 marketing dollars than to reach patients with unmet needs. That's why niche marketing has gained steam during the last few years. But increasing competition in accessing doctors who treat culturally and racially diverse patient groups means pharma marketers have to refine their definition of what constitutes a niche market in the first place. In doing so, they may stumble over a market that has not yet been saturated—US prisoners. 

 More than two million adults are incarcerated in the US, spread among federal, state, and juvenile facilities. (See "Potential Market?") They are more likely than the general population to have conditions such as HIV, hepatitis C, and psychotic disorders. In fact, they are three to four times more likely to suffer from serious mental illness, according to the US Department of Corrections. 

Physicians working in prisons are often not prison employees, according to Dilip Phadnis, chief executive of the Rowin Group, which is undertaking a study on prison drug use. He says institutions often outsource clinical services to companies such as Prison Health Services, which serves more than 300 correctional facilities in the United States. 

Phadnis notes that prisons use a national formulary and three prescription benefit managers (Correctional Medical Systems, Secure Pharma Plus, a sister company to Prison Health Service, and Diamond Drugs) cover nearly 700,000 prison lives.  

 More companies are making inroads into marketing to stakeholders who influence what drugs are used in jail. For example, Pfizer included this market when it launched its anti-psychotic Geodon (ziprasidone) in 2001. And the National Council on Correctional Health Care already reports many Big Pharma exhibitors—such as Abbott, AstraZeneca, Boehringer-Ingelheim, Janssen, and Roche—for its annual meeting at which 2,000 correctional health professionals are expected to gather in November. 

 Prisons spend nearly $6 billion on healthcare each year, according to the Rowin Group, so opportunity abounds. So do questions—like the rules governing the detailing of prison doctors. But careful market research, thoughtful education, and communication with all stakeholders paves the way to make the most of this growing opportunity. 

Articles

Columns

There's no better use of healthcare marketing dollars than to reach patients with unmet needs. That's why niche marketing has gained steam during the last few years. But increasing competition in accessing doctors who treat culturally and racially diverse patient groups means pharma marketers have to refine their definition of what constitutes a niche market in the first place. In doing so, they may stumble over a market that has not yet been saturated—US prisoners.

Doctors Behind Bars

Although The Medicare Prescription Drug Benefit

 will not go into effect until January 1 of next year, pharma companies face pressing deadlines right now that could significantly affect their share of the business from the 40 million Americans currently eligible for Medicare. During the first three months of 2005, companies must decide how they will contract for their products under the new Part D drug benefit of the Medicare Modernization Act (MMA). As this article goes to press, strategic analyses and discussions should be well under way. The decisions companies make over the coming weeks will directly affect their brands' access, reimbursement, utilization, and profitability under the new benefit.  

This article discusses the key factors pharma marketers must consider when making such critical decisions. It also serves as high-level strategic checklist for strategic planning and will help readers look ahead by providing an overview of some of the sales and marketing changes pharma companies face. For executives who have not yet considered these issues, it is most definitely crunch time.

Pharma companies that wish to compete in Medicare Part D must develop contracting strategies for their products during the next month or so. Because the focus has been on January 1, 2006—the benefit's official start—it may come as a surprise to many that the timeline for making these strategic decisions is so tight.   						

There are several reasons for this time crunch. The Centers for Medicare and Medicaid Services (CMS) requires that managed care organizations (MCOs) and pharmacy benefits managers (PBMs) that wish to become plan sponsors under Part D submit bids to CMS by June 6, 2005. These bids can be developed only with an understanding of the specific contracting terms for the products involved. Therefore, between now and June, MCOs and PBMs must discuss formulary positioning and product-specific contracting terms with pharmaceutical manufacturers. A CMS guidance issued on December 3, 2004 tightened the timeline even further by requiring MCOs and PBMs to submit their proposed formularies and approved drug lists by April 18, 2005. (See "Part D Timeline.") 

All of this leaves a very narrow window during which pharma companies must make some crucial decisions. For companies that are prepared, the potentially expanded market created by Part D represents a great opportunity. For others, failing to react quickly enough or making a wrong decision could be very costly mistakes. The challenge for manufacturers is to conduct the requisite research and analysis to support informed decisions—all within the constraints of a very tight timeline set by CMS. For companies that have not yet developed product-specific contracting strategies for Medicare Part D, now is the time to act. 

To develop an effective product-specific Medicare strategy, pharmaceutical marketers must gain a solid understanding of how Part D affects their products. This process may require significant primary and secondary research as well as financial modeling and scenario planning. Five key factors must be carefully evaluated: 				

 age distribution of the patient population receiving the drug 

 current management of the indicated disease in the Medicare population and how it could change

 geographic distribution of the patient population

 Medicare formulary management for the therapeutic categories

 effect on products' managed care and Medicaid business

 By looking at the age distribution of a product's patient population, marketers can answer some critical questions: How important is Part D to our overall business? What portion of our business is currently represented in the age 65 and older population? How well are we currently doing in the market segments most likely to be affected by Part D? What is our market share and how does it compare with our competitors in this population? 

