How well is the pharma industry prepared for rapidly approaching industry upheavals? Not very, according to a 2002 global
survey on corporate early warning systems conducted by the Fuld-Gilad-Herring Academy of Competitive Intelligence. More than
100 managers responded, most of whom work in their companies' strategy, product management, or intelligence departments.
Although 77 percent say their companies anticipate an increased level of business risk in the next two or three years, only
2.6 percent claim to have a formal early warning process in place. The majority (56.4 percent), say their companies have only
some components in place, and more than 37 percent report they have no systematic process.
The survey, modest as it is, exposes a large gap in competitive preparedness. Nearly every manager sees one or more looming
threats just over the horizon, yet only a small fraction have done anything to see around the corner. This article describes
how pharma companies can implement an early warning system that will help them prepare for the future, no matter how it unfolds.
Despite deal making and some farsighted alliances and acquisitions, the industry has collectively neglected to anticipate
a number of significant shocks that have begun to erode its potency and future earning potential. Pharma companies involved
in producing AIDS drugs did not anticipate the moral backlash and media frenzy surrounding the provision of low-cost drugs
to Africa. Back in the early 1990s, many pharmaceutical companies did not believe that price controls were imminent in the
United States. They saw Hillary Clinton's failed attempt to rein in the healthcare and pharmaceutical industries and breathed
a sigh of relief. Nevertheless, price controls became a norm in Western Europe and Canada and are now one of the US public's
biggest concerns. Even if Congress hears some of Big Pharma's arguments, chief of which is that price controls will choke
cash needed for R&D investment, one outcome is definite: Change will occur. The decades-long US pricing policy status quo
is about to come to an end.
Tsunamis in Other Industries
At the company level, competitive blindness is the biggest reason managers fail to prepare for dramatic change. The blindness
is mostly self-induced. That is, managers are often unable to see the long-term threat or opportunity because of the way they
categorize it in their minds. An example of that competitive blindness expressed itself during a consultation with a US-based
This particular company has had a successful run with two of its treatments but is now encountering competition for the first
time. Suddenly, it is dealing with problems such as me-too products on the market, alternative treatments, generics, and pricing
pressure from managed care insurers.
When the product managers and marketers were asked, "How do you know when you need to learn about long-term threats (or opportunities)
or what those threats might be?" they weren't sure. So they were asked to examine and rate only two factors:
- the impact a particular set of events might have on their company and its bottom line
- how certain they were that the event would happen in the first place.
They were given a list of six events that might occur over the next few years and asked to apply the two criteria. Following
are three of the scenarios and how they rated the impact and certainty of those events.
- Generic forms of their leading drug will enter the market within one year after their patent expires: complete certainty and
extremely high impact.
- Technology development, new delivery technology, genomic lead discovery, and continued small-molecule development will replace
the need for their biotech solutions within 10 years: very uncertain but high impact.
- Medicare reimbursements for one of their key products will drop precipitously over the next few years: highly certain and
also high impact.
They quickly realized that they were dealing with two very different sets of problems. When an issue has both high impact
and high certainty, it means the problem or the opportunity is already here and needs to be dealt with. It is a tactical issue
that needs to be tracked with all of the company's resources—databases, heard-on-the-street information from salespeople,
news sources, etc. Price controls are one prominent example of a "high impact, high certainty, here now" problem.
When a coming event has high impact on the business but a great deal of uncertainty surrounding it, then it is a true long-term
threat or opportunity and is a prime candidate for early warning. Genomics, for example, hits this mark. Its role in drug
discovery and development has the potential to affect the entire pharma food chain. Yet, the uncertainty of where and when
genomics will have that impact makes it a perfect topic for early warning.
What makes an early warning process valuable is its ability to help a company avoid driving itself toward one specific outcome,
which increases its chances of being wrong. That's risk. Taking the time to sketch three or four outcomes—and plan strategies
that account for each outcome—gives companies a safety net.
Control Your Destiny
How will pharma executives deal with major upheavals when they arrive? Based on other industries that have recently experienced
tsunamis, the answer is that some companies will thrive on the changes, while others will end up fighting for survival. Unfortunately,
there are many examples of pharma firms waking up too late to do anything but to try to plug the dike.
The biotech tsunami—now over 20 years in its formation—has caught a number of traditional pharmas by surprise. Pfizer is one
example. By the late '90s, the company's pipeline had thinned, and Pfizer needed to fill it—at any cost. Instead of recognizing
the potentially long-term but less expensive biotech approach to developing future blockbusters, the company ignored the tsunami
and found itself up against a wall. So it paid dearly to acquire the blockbuster Lipitor (atorvastatin).
Another example is the HIV tsunami, which took a bite out of GlaxoSmithKline and others in recent years. Following Glaxo's
Zantac blockbuster of the '80s and '90s, the company saw the HIV market as a potentially explosive opportunity. What it and
others did not anticipate was the backlash from countries in Africa where AIDS had reached epidemic proportions and for whom
the high-priced drugs were out of reach. Political pressures from the United Nations and from other groups have forced companies
to deliver HIV-fighting medications at or below cost. A once promising blockbuster opportunity disappeared. Again, the AIDS
tsunami did not suddenly emerge; it was more than a decade in the making.
The war game difference. A few years ago, a large European-based pharmaceutical company that faced a competitive shock decided to run a war game.
Its blockbuster's patent would expire within the next 24 months, and having lived off the product for so long, the company
kept trying to find ways of extending its lifecycle through various formulations and patent-extending approaches.
Management began the exercise with the belief that they should acquire a new pipeline with the cash hoard from the blockbuster
product. They ended the exercise with a realization that the future would not be theirs to control. Even when the management
split into two isolated groups, the two teams independently came to the same general conclusion: A Big Pharma would either
detour around them by buying or developing the new products the company wanted to develop or would simply acquire the company