Cornell University Johnson at Cornell University

Business Roundtable

Rx for Big Pharma

By Shannon Dortch

Challenges facing the U.S. pharmaceutical industry got lots of attention and discussion at the Johnson School in summer and fall 2006, at a time when the industry continued to make news headlines, ranging from allegations of payoffs to forestall a generic launch, to large cash donations to congressional campaigns.

In June, Roche Group, Inc., of Nutley, New Jersey, hosted more than 60 students, alumni, and friends, for "The Business of Pharma." This was the fifth in the Johnson School's signature "Business of..." series, which brings pressing issues in business to the fore.

The program, titled "The Big Pharma Business Model – Can it Survive?" was moderated by Carolyn Choh Fleming '85, MBA '87, professor of pharmaceutical marketing at Saint Joseph's University. Fleming led the panel and audience through a discussion of the current big pharma model, opening with a discussion of its "broken" characteristics.

"Growth and profitability have declined across the board," she said.

Dennis Burns
Dennis Burns of
Roche Pharmaceuticals
"And the industry has created no new value in the past four years."

Waves of innovation in the 1980s and 1990s resulted in blockbuster drugs, which drove growth in the industry, said Sundeep Lal, MBA '98, senior director, external scientific affairs, worldwide licensing and external research for Merck & Co. "Your own successes are your worst enemy; a drug like Zocor is hard to repeat," Lal said. "The question is, can you have repeated blockbusters and repeated innovation?"

Panelists touched on poor public opinion of the pharmaceutical industry, citing both direct-to-consumer advertising and the high cost of some drug therapies. "Our industry had tarnished its reputation, and we mostly have ourselves to blame," said Dennis Burns, vice president, global head of business development, pharma partnering, for Roche Pharmaceuticals. "Direct-to-consumer advertisements sometimes trivialize the mission of our industry."

The implementation of managed care also contributed to consumer dissatisfaction with the pharmaceutical industry, as patients began paying a larger portion of their health care costs, said William Heiden MBA '87, president and CEO of Elixir Pharmaceuticals, Inc. "One of the drivers is the shifting burden of cost, which increased patient awareness that medicine is not free."

The panel was rounded out by Thomas S. Loane '67, MBA '68, vice president and CIO of Teva Pharmaceuticals, one of the world's leading producers of generic pharmaceuticals.

"I feel like the goalie from Harvard in Lynah Rink," Loane said. "I'm here to keep the branded companies honest."

Business of Pharma panelists at Roche Pharmaceuticals headquarters (from left to right) Thomas S. Loane '67, MBA '68, of Teva Pharmaceuticals; Associate Dean Joseph Thomas; Carolyn Choh Flemming '85, MBA '87 (front); Dennis Burns of Roche Pharmaceuticals; Sundeep Lal, MBA '98, of Merck & Co.; and William Heiden, MBA '87, of Elixir Pharmaceuticals
Business of Pharma panelists at Roche Pharmaceuticals headquarters (from left to right) Thomas S. Loane '67, MBA '68, of Teva Pharmaceuticals; Associate Dean Joseph Thomas; Carolyn Choh Flemming '85, MBA '87 (front); Dennis Burns of Roche Pharmaceuticals; Sundeep Lal, MBA '98, of Merck & Co.; and William Heiden, MBA '87, of Elixir Pharmaceuticals
In September, Johnson School students, faculty, and friends picked up the "Big Pharma" question again, when Robert Essner, chairman and CEO of Wyeth, one of the world's largest pharmaceutical companies, delivered the Lewis H. Durland Memorial Lecture in Sage Hall. Earlier in the day, Essner met with the student-run Healthcare and Biotechnology Club for an intimate roundtable discussion on the pharmaceutical industry.

Like the panel at "The Business of Pharma," Essner didn't shy away from the complexities of his industry, nor from the role it has played in its own troubles. In his address, "Permanent Whitewater: Leading Through Challenging Times," Essner candidly addressed the challenges and future of the pharmaceutical industry, from his perspective as CEO of $19-billion player.

As a 30-year-veteran of the pharmaceutical industry, Essner has observed it evolve from a placid, credible business, to one operating in an environment of economic turbulence and often public hostility. He noted that many changes in the industry are, ironically, due to the attention it has garnered through its astonishing breakthroughs in discovering and commercializing treatments for diseases previously untreatable or requiring radical surgery. For example, drugs such as proton pump inhibitors have largely eliminated the need for emergency ulcer surgery, while rheumatoid arthritis patients, once headed inexorably toward physical incapacitation, now can maintain a good quality of life.

Carolyn Choh Flemming '85, MBA '87
Panel moderator Carolyn Choh Flemming '85, MBA '87
"Today, modern medicine is enabled by drugs," he said.

Yet along with these successes has come greater scrutiny from the government agencies, elected officials, insurance companies, and consumers themselves, who object to the cost of "blockbuster" drugs and to companies' aggressive marketing of them directly to consumers. Add to that highly visible drug-safety issues and recalls, and the industry continues to find itself in the public hot seat.

The failure of the industry to diffuse public hostility, despite its role in easing suffering, largely lies with its own management, Essner said.

"Many executives came from within the industry, and they were better at talking than listening," he said.

Durland Lecturer Robert Essner of Wyeth
Durland Lecturer Robert Essner of Wyeth
"Health care is profoundly important to people, yet we justified why we were correct, without responding to the fact that health care is a gut issue."

Essner's lecture and the question-and-answer session that followed are available at our video archives.

The student-run Healthcare and Biotechnology Club brought the next round of industry dialog to Sage Hall in November, with its sixth annual Healthcare and Biotechnology Symposium. William Heiden, MBA '87, returned to the podium to open discussion on deal-making in the pharmaceutical industry.

Future deals will line up along a newly developing bifurcation in pharmaceutical research, Heiden said. Small companies will specialize in the research and discovery aspects of drug development, while big pharma companies will focus exclusively on clinical development and commercialization.

"Research and discovery is the art of the industry," Heiden said. "It's very creative and needs to be conducted in an unstructured environment."

In contrast, he observed, the world's largest pharmaceutical firms are well-equipped and highly experienced in running clinical trials, and in operating within strict regulatory guidelines.

Heiden predicts deal-making between large and small drug firms to accelerate in the near future, as large companies aggressively court smaller ones with promising compounds in development, partner earlier with them, and even establish internal venture capital groups to invest in smaller companies. Expect these small cash-hungry firms to enter deals early, but hang onto the U.S. rights to their compounds.

"Big Pharma knows there is an innovation shortage," Heiden said. "They know they have to run, not walk."