Part D may have a far greater impact for products taken mostly by younger patients than for a product whose users are mostly over age 65 (and therefore eligible for Medicare). A caveat to this, however, is that age alone can be a misleading indicator of Part D's overall effect on a product; roughly one-third of all dual-eligibles—those enrolled in both Medicaid and Medicare—are under 65.   

Take anti-psychotic drugs for example. If the brand team for this type of medication looked simply at age distribution, it would notice that most patients are much younger than 65. Based on that finding alone, the team might conclude that Part D would not significantly affect the product's market performance. But they would likely be wrong. Many people taking anti-psychotic drugs are dual-eligible for both Medicare and Medicaid even though they are under 65. Currently, these patients receive drug coverage under state Medicaid programs. However, these dual-eligible patients will begin receiving their drug benefit under Medicare Part D in January 2006. Thus, Part D will be much more important for some categories than first glance would suggest. (See "Medicare Patients at a Glance," ) 

Marketers must determine whether the conditions for which their products are indicated are managed differently in the senior population than in the broader population and, if so, why. Are these differences a result of safety, efficacy, or economic concerns? In addition, they need to understand how the management of those conditions might change under Part D. The availability of the benefit may motivate physicians to alter their prescribing habits in various ways, posing new opportunities (and threats) to Rx products. Different drugs will be affected in different ways, and each brand team must assess its own specific situation. 

To illustrate how prescribing habits can change in the pre-Part D environment, a physician may treat older and younger hypertension patients differently: 

 The physician may be more likely to prescribe a branded angiotensin receptor blocker (ARB) to younger patients who are covered by their employer's private health insurance and can afford higher co-pays.

 For older patients on multiple medications, who may be on fixed incomes and paying cash, the physician may be more likely to prescribe a cheaper generic angiotensin-converting enzyme (ACE) inhibitor, such as lisinopril.

After Part D goes into effect, the older patient would qualify for drug coverage under Medicare and would be in a better position to purchase the more expensive branded product. Therefore, in some cases, Part D could increase the demand (commonly referred to as "induced demand") for branded products.  

On the other hand, Part D contains many incentives to drive generic prescribing. The widespread use of e-prescribing, which the legislation has mandated to begin in 2008, as well as point-of-sale counseling from pharmacists could also play a major role in driving the use of generics. These factors can pose a threat to certain branded products and must also be considered. 

The only way to make educated decisions is to assess MMA provisions that promote the use of generics and to conduct research with MCOs, PBMs, and physicians to determine how categories are likely to be managed and how physicians' prescribing behaviors could change. The outcome of this research will differ by product category and brand and will provide useful insights for developing brand-specific Medicare strategies. 

 On December 7, 2004, CMS announced new geographic regions for Medicare Part D, essentially redrawing the boundaries of competition for pharma companies, MCOs, and PBMs. Assessing the distribution of a product's current access and reimbursement in managed care and Medicaid, as well as current and potential patient populations across these regions, can help brand teams answer another key question: What geographies are most important with respect to Part D?  

For each of the 26 regions for Medicare Advantage and 34 regions for prescription drug plans (PDPs), a brand team must consider: 

What is the total number of Medicare beneficiaries in the region? What are their demographics (income, dual-eligible status)?

 What is the current access and reimbursement in the region for managed care and for Medicaid? 

 How well is the brand performing in the non-Medicare population in the region?

Although CMS worked with the United States Pharmacopeia (USP) to develop model formulary guidelines that MCOs and PBMs can use in developing their Part D formularies, the agency has made it clear that the USP guidelines will not be the definitive requirement under Part D. Instead, USP guidelines will provide one benchmark, while MCOs and PBMs serving as sponsors under Part D (with CMS approval) will determine their own formularies and how they manage individual drug categories. Thus, manufacturers not only must consider USP's Medicare formulary guidelines, they must also look to existing practices in managed care and must talk with individual MCOs and PBMs to determine how they manage specific therapeutic categories. 

 With the new "rules of engagement" laid out under Part D, marketers should analyze the potential effect of this program on other parts of their products' business, such as commercial managed care and state-sponsored Medicaid. Because Medicare Part D is designed to be a privately managed, publicly funded program, the same MCOs and PBMs that manufacturers have been dealing with for managed care will be plan sponsors under Part D. Thus marketers need to consider the potential for spillover from managed care to Part D and vice versa.  

For example, conversations with decision makers from leading MCOs and PBMs suggest that plans will certainly look to their existing formularies when developing their Part D formularies. Thus, if a product currently has preferred formulary status with an MCO, the product may have some slight advantage when it comes to the plan's Part D formulary.   

Marketers will also need to determine how Medicare Part D will affect their Medicaid business—both at the national and state level. More than 7 million of Medicaid's roughly 50 million beneficiaries are considered dual-eligibles—low-income seniors or disabled persons who are enrolled in both Medicaid and Medicare. In January 2006 under Part D, coverage of prescription drugs for those dual-eligibles who receive the full Medicaid benefits package will shift from Medicaid to Medicare. Meanwhile, states will still be required to finance a large portion of these costs through "clawback" payments to the federal government. Thus, marketers will need to determine how the transition of the pharmacy benefit for dual-eligibles from Medicaid to Medicare Part D will affect their products. A few key questions for brand teams include: 

 How much of the product's business is left in Medicaid (at national and state levels) after the dual-eligibles transition to Part D in 2006? 

