The first (1985-2001) we’ll call Big Management. Give a set of smart managers lots more R&D resources and bigger commercial forces and they’d be able to outstrip their more frugal competitors, providing shareholders outsized returns because each new investment dollar would yield an incrementally greater relative return. Improved drugs, created on an industrial basis, would provide medical or convenience advantages which, aggressively explained to physicians and consumers, should uncover the untreated and convince the treated to switch or more consistently follow the medical regimen. There was also a managed-care angle to all this: McKinsey back in 1995 predicted in IN VIVO that a formulary could meet 95% of drug needs with just 247 products, 90% of which would be generic by 1998. Implication: consolidate and reduce redundant industry infrastructure…without reducing your own.
Model company: 1990s Pfizer: productive pipeline of primary-care follow-ons marketed by ever increasing numbers of reps hammering away with a simple message about a drug’s advantage.
Model drug: Norvasc, a me-too calcium channel blocker out of Pfizer’s own labs that replaced its in-licensed, genericizing Procardia XL.
Corollaries: the death of the mid-sized company (no way to compete in R&D or marketing); the land grab for genes and targets (since R&D can be industrialized, he who owns the biological substrate will dominate the new-product landscape).
Let’s briefly catalog why all that turned out wrong.
First, R&D couldn’t be industrialized. Too many miners broke their picks on the rockface of biology.
Second, while noisier marketing increased sales, it also meant doctors stoppered their ears more effectively (or simply closed their doors), dramatically reducing incremental sales from incrementally added sales reps. Worse, side-effects now evident in larger populations of pill-takers--implicitly assured in DTC ads of risk-free medicine--increased FDA’s trials and safety requirements and thus the cost and risk of clinical and regulatory efforts.
Now we’ve entered the era of Splinter Theory. Successful companies will shun simple-message primary-care programs and focus on products for smaller patient populations, recognizing the multiform nature of disease, with consultative selling efforts around complex medicines and treatment regimens. Any attempt at industrializing R&D will destroy the a-ha moments of discovery and, increasingly, development (identifying the right disease and the right subpopulation). Large sets of biological IP are far less important than pathway and medical understanding.
Model company: Genentech: productive pipeline of high-cost specialist drugs marketed by relatively small numbers of reps supported by major reimbursement effort).
Model drug: Herceptin, a therapy out of Genentech’s own labs only for breast-cancer patients with a specific tumor type.
Corollaries: Mid-size spec pharmas without research can profitably soak up the niche markets too small for Pharma. Big Pharma should break-up into smaller, independently traded units, to sink or swim on their own.
It is now nearly as common to hear from the prophets of Splinter Theory as it was to hear about Big Management in 1995. The latest variation comes from Deloitte Consulting (whose report you can get here). They identify – surprise! – a productivity crisis in the drug industry and go on to predict the rise of a new set of smaller, focused players who will beat the crap out of the nearsighted and flabby Pharmas who have shackled themselves with infrastructure to yesteryear’s failed blockbuster, primary-care strategies.
We too have been on the Splinter side of the argument for the last several years – see, for example, such past disquisitions on industry disaggregation here or here).
But unlike Big Management, Splinter Theory is getting damned little traction among the large drug companies. Big Management was easy for consultants and bankers to sell. “Spend more” is a nice way of saying “do more of what you’re already doing – but give yourselves bigger jobs and the salaries that go with them.” And as for acquisitions: they’re exciting, with a huge existing machinery to push them along.
Splinter Theory, on the other hand, is definitely unattractive. What CEO wants to run a smaller company (with a presumably smaller comp package)? Is there a head of R&D willing to cut his budget by, say, 75%, -- and then – depending on the variation of Splinter Theory in effect, either let external companies take on development responsibilities for key projects or spin them off entirely to separately traded specialty units? Meanwhile, what marketing boss will have the fortitude to start gutting his primary-care sales force in favor of a Genentech-style specialty model?
Instead, we have the odd situation of managers recognizing the failings of Big Management and the attractiveness of Splinter Theory – and trying to compromise between them. Take AstraZeneca. MedImmune has been left to manage itself independently. But not too independently – it ain’t trading independently, for example. “I don’t think the break up model works if you think that the strength of an organization is what matters,” AZ’s executive director of development John Patterson told our Melanie Senior, after hearing a discussion from a GlaxoSmithKline research executive on the virtues of disaggregation. Then again, if the strength of the organization matters – why manage the company independently?
We’re increasingly afraid that Splinter Theory will only reify itself into a real Big Pharma strategy only upon the catalysis of some sudden, exogenous event. We’d originally assumed that said event would be a private-equity attack on a drug company, with subsequent force majeur break-up. But the credit crisis put the kybosh on that one – acquisition debt costs too much. Also unlikely: activist shareholders. Instead, it looks like Big Pharma’s top brass will only move when Wall Street en masse abandons them for the “New PharmCos” imagined by Deloitte’s creative consultants.
But don’t hold your breath.
