that pharma uses to grow revenue.  Marketing, however, has become increasingly subordinate and non-aggressive. As entrenched, category- leading products have aged, companies have remained content to enjoy high margins from these cash cows without the marketing expenditures needed to grow top line sales.

The condition of pharmaceutical marketing as an industry stepchild is apparent from this. Rather than growing sales, financial management decrees a preference for the guaranteed net increase that comes from reducing promotion on a product with several years of remaining patent life.  This idea of saving your way to prosperity is anathema to marketing but sweet nectar to finance.

So why would an industry reduce its lifeblood R&D and curtail its marketing? No mystery there.  The compensation contracts of fiduciary officers are premised on delivering quarterly earnings growth. If it requires mortgaging away a company's future to meet the incentive clauses in an executive's performance contract, so be it.

And new products are easily acquired through the purchase of small companies that are more than happy to license or sell their intellectual property. Over the long-term, it remains to be seen whether these trends will erode the industry's historic growth and margins.

Short-term, as a means of surviving today’s challenges, finance has become the pharma executive's handmaiden.

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