New Playing Fields

For the past 20 years, the blockbuster model has dominated the pharmaceutical industry. It has generated tremendous value for companies and shareholders and will likely continue to do so well into the future. That business design matched Big Pharma's expansive product development and marketing investments with the ample supply of opportunities for benefiting large patient populations and allowed an unusually large number of players to succeed in the high-stakes game. Not all companies can continue to win that game, however, so new fields of competition will be needed.

This article describes four emerging arenas now challenging the broadbased success of the blockbuster model and approaches that some pharma companies are taking in response. (See "New Game, New Rules," page 90.)

Last year, 20 companies produced at least one product with global sales greater than $750 million, and eight companies had three or more such products. Bolstered by that level of sustained performance, investors have great expectations for the future, as reflected in current stock valuations that anticipate a continuing revenue and earnings increase of 15-20 percent a year.

Challenges to the Blockbuster

But to meet those expectations, the pharmaceutical giants must now address a new challenge. Decades of biotechnology and genomics research have generated a flood of therapies that strain the gates of the drug development and marketing system.

During the next decade, pharma is likely to become more like other contemporary industries, which have fewer top players. Successful companies from those industries have business designs that deliver unique products and services, making them stand out in the eyes of customers, suppliers, and investors.

Consolidation raises the stakes for pharma companies that continue to use the blockbuster model. Some will surely continue to flourish, but by necessity or choice, others will change the way they do business and generate value. The leaders of those companies must master a new discipline-business design-and do it quickly. Following is a brief description of new competitive arenas that represent opportunities for revamping marketing approaches.

To win in this emerging playing field, companies must excel along three dimensions. First, they must target messages more closely to the needs of individual physicians. Second, they must understand the media that target different types of physicians most effectively and tailor their marketing efforts accordingly. And third, they must recognize the influence of the entire range of decision makers-providers, patients, pharmacists, nurse specialists, and third-party payers-and address the concerns of each.

Share of Mind

All of those objectives demand a deep understanding of constituent needs. Many new tools are available for communicating with key groups, and the best companies will devise systems for trying new approaches, evaluating the effectiveness of each, and fine-tuning those that provide a significant economic return.

The ability to effectively communicate benefits to doctors and other decision makers is, of course, fundamental to the strategies of leading pharma companies. Doctors try to keep up with the panoply of emerging treatments, but industry marketing efforts strain the limits of their time and attention. In the second half of the 1990s, the number of pharma sales reps increased at an annual rate of nearly 20 percent, but the number of physicians remained relatively flat. (See "A Tougher Sell," page 92.) It's no surprise that doctors-directly and through the policies of practice groups, hospital committees, and HMOs-are less willing to spend time with reps. Competition for their attention will remain fierce as the number of products, sales reps, and patients expands.

In the future, companies will need to execute traditional practices flawlessly and adopt innovative approaches. They must augment leadership in sales-force effectiveness, physician targeting, and physician relationship management with a range of new tools that focus on the priorities and media preferences of therapy decision makers. Examples of new approaches include:

E-detailing. One form of e-detailing allows doctors to sign up for "e-visits" in lieu of face-to-face encounters. Companies, including Eli Lilly, AstraZeneca, GlaxoSmithKline, and Bristol-Myers Squibb, provide the necessary equipment, and doctors agree to receive a pre-set number of digital sales calls as well as access to medical information and patient education materials.

Addressing messages to other healthcare professionals. Limitations on the ability to communicate with physicians have led companies to reach out to other healthcare decision makers. Eli Lilly's launch of Humalog prefilled insulin pens included training not only for physicians but also for nurses and certified educators who treat large numbers of diabetics in doctors' offices.

Reaching patients and their caregivers. As DTC matures, many companies are addressing both patients and their primary caregivers, using everything from broadcast TV to targeted online channels. Pfizer and AstraZeneca have developed parent-oriented locations on their websites to address questions and concerns about important pediatric products such as Pfizer's antibiotic Zithromax (azithromycin) and AstraZeneca's asthma treatment Pulmicort Respules (budesonide).

