If you look at pharma's pipeline, you'll see that personalized medicine is powering drug development. Every major pharma company has a biomarker development program to bring new targeted therapies to market. But there's also an opportunity for companies to apply the paradigm of personalized drugs—specifically, the use of diagnostics to "test and treat"—to therapies already on the market. Companies can leverage diagnostics to drive sales by identifying patients who respond to a given therapy. Industry can best apply this tactic to smaller revenue drugs, where traditional techniques are either ineffective or don't offer a good return on investment.

For pharma companies facing a difficult economic climate, pairing diagnostics with therapies offers a powerful incentive: Manufacturers can improve sales by helping physicians find the most appropriate therapeutic option. One of the key benefits of this approach is that the molecule remains unchanged; rather, the patient base is selected to maximize benefit—which is less expensive than conducting additional clinical trials for new and improved molecules.

There is an opportunity to apply a more personalized approach to small-molecule drugs because many are not effective across the general populations they purport to help. (See "So-So Effectiveness".) Still, within these uninspiring numbers, there are subgroups of patients that do respond to treatment. Companies that launch a diagnostic test can identify these subgroups of "responders," build relationships with doctors by providing them a tool that dictates effective treatment and spares patients adverse events, and argue the value of the drug to payers.

Yet pharmaceutical companies have ignored the opportunity to utilize the same biomarkers and resulting diagnostics for marketed drugs because of one key difference: There isn't a one-to-one correlation. Rather, diagnostics for marketed drugs identify patients that respond to a class of drugs, not a specific drug. That means class leaders have the potential to gain the greatest value from linkage to a diagnostic test. But other drugs that offer differentiated benefits can also generate returns.

How does this work? The linkage to a diagnostic changes the discussion inside the physician's office. Instead of just pitching a drug, reps can speak with doctors about particular patient populations; early disease detection, diagnosis, and differentiation of patient subsegments; selecting pharmaceuticals and avoiding therapeutic side effects; and therapy monitoring. Reports from companies pioneering this effort indicate easier physician access and longer sales calls than traditional therapeutic-only pitches—and an incredible increase in sales. (See "Growth Outpaces Benchmarks".)

Here, we offer several case studies from specialty pharmaceutical companies that illuminate best practices and demonstrate the viability of this new approach in both the US and Europe.

Disease areas in which physicians struggle to make a differential diagnosis are ideal for the introduction of diagnostics. Irritable bowel syndrome (IBD) is a good example. Patients with IBD usually present to physicians with pain, cramping, and diarrhea. Distinguishing between IBD and other gastrointestinal disorders usually requires invasive and expensive procedures, such as colonoscopies, endoscopies, and CT and MRI scans. And once an IBD diagnosis is made, physicians still need to distinguish between the two major forms—Crohn's disease and ulcerative colitis—to determine treatment.

Into this market came Entocort EC (budesonide), developed by AstraZeneca and launched in the US in 2001 for the treatment of mild to moderate Crohn's disease. Entocort EC is an enteric-coated formulation of the well-known steroid, designed to release the drug in the colon and generate lower systemic absorption with fewer side effects. But by 2003, sales of the drug were only $25 million—leading AstraZeneca to outlicense it to Prometheus Labs, a San Diego-based specialty pharma.

Given the difficulty in making diagnosis and treatment decisions, the benefits of a diagnostic test were obvious. Prometheus developed one (which in its updated version, IBD Serology 7, had 92 percent reported accuracy) to help physicians distinguish subtypes of IBD based on serology markers found in the blood, as well as determine the severity of the disease.

Prometheus Labs recruited a 170-person specialty sales force to market the diagnostic as well as Entocort EC and other proprietary pharmaceuticals. In doing so, Prometheus was able to help physicians identify a subset of patients who would benefit from the therapeutic agent, and improve the efficacy of Entocort EC without chemically altering the drug. With the promise of improved efficacy highlighted by the diagnostic, Prometheus was able to immediately raise the average wholesale price for Entocort EC by 66 percent upon acquiring the rights in 2005, and 10 percent every year thereafter. The current pricing for Entocort EC is 120 percent of the price when Prometheus started marketing it, reflecting the increased value to patients, physicians, and payers 

Prometheus' ability to work in both the diagnostic and therapeutic areas was critical to achieving a quintupling of sales. Entocort EC  sales in the US have grown by 59 percent annually since Prometheus started detailing the drug—and are now $125M annually. 

The value of this approach becomes even more apparent when compared with the European market, where AstraZeneca retained ownership but attempted to boost sales through traditional models. In Germany, AZ negotiated an exclusive promotion agreement with Eisai GmbH to market Entocort EC. But without a diagnostic, Entocort EC sales grew only 10 percent annually from 2005 to 2007, and  just 7 percent in constant dollars.  

The IBD Serology 7 test marketed by Prometheus helped identify patients with Crohn's disease; it did not point physicians to prescribing Entocort EC. In keeping with the American College of Gastroenterology guidelines, physicians could prescribe an oral steroid for patients with mild to moderate Crohn's disease—a category in which Entocort EC is the major branded product. The diagnostic also helped identify ulcerative colitis patients, who would not benefit from Entocort EC.

Diagnostics are also helpful in identifying new patient populations that can benefit from available treatments. Niaspan, an extended-release formulation of niacin launched by Kos Pharmaceuticals (now Abbott) in 1997, offers one example of how to maneuver in this area.

Niaspan treats hypercholesterolemia, and is indicated as an adjunct to diet and statin medications. When taken in large doses, the drug blocks the breakdown of fats in adipose tissue, specifically very low density lipoprotein (VLDL), the precursor of LDL or "bad" cholesterol, and increases the level of high density lipoprotein (HDL) or "good" cholesterol in blood.

The traditional routine cholesterol panel (total cholesterol, HDL, and LDL) provides only a 40 percent predictive value for coronary heart disease. But in 2003, several diagnostic companies launched a new test—an LDL subfractionization test—that identifies more than 90 percent of patients at risk for heart disease. The tests identified at-risk patients with normal LDL test results (that is, patients who would otherwise not be diagnosed) and identified a subset of patients who would benefit from a combination of drugs to boost HDL levels using Niaspan instead of statins alone.  

Although there were many drugs physicians could choose from, based on Kos' marketing effort, Niaspan achieved US sales of approximately $225 million by 2003, growing at a 26 percent pace compared to 14 percent growth for statins, the standard of care for patients with high cholesterol.

Prescription by trial-and-error, particularly when it comes to more serious conditions, is an unacceptable approach to treatment. However, in multiple sclerosis, that was the standard of patient care for far too long.

The symptoms of MS mimic many other neurological disorders and may disappear and recur periodically. Physicians diagnose MS mostly by ruling out other conditions, and then conducting tests of visual-evoked response and brainstem auditory-evoked response, followed by a brain MRI to confirm diagnosis. As the degenerative nature of the disease takes its toll over time, second and third line treatments are used until they are no longer efficacious.

An Austrian company, Sanochemia AG, saw a market opportunity to improve MS diagnosis and improve uptake of Viveo (tolperisone), an immediate-release muscle relaxant used to treat painful muscle cramps and spasticity associated with neurological conditions. Tolperisone is a third line treatment that was originally launched in Europe by Orion Pharmaceuticals at the end of 2007. Viveo is a more potent form of tolperisone, which is available as a generic in Germany, and was launched at a 20 percent price premium. Orion detailed the drug with a 130-person, neurology-focused sales force. In March 2008, Sanochemia launched MR-Lux, an MRI contrast agent (gadopentate dimeglumine) used to diagnose MS and other CNS conditions.

