PHARMA: The Industry Veteran, on what the Vioxx verdict means

After too long an absence, The Industry Veteran is back to tell us what's really the problem going on in big Pharma. It's that short-term thinking has invaded its strategic marketing. I remeber being at a meeting in 1998 where then consultant and now big cheese at United Healthcare Bill Whitely warned pharma clients about becoming so keen on being consumer companies, and I think the Veteran would agree. Here's the Veteran's restrained tone (and I'm not kidding this time!)

A recent piece in a UK newsletter got me to thinking about some implications of last week’s Vioxx verdict. The newsletter contends that the core of Big Pharma’s problems began in the 90’s when marketing rather than research began to direct the industry’s course.  I would draw some other implications from the Vioxx scandal. 

First, Merck’s malfeasance amply illustrates an argument I have made elsewhere on THCB: the Bush/Right Wing goal of an unregulated market for pharmaceuticals and most other aspects of healthcare remains delusional. Contrary to hosannas from market true believers, sick people either lack the time or the repose to make rational, profit-maximizing choices. Even if they possess such detachment, the asymmetry of information operating against them militates against rational, well informed choices. Moreover, consumers-patients have no idea of the bundled cascade of services or costs that follow from their choice of, say, a doctor or a hospital.   

A second lesson of Vioxx is that many other parties must share some blame with Merck for furthering the promiscuous overuse of COX-2 inhibitors. Physicians and their professional societies now proclaim in high dudgeon that they were unduly influenced to overprescribe the COX’s by pharmaceutical sales reps, bountiful sample packs and deceitfully published articles. In fact their current wailing amounts to an admission that clinicians and their organizations failed to fulfill their professional responsibilities. For years the societies and the state licensing boards allowed physicians to complete their continuing medical education requirements by attending company-sponsored events. The manufacturers have been only too happy to relieve physicians of the need for footing the bill to keep up with advances in their  respective disciplines. Now the same physicians and their accomplices self righteously complain that they have been influenced by promotions. Do they honestly expect us to believe or empathize with their purported shock and outrage, expressed with all the sincerity and histrionic skill of WWF wrestlers?

The third-party payers also contributed to Vioxx’s 150,000 hearts attacks and 50,000 deaths. These organizations failed to scrutinize the COX-2 studies and placed those drugs on their formularies, often without even the disincentive of higher co-payment requirements. Their coverage of the COX-2’s was not merely a result of deference to physicians’ preferences or consumers’ demands as much as it was an acceptance of bribery. Merck, Pfizer and the other manufacturers offer competing rebates on their products, thereby reducing pharmacy benefit costs for the payer organization. In such cases the HMOs’ formulary committees and their pharmacy benefit managers eagerly swallow the manfacturer’s claims of efficacy and safety.

Contrary to Drug Researcher’s arraignment of marketing as the Vioxx culprit, I would claim that Merck and other Big Pharma companies practiced short-term gouging and exploitation that are the very opposite of smart marketing. Over the past 25 years the pharmaceutical industry has  enjoyed extraordinarily high returns on equity, assets and sales, often the highest of any global industry.  The American public has permitted the industry its enormous margins because of an implicit covenant. The pharmaceutical industry’s obligations under the agreement have included the following.

(1) The industry must develop products that the public perceives as substantially improving the length and/or quality of life by advancing, each decade, the standard of care in one or another disease condition. Pharma came up short here. The number of new molecular entities that have appreciably advanced the standards of care within the last 10 years has declined considerably. The research paradigm of medicinal chemistry has already “picked the low hanging fruit” and the public correctly perceives that the industry uses a considerable portion of its research budget to develop patent-extending knockoffs.

(2)  The industry must promote its products in a restrained, professional manner. This sotto voce element of the agreement went out with the trash in April of 1997 when industry lobbyists prevailed on Congress to permit direct-to-consumer advertising on a virtually unfettered basis. The restraint and scientific rigor befitting a research-driven industry conjoined to the medical establishment soon vanished. Big Pharma’s public face was no longer esoteric or dauntingly technical in a manner to command respect. Instead it began to advertise cholesterol medications with Dr. Seuss ads and southern football coaches. Pain relievers were promoted by ice skating champions and glamorous, middle-aged models doing tai chi in the park. The public can endure such fantasy and hyperbole when it comes to soft drinks or automobiles that sell good times and sex over the intrinsic features of those products. When Pharma stooped to the same lowest-common-denominator, however, its exalted image went out with the empty bottles of Pepsi.

(3)  The industry must not price its products beyond the reach of its core customers: the elderly.  Pharma’s lobbying group, the PhRMA, and its lackeys in the media (e.g., the Philadelphia Inquirer) still adamantly contend that Americans must pay double and triple the prices paid by Europeans and others to fund further research. For a while that argument maintained traction but the public now knows that Pharma spends considerably more on SG&A than on research while the total compensation of top executives runs from $30 million to $50 million a year. Of course the concurrent erosion of the wider, employment-based health care system has also helped take the veil off Pharma’s unconscionable pricing. As tiered co-payments became the norm, 28-year old mothers who purchase oral antibiotics for their children must now pay $20 and $30 for the same products that used to cost them only $5 or $10.

In short, Pharma has cooked its own golden goose by failing to meet expected standards for product development, by deceptively huckstering its promotions, and by using spurious rationalizations to overcharge its customers. That, ladies and gentlemen, constitutes the opposite of elementary marketing principles. Perhaps I might then differ with Drug Researcher by saying that Pharma has switched from a research-driven industry to one that is driven by bad and unethical marketing.