|  The popular press has picked up recently on some issues over
drug safety regarding two classes of commonly prescribed medicines. This
not only
raises the profile of the effectiveness or otherwise of these medicines,
but also raises further questions about the behaviour and activities
of the manufacturers that brought them to market. Initially the issues
concerned some of the cholesterol-lowering drugs and, then, concerns
were highlighted over some of the anti-inflammatory COX-2 inhibitors
(coxibs). Both classes of drugs are significant sources of current revenue
for the major “ethical” pharmaceutical manufacturers. The
impact of bad news of this nature not only causes concern to patients
and the prescribing professions but also affects the share prices of
these companies and the return institutional investors expect. It is
at this later point that an incriminatory finger of partial blame can
be pointed, since it is maintaining sales and profits at the levels experienced
in the 1970s and 1980s, which set a standard for shareholder expectations,
that significantly drives the behaviour of the large companies. They
are still looking for blockbusters — frequently prescribed mass
volume products — with which to flood the market. It is two classes
of such blockbusters that have recently shown not only worrying underperformance
but concerns over how ethically these products are brought to market.
Understanding the logic that drives the behaviour of large companies
is not a straightforward process. Their positive spin on helping to deliver
a public benefit, for instance the development of medicines to alleviate
major health conditions, has to be balanced against making a profit from
these medicines in order to drive further speculative research and satisfy
investors.
Sharper relief
The fickle nature of this balance has been put into slightly sharper
relief over recent months by the events that have unfolded. This is
reflected in the way in which the managers of these large organisations
behave and the direction they take the companies in. When commercial
organisations are facing a period of unexpected bad fortune, and a
potential downturn in business, the usual mantra that is touted to
get back on the road to recovery is to “get back to basics” and “focus
on core business”. In essence, what this means is to cut out
any perceived waste and concentrate energy into what traditionally
the organisation has been good at. Any company activity that does not
help it deliver what it perceives it should be doing, and what it successfully
achieved in the past, is cut. This conservative behaviour excludes
experimenting with new ways of doing things.
In the short term this can, of course, be the correct course of action,
especially if other products in the portfolio are still in demand. The
future of “ethical” companies is measured by the stock market
and investors, not by what they are currently delivering but by what
they are likely to deliver in the future. Cash generated today is put
into the huge coffers of research and development funds, in order to
deliver jam tomorrow.
A cost-cutting exercise therefore keeps profits up and cash flowing into
R&D, satisfying investors. The major flaw in this cycle of events
is that, as reported by a number of other sources, the R&D machine
is not delivering big new products. Recent events would also tend to
indicate that those big new products that have come out of the R&D
pipeline in the past 10 years may not actually be delivering the major
benefits promised and, in some cases, if not used with caution, may cause
more harm than good.
This conservative model and response to the challenges ahead may not
be a secure route to the future. It is time to review the cycle of paying
a premium for blockbuster medicines. The increasingly expensive R&D
programmes are not delivering the future medicines of mass appeal.
One of the fallacies of the cost-cutting approach is that, over time,
with each wave of marginal cuts, more of the core functions of the business
are exposed as inefficient. Frontline sales staff are retained, middle
management slimmed down and manufacturing shifted to areas of the world
with cheaper labour costs, yet nothing changes to the basic business
model. This culture of attrition, which usually goes on year after year,
effectively encourages the more entrepreneurial individuals, or those
who challenge the norm, to leave and join more dynamic sections of the
market. The chances of any radical change in management style or approach
to delivering new business therefore become less. This creates a long
period and cycle of perpetual erosion. As customers, we get to see the
fruits of this behaviour in the “innovative” products that
are brought to market. Revenue is driven through a trickle of preparation
modifications, “me-toos” and combination therapies, instead
of new products of significance that have been thoroughly researched
and tested.
Instead of this traditional conservative behaviour exposing the management
of these companies to greater scrutiny, we as investors blindly believe
them. More money is being spent on R&D with little outlook of improved
discovery. In addition the past five years of consolidation between the
big players has not delivered significantly greater efficiencies or more
productive pipelines.
This can best be paraphrased by anecdotally quoting Tom Peters from one
of his road shows where he stated: “If you take one large dumb
company and merge it with another large dumb company, all you get is
an even bigger dumb company.” This strategy of trying to achieve
economies of scale through size does not appear to have paid off either
from a marketing perspective, or an R&D argument. Those companies
that had major products in the cholesterol-lowering and coxib fields
are now struggling to fill large revenue holes. The future does not look
any brighter as current published pipelines do not show any product of
mass appeal on the
horizon. Lame course of action
A serious question needs answering as to why they are still following
the same course of action, which looks even more bizarre when it is
compared to how the market these companies work in has changed significantly
over the past 20 years with greater regulation, and increased generic
substitution.
A look into the crystal ball to see what the pharmaceutical market
will be like in 20 years’ time suggests an even more polarised market
than the one that exists now. The major part of this market will be generic
medicines for the common major therapeutic fields, ie, antibiotics, analgesics
and drugs for myocardial, metabolic and mental health. These fields will
be topped up with the occasional new entrant that is likely to provide
a significant rather than a marginal improvement on existing medicines,
for example, a radical new antibiotic to fight methicillin-resistant
Staphyllococcus aureus. This will be characterised by high-volume, low-priced
and hence low-margin products for a mass market.
The second and more diverse component of the pharmaceutical market will
be highly specialised tailored products, most probably genetically engineered
for individuals depending on genotype. This will be very low-volume,
high-priced and hence high-margin products for a specialised market.
The question that the large pharmaceutical manufacturers are struggling
with is where they want to be in this market of the future. The large
mergers that have created the current behemoths of GlaxoSmithKline, Pfizer,
Novartis, and Astrazeneca would indicate they are gravitating to the
mass market approach. These companies have traditionally survived through
economising on mass marketing of a few “golden eggs” to provide
them with high-margin cushions. They struggle with the complexity of
marketing a large, diverse portfolio.
The genetics and genomics revolution has yet to produce the magic bullet
for the specialised market, and this market is extremely small, dynamic
and high-risk. In addition it will not require mass marketing and a fleet
of medical representatives. Caught in a quandary
The large pharmaceutical companies are caught in a quandary: continuing
to do what they have done in the past and so continue to experience
a slow decline, or diversify. Some of the large companies that have
not diversified enough, and have relied heavily on maintaining their
profitability — and favour with stock investors — through
focusing on a few golden eggs, have already demonstrated the risks
of this strategy.
History may show whether Merck Sharp & Dohme will be able to survive
the withdrawal of Vioxx, show how Astrazeneca will continue to cope with
the potential problems with Crestor, and throw light on Bayer and Pfizer’s
potential problems with other versions of the same classes of drug.
Other companies may have already taken the decision to diversify and
survive. Roche would appear to be recreating itself as a specialist supplier.
It learnt its lesson in the 1960s with concerns over addiction to Valium.
GSK and Novartis have diversified further into vaccines, and over-the-counter
and lifestyle products.
In the past the large pharmaceutical manufacturers have been able to
create their own markets. Maybe the tide has now turned and the markets
and regulators are indirectly deciding the fate of the companies. The
problem for the big companies is whether they can afford to bide their
time or whether the market will force their hand sooner.
Part of the key to unravelling this conundrum will depend on whether
the companies’ investors still expect historically high returns,
and whether the companies can be more creative with the cash that they
currently pour into R&D. |
The
Pharmaceutical Journal