With this diagnostic on the market, neurologists were able to make a definitive diagnosis of MS, which in turn meant that patients migrated to Viveo more quickly. Since launch, Viveo has doubled initial expected sales and is projected to grow at 40 percent compared to 7 percent projected increase in sales of generic tolperisone. The ability of Viveo to leapfrog less expensive generic tolperisone is due to its improved dosing, which leads to better patient compliance. The chronic and degenerative nature of MS puts a premium on simplifying the therapeutic regimen for a patient.

Other diseases that follow this pattern present an opportunity for linking diagnostics with therapeutics. These examples vary by therapeutic area, geography, and developer—but there are also striking similarities. First, the marketed drugs are not targeted therapies that work against a specific biomarker or unique disease pathway. Rather, they are small-molecule drugs whose mechanism of action is not unique. In each case, the drugs are reformulations of compounds with generic competitors available. Second, the diagnostic was brought to market after the drug was launched, often by a third party with no special knowledge of clinical results from drug development.

Because the biomarkers used for the bundled diagnostic are not exclusive to the drug developer, there is an opportunity for late-to-market  participants to effectively compete using this approach. In fact, the basic science that underpins the biomarkers was either developed by academic research institutions and licensed by diagnostic developers, such as the case with Prometheus and Berkeley Heart Lab, or had been on the market for some time, as was the case with Sanochemia Diagnostics.

Given that the diagnostic test only identifies the class of drugs that are effective for a group of patients, sales presence does matter. The sales force must be able to answer questions about the diagnostic and clinical guidelines for disease treatment. There cannot be a single-minded pursuit of sales of a particular drug, because the diagnostic will also highlight patient subgroups that will not respond appropriately.

Forty percent of US branded pharmaceutical sales are derived from products that sell less than $150 million annually. Despite their importance to the industry, growing these products has proven difficult. The techniques and strategies that are effective for larger sales compounds, such as reformulation and indication expansion, can rarely be justified for smaller products. What's more, there's little ROI for these small drugs in tapping the usual media mix. Instead, these compounds gain attention only when a generic drug launches a patent challenge—or the company decides the drug no longer fits within its strategic priorities, and sells it off.

While the personalized medicine approach does work with larger volume sales products, it must compete with more traditional life cycle management techniques, which may generate similar or better returns. AstraMerck's decision to acquire the marketing rights to a hand-held diagnostic gastric ulcer test (HPChek, in 1996) offers an example. At that time, Prilosec was the leading proton pump inhibitor, with annual US sales approaching $2 billion. AstraMerck obtained an indication expansion for Prilosec for the treatment of gastric ulcers in combination with the antibiotic Biaxin. The test developed by the now-defunct Chemtrak was an inexpensive ($12), disposable, single-use, whole-blood test that provided confirmation of 

 antibodies as an alternative to endoscopy and biopsy. HPChek received FDA approval in 1996.

Upon approval, AstraMerck obtained full marketing and distribution rights for HPChek, and the test was marketed along with Prilosec. Results from this marketing demonstrated a healthy 18 percent growth in sales of Prilosec to treat gastric ulcers. AstraMerck, however, concurrently launched an extensive direct-to-consumer marketing campaign for Prilosec, emphasizing the main indication of gastroesophageal reflux disease, which grew sales by 32 percent during the same time period. Based on these results, AstraMerck returned the rights to HPChek to Chemtrak after five quarters.

The first-mover diagnostic that helps identify and segment patients by disease can potentially affect multiple drugs in a class. After an initial diagnostic is available in a particular disease area, roadblocks appear. For the drug developer that starts to see sales of traditionally stable products decline, there may be insufficient time to mount a competitive response.

The second mover who attempts to leverage a diagnostic test will need to launch a differentiated test that provides additional medically relevant disease information. Given the nature of the small-molecule drugs that do not exclusively bind to a single target, this can present an expensive technical hurdle.

The explosive growth in diagnostics based on advancements in molecular medicine will drive more opportunities for this approach. In many cases, the diagnostic will already be FDA approved, and the challenge will be integrating the product, diagnostic, sales, marketing, and reimbursement capabilities. In other instances, the diagnostic will need additional development and clinical validation. Nevertheless, the additional costs for these activities will be less than the costs of manipulating the molecule or paying for clinical trials to expand indications.

The source of this innovation will not necessarily be the original drug developers. Academic researchers, diagnostic companies, clinical labs, and specialty companies will also play a critical role in providing content. Pharma companies that need to extract the maximum value from their current portfolios will also play a role. While pharmaceutical companies that have diagnostic divisions may have an initial advantage over "pure plays," the availability of strong diagnostic sales and marketing capabilities at clinical labs and independent diagnostic developers will provide strategic and alliance opportunities for pharmas to take advantage of.

Amit Agarwal is a partner with Scientia Advisors. He can be reached at 

Articles

Features

"Test and treat" strategies aren't just for new-to-market drugs anymore.

Overlooked Opportunities

Increasing numbers of low-cost and substitute products. Intense cost pressures. Falling prices and profits. Dramatically higher R&D costs. Fewer new, innovative products. High-quality products with little differentiation. Single-digit sales growth.

These are characteristics of several key US industries: automobiles, telecommunications, manufacturing, apparel, airlines—and pharma. Like products, industries go through life cycle phases. And in recent years, just like others, pharma  has matured into the Competitive stage of its life cycle. Most pharmaceutical executives understand the importance of product life cycles for brand planning. Similarly, they need to recognize the drivers and implications of industry life cycle stages. Moreover, understanding industry life cycles can help companies anticipate and benefit from market changes, ultimately providing a competitive edge in an increasingly competitive field.

Experts identify four industry life cycle stages, though these vary from industry to industry. For pharma, the life cycle can best be characterized as Commencement, Commercialization, Competition, and Commoditization. (See "Pharma: A Life in Stages".)

The life cycle typically takes the form of an S-curve. The introductory stage is a relatively flat line, reflecting the challenges of gaining customer acceptance (Commencement). As customers appreciate and demand the product, explosive growth occurs (Commercialization). That growth eventually tapers off as customer segments become saturated (Competition). Ultimately, sales growth stops and begins to decline as cheaper substitutes and alternative products appear (Commoditization).

The US pharmaceutical industry—the world's largest, with more than $286 billion in sales—is currently in the Competitive stage. What's the telltale indicator? A relatively consistent decline in sales growth over the past decade, from solid double digits to single digits. In 2007, US pharma's annual growth rate hit 3.8 percent, the lowest since 1961, when the Commercialization stage began. Other characteristics of the Competitive stage: increasing marketing and R&D costs, more sophisticated buyers, greater competition, and decreasing profits. (See "Characteristics of the Four Stages of the Pharma Life Cycle".) 

Characteristics of the Four Stages of the Pharma Life Cycle 

Industries mature at different rates, depending on market-and industry-specific forces. Using Harvard professor Michael Porter's Competitive Structural Analysis Model, we can identify five forces catalyzing pharma's transition to the Competitive stage.

