How Big Pharma Blew It
December 1 2004 by Chief Executive
For years now, Big Oil, tobacco and HMOs have pretty much held a monopoly in consumer loathing. But no longer: According to a recent Harris Poll, pharmaceutical companies have tied the big bad three as the industry that consumers love to hate the most.
In fact, opposition is coming from all sides. Politicians from both major parties regularly denounce the drug makers for their prices, their marketing and for blocking Grandma from buying inexpensive medication from Canada. New York State Attorney General Eliot Spitzer this summer charged GlaxoSmithKline, the second-largest drug company in the world, with fraud for not revealing the negative results of clinical trials that tested antidepressants on children.
Dozens of states have sued or investigated drug companies over their pricing tactics. In the space of just a year and a half, at least six books critical of the industry have been published, with titles like The Truth About the Drug Companies and The Big Fix. “You take Pfizer, you take Merck, you take Bristol-Myers, you take GlaxoSmith,” says Larry Bossidy, former CEO of Honeywell and author of the new book Confronting Reality. “All of them face the same challenges. They’re all looking down the same gun barrel.”
From Indiana to New Jersey to Basel, Switzerland, CEOs of Big Pharma scratch their heads at the outpouring of anger. How did an industry that makes Gleevec as a treatment for cancer, Fosamax for osteoporosis and Lipitor for cholesterol€¦quot;an industry whose products save people’s lives€¦quot;come to be so reviled? And what, if anything, can they do now to change that negative image? The giant drug makers and small biotechs, as well as consultants, economists and consumer advocates, point to causes that range from lousy PR to nasty battles with manufacturers of low-cost generic drugs to the flawed basic structure of health care in the United States. The biggest single point of protest is prescription drug prices, which have been soaring at far faster rates than the general cost of living. To some degree, the industry’s dilemma is the inevitable side effect of being a big, profitable business. But to a larger degree, the wounds are self-inflicted. “What the public is telling us is, €˜We love the innovation that you come up with, but we can’t afford it,’” says Sidney Taurel, chairman, president and CEO of Eli Lilly.
From the other side of the divide, Dee Mahan, senior policy analyst at the Washington-based consumer group Families USA, puts it this way: “It’s not like buying a Lexus€¦quot;it’s not something where you have a choice. People get angry because this is something that is critical that they need, and companies are raising the prices so much.”
Most people date the current problems to the early 1990s, when President Bill Clinton’s health care reform plan rode a tide of public concern about rising costs. At first, HMOs bore the brunt, but after they loosened their coverage rules, the angry eye turned to drug companies.
Some of that is convenience. These companies were obvious targets because they were big, they comprised one of the nation’s most profitable industries, and they were powerful players in Washington. And just around that time, a flurry of breakthrough drugs came to market, like Mevacor for elevated cholesterol and Prozac for depression, and new drugs are always pricier than older ones with generic competition. “It’s politically easier to point a finger at the small number of big pharmaceutical companies than at hospitals and doctors,” complains Ben Hohn, a New York-based consultant at The Monitor Group, who specializes in biopharmaceuticals. “People have a personal relationship with the doctor, and they tend to associate the doctor with the hospital.”
Daniel Vasella, CEO of the Swiss drug giant Novartis, notes that “it became pretty obvious in the late ’90s that the industry had a problem.” A decade earlier, he recalls, people reacted with sympathy when he told them he worked for a drug company. “Today, the reaction is generally cold.” Vasella and other industry defenders say a knowledge gap among consumers is partially to blame for their troubles. The economics of drug pricing and the relative benefits, they say, are intrinsically difficult to explain to the general public.
“People don’t realize the tremendous risks,” says Kenneth I. Moch, president and CEO of Alteon, a New Jersey biotech company that specializes in cardiovascular disease, diabetes and aging. “The only way to attract investors and capital is to have high rewards.” Based largely on controversial studies by Tufts University’s Center for the Study of Drug Development, the industry claims it costs over $800 million and takes at least 12 years, on average, to come up with a new drug.
