The Learning Curve

To help celebrate the 20th anniversary of its award winning Healthcare Marketing MBA program, St. Joseph's University asked Pharm Exec to convene a panel of nine top graduates working in the industry from the past two decades. Convene we did: our May 14 discussion summarized below highlights five themes that tomorrow's managers will need to address if the industry is to prevail in a world where bottled water commands a premium price while essential medicines are the last course in a beggars banquet.

Photos: Melissa Kelly/Saint Joseph's University

William Looney, Pharm Exec: Gathered here today is a diverse panel of business school alumni who are actively engaged in the day-to-day tasks of turning a scientific premise into products that pack punch—with payers, providers, and patients. We also have two distinguished academics with acute powers of observation on how these doers actually "do it." Let's start with a perspective from the latter. What are the three or four issues that young managers must tackle to succeed in Big Pharma today?

Professor Bill Trombetta, St. Joseph's University Business School: The fundamental issue is to know your customer. It's the prerequisite for securing competitive advantage in a complex and increasingly crowded marketplace. Everyone talks about a new business model, but defining what that is—or whether any single model should suffice—remains elusive. The consensus, however, is that business practices must bend to the reality that after 30 years where blockbuster, small molecule drugs suitable for big patient populations kept falling from the sky, the good times are over. So how do you adjust to accommodate investor expectations for continued high performance?

You can't start that discussion until you circle back to the core, which is the customer. The industry has never spent much time examining the customer; because the health business is a public good, pharma firms treat the customer as a given. That's a huge mistake because the customer base is changing. The industry is far from the ideal relationship as was once described between Wendy's fast food restaurants and Coca Cola: without its supply of Coke, Wendy's simply could not compete. Clearly, Coca Cola was doing something for the Wendy's identity beyond supplying soda syrup. That is what Big Pharma has to do: identify that secret syrup that makes the customer relationship essential and symbiotic, virtually impossible to break.

Management is also learning from other industries that successful innovation often has more to do with process improvements rather than the product itself. Toyota, it can be said, has reaped enormous profits not from the flash of its cars but from the relentless efficiency of its global supply chain. Another example is Sysco, a restaurant service company that sells exciting things like canned hams. It set up a free business consulting unit to help its customers run their own kitchens. The motive was simple: If Sysco could help improve their customers business, then that would carry over to boost its own prospects, not to mention making it just a bit harder for competitors to elbow their way into the relationship.

These isolated examples prove the rule about the importance of thinking beyond the pill. When Business Week a few years ago completed a major world survey of the most innovative companies, the top ranks were filled with companies who executed brilliantly around a modest platform, such as Ikea and Walmart, whose new idea was to make consumption of consumer durables more accessible to the masses. Interestingly, despite being host and employer for dozens of Nobel Prize winners, not a single pharma company made the list.

Finally, health reform, not just in the United States but throughout the world, will have enormous impact on how the industry wins—and keeps—that customer. The new German reform legislation, AMNOG, has an important provision that effectively encourages drug firms to seek out ways to generate revenue with health services that "surround" the pill. Here in the United States, the March 2010 health overhaul raises a raft of strategic questions. What happens when the physician becomes just an employee of a networked accountable care organization? If sales reps have less chance now of seeing a physician, what will it be like when United Health Care completes its transition beyond third party insurer to full-service provider, and reaches the target of owning 1,000 group oncology practices that provide care directly to patients? Or when physicians in those practices don't set their own wages but have to bargain collectively for an annual cost of living increase?

We are not talking about bottled water here. But think about it. Someone has persuaded millions of Americans to fork over $2 on average for an unadorned bottle of water, yet millions more people will balk at taking the same $2 from their pocket for one of your research-intensive pills. Reputation—as exemplified by the treatment of customers—must have something to do with this. Former Lilly CEO Sidney Taurel once noted that "while investors and shareholders love us, there are two groups that don't—physicians and the patient. And the reason for that is they see us as nothing more than pill pushers." That perception has to change, if the industry is to justify its margins going forward.

Looney: For those of you on the business side of pharma, are there other issues that shape the way you approach your work?