 The industry's impressive run of developing new products peaked in 1996, when FDA approved a record 53 new molecular entities (NMEs). But over the past decade, pharma's pipelines have dried up: In 2007, only 17 NMEs were approved, though R&D spend had doubled. This past year, the US branded pharmaceutical industry launched fewer products than in any of the past 30 years. The lack of new, truly innovative products is the root cause of most of pharma's other difficulties, including greater generic penetration, higher cost pressures, slowing sales growth, and reduced profitability.

 The increasing power of managed markets in the US has accelerated the transition into the Competitive stage. Private and public payers have dramatically influenced the prescribing, pricing, and perception of branded drugs, while employing techniques such as restricted formularies, product tiers, and prior authorization to control their use. By forcing companies to compete for reimbursement access, managed care companies have negotiated dramatically lower prices for pharmaceutical products. Moreover, managed market entities have highlighted to consumers the high costs of branded products by introducing higher copays and more out-of-pocket payments for non-reimbursed products, resulting in additional pressure on drug costs.

Twenty years ago, it typically took years for a branded competitor with a similar mechanism of action to enter the market; now it's not unusual to have multiple, same-class competitors at the same time. In addition, the explosive growth of generics has left branded products with less than one-third of the US prescription market. Generic intrusion has been hastened by generic companies that aggressively challenge patents and increasingly bring their products to market even at the risk of lawsuits. According to Urch Publishing, new generics will threaten more than $100 billion of brand revenues in the US and Europe in the period from 2007 to 2011, with the most dramatic changes occurring in 2010–2012. The branded market has been further eroded by non-prescription options, including over-the-counter products and alternative therapies.

Intensified scrutiny and criticism of the industry

 No other US industry has as many stakeholders as pharma. Virtually every American uses ethical drugs at some point in his or her life. A variety of healthcare professionals and other entities are involved in assessing, prescribing, distributing, managing, and dispensing pharmaceutical products. Numerous regulatory agencies regulate and monitor most aspects of the industry. Other government officials, policymakers, and payers have direct or indirect oversight and influence. These and numerous other stakeholders—such as the media, lawyers, and politicians—have forced pharmaceutical companies to spend enormous amounts of time, money, and other resources in responding to their demands, resulting in reduced efficiencies, sales, and profitability.

 The lack of new products compels companies to rely almost exclusively on existing markets and products. Regulatory restrictions have made it increasingly difficult to expand markets. Payers limit pharma's ability to raise prices, while patent challenges and generic products have reduced the duration of product exclusivity. Consequently, companies are left with only one real option to generate sales: grabbing market share from competitors.

How should companies respond to this pharma-versus-pharma environment? Here are 10 Competitive Success Factors for surviving and thriving in the Competitive stage: 

 Companies in Competitive stage industries, such as consumer electronics and airlines must focus on competition and respond aggressively simply to survive. The vast majority of pharmaceutical companies have never experienced competition of this intensity, and need to instill a much more competitive mindset in all levels of the organization. Executives should formulate and execute revised strategies for this new environment as soon as possible.

 Increasing focus on competition requires changes in corporate structures, functions, and processes. Most pharma brand teams assign a single product manager, market researcher, or competitive intelligence professional to be "in charge of" competition. More progressive companies, however, use multi-disciplinary groups, such as Competitive Centers of Excellence, or full-time competitive teams to handle such responsibilities. For example, some pharmaceutical companies deploy competitive counter-launch teams whose sole responsibility is to undermine and thwart competitive products up to two years prior to the competitor's launch. Companies should apply similar approaches to corporate competitive planning, with assigned, dedicated staff and regular meetings.

Most pharmaceutical product teams create only portions of competitive plans, such as competitive product market research and competitive product profiles. Relatively few brand teams conduct integrated, comprehensive competitive plans that synthesize findings and identify specific action steps based on competitive company and product profiles; competitive intelligence and research; customer analyses; stakeholder analyses; market and environmental analyses; and corporate profile relative to competitors. It is not enough just to prepare these plans: They need to be implemented, reviewed, revised, and regularly revisited.

Pharma executives should also prepare corporate competitive plans to anticipate and prepare for changes in the broader environment. At minimum, executives should incorporate company competitive planning during annual strategic planning and budget review periods. Such plans help to identify potential competitive game-changers or wild cards, test market assumptions, and uncover potential blind spots.

 The paucity of new products creates even greater pressure for a successful launch. Conversely, because of stagnating markets, competitors cannot afford to have a powerful new player penetrate their limited market space. Consequently, competitors will increasingly use counter-launch plans to preempt new competitors—particularly during the pre-launch phase when the new product is most vulnerable. For instance, Amgen has, to date, protected its multibillion-dollar anemia franchise in the US by filing a patent infringement lawsuit to prevent Roche from introducing its new agent Cera. Similarly, Bristol-Myers Squibb, makers of the blockbuster anti-clotting agent Plavix, has aggressively tried to pre-position Lilly's new competitor Effient. "The way I see it, if and when it is approved, [Effient] will be a niche product," BMS CFO Lamberto Andriatti recently told analysts.

Like sports teams, pharmaceutical companies should "scrimmage." Traditionally, pharma marketers have conducted business "war gaming" only when launching a product. In today's market, these exercises should be conducted at least annually. Companies should conduct a new version of war games called "competitive simulations." Competitive simulations are more realistic, engaging, and productive versions of war games that factor in not only physicians, payers, and consumers, but also other influential stakeholders.

Unlike traditional war games, which focus on physician promotions and detailing, competitive simulations are customized to test important strategic and tactical issues for a particular product and market. Simulations may be used to test the overall marketing plan or individual plan sections, such as payer strategies or communication plans. Most important, competitive simulations provide usable results, including specific action steps for going to market and winning.

In the Competitive stage, the sheer number, intensity, and diversity of competitors compels companies to create unique, sustainable product and corporate positioning along several dimensions. For example, to enhance its ability to negotiate with governments and other large payers, Novartis has repositioned itself as a full-line healthcare product company by offering branded and generic pharmaceuticals, vaccines, and consumer healthcare products.

Other companies will succeed in this competitive environment by focusing on a specific strategic market segment, geographic region, or disease state, and serving that target more effectively and efficiently than competitors. For example, Novo Nordisk achieves differentiation by focusing on all aspects of diabetes pharmacotherapy, including a diverse portfolio of diabetes products, numerous product formulations, novel delivery systems, extensive diabetes education programs, strong stakeholder relationships, and global diabetes philanthropic initiatives.

 In the Competitive stage, it's particularly important to focus on payers, sophisticated repeat buyers who have the advantage of deciding among multiple competing brands. In today's market that means that competition shifts toward greater emphasis on cost and service.

Pharmaceutical companies must move aggressively to identify substantive ways to reduce costs. Companies have implemented techniques such as rationalizing R&D and product portfolios, revising processes, and raising employees' financial consciousness. Companies in other industries, such as Dell and Nike, have become "virtual companies," essentially outsourcing most functions. Over the past decade, pharma companies have increasingly moved in this direction by outsourcing manufacturing, distribution, clinical development, sales, marketing, IT, and even discovery. This approach not only makes companies more cost-efficient, but also more responsive to customers and competitors.

