What business is pharma in? Not personal services

Just this week, another self-proclaimed savant (see here) declared that pharma's historic mission of developing new drugs to advance curative medicine is dead. In this case, the would-be guru runs a tech company with products for enhancing the electronic connectivity of patients and their health care professionals. His previous work involved advising hospitals on information management for a major consultancy and, before that, he spent a dozen years at Microsoft working on health care IT.

Thus, it should come as no surprise that he suggests that pharma quit trying to develop, manufacture and market new drugs. He recommends, instead, that the industry become a service supplier, using its well developed contacts with physicians, pharmacy chains, managed care organizations and other health care stakeholders to underwrite and promote the very tech services this soothsayer-pitchman offers.

In most cases, critiques of thinly disguised self-promotions are not worth the effort, but one or two points here do merit a quick rebuke. To support his recommendation, the guru resurrects a 50-year-old article by a Harvard Business school lecturer. Its decrepitude means that many people may not even be familiar with the putdowns that consigned this classic article to the lumber room (see the 1975 reprint here), so a brief revisit seems in order.

Professor Theodore Levitt recounted a bit of railroad history from the post-World War II era to make his point that business leaders must constantly re-imagine the scope of their respective domains. In 1945, according to Levitt's narrative, the railroad companies maintained substantial interests in the still embryonic airline industry, yet the rail magnates failed to capitalize on their opportunities and sold out their interests. Their failure, according to Levitt, rested on their conception that they were in the railroad business rather than the transportation business. Had they possessed the vision to expand their horizons, Levitt suggests, planes that now say American or United would instead carry the logo of Atchison, Topeka & Santa Fe.

Over a period of perhaps 20 years, Levitt's article provided the conceptual underpinning for several waves of mergers and acquisitions. So, for example, when Viacom acquired CBS, Paramount Pictures and Simon & Shuster, it did so with the rationale it is not in broadcasting, movies or publishing, but rather in communications.

In a few cases the synergies and economies of scale proved successful, but those were the exceptions. The over-conglomerated companies ran into trouble and then tried to make virtue out of necessity by saying things such as, "We're returning to our core competency" or "the proceeds of sale [from the business unit we acquired and never did master] will permit us to invest in our faster-growing segments."

These checkered results led to several criticisms of Levitt's over-idealized notion that management is all about imagination. One of the more enduring reviews argued that even if the people running the railroads in the 1940s had decided to expand into commercial aviation, there was scant likelihood that the dimwits who ran railroads into the ground would have done appreciably better with airlines.

Earlier postings here made the point that pharma managers, accustomed to operating with product development times of a decade or more, would find it difficult to adjust to tech where eighteen months represent a generation. Simply hiring leaders from other industries with more appropriate time frames has never worked well for pharma. The careers of Ray Gilmartin at Merck (from hospital supplies) and Jeff Kindler at Pfizer (from McDonald's and General Electric) illustrate the general rule.

Clearly pharma has to retool, refocus and right-size itself, but becoming an interconnectivity service supplier represents a fast track to oblivion. It might work if the wannabe guru envisions pharma companies as subsidiaries of his former employer, Microsoft, or conglomerates such as GE. But to this point neither Microsoft CEO Steve Balmer nor GE CEO Jeff Immelt has shown an interest in acquiring Merck or Pfizer. Unlike some soothsayers, those executives know their limitations.

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