Jim Robins, GlaxoSmithKline: A number of environmental factors and healthcare market drivers are converging to make this a dynamic—and challenging—time for the pharmaceutical industry. First, healthcare costs in the United States are already at an unsustainable level and are projected to continue rising. We will also experience a significant increase in the number of patients entering the healthcare system who previously did not have insurance coverage. Second, our R&D efforts have been increasingly challenged to discover new innovative medicines for unmet needs while a significant number of branded medicines continue to lose their patents. Lastly, we are seeing the majority of funding and purchasing power shift to the public sector. This is reflected by the US healthcare marketplace demanding a higher quality of care, lower costs, and improved health outcomes. This is having a major impact on how we approach providers, payers, and patients. It necessitates a holistic approach based on providing a range of services beyond the pill—one which depends on knowing our customer's needs much better than in the past and being able to deliver value based on those needs.

Charles Collins, Engaged Managed Markets: Another critical trend is the extreme price sensitivity of the drug market today. I disagree that the perception of the industry as a "pill pusher" is somehow our fault. Most customers just want us to drop prices or to give them more bundled options in limiting their pharmacotherapy cost exposures. Add-on services don't enter into the equation; there is little understanding that we might actually want patients to get well. To counter that impression, we have to do a better job at positioning around a business platform geared to prevention and evidence-based outcomes.

Tony Mack, ProSolus Pharmaceuticals: Size and scale remain important, but abandonment of the arms race has created more opportunity for the niche player unable to compete with the big companies and their enormous promotion budgets.

Lisa Flaiz, IMC2 Health and Wellness: One issue today's manager has to address is the impact of digital media on promotion. Brand equity in the digital world is an unending, 24/7 cycle, not the "put it up/take it down" mentality of print, where the battle for market exposure was conducted like a campaign, with a beginning and an end. Social media has also transformed messaging into conversation, not a diktat, and on that score it forces you to differentiate a brand against the competition on something larger than its safety and efficacy.

Power of small

Looney: Are there special issues that confront the smaller players in the industry?

Christopher Jarmuz, Eclipse Pharmaceuticals: It is hard for small companies to go it alone. "Venture capital" is an oxymoron for biotech start-ups because there is less and less desire to venture when there is so much risk and no predictable ROI. Finding capital to expand is not easy, while up-front costs continue to mount. Legal and regulatory requirements are the same regardless of whether a company is small or large. Compliance is a heavier burden today than it was only five years ago. A small start-up cannot push these obligations under a rug; they must be financed and accounted for. Moreover, given these challenges, smaller companies will need to consider risk mitigation strategies that include "virtual commercial models" when it comes to the deployment of sales and marketing as well as such areas as medical, legal, regulatory, and other front office operations.

Bill Trombetta

Joseph Truitt, Achillion Pharmaceuticals: Success for a smaller company requires a singular focus on products that fill an unmet medical need. When you have that, things tend to fall together. Investors are more interested, which is critical because access to capital is a precondition for growth. Physicians and patients align with your interests because the consequence of failure is serious. Regulators will provide the feedback to ensure your application is fairly reviewed. Achillion is presently committed to one disease: hepatitis C, a global condition for which there is no available cure. We have carved ourselves a niche, enlisted the right stakeholders, created a dedicated team of scientists and developed a compelling story. We are small enough to be flexible. We are able to take a molecule from lab synthesis to test in patients in 11 months. That is less likely to happen in Big Pharma because, in my view, process tends to discourage timely execution.

Of course, scale and resources are important. It is common wisdom today that branding and value metrics must begin at the pre-clinical stage. And those metrics have to be built around a global platform, which requires deep knowledge of issues like pricing considerations in emerging markets, or identifying the IP and the generic space for competition. At Achillion, there are only two of us that comprise the commercial development, but we work each day to further the interests of the company to patients, investors, and fellow employees.

Looney: Is Big Pharma getting better at partnering? Is the burden and risk of commercialization being adequately shared?

Truitt: All the big companies recognize the potential in a business relationship with smaller companies that have niche expertise in particular areas of science. The challenge remains keeping the contacts on keel, because the big players tend to move people around too much. When I hear that a deal is under "strategic review," I interpret that as "see you in six months." There is no malice; it's just that the process gets in the way of action.

Eric Floyd, Lundbeck: This industry no longer has the luxury of building castles internally. My current employer, Lundbeck, has excellent science and a specialty focus on developing innovative medicines in the challenging field of CNS. However, due to the high development costs required to commercialize these therapies we cannot accomplish this alone; we have no choice but to partner with companies with a bigger global footprint. I also spent years at Hospira and at Merck, and both are having to radically adjust their business models: Hospira, a generics company, has concluded it cannot survive on a diet of ANDAs and injectables alone and is shifting more to devices and biosimilars; Merck has frankly been humbled to the point where it had to abandon its fortress-like stance which said "if we can't invent it here, we don't want it." It is streamlining its R&D bureaucracy and working hard to network as a "partner of choice."

