Thursday, April 01, 2010
A Mini-Case Study in The New Economics of Advantage
"Pfizer, the world’s largest drug maker, said Wednesday that it paid about $20 million to 4,500 doctors and other medical professionals for consulting and speaking on its behalf in the last six months of 2009, its first public accounting of payments to the people who decide which drugs to recommend.
Pfizer also paid $15.3 million to 250 academic medical centers and other research groups for clinical trials in the same period."
Interesting. So why is Pfizer acting so constructively? Because, well, the costs of not acting constructively just went up radically:
"A spokeswoman for Pfizer, Kristen E. Neese, said most of the disclosures were required by an integrity agreement that the company signed in August to settle a federal investigation into the illegal promotion of drugs for off-label uses."
There are a couple of very interesting points to note.
Pharma players "invest" in "relationships" with doctors to control their key distribution channels. And these numbers suggest, under the rules of industrial era capitalism, just what a great investment that was. For a few tens of millions, Pfizer reaped marginal returns roughly numbering in the hundreds of millions.
But that was yesterday. The costs of giving side payments to doctors just went up radically, now that regulators are on the offensive. Regulators are on the offensive, of course, because pharma is failing to create meaningful, authentic, thick value in the first place. Let's put that in strategic terms: the opportunity cost of creating thin value, today, is leaving yourself open to fiercer, more frequent, and more intense attack.
And that puts pharma on the back foot. The dominant business design has been based not on making radically more effective drugs - but on marketing yesterday's drugs more effectively; discovering new segments and markets, gaining exclusive access to them, and building patent thickets to deter rivals from entering them. That game's over. And it's not entirely clear what pharma's going to do about it. Now, for example, that Pfizer's disclosing it's numbers, the incentives for doctors to bid up the price of their (ahem) services are significantly enhanced.
The lesson? Simple. The price of protecting yesterday is creating tomorrow. Yesterday, pharma was built on an extractive advantage. Tomorrow, it must be built on a creative advantage.
"The price of protecting yesterday is creating tomorrow."
Killer, killer stuff, Umair.
// scott truitt // 3:36 AM
Umair, did something happen over at HBR? This looks like something you would post over there.
No problem, I was subscribed to Bubblegen before you moved almost all of your posts to HBR. Just wondering if you got some pushback from them or something.
// Bob Haugen // 12:30 PM
thx for the kind words, scott.
bob, everything's good at hbr - new post up today, in fact.
i just decided to start essentially sharing some of the notes i'm jotting down for my next book (and maybe an idle thought or two about interesting developments). hope you enjoy!!
thx for the comments, guys.
I have only started reading your blogs recently. Some really provocative and positive ideas here for someone like me who is feeling dissatisfied with the way business world is wolrking.
A specific question re your Pharma example. Does 'creative' go beyond new drug discovery to include distribution / sales etc.?
From my limited experience, the established channels are full of waste / excess cost at many stages. As the size of drugs comes down from Billions to 100s of millions, these costs need to be dealt with to generate thick value
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