 How will states change their approach to managing the therapeutic class in which the product competes? 

 How (if at all) should marketers adjust their approach to competing in Medicaid? 

Once a brand team has gained an understanding of how Part D is likely to affect its product, marketers can begin to develop an overall Medicare strategy and contracting approach. But first the team must establish its overall objectives and answer a series of key questions: 

How do we want to compete in Part D? Aggressively, moderately, selectively participate or not at all? 

 How will we balance access and reimbursement with market share and profitability? 

 What are the clinical and economic components of the product's value proposition and position? 

 How should we approach contracting? Should it vary by type of customer and formulary position being offered? 

Brand teams should establish a range of strategies, then evaluate their options using both quantitative and qualitative criteria to select the most appropriate one. They must define tactical initiatives and develop an implementation plan based on the critical Part D milestones that have been determined. 

While pharma companies are focused on initial planning for Part D, they should not lose sight of the broader ramifications of the benefit. As companies implement their strategies, the selling environment may change significantly, and as a result, some sales and marketing tactics may need to be adjusted. It is difficult to predict exactly what those changes will look like, but it is possible to identify where they are likely to take place: direct-to-consumer (DTC) marketing, managed care sales and account management, and field sales. 							

Under Part D, marketers will also need to reassess their overall approach to marketing to key customer groups—MCOs, PBMs, providers, and seniors. Thus, for each customer group, companies will need to consider: What is the right value proposition and positioning? What messages are appropriate? What is the right promotional mix and how should we allocate resources? 

Seniors, who will become a more important patient segment for many prescription brands, are likely to receive a barrage of DTC marketing through various media, including television, newspapers, and direct mail, as well as through their respective Part D plan sponsors. Pharmaceutical marketers will need to determine the optimum approach for reaching this new patient segment. 

Managed Care Sales and Account Management.

 The relationships between MCOs, PBMs and pharma companies are likely to change as the same parties begin to interact on two different books of business—commercial managed care and Medicare. To illustrate: If a pharma company is dealing with the same pharmacy director on both Medicare and commercial contracts, the director may be motivated to drive parity between the two books of business. Because Medicare rebates will likely be significant, the pharmacy director may try to pressure the manufacturer to offer increased rebates on the commercial side as well. Under this scenario, the pharma company's overall profit margins could be squeezed. To prevent such an outcome, manufacturers will need to be strategic about how they approach account management for MCOs and PBMs involved in both commercial managed care and Medicare Part D.  

Given the new regions defined for Medicare Part D, companies will need to re-evaluate certain geographic areas, because their importance could change significantly. Companies will need to consider making appropriate adjustments to their sales force size, structure, and alignment, as well as to how resources (for example, sampling and promotional dollars) should be allocated across the sales force.  

Also, as things shift under Part D, sales force incentive compensation plans are likely to become outdated and will need to be realigned. Consider the following hypothetical situations: In a territory with a large number of Medicare beneficiaries and favorable Part D formulary positioning for key products, a rep may have to do very little work to meet his goals and achieve a maximum bonus. In a territory with fewer beneficiaries and/or mixed coverage for key products, a rep may expend Herculean efforts but barely "move the needle" and fail to receive an appropriate bonus.  

A product's formulary position under Part D may also have a significant effect on the product's overall sales performance because of increased or decreased physician prescribing. If a physician who has been a historically  strong prescriber learns that the product does not have adequate formulary coverage under Part D, she may be less likely to continue prescribing that medication, and her new mindset could spill over to non-Medicare patients. Such changes can ultimately affect product sales and necessitate adjustments to pull-through approaches. 

Although pharmaceutical marketers have much to consider before developing product-specific strategies, there is still a window of opportunity to act now—a window that is rapidly closing as the timeline shortens. In addition, pharmaceutical  companies must look down the road and anticipate what the long-term ramifications of the Medicare benefit are likely to be. A watch-and-wait approach at this critical juncture would be very short-sighted indeed.   

 is senior vice-president, Managed Markets Practice, Campbell Alliance. He can be reached at 

Features

For companies that are prepared, Part D represents a great opportunity. For others, failing to react quickly enough could be a costly mistake.

Medicare: D Day

				In the highly competitive arena of pharmaceutical development and marketing, organizations aiming to keep pace must look beyond their own backyards. Alliances between pharma and biotech companies, or between big pharmas and small, are commonplace and increasing. The logic behind such teaming is clear: Each partner brings something of value to the table and, working together, they create (at least theoretically) a stronger force and position themselves for greater results through strategic collaboration. As pipelines need fuel to sustain profitability and growth, organizations look to ensure competitive advantage by joining with an ally to co-develop and co-promote products, leveraging each other's strengths and building on mutual opportunities.  

We understand why alliances are formed. The continuing question is: How can companies best prepare and sustain their alliance teams for success? 

