PHARMA: Industry Veteran on Don Johnson’s ideas on saving Merck
Don Johnson at the BusinessWord blog had a long piece on how Merck might be turned around. I personally think that the cause is pretty hopeless, and that like many other once great companies, Merck will just have to accept its future shotgun marriage–although I think that the price needs to get a little cheaper before that happens. However, the Industry Veteran has a few ideas of his own about Don’s view of Merck, and as a Christmas treat to THCB readers, I serve them up for you, written in an open posting to Don:
Don–Your suggestions to Merck are provocative, wholly unrealistic, but at least amusing.
I don’t know if your suggestions to Merck reflect the frustrations of a market ideologue when confronted with actual corporate behavior, or just indicate someone who wants to see good corporate citizenship from Big Pharma but doesn’t know beans about the industry. In either case your list contains some laudable goals but their prospects for adoption are remote. Below are my comments on a few items in your list.
* Appointing a glamorous, articulate physician as CEO may make casual observers feel better, temporarily, but unless the person also knows the pharmaceutical business very well, he won’t be able to address the structural problems and strategic deficiencies that have put Merck in its current predicament. The Merck Board appointed a person from outside the industry in 1994 when they picked Gilmartin and he took the company to its present condition. More precisely, he failed to initiate changes to an organization that his predecessor left in precarious circumstances. Merck’s arrogantly chauvinistic approach to R&D was the lengthened shadow of the previous CEO, Dr. Roy Vagelos. When Gilmartin arrived at Merck, its haughtiness and financial statements during the boom 90’s concealed some major problems. As an outsider to the industry Gilmartin felt obliged to leave the cultural legacy and strategic approaches in place. Instead he merely added his own affectations such as a crippling political correctness and the ascendancy of the legal department. Gilmartin also outsourced virtually all organizational planning to cronies at the Monitor Group. The result brings to mind a line from an Ernest Hemingway story. Someone asks how a particular character went broke. "Two ways," he was told. "First gradually, then all of a sudden."
* Single pricing for the entire world won’t work. Too many countries will execute compulsory licensing (i.e., break patents). I’m not talking about just poorer countries in Latin America, Africa or Asia, but western Europe as well. Here’s where your naivete sets in. Don’t you think Big Pharma and its lackeys among American trade emissaries have tried getting tough with other countries? The Bush administration recently tried it with what they thought would be a compliant government in Australia. After all, they’re conservatives, they supported his decision to invade Iraq and they were looking for us to lower quotas and tariffs on their agricultural products. All political segments in Australia held firm and the PM issued a stern rebuke to the Bushies. If we couldn’t squeeze the Aussies for a fairtrade agreement, you better believe it won’t work in other places.
* The idea of trading away some premium pricing in return for volume guarantees sounds appealing, but Big Pharma is against it because they fear it will open to door to a single buyer (or Single Payer, as it’s commonly called) relationship. Most of the world lives with that sort of a system and, in many cases, their health care outcomes are better than ours (the WHO rated the US as 37th in the world), but the bloody shirt of "Canadian-style health care" will be thrown in the face of anyone who pushes your suggestion.
* Raising the regulatory standards to both protect the public and impose competitive entry barriers sounds interesting (although the libertarian in me feels a minor twinge), but here you’re really outside the loop of plausibility. Try suggesting tougher approval standards to any of the R&D fiduciary officers in Big Pharma companies and tell me if your wrist chronometer records tenths of a second before you’re shown the door.
* Now here’s where you really start operating in fantasyland. "Produce and sell drugs that will win in their classes and get rid of product lines that aren’t number one in their classes in cost effectiveness, safety and efficacy. Price accordingly. Call off the detail dogs, who aren’t trusted by physicians and, according to recent research, may be less profitable than conventional wisdom suggests." The Jack Welch stuff won’t work in pharmaceuticals because, unlike most of GE’s operating divisions, product development is extremely long and precarious. That’s why Pharma has developed an economic model where a competitor can hold fifth-place in ACE-inhibitor market share or fourth place in the statin class and still make a ton of money. If wishes were fishes…
* Now this idea of getting tough with the product liability trial lawyers seems clever: NOT. I wonder why someone else didn’t think of that. Actually someone did — it was the tobacco companies and you may remember how well it worked out for them. Given the number of Pharma researchers and investigator-physicians who feed information to Public Citizen, to plaintiffs’ attorneys and media reporters, how long do you think it will be before someone comes up with incriminating documents and makes the fen-phen damages look like chump change?
* You make some suggestions that do appeal to my libertarian side because their objective consists of evening up the asymmetry of information that exists between the Pharma manufacturers on one side and practicing physicians and patients on the other. It’s actually amusing when you advise Merck to sponsor a "prime-time consumer-oriented health and medicine talk show on MSNBC or CNBC. Allow physicians and consumers to ask questions and comment on blogs and message boards. No holds barred. Docs will watch and learn". That will be must-see TV when pigs fly. Some of your other suggestions actually seem biblical: Merck should cut its marketing budget and drug prices in half, help institutional buyers reduce inappropriate uses of expensive drugs and put easy-to-comprehend product comparisons on the Internet. And the last shall be as first and the meek shall inherit the earth.
My own suggestions to the Merck board are substantially more modest, less apocalytptic, but more likely to deal with the world as it is.
* Hire one of the usual suspects from outside the company as the next CEO. The Dutchman who ran Warner-Lambert and Don Hayden at BMS are two likely candidates. Have the new guy bring in his own R&D man and together they should go up and down the halls of MRI, West Point and Upper Gwynedd the way the Russians went through Berlin: house to house carnage, taking no prisoners, looting, pillaging, raping and humiliating along the way. Ooo, Ooo, "the delicate flowers" in R&D, as Richard Sykes once called them, may be offended and leave. Tell them not to let the door hit them in the ass. Confiscate their notes, hold on to the intellectual property rights, and after the security marshalls lead them out the door, hire other scientists to replace them. In case you hadn’t noticed, it’s buyer’s market out there.
* Eject from business departments the ignoramus, Ivy League MBAs who know nothing about the industry but feel they can comprehend the universe with spreadsheets. These people are holdovers from Vagelos’s era, abetted in politically correct fashion by Gilmartin and David Anstice. And while we’re at it, stop the kickback arrangements with outside suppliers that has made Merck’s self-righteous hypocrisy well known inside the industry years before Vioxx.
Hey, that’s just for starters. For anything more specific, Merck will have to pay. Of course the idea of Merck paying me to tell them that they’re such dumbf—s is also in the realm of biblical prophecy.