Truitt: What we should expect to see are more models like the deal a few years ago between Pfizer and GSK to consolidate their HIV franchises in a spin-off company, ViV. It was a way to get out from under a burden where neither company could maintain the relentless focus necessary to succeed in HIV.

Flaiz: Partnering is not just working with outside contacts. Internal partnering across functions is just as important, and actually the connections can be more elusive. We have all heard about scientists who have trouble working with the marketers, but there is also a lack of collaboration among scientists across the industry. I fear that bad science is going to be repeated because, among other things, drug developers are still holding IP pretty close to the vest, preventing others from learning from what has failed.

Push for value

Looney: A key driver for the realignment in the business model is the insistence of payers and providers that medicines evidence real value. There is an important experiment under way in the United Kingdom whereby the government is seeking to clarify the meaning of "value," as a construct that combines two factors: (1) filling an unmet medical need; and (2) advancing the science in its respective therapeutic class. Is this effort to define value a good thing or bad?

Jim Robins

Robins: It is an appropriate effort if the patient interest is at the center of the decision making process. If austerity is the primary motivation, then it will discourage innovation. We as an industry must recognize that everyone in the decision chain wants the most relevant and specific information, more than what has been provided in the past. Industry and payers are seeking to define the terms of engagement around a medicine's value much earlier in the R&D process. Pharmas must have an informed understanding of what a payer is willing to pay for a medicine, what outcomes they expect, and what relevant comparators they want to see in our study trials.

Robert Bedford, BulletinHealthcare: The push to prove value is not entirely negative. It exists as a source of discipline—a Darwinian approach. New ideas can spring from austerity. For example, is there a better way to reach physicians when market forces and common sense can no longer accommodate a huge sales force? That question is shaping a lot of the interest in mobile apps, social media, and other alternative non-personal promotional methods.

Ken DePinto, Brand Institute: Payer carping about value is forcing drug companies to confront many practices that were condoned when times were flush. A good example is the attention now being paid to low rates of patient compliance with medicines. It's an enormous source of waste—I refer to it as running the air conditioner with the windows open. Yet I rarely see it built into the revenue and return projections that determine where a company puts its resources.

Flaiz: A larger point is that our models and forecasting tools still rely on assumptions drawn from past experience. We talk about health outcomes being our focus yet our models are built around traditional financial metrics that cater to the venture capital community.

Robins: I think that is changing, at least in the big companies. We can't build a value proposition solely on the basis of achieving high margins. Society is expecting a lot more from us.

Professor George Sillup, St. Joseph's Business School: Evidence is good but your customers are going to want it in ways that are hard to deliver—or around metrics that will tend to diminish the gloss. I know this keeps many CEOs in the industry up at night, especially as we move closer to a day when the FDA will start looking at cost effectiveness as well as clinical safety and efficacy. It's not here yet but some of us think it's coming. When I worked at Roche I produced a large number of economic studies on products. Payers were inherently skeptical about using them to make formulary decisions, asking if they could reproduce the study with their own data, or if we could explain how to translate our randomized data against placebo—a perfect depiction of illness—into what happens under routine clinical practice. Presenting evidence that meets the demand of the payer for certainty at low cost is going to be a challenge.

Collins: Ultimately wellness is where the value sits in healthcare. This is why industry has to think beyond the pill and contribute with services that position us as integral to promoting good behavior throughout the system, not just the 10 percent we represent of total spending. Diabetes is a good example. Although we have the pharmacotherapy and the primary care intervenors, no one is connecting the dots back to the patient. Couldn't our sales reps do this? It's worth thinking about.

Jarmuz: It's true that value is a function of good scientific information that physicians and patients can act on. But there is a disconnect, because the industry is increasingly handcuffed and muzzled in terms of just what it can say. Right now the lawyers are running the show to minimize risk. Marketers' promotional options are being limited due to REMs and the Sunshine Act requirements. And there is a lot of push back from regulators, professional advocates, and the public as to what value a therapy is bringing to patients and the healthcare system.

Looney: Can't the service model evidence better outcomes simply by example? Isn't the better metric a satisfied customer who likes to work with you?