Communications exchange. Given the difficulty and importance of communications, it has become common for top companies to trade on their capabilities by marketing other companies' products. Merck took that approach when, in the 1980s, it developed a relationship with the Swedish company Astra in which Merck agreed to lend its access and communication expertise to the US commercialization of Astra's products. The companies' joint venture, Astra-Merck, soon guided Prilosec (omeprazole) to the position of the world's best selling pharmaceutical.

Companies such as Pfizer and Bristol-Myers Squibb also plan to continue trading on their effectiveness as communicators. In recent years, Pfizer and BMS have received more than 30 percent of their revenues from products discovered by other companies. Because of the growing integration of professional and consumer communication networks, partnerships in the next decade will be driven more by global marketing effectiveness than by expertise in local markets.

In 2000, pharma companies enrolled more than 600,000 US patients in clinical trials. That number is likely to grow as the number of pharmaceuticals under development rises, requiring more resources to recruit both patients and investigators. Many companies already recognize some of the challenges posed by the growing number of treatments approaching trials and the rapidly rising number of participants, but they must also be aware of the effects that intensifying competition for patients and investigators will have on availability and cost. The challenges will be especially great in markets where several companies develop therapies, often derived using biotech methods, that target less prevalent diseases and conditions.

Clinical Challenges

To date, companies have responded to such problems by spending more on advertising and stepping up investigator recruitment. Those traditional approaches, however, are becoming more costly and often yield unacceptable trial-recruitment time frames.

To win in this arena, companies must find new business designs--from inside or outside the industry. Many companies have begun to use customer relationship management programs to identify potential trial participants more quickly.

They are also conducting trials in more locations to expand the pool of potential patient participants. That global initiative was evident in Merck's Vioxx (rofecoxib) trials, for which it enrolled more than 8,000 patients in 40 countries. Merck now conducts approximately 35 percent of its clinical trials outside of the United States.

At the same time, many innovative startups are bringing Internet tools to bear on the problem. Whether the solutions come from incumbents or upstarts, it is clear that value will flow to the companies that develop the most effective recruitment programs, because faster, more efficient trials extend products' patent-protected time on the market. More important, companies that can effectively navigate that development challenge will become increasingly attractive partners for biotech and academic researchers who discover novel compounds.

In 1999, more than 60 percent of patient visits to physicians resulted in a prescription, and 2.5 prescriptions were written for the average US senior citizen per month. To meet the industry's revenue targets, the number of new prescriptions in the US market must rise about 10 percent a year, which means that the number of prescriptions written must double every seven-and-a-half years.

Compliance Conundrum

If the market were to meet that projection, seniors would be receiving five prescriptions per month by 2006 and ten by 2013. But are such expectations realistic? Instead, consumers may actually grow more resistant to taking or paying for the next new thing as their therapeutic regimens become increasingly complex.

More advertising is only a partial answer. Pharma companies spent nearly $2.5 billion on direct-to-consumer advertising in 2000. In most instances, their efforts focused on raising awareness of innovative therapies, encouraging consumers to review options with their doctors and building familiarity with brand names in crowded therapeutic markets. But brand building is not enough.

A few companies have responded by changing their products. Many have reduced the frequency of dosages from several times a day to once daily, as in UCB Pharma's Ditropan (oxybutinin) for overactive bladder; Novartis' Dynacirc (isradipine), a calcium channel blocker; and Bristol-Myers Squibb's Glucotrol (glipizide), an oral diabetes medication. By doing so, they have improved patients' convenience and compliance, making their products more competitive in crowded areas.

Taking the concept to the next level, several companies have developed combination therapies, including Bristol-Myers Squibb's Glucovance (glyburide and metformin) and GlaxoSmithKline's pentavalent childhood vaccine. That approach limits the number of individual therapies a patient must take. And by combining a product approaching expiration with a new patent-protected product, companies can also extend the patent lives of the older products.

Other companies have adopted innovative delivery techniques. Pfizer and Aventis are currently in Phase III trials for an inhalable form of insulin designed to overcome the noncompliance resulting from diabetes patients' natural resistance to multiple daily injections.