 In the Competitive stage, companies have a much more difficult time discovering new products. Consequently, competition shifts from internal discovery to external licensing and partnering. Over the past decade, pharmaceutical companies have been forced not only to find new compounds, but also to compete aggressively with their peers to gain access to those products. In a reversal from the Commercialization stage, pharmas in this stage are now actively marketing to biopharmaceutical companies, academic institutions, and other organizations, sometimes participating in product "bake-offs" or auctions for attractive, early-stage compounds. Companies are also competing for other types of technologies, such as genomics or nanotechnologies, to help expedite the discovery, development, or delivery of products.  

Stakeholders other than physicians and patients—various healthcare professionals, regulators, consumers, the media, politicians, distributors, and patient advocacy groups—are increasingly influencing the adoption, utilization, pricing, and perception of drugs. What's more, companies are competing among themselves for the influence and support of these key constituents. Forward-thinking companies have developed strategic stakeholder leader plans, similar to those developed for key opinion leaders, to gain competitive advantage with these influencers.

 Key staff members need to know how to analyze competitive products and companies, monitor competitive activities and signals, anticipate competitive moves, develop preemptive and defensive strategies, utilize best competitive practices, and take decisive action. Progressive companies have instituted competitive leadership forums, train-the-trainer programs, competitive case studies seminars, and a variety of other initiatives to provide professionals with the confidence and techniques to gain a competitive edge.

The US pharmaceutical industry will remain in the Competitive stage for the foreseeable future. Customer demand will remain high, especially with an aging population, but sales will peak in many established therapeutic areas as competitors and payers drive down prices and volume. While there is little chance of the industry reverting to the high-growth cycle of an earlier era, there are opportunities to delay the next stage, Commoditization. In this end stage, pharmaceutical products become nearly indistinguishable, and customers buy primarily on price. Sales stagnate or decline as multiple competitors fight for shrinking branded markets. At this point, generic products could represent more than 80 percent of total prescription sales in the US.

Slow-growing, price-constrained European markets are closer to this stage than the US market, while high-growth, emerging markets such as China, India, and Brazil remain in the Commercialization stage. One of the best ways for the pharmaceutical industry to stave off Commoditization is by developing new technologies and technology platforms that ensure the development of new, patent-protected products. For example, biotechnology is the driving force behind a wave of novel, high-priced, high-value products. In fact, biologics are growing at a rate of 13 percent—four times the rate of traditional small molecules. There is significant hope that biotechnologies, genomic technologies, nanotechnologies, and other future technologies can help keep the US pharmaceutical industry in the Competitive stage.

Pharmaceutical executives and their companies are at a critical juncture as the industry confronts its Competitive stage. Executives who can recognize these changes, respond strategically, and take preemptive action have an opportunity to win in this new competitive landscape. The most successful companies will be those that can transform as the industry itself transforms.

 MD, MBA is president of the consulting firm Bernard Associates, LLC. He can be reached at 

Every industry has a life cycle, and pharma's has just entered its competitive stage. Here's how to prepare.

Pharma vs. Pharma

In these tough times, how does pharma see its future? How confident are top executives in the future of the industry and their own company? Does size make a difference? These were among the questions TGaS Advisors asked 20 operations executives from a cross-section of large, mid-tier, and specialty companies for its annual State of Commercial Operations benchmark conducted late last year.  

Asked how confident they feel about the next three years, the execs responded based on their career experience (most are 25-year veterans) and their five to 10 years as decision makers.  

The results? We found a divergence  of confidence based on size, with large-tier companies (3,000-plus sales force) more confident about both the industry and their own firm than mid-tier (500 to 3,000) and specialty pharmas. Overall industry and company confidence, however, is down, primarily due to darker forecasts at the mid-tiers. With confidence charted on a 100-point scale (100 is "extremely optimistic"), company confidence falls in the 65 to 75 spread, while the industry confidence range was 52 to 66. (For more highlights, go to 

Last year's results were the reverse. Large pharmas were more pessimistic about their own company than about the industry, while mid-tiers were far more hopeful, ranking their firms 17 points above the benchmark. What changed? Has Big Pharma confidence turned the corner after several storm-tossed years? One executive told us, "Industry has ripped off the Band-Aid and felt the pain." Companies looked at their commercial organizations and made the necessary cuts. Mid-tiers, with fewer resources, are now feeling the pain. Specialty pharmas are still markedly more confident than the industry overall, but even they show less confidence than last year (down 9 points).   

 is founder and managing partner of TgAS Advisors. He can be reached at 

Back Page

How hopeful are execs about the future of their own companies and the industry in general?

Pharma Confidential

When the National Kidney Foundation was looking for a more effective way to educate patients about the challenges of dialysis, they decided to take a unique approach: They created a graphic novel to achieve their desired results. 

Graphic novels, the combination of a comic book and a novel, have come a long way since first appearing in the 19th century. In 1986, Art Spiegelman's  graphic novel 

 won the Pulitzer Prize for literature. More recently, Hollywood has adapted numerous graphic novels into films. Today, the genre has entered the medical marketing and education world as a potentially excellent tool to communicate a message.  

Graphic novels communicate more clearly, simply, and effectively than many other communication vehicles. As a result, they reach diverse audiences, adapt to multiple media, and make complex ideas simple.  

The graphic novel can appeal to almost everyone from kids and adults to consumers and professionals. They communicate to any and all reading levels—from far below average to the most sophisticated. The "pictographic" nature of the graphic novel even makes it one of the few tools that can reach the non-reader. The graphic novel appeals to people who have no access to, or no interest in, a computer. Yet the genre also can adapt to a rich, interactive experience that appeals to the most avid computer user. And in a graphic novel, traditional rules can be broken. For example, people don't have to be black, white, or brown; they can be orange. That definitely redefines "diversity advertising." 

The graphic novel can be printed—as a book, a series of comic books or comic strips, flyers, or posters. It can also be taped to the wall, handed out, mailed, projected at a meeting, posted on the Web, filmed for TV, or adapted for PowerPoint or keynote presentations. You get the versatile point! It can even be recreated "live" for special events. Furthermore, a target audience can experience a graphic novel in virtually any setting. It requires no special equipment, laptop, or television. It can be read casually or studiously, in private or public. It can be an individual's personal experience, or shared. 

In serial form, the graphic novel supports substantial character and plot development, plus the exploration of complex subject matter. Over a series, a graphic novel can introduce several characters in multiple situations exploring a wide range of issues. When a vehicle that was once perceived as escapist entertainment addresses intellectually and emotionally complex issues in a mature way, the impact can be powerful. A good graphic novel can illuminate a topic, change behavior, sell a product, and teach buyers how to use it (or sellers how to sell it). 

As a child, you may have received small comic-style books from your doctor or dentist that covered subjects such as vaccinations, hygiene, or toothbrushing. These were forerunners of the graphic novellas being implemented today in medical marketing and education. Two examples stand out as major milestones—one from the 1990s and one that launched over a year ago and is currently running nationally. 

In the '90s, the New York City Health Department developed a black-and-white comic strip series called Decision that followed characters dealing with HIV. The strips initially appeared in subway cars, and then were compiled into comic book form for handout. When the third issue invited readers to suggest the next events in the evolving story, the health department was inundated with suggestions. After several more issues, the health department decided to stop making Decisions, but it became regarded as a breakthrough in new applications for the graphic novel form and remembered as a very effective campaign. 