One of the biggest challenges in creating successful alliance teams is the ability of brand and senior management from each company to understand and manage the issue of cultural compatibility. "It takes two to tango," says the old adage. But what happens if one partner excels at tap-dancing, while the other prefers a stately waltz? At best, there's the chance for each to learn some new steps; at worst, the partners won't even agree on what tune to play. 

Culture is "the integrated pattern of human behavior that includes thought, speech, action, and artifacts." Or, as Marvin Bower, former managing director of McKinsey & Company once said: "It's the way we do things around here." Extending to alliances, it's how the behaviors, values, and operating procedures of two separate entities interact.   

Effective teamwork doesn't happen by accident. Ignoring cultural issues overlooks the fact that however strategic and viable the mission at hand, it's up to the people involved in the alliance team, with all their individual talents, skills, foibles, and tendencies, to align and move forward on the shared agenda thrust upon them. The lawyers who wrap up the deals on alliance contracts are understandably focused on the bottom line—specifically, how will this deal enhance the company's financial performance? Meanwhile, the joint team tapped to carry out the deal is subject to a host of pressures, the most fundamental of which is that their ability to get work done 

—as a team—will determine their ultimate success.  

Once a deal is in place, close and immediate attention to potential cultural issues confronting an alliance team offers a huge jump-start toward success. Too often, however, no attention is paid. The alliance is announced. Individuals from each side are thrown, willingly or otherwise, into the fray. Groups of functional experts from each company are now expected to work in lockstep, as a team—collaborating, communicating, managing conflict, making decisions, effecting strategy—without regard to how such operational procedures are normally conducted within each respective camp. Certain "mechanical" processes, such as forecasting, budgeting, information technology systems, usually have to be put in place right away. Yet the team itself is expected to "bond" and "grow together" without even the corporate equivalent of a ceremonial "Kumbaya" around the campfire to commemorate the union.  

Given the enormous costs associated with failed alliances—of which statistics tell us there are many—addressing the cultural fit of the allied companies is ultimately a fiscally responsible course of action.  

EquiPro recently worked with the newly formed senior management steering committee of an alliance team comprised of members from a big pharma and a small pharma. Their charter was to ensure the success of a new drug by providing strategic direction; challenging and approving the brand plans and key business decisions; and creating winning external/ internal conditions across both organizations.  			

As part of the "team jump-start" process (an off-site meeting to align their goals), we suggested that team members examine each other's culture to anticipate areas of potential compatibility and conflict. We used the Leadership Culture Questionnaire, a validated survey developed by the Management Research Group (MRG). The survey measures 22 specific cultural practices within five leadership functions—creating a vision, developing fellowship, implementation, follow-through, and team-playing. The survey results indicated which cultural practices were strongest in each company. These practices were assumed to reflect the leadership values and behaviors of the senior management of each alliance partner.  

The steering committee came together to explore particular strengths, challenges and potential implications for their collaboration, using the quantitative survey data for their discussion points and as a common basis of analysis. Essentially, the issue was how to learn from the leadership culture data—that is, how to capitalize on their differences, adapt to and transfer new methods to the joint team, and become more effective in interacting with each other.  

On the surface, these allies appeared strikingly different—the small pharma a fast-moving, entrepreneurial organization, the big pharma more conservative and accustomed to layers of decision-making. Surprisingly, the profiles generated using the culture survey proved strikingly similar (See "A Tale of Two Cultures,"). The team saw this similarity as a potential asset in some areas—and a potential liability in others. For example, the two organizations shared high scores on innovative problem solving, a positive factor in fostering new ways to approach their mutual objectives. Interestingly, especially with regard to big pharma team members, the new partners also shared a trait of not being very process-oriented, indicating a need for the joint team to develop systematic ways to make decisions and determine strategy.  

This illustrates the advantage of providing alliance teams with solid information about cultural style differences and similarities. It creates an opportunity to implement structures, processes, and norms that anticipate and help mitigate potential risks, threats, or incompatibilities inherent between the two allied partners. In turn, an effective, high-performing alliance can generate a stronger bottom-line outcome.  

Consider another case—one of cultures colliding: a small biotech with a promising new pipeline drug approaches a big pharma company with established marketing channels and deep pockets.  			

In this case, the issue of culture was never raised, even while the companies' differences in size and geographic locations raised immediate, implicit assumptions about cultural differences. For example, though entrepreneurial in nature, the small biotech was risk-averse, academically oriented, and had a definite bent toward filling its ranks—in particular, its upper echelon leaders—with experienced people. Conversely, the big pharma had a broad enough talent pool to afford a few calculated risks and adhered to more of a "sink or swim" philosophy of indoctrinating managers. These distinct cultural characteristics showed up immediately on one of the team's first important tasks: agreeing on who should be on the team. Both kept to their usual practices—the small biotech tapping veteran talent, expecting them to roll up their sleeves and be productive team members, and the big pharma giving less experienced people stretch assignments for development, relying on senior management to provide hands-on coaching. 

Beyond a lack of agreement about team-member selection, the companies' different philosophies converged to become a source of mutual frustration in several areas. Over time, the culture clash became painfully obvious and the team derailed. In a smart attempt to get to the crux of their problems, team members gathered off-site, where the senior management and team leaders from each camp stepped to a podium for a specific purpose: to explain their respective organizational cultures, describing "the way we do things around here" and then relating that back to the alliance. 