Truitt: A good distribution partner can perform miracles in the relationship with payers. You need a partner who can monitor the whole transaction with the patient. This by itself tends to foster positive outcomes because it enhances the patient experience. We've worked with a number of big distributors who provided "hub services" that track the contact with the patient from the initial visit to a physician and the prescription. They coordinate specialty pharmacy outreach to make sure the patient adheres to therapy. Although the service is expensive and reduces our margins, it is worthwhile because the payers are happy and we raised our positive profile with patients. We demonstrated improved outcomes—increasing the volume of scrip as patients stay on therapy longer.

Bedford: Having patients advocate for you is priceless. They like to be engaged and educated—and a compliant patient is a customer for life. It matters little for profitability in the long run that margins might be slightly lower. These programs are really about protecting and differentiating the brand while improving patient outcomes.

Reform redux

Looney: Is US health reform—the Affordable Care Act approved by Congress in March 2010—a real game changer in how the industry grapples with the issues of delivery and value we have been discussing so far?

Flaiz: I don't see it as a revolution. The law impacts the commercial insurance model, not how healthcare is delivered. We will see a potentially large increase in the insured population.

Jarmuz: Reform has exposed the large excess capacity in the health system and hence there is a rush to consolidate to become more competitive and efficient. In addition, to better manage risk and bring more value to patients, there will be acceleration in the development of Integrated Delivery Networks or more comprehensive systems of care.

Truitt: More people in the system means stretched budgets and rising outlays for care. The response over time is likely to be a transition to the Veterans Administration [VA] procurement model: send in your bids and the winner takes all. Of course, this will have an adverse impact on margins. So one of the scenarios we are looking at is the cash market for medicines, where you dilute the impact of government reimbursement by asking some patients to pay most or all of the cost of a new drug, out of pocket. This is the case in China. There is a choice between listing on the essential drug formulary or taking your chances on patients with the means to pay on the cash market—culturally that is still acceptable in China, but here it may be different. Nevertheless, there is a complementary trend toward "concierge medicine," where physicians elect to limit the number of patients they see in return for charging rates higher than provided through group insurance plans. It's something that at least has to be considered.

DePinto: It's rash to be complacent about anything related to reform. The scenarios are endless because the legislation emerged from a very partisan political process, which may affect how the Supreme Court rules on the constitutionality question. And we still have a disenfranchised healthcare system. I was a stone's throw from the White House where I was witness to any number of homeless people, all smoking cigarettes. Their problems are not being addressed.

Bedford: Putting aside the politics of reform, we know that half of the spending on Medicare and Medicaid is for chronic conditions related to obesity. This is the biggest unmet medical need and it cannot be resolved solely by administering a drug.

Going global

Looney: Discussion so far has reinforced the importance of the US market in providing the subsidy necessary to maintain the momentum of discovery and innovation. What about the rest of the world? Are the emerging markets likely to provide a recourse against declining margins in the mature countries, including the United States?

Lisa Flaiz

Truitt: It depends on the disease. I can cite our own commercial model built around hepatitis C. We have a potential market of five million patients in the United States; in China, it is 50 million. Even on a cash adjusted price basis, the emerging markets are very attractive. The caveat is you need to do your homework, especially around IP.

Floyd: Europe is becoming a very tough market, not only on reimbursement but also due to the high hurdles being placed on the information and evidence required to secure registration. The new German approach is basically being applied to the whole of Europe: an applicant must prove differentiation against current therapy, as well as safety and efficacy. More important, proof of efficacy must be periodically updated, to certify continuing medical need. This introduces a lot more uncertainty to what was formerly a one-time, go/no go decision. There is an obligation to initiate studies that demonstrate the drug is maintaining its efficacy; otherwise the price might be lowered. The United States is going to be the only large market remaining where you can get something close to your desired price, but even here the cost of doing that is trending higher. This explains why Big Pharma is so interested in assets of the smaller biotechs, because they have the science and data needed to keep the evidence stream maintained and up to date without being encumbered by Big Pharma bureaucracy.

Looney: Is the US still ahead of the game in serving as the preeminent source for innovation? Does everyone still want to be here first?

Jarmuz: People drive this industry. You'd have to look hard to find anyone with money and resources outside the US who did not send their children to be educated in the US. The interesting trend is that whereas these freshly minted scientists and engineers once chose to stay here and contribute, many are going back home. Unless we apply creative strategies to retain scientific talent, this trend will continue especially as emerging economies develop their own pharma and biotech industries.