Shot in the Foot
Still, the pharmaceutical makers can hardly claim to be innocent victims. Even some industry stalwarts cringe at the record:
- They filed multiple lawsuits, sought questionable patent extensions and made outright payoffs to generic companies in order to maintain their monopolies on expensive blockbuster drugs like AstraZeneca’s Prilosec for heartburn and Bristol-Myers Squibb’s Glucophage for diabetes.
- They plied doctors with fancy dinners, Super Bowl tickets and exotic vacations to persuade them to prescribe particular drugs€¦quot;sometimes going so far that they broke the law.
- As AIDS and HIV spread across poverty-stricken Africa, they refused to lower the prices of their expensive medications, claiming they didn’t want to set a precedent by ceding any intellectual property rights. When the companies finally gave in to public pressure, they did it in baby steps and had to be tugged again and again. “The HIV story is not a pleasant one,” Roy Vagelos, the former CEO of Merck, said in a 2002 interview. “Not coming up with a [discount or donation] program earlier was very damaging to [Merck's] reputation.”
After the Food and Drug Administration opened the door to pharmaceutical advertising on TV in 1997, the ad dollars poured in. The industry now spends some $3.8 billion on direct-to-consumer advertising that is almost indistinguishable from commercials for Diet Coke or Tide. The companies defend this as educating the public. But Mahan of Families USA says, “There is just too much. People ask, €˜This is where the R&D money is going to?’”
James Love, director of the Consumer Project on Technology, another advocacy group in Washington, points to another problem with TV commercials: “[The companies] lose the aura of the scientific organization. They come across as selling soap.”
On top of all that, baby boomers were starting to hit their 50s in the late 1990s, an age when prescription use rises dramatically. And boomers are a lot less likely than their parents to meekly swallow their doctors’ advice€¦quot;or expensive medicine.
As the bad headlines and bad feelings piled up, says Ira S. Loss, executive vice president of the stock-market research firm Washington Analysis, “I think the leadership was very slow to recognize the severity of the problem.” For an industry famous for its political clout€¦quot;it usually has more Washington lobbyists than there are members of Congress€¦quot;Big Pharma was politically tone-deaf to the PR disaster it was incurring by opposing a prescription drug benefit in Medicare for many years and blocking the purchase of low-cost drugs from Canada. “We were concerned more with explaining our point of view to opinion leaders and politicians than to the general public,” Lilly’s Taurel concedes. “That may have helped worsen our image.”
Self-Analysis: A Good Start
Boyd Clarke, a former marketing executive at Merck and now CEO of Neose Technologies, a Philadelphia-area biotech firm, muses: “I sometimes wonder whether Pharma has not gotten itself in a bad position by being so identified with the Republican Party that there is a great deal of difficulty in getting its message out in a nonpartisan context.”
Now the drug makers have started to catch on and have attempted to introduce change. Executives like Taurel, Vagelos and Pfizer CEO Henry McKinnell have been speaking out about some of the issues behind the industry’s lousy image. The Pharmaceutical Research and Manufacturers of America, the major trade group, in 2002 adopted tighter restrictions on marketing to doctors (though arguably these are still often ignored). After Spitzer’s lawsuit, Glaxo, Lilly and Merck announced they would make more of their trial results publicly available. Many people also praise Bristol-Myers Squibb for its public service ads featuring cyclist and cancer survivor Lance Armstrong talking about the importance of pharmaceutical R&D. And this fall Pfizer launched an innovative program to sell drugs at deep discounts to the uninsured and working poor.
But with prices still the highest in the world, TV ads blaring and patients complaining, Big Pharma obviously has more work to do. Merck’s recent recall of its blockbuster arthritis drug Vioxx, for serious cardiovascular side effects, has only added to the public cynicism, because the company had spent the prior three years pooh-poohing published studies that hinted at exactly those cardiovascular problems and allegedly trying to silence scientists who warned of the dangers.