In 2007, the National Kidney Foundation developed a graphic novella called Hope & Main, the "first reality series of, by, and for the dialysis community." Hope & Main serves as a centerpiece of an ambitious multimedia campaign. A pharmaceutical company funded the first year (six installments) of Hope & Main with a non-restricted educational grant. Their goals were to 1) support a unique solution to the need for "pictographic" education about dialysis issues, and 2) strengthen the company's marketing position in the dialysis community.  

The following steps were taken in the development of Hope & Main. They serve as a primer for the creation of anygraphic novella:  

Extensive research and firsthand experience of the National Kidney Foundation showed the need for a "pictographic" solution. While the numerous multimedia tactics of the Foundation are effective with professionals and many patients, a significant share of the patient audience is unable or unwilling to use the Internet, resistant to most print materials, and unreceptive to educational DVDs—in fact, unreceptive to most of today's media mix. They need information in more visual form, independent of electronic media. The solution was to create a series of comic strips forming a graphic novel: Hope & Main. 

Potential topics to cover were also researched before creative development began. Advisors—professionals, patients, caregivers, and members of the National Kidney Foundation team—contributed ideas regarding the most critical issues facing the dialysis community, the role of each professional on the multidisciplinary treatment team, the various types of patients in a dialysis center, and their most pressing concerns.  

The creative team behind Hope & Main crafted a "story bible," just as creators of a television show do. They wrote "back stories" for each character (information that may never appear in the actual novel but helps the creators make characters more credible). They also created a full script for the first installment of the novella, plus outlines for five more—to demonstrate a firm grasp of the subject matter, to show the development of the Hope & Main characters and plot lines, and to prove that the concept can sustain interest over a series. 

After determining the preferred style of rendering the characters, the novella's palette, and other visual details, the team screened artists—dozens of potential candidates—before finding the right one. Working with the artist, they went through numerous sketches and revisions of renderings of each character to achieve the right look in "personality," age, wardrobe, and other details. With a total of 10 characters—five patients and five professionals—each had to be clearly delineated. 

Throughout, the editorial board reviewed sketches and final renderings of each character, as well as the script. The first Hope & Main came together in the form of black and white rough sketches organized into panels. These were reviewed and revised before text was added. 

The entire team of collaborators, including the editorial board, reviewed the next version. Numerous changes were made in text and illustrations before creating a full-color version. Once again, more changes were made to both the illustrations and text. Once finalized, the novella was produced (and even translated into Spanish!) 

The Hope & Main team also developed ancillary programs supporting the novel:

A Web site for professionals, patients, and caregivers

A bimonthly professional journal and patient newsletter ads announcing each new issue

A direct mail campaign featuring the graphic novella's characters

Email alerts to professionals and patients for each issue

A learning aid that details the educational messages of each installment for patients

A teaching aid with each installment for physicians and allied health professionals

An exhibit booth for major meetings that target professionals or patients

Multiple feedback forums are in place for Hope & Main: online discussion groups, focus groups, mail surveys, and more. Consumers and professionals have weighed in with praise, criticism, and ideas. Receiving feedback (and reporting it to the creative team and editorial board) is a daily activity. Audience members have suggested enough plot lines and topics to carry the program through the next decade, if feasible.  

The success of the Decision and Hope & Main campaigns demonstrates how a graphic novel can engage a wide range of audience members. Today, graphic novels serve as a medium for branding campaigns, as a sales training tool (to depict sales situations traditionally addressed in "role-playing" exercises, for example), and in many other applications.  

So the next time you need to motivate or educate, just go graphic!  

 is a founding partner of bryantBROWN communications. He can be reached at 

Columns

The graphic novel emerges as a versatile, effective medical education and marketing tool

Getting Graphic

Quality over quantity, a more tenured sales force, and yes, even some exciting double-digit growth were bright spots for pharma in 2008, a year which saw company giants begin to rightsize their sales forces and pull back from the "arms race" mentality. The number of reps dropped by as much as 8 percent by May, when the Hay Group Annual Sales Force Effectiveness Study was conducted—signaling, for many companies, a more turbulent year ahead. 

With these reports, amid economic uncertainty, one might speculate that those who are employed are staying put. The fact is that even with fewer sales reps overall, they're still in demand ... and they're still on the move. Certain segments of the industry are expanding—a fact not lost on sales staff, as voluntary turnover has remained high, or even increased, among some employee groups. In this environment, companies dare not become complacent in policies to retain top performers. In fact, applying extra rigor to human capital during an economic downturn can deliver a sustainable advantage. 

Interestingly, the sectors that are expanding are doing so very rapidly, at a rate reminiscent of Big Pharma's bygone era. Just look at biotechs: Despite the much-publicized layoffs, almost every biotech participating in the survey expected to increase its sales force by 15 percent or more in 2008. About half of all specialty pharmas planned to expand at that rate, as did just over 40 percent of small and mid-sized companies. Growth of hospital and specialty reps was projected to slow, but still see double-digit increases—15 percent and 17 percent, respectively. So, the growth is not hard to find, if you know where to look. (See "Selective Expansion"). 

Growth is not hard to find, if you know where to look-namely, outside of Big Pharma. Meanwhile, as the economy and healthcare industry began to show some cracks, fewer reps expect to voluntarily leave their jobs. 

As the overall size of the sales force shrinks, several trends are apparent. For instance, sales reps and managers have become more tenured. During the hiring frenzy a few years ago, 40 percent of district managers had less than 18 months of experience in their positions. Today, about 80 percent have at least two years of relevant sales experience.   

Industry experience is a key attribute for candidates, and 95 percent of surveyed companies say they aren't shy about poaching reps from other firms. That fact alone suggests pharma is now a harder industry to break into for college graduates—and others. While 28 percent of respondents use contract sales organizations (an increase from 20 percent in 2007), almost one-third report that they never (or infrequently) recruit contract reps into full time positions.   

Generally speaking, there is an inverse relationship between the strength of the economy and the rate of turnover; the tighter the job market, the lower the employee attrition. Because data for the survey were collected in May (before the cracks in the economy really started to appear), and because certain segments of the industry are expanding at a healthy clip, it follows that the voluntary attrition rate within sales jobs remained high in the 2008 study. At the time of the study, voluntary turnover was expected to stay at 2007 levels.  

Hay Group research has repeatedly demonstrated that pay is the primary reason why high performers leave jobs—which are the very people companies want to retain. This explains why 81 percent of surveyed companies have implemented new retention initiatives, and why about half have formal procedures in place to retain high-potential employees, up from 22 percent in 2005. 

Pharma has long been a lucrative industry for salespeople. But the 2008 Hay Group survey reported a leveling off of reps' total compensation—and for the first time this survey noted that salaries had even begun to slip. The median total cash compensation for a sales rep in 2008 is $96,700, compared to $97,000 in the prior year—certainly down, but still higher than the $74,400 payout in other industries, according to Abbott, Langer Association Surveys.  

Interestingly, reps' base pay is still growing. The median base salary for a sales rep is $74,500, up from $72,100 the prior year. This shows that companies increased the proportion of total compensation contributed by base pay, as opposed to bonuses. (See "Base Pay as a Percentage of Total Compensation") Just last year, base pay made up 74 percent of the average total compensation package. This year, companies reclaimed some of that risk, and base salary now hovers around 77 percent of the total package. This shift is seen primarily with specialty and small to mid-sized companies—the segments that are doing the most recruiting.  