Developing new formulations is a start, but companies also must gain a deeper understanding of their customers. Development teams will have to consider how new treatments fit into patients' overall therapeutic regimens. Areas of emphasis may shift as companies strive to maximize their products' relevance to consumers' health, and the ability to segment customers by needs, medical condition, and other factors will become one of the key differentiators in this area of competition.

For pharmaceuticals that treat chronic conditions, marketing teams will need to shift their focus from creating awareness to ensuring compliance. Merck recently launched a program introducing the bone mineral density measure to patients taking its osteoporosis therapy Fosamax (alendronate) to help them observe the progress of their treatment, because compliance generally rises when patients monitor their own progress. Better compliance, in turn, leads to more sales.

Top companies' competitive positions have long been based on their investments, processes, and good fortune in identifying effective compounds. With the advent of genomics, proteomics, combinatorial chemistry, and high-throughput screening technologies, both the opportunities and resources for discovering therapeutic candidates have increased substantially. As long as competition remains centered on the search for new compounds, investment in those technologies will continue.

Shift to Target Discovery

Yet even as opportunities for identifying new entities expand, a whole new field of competition is on the horizon. According to the Pharmaceutical Research and Manufacturers of America, the entire industry has, until now, focused on therapies that target a mere 500 proteins. But PhRMA now estimates that research on the human genome will identify between 3,000 and 10,000 addressable protein targets. (See "Expanding Targets.") The contest to identify and gain control over the targets with the highest potential value is perhaps the most obvious challenge.

Some companies have already begun to place their bets. One set of players is rapidly gathering legal rights to the genes themselves to obtain broad patents. (See "Patent Power.") Even though the US Patent Office has mandated that gene patents will be granted only if its function is understood, those companies could gain substantial control over all therapies designed to influence the biological mechanisms associated with the genes they are able to patent.

For the most part, Big Pharma has chosen to forego leadership in the race to patent genes. US Patent and Trademark office data show only GlaxoSmithKline, Novo Nordisk, and American Home Products are among the ten largest holders of gene patents midway through 2000. Most of the top companies are instead betting on relationships with biotech companies to gain access to the most promising targets.

Important recent examples of that strategy include Millennium's alliances with Abbott for the development of obesity and diabetes treatments and with Aventis for therapies addressing several other conditions. By taking such actions, integrated pharma companies commit to a strategy that emphasizes differentiation in commercial development and marketing capabilities.

The capital markets seem divided on what will generate the greatest return. Share prices for Big Pharma continue to soar despite the potential threat to their fundamental business design. At the same time, valuations for some new companies are reaching unexpected heights.

For the past 20 years, a large number of players based on the blockbuster business design have shared the bulk of the industry's value. Competition has centered on identifying and developing new therapies, and growth has depended on companies' level of investment and ability to exploit that model.

New Model on the Horizon

But future growth will depend more on companies' ability to overcome the new constraints and uncertainties presented by emergent arenas of competition. If pharma follows the patterns established in many other industries, differing levels of performance in those arenas will lead to a polarization of value between winners and losers.

According to Value Migration by Adrian J. Slywotzky and Profit Patterns by Slywotzky, et al., one company-at most, a handful-in virtually every industry is able to identify and implement a winning business design ahead of the competition. That company soon reaps the bulk of the profits while others stagnate, are acquired by the winners, or die.

A few large pharma companies will continue to prosper using the blockbuster model. They will adjust their business designs to successfully overcome the challenges ahead. But others can no longer rely on that model alone.

Novartis and Aventis recently announced they will modify their strategies and focus on particular therapeutic areas. They plan to raise their credibility with decision makers and better align development resources with customer priorities in target markets.

Other companies are explicitly moving beyond the blockbuster model in ways that emphasize the relationship with patients. Several are taking actions to maximize the value of new products with a business design that takes into account patients' entire range of healthcare needs and priorities. Some future leaders are likely to extend that model, building consumer franchises that link diagnostic testing, therapy selection, and monitoring of health indicators. Companies will be differentiated by the trust patients put in their offerings.

Whatever the outcome of those approaches, it's likely that much of the value in the industry will migrate to new business designs.

Although pharma companies, as a group, have been extremely successful using the old model, they would be unwise to ignore the limits now surfacing. In the long run, some are sure to lose.