One important result of the experience was that the alliance team moved from a stubborn perspective of "Why can't you be more like us?" to realizing that the team was formed specifically because: "You're not like us—and that's okay." The point was to recognize and respect their differences and then leverage them for the good of the alliance.  

The open communications enabled a newfound trust and a focus on shared values, and their collective cause became the basis for their work going forward. They acknowledged, belatedly, that perhaps if they had examined their cultural issues from the start, the team could have spent significantly less time, money and frustration and been that much further ahead on their project goals. 

When examining the cultural fit of an alliance team, the objective is not to change the organizational culture of the other party. Alliances are not intended to last forever. Both organizations will retain their respective identities. Cultural differences are, at their core, differences in leadership values. It is important to acknowledge and make transparent and explicit the leadership values of each alliance partner—including the fact that those values propelled each partner to a level of success that made the alliance attractive in the first place. To do this, EquiPro frequently uses a Culture Appreciation Exercise to facilitate learning about each other's organization, separate realities from perceptions, and determine how to make differences between the two work for the alliance.  			

In some cases, specific process changes can set team members on the right track. For example, we worked with an alliance team that was on its way to developing a blockbuster in a niche therapeutic market. When team members came together every two months for face-to-face meetings, they seemed to operate as an integrated and compatible team. Yet the minute they walked out the door, they were already feeling the tug of their own organizational cultures. Despite their satisfaction in the team setting, members on each side faced line managers who wanted to wield more power over the alliance and perceived "the other company" as having conflicting goals and interests from their own. Once team members were "back home," the strength of their organizational cultures held sway. Frustration set in and team trust began to erode.  

EquiPro's Team Effectiveness/Cultural Diagnosis brought this to the surface. We then put in place a more structured communications and decision-making process that helped to keep the team more aligned and counter-balance their cultural pulls. 

Alliance teams are, by definition, temporary in nature—even if "temporary" can mean up to a decade or more. Still, in terms of the influence team leaders and members have on the outcome of their business charter, an alliance team operates no differently than an individual company. A leadership "loop" exists within every organization: leadership values and behaviors establish a particular organizational culture; that culture, in turn, influences the motivation and capabilities of employees charged with getting the work done; their level of motivation and capabilities determines the level of performance; and the performance results feed back into the loop to corroborate or modify existing leadership values and behaviors. 			

Within a single organization, the perpetual domino effect of this model is straightforward. Extended to an alliance team, however, two separate cultures are in play and, where disparities exist between them, two sets of messages are delivered and conflict is bound to emerge. Examining cultural disparities—as well as areas of like-mindedness and similar modus operandi—enables a team to mesh and come "into the loop" with a consistency of purpose and influence.  

One alliance team adopted the motto: "Beat the competition with the brand, and do no harm to our partner." Not a bad idea, but also not really a best-case scenario. As the industry gains more experience in alliance management, companies need to aspire to be "partners of choice" and to develop a credo of guiding principles that govern how their teams enter into and carry out a cross-cultural alliance. In recent years there has been a dramatic increase in the degree to which pharma companies rely on other organizations to supplement pipelines and commercial capabilities, and the trend shows no signs of slowing. Financial potential will continue to dominate deal decision-making. What pharma is still learning is how excellence in alliance management—which includes managing cultural differences—can reduce many of the risk factors involved in any major partnership.  

An effective, high-performing alliance can generate a stronger bottom line outcome.

Bridging the Gap

 Antiretroviral drugs can bring patients back to life. But how do pharma's products get to patients at the heart of the world's biggest health disaster? 

 The Medicare Prescription Drug Benefit doesn't begin until next year. But for pharma, a key deadline is right around the corner. 

Sampling is an enormous part of pharmaceutical marketing. But no one has been sure what 

Doretta W. Gasoreks and Jeffrey T. Resnick

In a memorably bad year for pharma, a few companies still managed to shine. 

Lynda C. McDermott and Esther Fleischhacker

It's not the deal that scuttles most strategic alliances. It's the culture. The key to success: Know your partner (and yourself). 

Fran DeGrazio of West Pharmaceutical Services on packaging for biologics. 

Safety is dominating the debate over drug regulation. And that's not all good. 

British royalty: Cambridge Antibody Technologies wins its case against Abbott. 

Cambridge Antibody Technologies (CAT) has won a great victory for small pharma companies in its battle with Abbott over royalties for the arthritis drug Humira (adalimumab). The High Court in London surprised the City by ruling that Abbott should pay CAT the originally agreed-on royalty of 5 percent, rather than the 2 percent it has thus far been paying. Analysts estimate the difference could be worth as much as £210 million ($392 million) to the biotech company. 

At the heart of the year and a half long court battle was the question of whether Abbott should be able to offset royalties it owes to third parties against what it has to pay CAT. The original deal was made in 1995 with Knoll Pharmaceuticals, the pharma division of the German chemical conglomerate BASF. Abbott purchased Knoll in 2000.  

