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PHARMA: Time to get Shakespearean at big Pharma? by The Industry Veteran

The Industry Veteran has been busy this summer, but luckily for those missing his unique view of the pharma world, he’s ba-ack. And in his purview this time is the whole issue of why Big Pharma is filling its top jobs with lawyers.

DICK: The first thing we do, let’s kill all the lawyers.

CADE: Is not this a lamentable thing, that the skin of an innocent lamb should be made parchment, that parchment, being scribbled o’er, should undo a man? Some say the bee stings: but I say, ’tis the bee’s wax; for I did but seal once to a thing, and I was never mine own man since.

Shakespeare, King Henry VI, part II: IV, ii

Late last week (July 26) Merck announced the promotion of corporate counsel Kenneth Frazier to succeed Peter Loescher as president, global human health, effectively making him the company’s chief operating officer.  Given Pfizer’s earlier decision to make their corporate counsel, Jeffrey Kindler, the CEO there, Frazier’s promotion means two Big Pharma companies within the past year have elevated lawyers to key, strategic positions.  The moves in both cases indicate the unwillingness of the respective companies to cleanly break from the unsavory and dysfunctional practices of their recent past.

By naming Kindler to the top spot, Pfizer’s board clearly desired a relatively inexperienced manager without settled attitudes toward the pharmaceutical industry.  As CEO it seemed apparent that he would move slowly and rely upon practiced hands within the company for guidance.  Kindler immediately acknowledged this when he promoted his rival for the CEO spot, CFO David Shedlarz, and publicly referred to him as his "right hand."  Such thinking among board members appears mystifying because if any pharmaceutical company requires fundamental changes to the economic model by which it conducts business, it is Pfizer.  Since the 1990s Pfizer led the industry in implementing the blockbuster, mega-company approach.  Under William Steere, an agile and precise thinker, the company grew and prospered with the strategy.  In the hands of his successor, the arrogant head of finance, Hank McKinnell, Pfizer’s capitalization declined by more than 30% while the rest of the industry ignorantly followed his long walk down a short pier.

Kindler’s claim to fame as corporate counsel consisted of his use of outside contractors to pursue foreign Viagra counterfeiters and harass them into ceasing their operations.  While serving as Pfizer’s legal counsel Kindler hired the former number-three man at the FBI to direct corporate security and together they retained companies such as the Blackwater Group, one of the largest US contractor in Iraq.  Blackwater, which maintains close ties with right wing religious groups in the US, performs the usual range of corporate security and sleuthing services.  It is also a mercenary army for hire that makes abundant use of stealth surveillance technology.

One example of Kindler’s failure to break with the blockbuster/mega-company approach appears in his dealings with third-party payers. 

As part of McKinnell’s Maginot Line strategy, Pfizer took the
attitude that it provides "premium products at premium prices" and
refused to deal flexibly with managed care organizations and PBMs. When
patent protection on Merck’s cholesterol medication, Zocor
(simvastatin) expired, Express Scripts (ESI), a leading PBM, took aim
at Pfizer’s number one product, Lipitor, by removing it from Tier 2
(preferred brands) formulary status.  That meant patients seeking to
fill Lipitor prescriptions were required to make higher co-payments
than for rival brands Crestor and Vytorin, while co-payments for
generic simvastatin were enormously lower or waived entirely.  After a
few months Lipitor sales started falling precipitously.  At its most
recent earnings conference, Pfizer reported second quarter Lipitor
sales in the U.S. fell 25% below the same period of last year.

In an effort to halt Lipitor’s decline, Pfizer’s managed care
operatives tucked their tail between their legs and went to Express
Scripts to offer rebates in hopes of restoring Lipitor’s Tier 2
status.  Some observers thought Pfizer had finally made its peace with
managed care but sources at ESI claim Pfizer came to the table kicking
and screaming about every issue in the negotiation.  For example, as
PBMs obtain higher margins on generic products than they do on brands,
these companies invariably seek to migrate patients to generics
whenever possible.  One means of accomplishing this consists of
approving the lower Tier 2 co-payment only after the PBM completes a
drug usage review for individual patients, a process variously termed a
step audit or step edit.  The PBM wants the brand manufacturers to
submit their rebates while permitting the PBM to conduct step edits
across the broadest range of circumstances.  Those manufacturers
reluctant to trade away price in return for volume, the key element of
the post-blockbuster paradigm, try to limit the step edit conditions
under which they will pay the higher rebate.  In the negotiations with
ESI Pfizer tried to limit step edit authorization to the lowest, rarely
used, Lipitor dose.  Pfizer’s position was a deal breaker as far as ESI
was concerned.  The Express Scripts people rose to their feet to leave
the negotiating room in St. Louis and Pfizer, in begrudging fashion,
began to back down.  ESI negotiators had to throw down the gauntlet on
virtually every aspect of the deal.  On the matter of step edits, for
example, Pfizer’s position revealed an entirely different attitude than
AstraZeneca, which had long permitted edits on every Crestor dose.