The industry’s most common advice to itself is to do a better job of making the points about risk, reward and innovation that it claims the public doesn’t understand. Robert Essner, CEO of Wyeth, declared in a speech to the industry last spring that “too often our messages are aimed only at the head and are too easy to brush aside. We are most effective when we also aim our messages at the heart.” Actually, while CEOs may prefer the self-image of being too fact-oriented, most critics say the real problem is the opposite: The industry has to do more to get its message out with hard facts, rather than showcasing sexy athletes who use Viagra.
Advertisements should have charts showing how much the companies spend on R&D and marketing and how much they make in profit, suggests industry veteran Robert Ehrlich. As the marketing executive who launched the blockbuster cholesterol pill Lipitor at Warner-Lambert and who now runs a direct-to-consumer consulting company, Ehrlich knows how to craft an image campaign. He also urges companies to air more public service announcements about medical conditions and wellness in general, rather than just pitching particular brands.
Some experts say CEOs should be out there personally delivering the message. “It implies the importance the corporation attaches to the issue,” explains William W. McCutchen Jr., deputy chairman of the management department at Baruch College’s Zicklin School of Business in New York City. That would be a historic change for the industry. While hip, young, high-tech chief executives are all over the media, “there were not as many celebrity CEOs in pharmaceuticals,” says Alteon’s Kenneth Moch. “[The industry] was less oriented to consumer marketing, more intellectual and scientific.”
Politically, too, Big Pharma must change its M.O. It needs to choose its battles€¦quot;and when it can’t win, it should bow out gracefully, not grudgingly. The war against reimportation is already lost. So are the most egregious attempts to stretch out patents.
To skeptics, those suggestions are mere window-dressing. Just ask Abbey Meyers, president of the National Organization for Rare Disorders, an advocacy group for patients with diseases that affect few people, what Big Pharma ought to do, and she has one answer: “Lower your prices.” Even marketer Ehrlich offers that “a bold strategy would be, €˜Let’s cut our prices 30 percent.’” Not only would that solve the image problem, he contends, but it would also increase sales and possibly head off government price controls.
Is True Reform Possible?
If an across-the-board price cut seems too bold, then Ehrlich and others recommend that the manufacturers broaden their discount programs, which generally have been available only to the elderly poor. They could publicize the programs better, perhaps fatten the discounts, loosen eligibility rules as Pfizer did and set up a coordinated Web site. (A pilot site is being tried in three states.)
The problems with health care costs in the U.S. go beyond the bill at the neighborhood pharmacy. “There’s no way the pharmaceutical industry, as 10 to 12 percent of total health care spending, can solve the problem,” says consultant Ben Hohn. For example, a key issue in this year’s presidential election was expanding coverage to the approximately 45 million Americans without health insurance. Big Pharma CEOs could speak out about the issue and use all those Washington lobbyists to urge Congress to pass health care reform. The industry has a business stake in this debate, Hohn points out, because people with insurance can better afford to buy the medicines they need.
A growing number of thinkers believe it’s simply too late for the industry to reform. There’s a fair amount of discussion about radically splitting the whole development process, with biotechs, universities and independent labs doing the R&D and a shrunken Big Pharma handling only manufacturing and marketing. At the least, the giants are being forced to rely more and more on biotechs to churn out genomics-based drugs targeted to smaller markets. Meanwhile, almost everyone expects more government regulation. The conventional wisdom is that inevitably, despite President Bush’s opposition, the new Medicare drug law will be amended to allow the government to negotiate prices, and that will lead to overall price controls.
Of course, the ultimate solution is for the pharmaceutical companies to do what they claim they want to do: discover important new drugs€¦quot;real medical innovations, not copycat drugs or treatments for lifestyle problems. “We should not be focusing on our reputations per se,” says Vasella of Novartis. “The best thing we can do as an industry is to focus on our mission, which is to help cure patients and ease suffering.” Indeed, if drug companies unveiled a more effective treatment for Alzheimer’s disease or the holy grail of medicine€¦quot;a cure for any kind of cancer€¦quot;that could well be the best medicine for the industry’s ailing image.
Fran Hawthorne is the author of The Merck Druggernaut (John Wiley & Sons) and the forthcoming Inside the FDA (Wiley).