Thursday, August 21, 2014
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The Hollywood Model of Pharma

Once the science started running dry and new product development slowed, Big Pharma's large, fixed overhead started draining profits rather than propelling them. After that became apparent the past several years, pharma started outsourcing and partnering away some of its historic functions. Some companies such as AstraZeneca announced they would discontinue preclinical and early stage clinical research in several therapeutic areas. Most noticeably, many pharmas have been paring down the in-person sales function each year. Since Big Pharma can't effectively develop drugs that advance care, it makes sense, from a profit-making standpoint, for the industry to cut back to core functions as it tries to make money by acting as investors-financiers-marketers for small companies that can develop such drugs. Of course, if investing and financing become the central, profit-making function, then finance officers rather than scientists, research physicians or even marketers become the driving positions.

The Hollywood Model of Pharma

By guest blogger Daniel Hoffman:

Shortly after finishing graduate school, I worked as the absentee manager of a small hotel in Burbank, California. The place actually had very few overnight transients, although it did a brisk “fast sheet” business where guests rented an empty room for less than an hour. Since my resident managers pocketed the proceeds from that source, most of the hotel’s revenue came from monthly rentals. Those guests were contract employees of the big Hollywood studios, such as Disney and Warner Brothers,  that were close by. If a studio was shooting a movie or a television show, it hired scores of electricians, set arrangers, sound technicians and other trades people for periods ranging from a few weeks to several months.

After completing his or her respective assignments, each artisan looked for his or her next engagement. A few residents remained at our hotel for two or three years under those circumstances, while others stayed for a few weeks and then vanished. At the time, I considered it an odd phenomenon, one that I was frankly happy to leave behind when I left California to pursue a more conventional career. Now, decades later, I suspect my Burbank hotel experience foretells the future of the industry where I sought a standard career as pharma evolves into its own Hollywood business model.

The Hollywood studios started their transformation into revolving-door businesses as early as the 1950s. A U.S. Supreme Court ruling in 1948 sparked the change when it found the studios’ “vertical integration,” their ownership of the movie theater chains, represented a conflict of interest. By the next year, the major studios starting selling their theaters and, over the next decade, they slowly outsourced and partnered away many of their major functions. Before the Court’s ruling, it was no accident that each studio produced 52 films a year to supply fresh attractions to its theaters that changed their movie listings every week.

The system evolved to a point where independent companies that obtain funding from diverse sources of venture capital produce most movies. The studios may produce a handful of their own movies each year, but they participate more widely as investors, distributors, marketers and facility lessors for films made by these independents. Big Pharma apparently looks at MGM and the other studios as a source of inspiration.

Pharma was able to profitably sustain a soup-to-nuts business model – encompassing drug discovery, drug development, registration, marketing, sales and many other functions – as long as the pharmacological sciences underlying the business continued producing a bounty of new products. Equally important, those new products produced profitable sales because they represented therapeutic improvements sufficient to compel their use by physicians and payment by insurers.

Once the science started running dry and new product development slowed, Big Pharma’s large, fixed overhead started draining profits rather than propelling them. After that became apparent the past several years, pharma started outsourcing and partnering away some of its historic functions. Some companies such as AstraZeneca announced they would discontinue preclinical and early stage clinical research in several therapeutic areas. Most noticeably, many pharmas have been paring down the in-person sales function each year.

Since Big Pharma can’t effectively develop drugs that advance care, it makes sense, from a profit-making standpoint, for the industry to cut back to core functions as it tries to make money by acting as investors-financiers-marketers for small companies that can develop such drugs. Of course, if investing and financing become the central, profit-making function, then finance officers rather than scientists, research physicians or even marketers become the driving positions.

Instead of Nobel Prize winners providing the industry’s professional models, Wall Street operators assume that role. Inevitably, the industry itself is likely to become a subsidiary of larger conglomerates, just as Warner Brothers is a piece of Time-Warner, Universal a small part of General Electric and Twentieth Century Fox an appendage of Rupert Murdoch’s News Corp.

I recently spoke to a former client who, during a 25-year career at two Big Pharma companies, launched six different products. He’s been without a job for 19 months and he told me about a recent experience when he applied for a contract marketing position with one of the Big Pharmas. The position deals with the US market and it requires people who possess several years of experience working here.

The contractor hired by the company to recruit for the position was located in Mumbai, India. After briefly screening my acquaintance, the contractor quickly told him that compensation involves an hourly rate with specified time allowances, no benefits whatsoever, and no expectation of a subsequent, full-time position. I was immediate struck by the irony of a major, US corporation retaining an Indian contractor to hire US workers under call-center terms. The mental image of the Burbank hotel I thought I had left behind suddenly reappeared.

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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.

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