Contrary to Pfizer’s recalcitrance toward third-party payers, Merck
named insider Richard Clark as their CEO in May 2005.  Clark had
previously spent several years as a senior executive at the Merck-owned
Medco, the largest PBM, and a forward-thinking approach to payers
represented a major component of his turnaround strategy for Merck.
Within months after starting as CEO Clark named Peter Loescher from
General Electric as his president for global human health/COO.
Loescher was also an innovative thinker.  GE’s previous chairman, Jack
Welch, said at his retirement that he regretted not securing a
substantial position for the company in pharmaceuticals and health care
manufacturing.  The desire to pursue such an opportunity, in no small
measure, led GE to name the head of their diagnostic imaging division,
Jeffrey Immelt, as Welch’s successor. Immelt brought Loescher to
General Electric and the two of them spearheaded the acquisition of
Amersham.  Loescher’s intention to claim a leading spot in personalized
medicine eventually led him to leave Merck for the CEO job at Siemens
where he recently paid $7 billion to buy Dade Behring, a clinical
diagnostic company.

If Ken Frazier maintains a larger strategic vision for Merck,
outside of dealing with product liability lawsuits, it has not been
evident.  An old axiom in business holds that if there is one thing
worse than naming a finance guy as a manufacturing company’s CEO, it is
putting a lawyer in the top spot.  That is because success in
marketing, sales and overall growth requires aggressiveness,
innovativeness and swift movement; all these characteristics are
anathema to lawyers.  The ladies and gentlemen of the bar deplore
risk.  Their reflexes are defensive and their idea of innovation
consists of taking precedent in contract law and applying it to trusts
and estates.  In this respect Frazier’s promotion hardly seems
auspicious.

Other aspects of Frazier’s Merck experience raise more acute
concerns.  During several management regimes Merck has demonstrated a
tendency for succeeding CEOs to add various affectations to the
corporate culture.  New CEOs have tended to leave their predecessors’
affectations in place and merely add their own.  In his position as
corporate counsel, Ken Frazier has implemented many of these
dysfunctional affectations.

When Dr. Roy Vagelos ascended from R&D to head Merck, he added
an arrogant hauteur to the company’s culture.  In part this was based
on the knowledge of a senior scientist who was always looking farther
than other people at drug mechanisms beyond the horizon.  In Vagelos’s
case the attitude combined a Greek’s cheeseburger-cheeseburger
abruptness with the sarcasm of a Harvard-trained physician.  In the
1980s and early ’90s the arrogance at least held some objective basis
because Merck was still introducing the first products into new,
therapeutic sub-classes.  By the late ’80s as the arrogance permeated
out to the business side and down to numerous functional areas, it
became dysfunctional.  In 1994 Vagelos retired.

Merck then brought in Ray Gilmartin from Becton-Dickinson as the new
CEO.  Possibly because he knew nothing about pharmaceuticals, Gilmartin
left the arrogance in place while the head of R&D, Edward Scolnick,
became its chief custodian.  Gilmartin merely added his own
affectations to the culture and these were dysfunctional from the
start.  One such quirk consisted of a preening, self-righteous,
political correctness that, in many functional areas, fused with the
legacy of arrogance.  Another dysfunctional addition was management by
cronyism.  Brand managers, marketing analysts, long-term planners and
Merckers in most other functional areas were driven to distraction or
worse by the fact that decisions from top to bottom ran through
Gilmartin’s friends and relatives at the Monitor Group.  For years
Merck people would post aggrieved messages on the leading
website/gripesite for reps, saying in effect, "Who are these Monitor
Group clowns running around Upper Gwynedd and how do we get rid of
them?"  Alas, Gilmartin’s departure was the only way to rid Merck of
its own version of Halliburton.

Even before the Vioxx scandal hit Merck, Ken Frazier implemented
these dysfunctional preferences.  He accomplished this by placing
lawyers from the legal counsel’s office on all the teams and committees
that manage corporate operations.  Not only did Frazier’s lawyers sit
on the brand teams and the public affairs operations and vet all the
suppliers, but they also functioned as first among equals in these
groups.  Merck became the most lawyer-ridden company in all of Big
Pharma.  The effect of this upon line managers was to substantially
increase the amplitude of the double messaging they received.  On the
one side the lawyers admonished them not to do certain things and
threatened that violations constitute firing offenses.  On the other
side, senior management began to apply more pressure as R&D started
its productivity slide and Merck’s historically unimaginative marketing
led to share declines in several product classes.  Brand managers began
to feel that lawyers were tying first one and then both hands, even as
the message came down that if they can’t goose up sales, "we’ll find
people who can."  The fact that lawyers sitting atop a broad range of
operations labeled their restrictions as ethical guidelines also
induced a smug self-righteousness among a substantial percentage of
Merckers.