Robert Bedford

Mack: Tax policy is neglected as a driver of innovation. US policy is outdated and we are less competitive compared to the rates set by Ireland and other countries. There are massive funds waiting overseas to be repatriated. Taxation is critical to a small company like mine. We located our R&D and manufacturing base in Florida because the state made it feasible with tax concessions.

Collins: The United States remains a magnet for innovation because the pricing is appropriate to the level of risk. Assurances that this will continue to be the case are beginning to sound doubtful. The game will change completely if the federal government moves toward the introduction of price controls. The climate can change literally overnight.

Trombetta: I'd like to see our polling firms pose two questions to the public. First is would you pay a bit extra to obtain a drug that was manufactured entirely within the United States, so that its safety is certifiable? Second, would you also pay a bit more for all your medicines to ensure that more jobs in the industry would go to Americans? I am not sure what the answers would be. But right now the messages coming from Big Pharma about jobs are all negative: more than 200,000 US jobs eliminated over the past nine years, with dozens of plant closings to boot. What a breath of fresh air it would be to reverse that to where the industry is actually saying "we are bringing jobs back, because quality begins here."

Stage next: What's needed to succeed

Looney: In light of what we have been discussing, what are the most "mission critical" functions a drug company will need to compete effectively in the years ahead?

Bedford: Sales and marketing must be given close scrutiny. Mobile technology solutions can be applied to make the spending on promotion much more efficient. The accessibility of this technology is a game changer for the company that gets it right. Some 90 percent of cell phones are always within 10 feet of the user. The technology is shrinking and becoming more portable, from laptop to iPad to iPhone, and at each stage it becomes easier to make useful information instantly accessible. To access targeted physicians in real time with appropriate promotional messages—there is nothing more user friendly and efficient than that.

DePinto: The common thread in today's discussion is cost as applied to outcomes. And the elephant in the room is patient out-of-pocket costs. The patient burden is going to be higher. Analytic functions that can make sense of what the patient gets for their involvement in paying for care will be very important.

Floyd: Regulatory expertise has to be made strategic. The process has become numbingly complex. Just look at the new PDUFA V legislation. For years the industry pushed the view that success meant a shorter review timeline. Now we are coming to the realization that shorter timelines just gives us a faster "No." What we are essentially asking for now—and hopefully getting—is a slower "Yes," with extra time tacked on to get a better read on the safety profile. That's how the stricter risk benefit calculation kicks in. We are going to live and die by the credibility of our product data. It all starts at the bench, with the science and the innovation. Without it, we have no leverage to negotiate.

Collins: Patients are going to be far more assertive in seeking the right healthcare choices. The industry has to be technologically savvy in responding to their growing awareness about different options available to address their conditions.

Flaiz: Technology is going to drive the future of drug marketing. Data will be available to link all the brand stakeholders around a differentiated, customized message. Likewise, marketing will have to be purpose-driven, focusing on how a brand contributes to better health outcomes. If you invest in the total health solutions approach, the profits will come because the system is going to be geared to proving a wider health benefit from any intervention.

Looney: What are the skills that executives will need in this new environment and is the pool of expertise sufficient?

Truitt: Diversity and flexibility are important attributes for anyone working in the pharma space. My company seeks people with broad backgrounds and a track record of trying different assignments.

Floyd: There is a dearth of skills coming down from Big Pharma to the smaller firms. It's because of the niche role that the large global companies force on their employees. The result is that many positions are akin to commodities—good for one function, with too many people doing it. Instead of the stereotypical pedigree, what the business truly needs in the years ahead is versatility and transferable skills.

Bedford: Our business also benefits from those with experience in other industries, particularly in finding new ways to engage the consumer. The problem is the regulation in pharmaceuticals tends to frustrate marketers with those skills.

Jarmuz: The challenge to me can be framed in a single question: How do we grow future leaders that haven't had numerous rotational assignments in all the key functional areas, and may have spent 20-plus years working for one or two companies?

Robins: Executives in today's environment must be skilled at leading their own organizations through change, especially when the magnitude and pace of change is expected to increase.

Looney: Finally, as the bookend that binds back to our start today, I'll ask Professor Sillup to sum up.

Sillup: There are five enduring themes that marked this discussion and will serve as our perspective on what matters for the future. Finding, demonstrating, and communicating value, with a focus on outcomes. Partnering with a wider circle of stakeholders to solve complex problems. Identifying your core competence and prioritizing around it. Spending more time on functions and process as a source and driver of innovation. And, last, building a talent base centered on broad-spectrum expertise.