Thursday, July 10, 2014
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The Time for Pharma to Create a New Business Model is Now

There was a time when pharma was considered a recession-proof industry and mothers encouraged their children to make careers there because people will always get sick. As with mothers' advice about sunshine, red meat and marriage, times change. Even now, as the economy ever so slowly makes it way out of the morass created by a "free market" mythology that disdains regulation, pharma's horizon appears none too rosy.

The Time for Pharma to Create a New Business Model is Now

There was a time when pharma was considered a recession-proof industry and mothers encouraged their children to make careers there because people will always get sick. As with mothers' advice about sunshine, red meat and marriage, times change. Even now, as the economy ever so slowly makes it way out of the morass created by a "free market" mythology that disdains regulation, pharma's horizon appears none too rosy.

Over the past ten years, the pharma industry has lost $1 trillion of capitalization. During this period the stock price of Pfizer, Eli Lilly, Merck and Bristol-Myers Squibb has each declined between 55% and 65%. While stocks in the overall market now sell at price/earnings multiples in the 14-15 range, pharmas sell at 8.5-12.5 P/E's. Some European equity analysts even encourage pharmas based on the continent to promote themselves as consumer products companies that just happen to own pharma operations because such companies fetch better stock prices than pharmas.

The factors that have brought pharma to this state are not difficult to discern. They include the following.

1. The patents on pharma's top-selling products are expiring while productivity at developing truly innovative new products to replace them keeps declining.

2. The commercial practices that have worked well for pharma over the past 40 years or more have come under increasing legal and political censure. These include such old standbys as off-label marketing, defrauding public and private payors and bribing medical practitioners and investigators. A decade and more of this has vastly diminished the credibility and persuasiveness of pharma's communications with its customers.

3. Pharma's customers, including health insurers, government agencies and medical providers are proactively seeking to shut down the industry's communication channels. Their efforts here include limiting the access of reps, medical journals scrutinizing pharma involvement in published studies, and specialty societies limiting pharma sponsorship of continuing medical education.

4. The ever-increasing costs of health care have made public and private payors less willing to accept high drug prices.

5. The shortsighted, ill-advised mergers and acquisitions that pharmas have completed over the past decade have hamstrung drug development productivity and ossified the way the industry conducts business.

Easy fixes show few signs of turning things around. So-called "bolt-on" acquisitions and various moves to become diversified health care companies require management capabilities beyond those that pharmas typically possess. It took Johnson & Johnson and Abbott many decades to acquire the skills of profitable diversifieds and pharmas appear unlikely to telescope the process. The developing nations such as Brazil, Russia, India and China do represent increasing segments of gross revenue, but the traps of doing business there and the availability of much smaller margins mean these countries are not pharma's big rock candy mountain.

Like many young people who come into the world from sheltered backgrounds, pharma must now make a more realistic assessment of its abilities and decide how it wants to earn a living. Please submit all suggestions on your way out.

 To check out more Check Up items go to www.philly.com/checkup.

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Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

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