What pharma needs to evolve

The pharmaceutical industry's fundamental problems by now are so well known that even major consultancies have detailed them in splashy sales promotions disguised as reports. Neither the industry's managers nor these slow-witted consultants, however, have devised plausible solutions to pharma's difficulties.

Stated in the simplest terms, pharma remains in large measure unable to deliver precisely what the world's health care systems need from it — therapies to materially advance the standards of care.  At the same time, the public and private systems that pay pharma's bill have grown increasingly unwilling to shell out for the molecular manipulations that have long been an integral part of the drug makers' business model. As a result, pharma barely returns the cost of capital it invests in research and development while the sector as a whole underperforms the S&P 500.

If pharma is to remain a worthwhile financial proposition, the necessary action step requires that the industry do something to generate an earnings pattern capable of attracting capital. It's not as if no plausible ideas have emerged.  Some were even discussed here, here and here.

Some pharmas have made laudable efforts, but with the exception of a few small and mid-size companies, these have occurred at the margins or in niche markets. There's good reason for that. The people running the major pharmas, as well as the layer beneath them managing operations, lack the experience, imagination and the acumen to make successful ventures into areas outside of prescription drugs.

People who matured in a patent-protected, highly regulated environment such as pharma generally remain insulated from the market forces that sharpen the skills of competitors in other industries. Pharma managers also accommodate their reflexes to product development cycles that last a decade or more. As a result they generally lack the quickness of, say, people in consumer packaged goods where manufacturers can sweeten a cola over the weekend and get it on store shelves the following Thursday.

The management approach traditionally used by pharma also fails to hone the skills that the industry needs right now.  Some organizational theorists describe it as command-and-control while others just use terms such as "hierarchical" or "top-down."  Regardless of the nomenclature, it makes for a slow pace because, figuratively, everyone learns to raise his hand before going to the bathroom. Pharma, for example, generally frowns on setting up innovative, skunk works projects. When it does create ad hoc operations to break new ground, the companies populate them with protected dimwits and timeservers who fail to grasp the current dynamics.

Recent news about the FTC green lighting the Express Scrips/Medco deal brings to mind another shortcoming of pharma's collective management. Sources who have dealt with the Express Scrips' (ESI) CEO, George Paz, describe him as an incredibly tough, resourceful and cagey fellow. One such informant from a Big Pharma company tells of a time when he brought his COO along to St. Louis to provide reinforcement at a negotiating session with the big PBM.

Paz kept them waiting in the conference room for half an hour and then quickly walked in with two aides in tow. He remained standing, interrupted the introductions and abruptly asked, "Who's your lead guy here?"  Informed about the COO in the room, Paz turned to face him and brusquely stated the price and terms he required on the matters at hand.

"Work it out," he told the guys from pharma, and then left the room.

So, if the top two or three management levels lack the requisite smarts, speed and toughness, they create a major obstacle for any industry, particularly one that needs boldly innovative moves.

Again, pharma's leaders aren't that way as a result of innate deficiencies. The industry through which they rose was a hugely successful cartel that failed to develop the leadership skills now needed for evolutionary survival.

In the past, pharma brought in senior managers from other industries and, for the most part, they were dismal failures. This was partly because they lacked any informed instinct for pharma's central task of new drug development. Also, many aspects of pharma are counter-intuitive and do not conform to conventional business patterns. Pharma in that respect reflects the larger health care arena. Even the Supreme Court's reactionary Justices were blissfully ignorant of those differences last week, as evidenced by their thickheaded comments comparing Obamacare to broccoli and funeral insurance. So marketers of Pepsi Cola and Clairol, for example, have not fared particularly well in pharma.

But if a genuine renaissance in new prescription drugs must await a paradigm shift in the underlying sciences, then pharma can tread water by supplying goods and services that a rapidly changing health care system will soon need. Perhaps the industry can effectively develop capabilities in those areas by bringing in outsiders, keeping them away from the Rx business and turning them loose on new ventures. That's one way to evolve and not join the dodo bird.

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