THE WAY OUT OF THE MAZE FOR THE PHARMACEUTICAL INDUSTRY

The pharmaceutical industry faces an uncertain future. Prices, intellectual property and marketing freedom are under assault across the world. Even in the U.S, by far the world’s largest pharma market, the industry is fighting a furious rearguard action against Canadian imports, changes to generics legislation and state-level curbs on promotion. What will the future look like? Mark Chataway offered three models in his talk to the PMI AGM in Derry.

Chataway first cited a provocative recent talk by Philip Evans of the Boston Consulting Group. Evans suggested that the pharmaceutical industry today is where big computer manufacturers were 15 years ago: incapable of cost-effective research and stuck with expensive old marketing models in a world where barriers to entry were falling because of technology, consumer behaviour and political trends. Evans most interesting theory centres on Emergence – the bottom-up clustering of individuals seen on the Internet and in media frenzies.

An even more pessimistic view of the future comes from Simon Bryceson, a reputation guru, who has worked for oil companies, mining groups and tobacco companies. He often tells board meetings of top-10 pharma companies that they are running at full speed down the “tobacco road”. The industry will, he thinks, become more and more socially unacceptable. Like tobacco companies, the pharma industry will keep making money but its freedom to market, recruit or influence the selling environment will be severely curtailed. Bryceson says that industry ineptitude is partly to blame but that the root cause is social change. The population is aging, older people are disproportionately politically active and older people need more medicines than the rest of us. The argument that high prices today guarantee innovation in the future is not very persuasive for an 80-year old.

Chataway suggested there might be a third alternative and used Nike as a model. It is a company with its share of controversy but it has created a premium market where none existed 20 years ago. He suggested that the pharma industry could do the same in consumer-driven markets and, as genetics start to deliver, in the market for disease prevention and well-being.

There are lots of obstacles as the industry tries to re-create itself. Chataway listed five major problems.

  • Industry has not been very good at discovering medicines or selling them. As the Wall Street Journal asked about GSK’s research programme, “$17 billion and what to show for it?” Many leaders of big pharma companies think the futures lies in in-licensing of compounds which can then be exploited through industry’s marketing expertise. It might be a lovely idea but the industry’s marketing depends on reckless spending sustained by heavily regulated and protected markets and by strong patent protection. It seems unlikely that there will be sustained political backing for high prices when 30 % of revenues are going straight back to marketing. In the US, sales since 1996 have grown by about 56 percent but marketing spending has grown by 63 %. This is hardly a story of commercial genius.
  • The industry has not made a compelling argument for itself. If political will is to be sustained, there must be much stronger communication of the message that industry has been at the centre of every major advance in treatment for the last 100 years. There is no sign that many of the companies or any of the trade associations are capable of this.
  • The worst job has been done around strategy on intellectual property rights in the developing world. Honestly, few Americans or Europeans care that much about Africa but much of the hatred of the industry has coalesced around a clever case on access to medicines. The case has been put by long-standing industry-haters such as Médecins Sans Frontières and Health Action International.
  • We will soon live in gerontocracies unless there is a dramatic change in political behaviour amongst the young. In many Western political parties, the average age of the membership is close to 70 (the British Conservatives are so terrified of the answer that they refuse to analyse their membership figures). Even if younger people re-engage with politics, and even in young countries such as Ireland, the number of older people is growing very fast. Russia will lose 50 million of its population by 2050; Italy has a birth rate of 1.3 children per couple. As power shifts to the elderly, and as the younger groups object to footing all of the bills, politicians will squeeze industries which are doing well out of the greying of the population. Given pharma’s emerging pariah status, it stands little hope of moderating these pressures.
  • Thinkers such as Steven Johnson say that we are seeing patterns of human behaviour which may have existed in the past but which have never been observable before. Evans calls it a self-organising principle in human society which cause people to coalesce around ideas and trends. Johnson says this is happening far faster and far more unpredictably than ever before. Potentially, this is an enormous opportunity for the pharma industry because people care enormously about their health (whereas brands – such as Nike or Pepsi Cola – which have thrived in the information society, have to create interest in products which are intrinsically irrelevant to most consumers). However, industry’s only real attempt at consumer communications has been in the US (and New Zealand) using an old mass-advertising model. Many companies now think that this model is prohibitively inefficient and expensive. Its successes (such as Clarityn) have relied on artificially high prices, sustained for long periods by controversial patent extensions.If industry is to thrive, according to Chataway, it must either find revolutionary improvements in research productivity or it must find new ways of forming relationships with its end-users. These relationships must influence beliefs and buying behaviour. The chances of current management doing this in most companies seem slim.

For copies of the presentation or more information, contact mark@hyderus.com.