Knoll, and later Abbott, used CAT's library and phage display technology to develop the genetically engineered human antibody treatment for rheumatoid arthritis, which was launched at the beginning of 2003. Abbott argued that it could reduce CAT's royalties to 2 percent because of the involvement of other companies that also required a royalty cut. CAT has been paid only $5.6 million so far, much less than the company believes it was due.  

In its first year on the market, Humira generated sales of $280 million. Sales are predicted to reach $1.2 billion in 2005, and analysts think they could peak at as much as $2 billion a year. Estimates of Abbott's total liabilities to the four companies whose technologies were used in developing and manufacturing Humira are around 13 percent of sales.  

In the ruling, Justice Hugh Laddie said Abbott's reduced payments did not meet the requirements of the royalty-sharing contract in place between the two companies. He claimed that Abbott's arguments did "violence to language of the agreements, renders them obscure and makes little or no commercial sense." Although the 1995 contract did contain a royalties offset clause, the reduction was only to come into play if CAT's contribution could prove to be lessened by the involvement of a third party who required royalty payments. This was not the case here, the judge ruled, claiming that Abbott deliberately misinterpreted the contract to reduce its liabilities.  

If Abbott is not allowed to appeal (or the appeal fails) then CAT will be awarded back payments of around £15 million ($27.8 million). Its shares rose by a quarter on the news. CAT's chief executive Peter Chambre described the victory as an exceptionally good result for the company's shareholders. At a stroke, it will create a well-funded biotech, with money in the bank to pay for research over the next few years. And with less desperation to find cash from investors, the company will be in a stronger position when negotiating deals with Big Pharma, which is becoming increasingly reliant on early stage research carried out by biotechs.  

In 2003, according Wood Mackenzie, 35 percent of the profits at the top 10 pharma companies came from in-licensed products. This percentage will rise as pharma companies enter into ever more licensing deals. And with a growing proportion of their revenues coming from in-licensed products, Big Pharma's bottom line is ever more dependent on the level of royalties it has to cough up to its licensing partners.  

So it's not just CAT that should be cheered by the decision, which has positive ramifications on a wider scale. Traditionally, biotechs have been negotiating from a position of weakness—few have the funding in place needed for their research. Despite the growing reliance of the big boys on the fruits of that research, they know they can negotiate hard and secure good deals. This decision tips the scales the other way a little bit. More financial security for the little guys can only be beneficial—for biotechs and Big Pharma alike. 

 globalcorrespondent. She can be reached at 

The High Court ruled that Abbott should pay the agreed-on royalty of 5 percent rather than the 2 percent it's been paying. The difference may be worth $392 million

Small Pharma's big Win

 billion dollars, sampling is a tempting target for industry's cost cutting efforts. The retail value of samples distributed each year to physicians is pharmaceutical companies' second largest promotional expenditure—topped only by the $16.5 billion dollars spent on detailing—yet the effect of this investment on physician prescribing behavior and the market in general is poorly understood.   

The relationship between putting samples in a physician's office closet (often shared by several others in a group practice) and changes in patient treatment behavior has been an elusive metric. Because the return on this promotional investment has defied quantification, some pharma management sees reducing samples as a way to improve the bottom line. But those executives are toying with a billion-dollar decision with little or no understanding of the actual role samples currently play in the complicated web of healthcare in the United States.  

ImpactRx has examined this issue since 2001 and has learned some valuable insights. From networks of more than 3,000 high-volume prescribing (HVP) primary care physicians and specialists, the company has collected extensive, longitudinal sample usage data that offers a different look (than has traditionally been available) at the use of samples in our healthcare system.  

With regard to samples, the research has uncovered an intricate relationship between the pharma industry, physicians, and patients. Physicians increasingly view samples as an important subsidy provided by the industry to their patients and thus the healthcare system of the United States. Almost universally, physicians in focus groups emphasize the important role samples play in providing drug therapy to their patients who do not have prescription coverage.   

A subset of physicians even refuses to give samples to patients with prescription drug coverage, preferring to save those samples for patients without it. Physicians also express a high degree of gratitude to the industry for providing their patients with samples and feel a need to support the companies that provide this subsidy. 

Thus, the United States currently has in place  a promotional mechanism in which a substantial portion of the samples distributed by the pharma industry is actually used to subsidize an underground network of support that provides prescriptions to a segment of the population that otherwise would not receive treatment. How extensive is this level of support?  

That depends on the therapeutic category. For erectile dysfunction, 34.7 percent of patients receive sample-only therapy. In other words, these patients see a physician and are given samples but not a prescription. In other classes, such as statins for cholesterol and oral anti-diabetics, the percentage is much lower, 5.8  and 5.5, percent respectively. (See "Treatment by Sample.") 

Although it is possible to quantify the amount of free therapy given out by physicians, uncovering their motivations is tougher. There are several reasons why a doctor might give a patient samples without a prescription—such as for an initial trial of efficacy and tolerability or simply to make room in the sample closet. Nevertheless, even if just a faction of these sample-only therapies represents physicians purposely providing free treatment to patients who do not have prescription coverage then the industry is contributing a major, virtually unheralded subsidy to the healthcare system of the United States.  

