From Managing Pills to Managing Brands

Most people in the pharmaceutical industry firmly believe that successful drugs are the result of breakthrough science. Drug companies have notoriously high R&D budgets, and the output of their new product development tends to be prolific. The Swiss drug giant Novartis, for example, has 166 projects under development. Indeed, a large proportion of the recent M&A activity in pharmaceuticals has been driven by a desire to expand the R&D pipeline. Everyone wants to bring out the next wonder drug. You might reasonably suppose, then, that the list of the world’s top-selling pharmaceutical products would abound with groundbreaking drugs. But you would be wrong. Look at the table “Rating the Pharmaceutical Hit Parade,” which shows the science classifications awarded by the U.S. Food and Drug Administration to the top-selling drugs in 1997. Although the drugs all passed the FDA’s tough criteria for acceptance, none received better than a “B” rating for the innovativeness of the science behind them. That means that none of them was considered a significant therapeutic improvement over existing treatments. It’s not that the science is weak. If anything, the science has been too successful. Heavy investment and increasing productivity in R&D are resulting in a proliferation of new drugs. That’s making it much harder for any individual drug to stand out on its scientific merits alone. What’s more, the proliferation is not sustainable. Each drug costs a fortune to develop and commercialize, and the need to set up new distribution channels, like direct marketing and the Internet, will only increase the costs, at least in the short run. On the revenue side, the presence of so many similar drugs and the increasing power of the customer are helping to drive prices down. So how should drug companies respond? An interesting precedent can be found in the fast-moving consumer goods industry. Consumer goods manufacturers have responded to product proliferation and falling margins by building strong brand identities in specific areas. Their strategic decisions are guided by marketing considerations rather than by product technology. As they adjust to their new environment, we believe the pharmaceutical companies will be forced to emulate both the focused strategies and the marketing savvy of their consumer goods counterparts. Focused Brand Strategies Recognizing that it takes a huge investment to build a successful brand, consumer goods manufacturers try to make their brands last as long as possible. Some consumer products—notably, Coca-Cola, Nescafé, and Persil (a European laundry detergent)—have stayed at the top for decades. That’s not to say the products don’t evolve, but the changes are presented as improvements and refinements rather than as breakthroughs. In the pharmaceutical business, by contrast, a new product is always given a new name. Drug companies believe that only by introducing a new name can you signal to the market that the product itself is new. Unfortunately, this approach throws out the company’s previous marketing investment entirely; it has to build a new brand with each new product. That may not have mattered when pharmaceutical companies could rely on a large, high-margin market for each drug they wheeled out. But in a crowded market with tightening margins, the new-product, new-brand strategy is becoming less and less feasible. We don’t believe that drug companies will have to compromise their reputations for innovation. They can resolve the trade-off between communicating a product’s newness and retaining the loyalty of customers by building a franchise around specific therapeutic areas based on a focused approach to R&D. In other words, their corporate brand can replace individual drug brands. A customer looking for a treatment for allergies, for example, would not look for Claritin but for the latest Schering-Plough medicine. Marketing Savvy Consumer goods companies are marketing powerhouses. They base all their product development decisions on their marketing priorities, and they are swift to embrace new channels for communicating with and distributing goods to their customers. Drug companies need to move in that direction as well, and there are signs that some are already doing so. At Pfizer, for instance, a member of the marketing department always heads each product development team. Such close cooperation between marketing and R&D has helped Pfizer pull off some remarkable coups. Take its success with Zyrtec, an antihistamine that may produce drowsiness in some of its users. That potential side effect put Zyrtec at a disadvantage because substitute products are available that are less likely to make users sleepy. But rather than compete on price, Pfizer’s marketers turned the disadvantage into an advantage. Drowsiness, they pointed out, reduced itchiness and increased the likelihood of a good night’s sleep—big concerns for many allergy sufferers. It is probably no coincidence that the CEO of Pfizer rose from the marketing department. Pharmaceutical companies also need to learn how to use popular media and the Internet to reach their consumers. That’s starting to happen in the United States, where TV and print ads have boosted the market share of many drugs, including Merck’s cholesterol-lowering drugs Mevacor and Zocor. But most drug companies have a long way to go to build the kind of marketing skills that are taken for granted in the consumer goods world. Better Science It may sound paradoxical, but adopting a marketing-led strategy is likely to improve rather than weaken the quality of a company’s science. Companies focused on particular therapeutic areas will be able to attract the best brains in those areas because they can offer appealing careers to highly specialized scientists. That’s going to increase their likelihood of developing truly innovative products. Greater specialization may also help companies profit more from chance discoveries by lowering the barriers to collaboration. A company that specializes in heart disease doesn’t compete with one specializing in diabetes. So if the diabetes company stumbles across a patentable drug for say, angina, it will be happy to license the idea to the heart disease specialist. Warner-Lambert, for example, co-markets its anticholesterol drug Lipitor with Pfizer. Even when the companies were locked in a takeover battle, the co-marketing arrangement helped to turn Lipitor into a blockbuster in record time. Launched in 1997 as the fifth drug of its type on the market, Lipitor’s sales in 1999 were projected to surpass $ 3.6 billion. Heightened competition in health care is creating big challenges for the pharmaceutical industry, and many companies fear it will threaten their capacity to undertake basic research. We firmly believe, however, that the companies prepared to improve the marketing of drugs will also become better at the science of drugs.

From Managing Pills to Managing Brands

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