Reps total compensation packages level off, and for the first time salaries have even begun to slip. The culprit is not the base pay-which continues to rise-rather, companies are awarding fewer bonuses.  

How companies arrive at their pay structure is also telling. Just five years ago, half of all companies targeted the 75th to 90th percentile of the market median when setting their total cash compensation for reps. Now, firms clearly feel less pressure to stay ahead of one another, and that percentage has dropped to just 26 percent. The majority (59 percent) target the market median for reps' total cash compensation.    

Most participating companies continue to use salary structure adjustments (modifications to salary ranges to bring them in line with the market) as a method to attract and retain sales talent. But the percentage that do so has declined for the past few years. In 2006, it was 90 percent; in 2007, 84 percent; and in 2008, 74 percent. The average salary structure increase for all employee groups was 3.3 percent in 2008, down slightly from 3.7 percent in 2007.    

Merit increases for pharma continue to exceed the average for other industries. Pharma provides a 4 percent increase for performance, compared to 3.5 percent in other sectors. This rate remains unchanged from 2006 and 2007. 

The industry mostly judges its sales force quantitatively-through scrips and market share. But qualitative measures also matter, with companies lowering daily sales call quotas for all but primary care reps to give the field force a chance at building more valued relationships. 

Nearly all respondents (94 percent) look at performance to determine merit increases. They use bonus results in the calculation 9 percent of the time (down from 15 percent in 2005), and conformance to core values 51 percent of the time (up from 31 percent the previous year). Other factors include team skills and compa-ratio calculations. The reliance on compa-ratios, which divide an employee's base salary by the salary midpoint, decreased from 45 percent in the prior year to 29 percent.  

Positioning the Bar: Quality Over Quantity 

One of the most interesting findings was that companies have lowered their daily call targets for all positions except primary care reps, who are expected to make an average of 8.4 calls a day. The most dramatic changes are for calls on corporate/national accounts and regional accounts, where the daily targets changed from 4.5 to 2.5 and from 4.1 to 1.3, respectively. These lowered call quotas reflect the time it takes to build strong and lasting relationships. The changes may also indicate that companies are moving away from counting sales calls, and focusing more on the quality of the call. It is no surprise companies are asking, "What is our ROI from these and other selling and administrative expenses?" 

To set sales quotas, companies factor in territory results previously achieved (90 percent, up from 76 percent in 2007), territory potential (89 percent, up from 57 percent), overall company objectives (76 percent, up from 65 percent), and managed care impact (48 percent, up from 22 percent). Consistent with their increased role, firms plan to consider managed care impact in a territory more often in 2009, 63 percent of the time.  

Pharma sales comp plans have never been—and never will be—simple. To be accurate and fair in determining rewards, employers have intentionally built checks and balances into incentive plans, often to the point of over-engineering them. Research has shown that plans that incorporate more than three variables lack the focus needed to inspire and direct employee behavior.  

Traditionally, companies structure incentive plans around quantitative measures. For general physician reps, for example, the mix is 92 percent quantitative, eight percent qualitative, measures. Mostly, firms look at script volume, market share, and revenue (including Rx dollar value). The leading qualitative metrics for reps are selling skills (78 percent), call average (78 percent), product proficiency (67 percent), territory management (67 percent), and customer focus (56 percent). Qualitative measures are given the greatest weight in plans for regional account managers (RAMs). For national account managers (NAMs) and RAMs, achievement of special objectives figures highly into the plans, comprising one-third of the mix.   

Most reps are eligible for a sales incentive plan after working for two months, suggesting companies are eager to usher sales people into productive roles quickly. (Five years ago, the average waiting period was three months.) Also, to the extent that companies hire seasoned reps from competitors, they can accelerate the training period. The average territory vacancy rate has decreased from 9 percent in 2007 to about 3 percent in 2008. Vacancy rates are higher in the small to mid-sized companies, which goes hand-in-hand with their expansion.    

Long-term incentive plans reward longevity, and 64 percent use them. More reps are now eligible for equity plans. The most popular are non-qualified and incentive stock option plans, which grew in popularity from 40 to 75 percent.   

Sales incentive programs depend largely on a company's ability to measure performance against goals. Companies do that at the individual level 72 percent of the time. Up to a quarter of managers get their comp based upon the performance of their district or region. Most often (67 percent of the time), plans pay incentives based on reps' achievement of a sales target or quota. About 18 percent of plans pay out primarily based on increased market share. However, market share has grown in popularity as a secondary mechanism, now used 35 percent of the time, compared to just 14 percent last year.  

The most common source of qualitative data is management evaluation. For district and regional managers and sales reps, performance is also measured by selling skill/call quality and call average/frequency. This year, there is more emphasis on territory management (51 percent, up from 30 percent), formulary access (28 percent, up from 20 percent), and staff development (25 percent, up from 13 percent). Most firms (80 percent) require reps to meet a threshold to receive a payout. But across the board, firms have become more inclusive: Reps' and sales managers' thresholds are 80 percent of quota (down from 85 percent in 2007) and 83 percent for NAMs and RAMs (down from 85 percent and 90 percent, respectively).   

On the other hand, companies have lowered the cap for payouts. Last year, the max payout was 200–225 percent of target; in 2008, it was 163–200 percent. The top 10–15 percent of performers typically achieve 110-120 percent of goal. Firms are also distributing incentives more promptly. Only 12 percent pay three times a year, while 68 percent award quarterly and 10 percent pay monthly (an increase from 4 percent).  

Companies allocate between 1 and 19 percent of their incentive comp budget to non-cash rewards (the average is 7 percent), although research has found contests and other non-cash incentives are highly motivating. The most common award remains the "President's Award" (which recognizes top performers), offered by 75 percent of companies. On average, 11 percent of sales reps and 10 percent of district managers qualify for it. Trips are still a popular sales award, and approximately 80 percent of companies offer them.  

Sales force growth is uneven right now, so recruitment goals differ from one sector—or company—to the next. The companies that are expanding have access to a ready pool of candidates from companies that are downsizing. Smaller firms—the very groups that are hiring now—often are attractive for the greater autonomy, enhanced visibility, and wider scope of responsibility they offer. They need to walk a fine line between the growth that comes with success and maintaining the small-company atmosphere.  

The first step in reducing future turnover rates is to understand why salespeople leave an organization—typically, because they are presented with a better opportunity. But opportunity doesn't always mean more pay; rather, it's responsibility and advancement potential for a position.   

Given the current environment in Big Pharma, many reps naturally have mounting concerns about the sustainability and stability of their employers—obviously a concern that cannot be countered by a well-conceived compensation plan alone. 

is Consultant and Project Director of Hay Group's Pharmaceutical Sales Force Effectiveness Study. She can be reached at 

 Hay Group's Annual Sales Force Effectiveness Study, now in its 18th year, is designed to diagnose the culture, policies, and practices within pharmaceutical sales organizations and to identify factors that either hinder or support sales performance. In May 2008, 42 pharmaceutical and biotechnology companies representing a broad cross section of the US market participated. About half of the responding companies classified themselves as small to mid-sized companies; 25 percent as specialty manufacturers; and the remaining 25 percent as biotechnology firms and "big pharma." This mix has given us insight into the pockets of the industry that are experiencing above-average employment growth. Data were collected on almost 80,000 incumbents holding 81 different types of positions within sales, marketing, sales operations, sales administration, and medical affairs. 