This has important implications for companies considering making changes to their current sampling system. Samples represent a "safety valve" for physicians by providing a way to treat patients who otherwise couldn't afford medication. Putting an end to sampling could erode, perhaps even destroy, the goodwill accrued by the pharma industry with physicians for providing this subsidy. On the other hand, the industry is currently getting little or no public credit for this enormous subsidy.  

Yet industry must still consider how much sampling should be reduced to maximize it return on investment and improve the bottom line. The first step is to look at where samples go after the sales representative puts them in the closet. Physician distribution of samples to patients can be organized into one of three major groups: 			

Samples given to newly diagnosed patients with a prescription

Samples given to previously diagnosed patients with a prescription

Samples given to patients with no prescription

ImpactRx data collected during the first six months of 2004 reveals some interesting patterns. (See "Sample Distribution,") The most striking finding is that roughly 60 percent of all samples are dispensed without an accompanying prescription—clear evidence of the magnitude of the subsidy provided by the pharma industry. But even stronger evidence can be found with a close examination of the level of samples being dispensed to previously diagnosed patients who also receive a renewal prescription. 

Although the average across all therapeutic classes in that group is 15 percent, the highest percentages are found in the chronic conditions: diabetes, high-cholesterol (statins), osteoporosis, and hypertension. These classes constitute an average 27.5 percent of all samples being distributed to previously diagnosed patients. 

The data does not distinguish between how much of this behavior is a function of physicians "clearing out their closets" as a result of over sampling and how much is physicians augmenting lack of, or poor, prescription coverage. Yet the information gathered in physician focus groups provides strong anecdotal evidence that a large portion of these samples is given to patients to subsidize their drug therapy. 

Also noteworthy is the distribution patterns in the more acute classes. Approximately three-quarters of the oral solid antibiotics and COX-2 samples are distributed to patients without a prescription. Other classes such as proton pump inhibitors (PPIs), asthma, and allergic rhinitis approach the two-thirds threshold. Not all of these samples are given strictly to augment holes in prescription coverage. At least 25 percent of all Americans have no prescription coverage, as reported by National Conference State Legislatures. Some is simply the cannibalization of potential prescription drug customers.  

That leaves only 25 percent of samples to be given to newly diagnosed patients with a prescription—the classic scenario of new-patient trial that represents the highest potential return on investment. And any new system that will reduce the tendencies or incentives for physicians to dispense free therapy when the patient could afford a prescription represents a double return for the industry: a paid prescription and no samples dispensed. 

Because the returns associated with sampling are so poorly understood, analyzing the short and long-term effects of changes in the sample distribution system is challenging. There are hundreds of possible variants between the current status quo and a complete end to sampling. Yet one thing is clear: The ROI of the current system is so low that any attempt to change it is worthwhile. 							

The easiest solution—a total cessation of sampling—comes with the unacceptable risk of destroying the goodwill accrued with physicians and exposing the industry to increased governmental intervention. So modifying the current system seems more advisable. One viable alternative is to highlight the untapped benefits associated with bringing this hidden subsidy to light. Media coverage of the pharma industry focuses on rising prices, shrinking Rx coverage, and cheaper prices in Canada and Europe. Yet it goes unmentioned that a multibillion-dollar subsidy, financed exclusively by the pharma industry, is in place and growing. 

So a case can be made that in configuring a new sample distribution system that quantifies, and perhaps even increases, the use of samples as a healthcare subsidy will generate public goodwill and potentially reduce the call for government controls.    

Ultimately however, a more comprehensive revamping of the system needs to occur. What type of system could do this? The first step is to understand and quantify what physicians are giving to patients on a brand-by-brand basis versus just knowing what reps are leaving in the sample closet. These types of data are available and can be used to benchmark brands' performance against one another and quantify the sample ROI. Redeemable vouchers, distributed by physicians and redeemed at pharmacies, might address this issue. The vouchers could be designed with a "check box" specifically asking for the reason the patient was given samples. "Lack of prescription coverage" as one option to check will generate data that should shed light on the true value of this underground subsidy. 

Any system that drives patients to the pharmacy will likely have other benefits as well. Roughly 40 percent of samples are dispensed with a prescription, but how many of those prescriptions are actually filled by the patient? Getting patients into a pharmacy to redeem their voucher has the potential to increase fulfillment rates. 

Vouchers can also help mitigate another problem: samples that end up in the dumpster. ImpactRx does not collect data on samples that are thrown away because they have expired, but anecdotal accounts from physicians indicate that a significant quantity of samples are ultimately discarded. 

This is not unexpected. Physicians are trained to diagnose and treat illnesses, and sales reps are trained to market and sell prescription drug products. But neither is trained in the nuances of inventory management. The current system cannot help but be inefficient. However, this is a real strength of pharmacies. Moving at least some sample distribution to pharmacies will take advantage of the efficiencies inherent in the electronic inventory, billing, and reporting infrastructures that already exist at pharmacies today. 