By making his lawyers the evaluators of potential service suppliers,
the cronyism was given sham legitimacy because bidders not tipped to
the secret, legalistic passwords and procedures were disqualified in
what amounted to a Potemkin village version of judicial review.  In
fact Merck’s marketing operations were no more ethical than anyone
else’s.  To meet their quotas, marketing and sales people had to
violate policies.  The managers were well aware of such routine
transgression but pretended not to know.  The entire organization,
under Frazier’s barristers, operated in the manner of a terror state.
People came to feel that they could be whisked off the street on a
whim, subjected to genteel water boarding, and cashiered for acting no
differently than anyone else.

The additional paperwork demanded from mid-managers by Frazier’s
lawyers contributed to burnout at Merck’s US headquarters.  Sixty-hour
weeks became the norm but the pace of action slowed to a crawl because
programs required a lawyer’s signature before they could proceed.
Morale did not improve when staff and line personnel remained in the
office until eight or nine at night, only to find that the lawyers
walked out the door at five o’clock, without exception.

In contradistinction to Merck’s US headquarters at West Point,
Pennsylvania, the global headquarters in Whitehouse Station, New Jersey
resembled neither the corrupt court of Louis XVI nor the terror society
of the Third Reich.  Perhaps a closer approximation was the predecessor
society of the Weimar Republic, urbane and well intentioned but
buffeted between cycles of inflation and depression.  Global HQ, of
course, does not directly run marketing and sales programs. Foreign
affiliates perform these functions while HQ supports and coordinates
their efforts. As a result of this relative detachment from direct
action, Merck never plagued Whitehouse’s operations with the grand
inquisitor lawyers.

Hyperbole aside, Ken Frazier is not a despot at heart or even a
banal evildoer.  A closer comparison is to Alberto Gonzalez and several
CIA directors: men who act with misplaced loyalty to psychopathic
leaders.  His appointment to head global human health may possibly
signal a positive trend.  The prospect exists that Clark seeks to
substantially strengthen the business development function, much as
Pfizer has done.  It is further possible that if such enhancement is in
the works, it represents a first step in a disaggregation of functions
and a movement toward what Oracle’s CEO, Larry Ellison, calls the
Hollywood model.  If Merck seeks to have small, independent companies
bring in new products at early development stages, a lawyer’s acumen
will be useful for structuring partnership, equity sharing and
financing relationships.

When Dick Clark first gained the top spot at Merck, under the
patronage of board member Larry Bossidy, formerly Jack Welch’s
number-two at GE, few people responded favorably.  Most thought Clark
would be an interim caretaker, following Gilmartin’s eleven-year
disaster.  Lo and behold, Clark quickly showed himself to be a
strategic thinker and an innovator.  It is possible that Ken Frazier
can provide a similar surprise, but only if he scraps the powdered wig,
especially the GE version of the lawyer as manager.

Ben Heinemann was GE’s corporate counsel under Jack Welch.  He built
a staff of more than 1,000 lawyers and left a legacy in which the
counsel’s office became a success factor alongside R&D, marketing,
finance and the other functions that typically drive big business.  In
most industries the approach is a recipe for disaster.  At GE Heinemann
enjoyed some success, in no small part because his political
connections in the Democratic Party (he was an undersecretary of HHS in
Jimmy Carter’s administration) helped him act as a lawyer-fixer.  In
pharmaceuticals the major devotee of Heinemann’s corporate lawyering
approach has been Kevin Sharer of Amgen, another ex-GE protege of Jack
Welch. The inside line in Thousand Oaks is that Amgen is actually a law
firm that derives its cash flow from biotech.  In recent weeks its
capitalization declined 50% from the end of 2006.  Jeffrey Kindler is
Heinemann’s most prominent epigone, having worked in the GE corporate
counsel’s office for six years. In short, Ken Frazier has several
directions from which to choose.

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Tom LeithJohn Irvine Recent comment authors
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Tom Leith
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Tom Leith

I am still digesting, but I’d like to ask: does The Industry Veteran think there’s anything wrong with this? The Express Scripts people rose to their feet to leave the negotiating room in St. Louis and Pfizer, in begrudging fashion, began to back down. ESI negotiators had to throw down the gauntlet on virtually every aspect of the deal. It simply sounds like a negotiation between relatively equal parties. Pfizer is trying to get the best price it can for a good drug, and so is ExpressScripts. I am glad to have a PBM negotiate for me — maybe I… Read more »

John Irvine
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John Irvine

Fantastic piece Veteran. Keep the analysis coming!! The two best lines IMHO: “If Ken Frazier maintains a larger strategic vision for Merck, outside of dealing with product liability lawsuits, it has not been evident. An old axiom in business holds that if there is one thing worse than naming a finance guy as a manufacturing company’s CEO, it is putting a lawyer in the top spot. That is because success in marketing, sales and overall growth requires aggressiveness, innovativeness and swift movement; all these characteristics are anathema to lawyers.” “The inside line in Thousand Oaks is that Amgen is actually… Read more »