The headlines are about layoffs, but some segments of pharma are still hiring. Pay, meanwhile, tightens.

Uneven Landscape

 may look as if it's about disaster, but that's not the way we meant it. It's not about falling off a cliff; it's about crossing a bridge that extends from yesterday, and an old, failing way of doing things, to tomorrow, and a revitalized pursuit of new (still only dimly understood) goals. Admittedly, in our cover illustration the bridge is out. But the point is still to cross the gulf; the absence of a span just means you have to cross with a bit more energy. There's also plenty reason to expend thought and creativity on the subject of landing.

Because that's what life and business are like. We're always crossing the next bridge before we come to it—or before it's been built or after it's fallen down. Those are the bridges that count, the ones that truly bring us from one place to another.

And that's what the pharmaceutical industry is doing today—getting to a new place. Much of this issue of 

 is devoted to exploring what that new place is going to look like. Two articles warrant particular attention in this light. Our annual forecast article, written again this year by senior editor Walter Armstrong, draws on insights from dozens of industry professionals, academics, and consultants, examining the ways in which politics and the current financial crisis will interact with pharma's own structural changes and circumstances in the first years of the Obama administration. In the world Walter portrays, there are almost too many potential drivers for action: an overstressed healthcare system, a disillusioned public, a president who knows he mustn't waste time in taking action, and a battered economy that will distort or even pre-empt the decision-making process. The trick will be getting a coherent strategy out of jittery, confused, and angry stakeholders.

Elsewhere, consultant Stan Bernard takes on what will arguably be the most distinctive feature of the new industry environment: competition. With payers using their purchasing power more aggressively, with the increasing ascendancy of generics, and with new demands for data on real-world comparative efficacy, pharma companies are going to be going head-to-head with each other in the next few years in ways they never have before.

The kind of competition Stan is talking about (and will be writing about quarterly in 

 this year) is not always pretty. Future articles will look at the specific tactics companies are already using to affect how competitors are perceived in the marketplace and pre-empt competitive claims. It's the sort of thing that—just like mirrored territories and giant sales forces and direct-to-consumer advertising—has a great potential benefit and a great potential downside. If fierce, head-to-head competition leads to greater clarity, greater understanding, and better outcomes for patients, it's going to be a good thing. If it turns out to be a way to manipulate patients, doctors, and payers, we'll soon be wondering how we ever got so far off track.

Here's what I take away from the Bush years: Market forces are incredibly powerful, but they can't be left to run things on their own. The grown-ups still have to run things. And the best thing the grown-ups can do is make market forces behave.

We don't even have to wait until we get to the other side of the bridge we're jumping.

From the Editor

It's just the way life works: You're always crossing the bridge before you get to it-or after it's gone

Getting Across

Months into the global financial crisis, the world continues to dedicate vast amounts of energy to worrying. Government officials issue lengthy statements to calm the markets; accountants spin their earnings reports; pundits yell more loudly than ever; and traders buy and sell at breakneck speeds.

Business leaders are also caught in the turmoil. We might wring our hands over the stock market and calculate hourly the amount of wealth lost. We might focus on making ourselves look better in front of our Boards, riding the classic "herd instinct" by cutting jobs and trimming expenses. Or we could fret over how the downturn threatens our firms in the months to come: no bonuses, no options, just doom and gloom as the credit crisis worsens. We can do all of these things—or we can run our businesses.

Granted, the crisis is bad—and it's likely to get worse—but worrying and second-guessing will help neither you nor your company. Great leaders use their energy to the fullest during trying times. They hunt for ideas, track the flow of capital (tight as it may be), and seize new opportunities as they are presented.

Through the years, recessions have been excellent laboratories for innovation. At the turn of the 20th century, John Moody began publishing his Manual of Industrial and Miscellaneous Securities, a compendium of market data for a wide array of industries. When the Panic of 1907 rocked the markets, Moody's company went under, but he'd taken away a valuable lesson about the importance of investor confidence and market analysis. In 1909, Moody began publishing again, but this time he rated the value of securities using a letter system derived from the early credit-reporting industry. Today, Moody's ratings are an invaluable tool in assessing a company's credit and stability.

Years later, during the Great Depression, Charles G. Guth took control of Pepsi-Cola, and used a creative strategy to steal market share from rival Coca-Cola. Guth surmised that an economic downturn would make value more important to consumers, so he began selling 12-oz. bottles of Pepsi for five cents apiece, the same price as Coke's 6-oz. bottles. He also took advantage of the popularity of radio with a new jingle:

In two years, Pepsi's profits more than doubled, and an early salvo had been fired in the Cola Wars.

IBM also gained ground during the Depression. Founder Thomas Watson, Sr. recognized that US industries would be unlikely to dedicate capital spending to new technologies, so IBM took its business to Europe, where sales soared. During the third quarter of 2008, as the economic downturn squeezed American businesses once again, IBM's Europe/Middle East/Africa division posted 10 percent revenue growth.

Of course, it doesn't take an economic collapse to create tough conditions. Consider Frank Yuengling, former chief executive of a small Pennsylvania beer company named after his family. In 1919, Prohibition leveled the American beer industry, wiping out most of the nation's breweries. However, with Frank's guidance Yuengling survived by using the firm's vats to brew "near beer," and opening a dairy to sell ice cream. By creating new revenue streams, Yuengling remained in business until the 18th Amendment was repealed in 1933. Today, the company remains America's oldest brewery, and a favorite brand among Philadelphians.

More recently, my last class at Fordham came up with a Web site to teach unemployed MBAs how to seek opportunities during the slowdown. For example, since plumbers and electricians are now in greater demand (and pulling in about $80 an hour the last time I checked), the site suggests starting job-training companies for those positions. Other creative ideas included helping recently unemployed patients get their medications affordably without insurance coverage.

It's important to recognize that there's value in being tested.  Henry Ford, one of America's most influential entrepreneurs, wrote, "Business is never so healthy as when, like a chicken, it must do a certain amount of scratching around for what it gets."

 is managing partner of Flaum Partners and chairman, Fordham Graduate School of Business, Leadership Forum. He can be reached at 

Leadership

When life gives them lemons, leaders roll up their sleeves and find a lemon distributor

Deal With It

Eli Lilly was one of the first major drug makers to voluntarily report payments to physicians. Today, other Big Pharmas are following sui, and it's no surprise. The Office of Inspector General (OIG) has hit medical device and pharmaceutical industries with multimillion dollar fines for violating fair market value standards; in fact, that's one main reason Daryl Johnson founded HealthCare Appraisers. Cultivating experience from work on the provider side of healthcare, a national medical oncology group, and practice management companies, Johnson started his own specialized healthcare consulting firm. Over time, the company received several projects from the life sciences industry, and it became clear to that fair market value ran the same fine line for both the hospital sector and the life sciences. 

Since there is no government approved standard to determine fair market value, what can industry rely on?

 That's one of the major problems. There was a brief period when the federal government created safe harbor rates for hourly compensation arrangements with physicians, but those tended to be very low. They were of limited usefulness to companies making payments to physicians, and subsequently the federal government rescinded them. 

Pharmaceutical companies are required to comply with the fair market standard, but the government sets forth very limited guidance in terms of how fair market value should be determined.  One key area of guidance in the area of fair market value is the emphasis on not placing reliance on market rates. There is specific guidance from the government that cautions companies not to rely on values that may represent an overcompensation bias. 

 I think pharmaceutical companies are beginning to look at areas they didn't heavily focus on before. Anecdotal evidence suggested that physicians would ask for what they wanted, whether for a particular role within the company or in advisory services or educational areas, so it was more of a pharmaceutical company responding to their requests.  

What has changed since the fair market value yard stick was created? Have companies reorganized to remain compliant? 

 Increased scrutiny has come down on the medical device industry and within hospital provider markets, and now more heavily of in the pharmaceutical market. I think [this scrutiny] has changed the way arrangements are made. They've changed the way pharmaceutical companies interact with their physicians and thought leaders.  

 The best approach is to rely on the knowledge base of fair market value that exists in other settings. Fair market value is a term of art. It's generally defined as a value negotiated at arm's length between a hypothetical willing buyer and a hypothetical willing seller. The IRS has very clear guidelines on methodologies that are acceptable from the standpoint of a fair market value standard. Those standards and the fair market value body of knowledge can generally be cross-walked to the determination of the fair market value of a compensation arrangement. For example, with traditional business valuations the primary approaches are cost, income, and market. Likewise, in a compensation valuation setting, consideration can be given to the same three valuation approaches—so we're using the guidelines and the techniques that were developed in business valuations and applying them to compensation valuation. 

How have thought leaders responded to these changes? Has it directly impacted relationships with doctors?

 The reality is that thought leaders are not necessarily happy with changes, because the changes tend to limit their compensation. Now, with the government looking over everybody's shoulder, pharma has to say, "We can't pay you any more than X amount." Oftentimes, that is a benefit of going to a third party valuation company. A pharma can say, "Well, the valuators said we can't pay you more than this amount of money," so it sort shifts some of the blame. 

Also, the government is starting to put the brakes on granting unlimited amounts of money that could look like referrals. This has affected pharmaceutical programs. One of the issues we run into is how to compensate for the time that it takes a physician to travel to a venue. What is the appropriate way to value that time? We've had some interesting debates. We tend to not value it as highly as when they are actually engaged in whatever function they are hired for, because their expertise is worth more when they are delivering something of value. However, you have to compensate for that time because it takes them away from their practice. Which brings up other interesting point: Do you compensate somebody for what they would make in their clinical practice, or do you compensate them at the same rate when they are doing something more administrative? 

 Among guidance from the government, I mentioned that reliance on market values might contain an overcompensation bias. Another specific area relates to the issue of opportunity cost. The government is pointing out that the value of clinical services and the value of administrative services may not be the same so that's a key aspect of guidance in establishing fair market value.  

Where are you seeing the most errors committed? And, in terms of documentation, what should be used to demonstrate compliance?

 Errors are arising in several respects. One is the lack of appropriate documentation by the pharmaceutical company in determining how certain rates were arrived at. Another common error is simply relying on present market values that may be unrealistically high. A third error is the inappropriate assumption that the process of an arm's-length negotiation or meeting the demands of physicians constitutes fair market value.  

It's really left up to industry to determine the extent of documentation that is appropriate. The federal government, except in cases of compliance with corporate integrity agreements or in the case of the medical device industry, doesn't require that compensation payable to physicians be supported by an independent third party opinion. If pharmaceutical companies determine fair market value, then they need to develop a compelling argument for their the basis of their information and conclusions. They also must be ready to demonstrate to the government that they believe that what they're paying physicians is within fair market value. 

How is each physician accessed in fair market value calculations? Are there tiers?

 For a marketing engagement or event, you want somebody with expertise and prestige. If you are going to invite this person in an advisory role, you might want somebody who has experience in a particular area that you need advice in. A doctor's physical location may not be as important as his or her educational background, publication record, number of invitations to international symposiums, and number of speaking engagements. We go down to the level of looking at the first author on an article versus other authors on it. We scrutinize their résumé in great depth; looking at what publications they are in, what topics they've presented, whether they are a chairman of a department at a major university medical school. We look at why a pharmaceutical company is engaging them or what it is they will be doing. For the most part, especially with the work we've done for pharmaceutical companies, you might have three, four, or five of these types of individuals. The vast majority are physicians looking to specifically market or educate communities about a particular drug's value. If a doctor went to Harvard and is the chairman of his medical school, that may not be as important as being respected in the local community.  

In non-referring engagements, with no opportunities for referrals or compensation, we look at expert witnesses in medical malpractice suits. Usually in these situations, companies want the highest-level thought leader to review the issue. We receive data from attorneys all over the country regarding how much they pay for a thought leader in orthopedics or in neurosurgery for consultations and for trials. We weigh that against what role the physician plays, and then crosswalk it as a way to get out of the non-tainted data.  

How do you validate doctors who disagree with the rate you suggest? 

 If a doctor refuses the rate, then the pharmaceutical company can either take a risk and hire him at the rate he wants, not hire him, or change the duties to be more amenable to the doctor. The bottom line issue is paying for referrals or paying for business. Are you compensating somebody to give you business versus giving it to them for what they are actually doing?  

You must determine what level of risk you're wiling to take, and that's understandable because you can use all kinds of ways to get around it. If you want to take more risk, you don't need an assessment. You can just say, "Well, that looks like fair market value to me." If you have one physician you are paying a large amount of money to for a specialized task, you're probably not carrying a lot of risk. If you have 75 physicians being paid a lot of money to do something, then that will be more visible and open to scrutiny. So it comes down to understanding this level of risk, and recognizing that penalties are substantial. 

is manager at HeathCare Appraisers. She can be reached at 

is principal at HealthCare Appraisers. He can be reached at 

With no formal fair market value guidelines imposed by the government, how "fair" is it for pharma to play by the rules?

Fair Market Value

First, there was the international heparin crisis. Then more contaminated food, a crackdown on cough-and-cold medicines for children, melamine in baby formula, and multiple drug safety issues. The Science Board said that FDA cannot do its job due to a depleted work force, obsolete information systems, and a weak science base.

"FDA is barely hanging on by its fingertips," attorney Peter Barton Hutt told Congress a year ago, leading the chorus seeking increased resources for the beleaguered agency.

Since the Vioxx debacle four years ago, FDA's credibility has crumbled, opening the door for Congress and the media to play "kick the FDA," commented professor Alastair Wood in a 

 editorial last April. A leading critic is Rep. Rosa DeLauro (D-CT), who chairs the House Appropriations subcommittee that oversees FDA's budget. At an Institute of Medicine meeting in April, DeLauro asserted that FDA needs "urgent and dramatic reform" because it cannot perform basic functions, such as tracking clinical trials, conducting required inspections, and following up on postmarket study commitments.

DeLauro blames many of FDA's ills on Big Pharma, and has blocked funding for the Reagan-Udall Foundation until its organizers ensure that it's "not just another tool for industry."

Will more resourches and new leadership fix FDA, or is a major overhaul in order?

Pharmaceutical Executive-01-01-2009