Implementing this will not be easy. Any system that has grown to $10 billion dollars in size will prove resistant to change. One of the first problems will be to herd all the major pharmceutical    companies toward accepting a new sampling approach at roughly the same time. No one will want to unilaterally change first and expose their products to a potential competitive disadvantage by not having samples in the closet while competitors continue to stack the shelves. 			

Nor will all pharma companies likely agree on how a replacement system should be designed. The data shows wide differences in sample usage across therapeutic classes, product lifecycles, and even within companies. There will be winners and losers with any change.  

These problems, however, are not insurmountable. The current system's ROI is so poorly understood that perhaps some forward-thinking companies will be willing to walk away from it in exchange for a new system with well-defined benefits. The companies that undertake this journey first will also benefit from having the most influence in shaping the new sampling paradigm.  

It should also be noted that the industry has already started build the foundation for transitioning from the sample closet to the pharmacy. The use of coupons continues to increase, and physician behavior is adapting accordingly. In 2004, in some categories, 10 percent of newly diagnosed patients received coupons. (See "Sampling with Coupons,") Overall a significant number of patients and physicians have been prepped for change. 

Although changing the current sampling system will be painful and messy, it is necessary. The level of inefficiency, waste, and unrecognized value in today's sample distribution makes it worth the effort. The pharmaceutical industry is at one of those rare conjunctions in business where everyone involved—the company, the physician, other healthcare providers, the patient, the pharmacy, and even the government—could all benefit from a new and improved way of doing things.  

 is president and CEO of ImpactRx and can be reached at 

 Bob Caprara is the company's senior vice-president, advanced analytics and market research, and can be reached at 

Physicians give only 25 percent of samples to newly diagnosed patients, along with a prescription.

The Sampling Subsidy

 issue for pharma, its regulators, and its critics. The past few weeks have seen the issue receiving a new level of attention in almost every area of drug development, regulation, and marketing. The latest round of events—from dropped research projects to new regulatory proposals—show just how pervasive safety worries are likely to become in the months to come.

One response to today's safety concerns is particularly alarming: The research community has become skittish about clinical studies that involve pain medications and other high-risk treatments. In December, researchers halted an important NIH-sponsored study to test whether COX-2 inhibitors might help prevent colon cancer. The study was killed when data from more than 2,000 patients indicated that those taking Pfizer's Celebrex (celecoxib) were experiencing more cardiovascular events. 			

A few days later, NIH halted a study testing whether naproxen (Bayer's Aleve) or Celebrex might help delay the onset of Alzheimer's disease in high-risk individuals. This time the researchers found cardiac risks in patients taking naproxen—but not Celebrex. Despite the mixed safety signals, investigators also put a hold on additional NIH cancer trials seeking evidence of additional uses for commonly prescribed painkillers. Some 40 studies testing Celebrex for various purposes are currently under review. Pfizer believes the data are inconclusive about safety and may yet reveal anti-cancer benefits. Pfizer is keeping Celebrex on the market pending review—but will comply with an FDA request to halt direct to consumer advertising for Celebrex and to provide more risk information to doctors pending further safety evaluation. 

The panel that conducted the review acknowledge that the bad news about COX-2 safety problems led them to examine the adverse event data from these trials earlier than planned. Some cancer trials use doses much higher than those recommended for arthritis patients, which may have led to higher rates of side effects. But more than 20 million people have used these therapies, and the reviewers felt they had to be exceptionally cautious. FDA plans to address COX-2 issues at a meeting of its drug safety advisory committee late this month and is working with the Institute of Medicine (IOM) on a broader assessment of the agency's safety review activities. (see "Making Medical Errors Rare," ) 

Another response to drug safety problems has been to urge more head-to-head comparison of similar medicines. The Medicare bill authorized the HHS Agency for Healthcare Research & Quality (AHRQ) to support more research on comparative effectiveness of medical interventions—explicitly including prescription drugs—for the top 10 conditions affecting the elderly. AHRQ's 2005 budget contains $15 million for this initiative—much less than the $50 million initially proposed, but enough to get the program started.  			

In December AHRQ issued a long-awaited list of priority conditions warranting comparative study: ischemic heart disease, cancer, asthma, stroke, arthritis, diabetes, dementia, pneumonia, stomach ulcers, and depression. AHRQ will start by funding projects to review the scientific literature on outcomes of various treatments for these conditions. The aim is to help physicians and patients make informed treatment choices by communicating the results to Medicare, Medicaid, health plans, prescription drug plans, and the public. AHRQ is not supposed to set national standards of care, but its analysis is likely to lead to increased agreement on the relative effectiveness of certain interventions. 

Manufacturers stress that any comparative drug analysis should focus more on effectiveness than on costs. In addition, it should include drugs among a full range of treatment options and recognize that patients respond differently to various treatments and products. Industry has long opposed any move by FDA to require clinical studies of new versus existing drugs in order to bring a new drug to market, as noted in a PhRMA (Pharmaceutical Research and Manufacturers of America) white paper on government-supported outcomes research issued a year ago in anticipation of increased involvement in this area by AHRQ and NIH. A main concern is that comparative studies could block some less effective products from coming to market, even when those drugs offer benefits for certain patients. 

Meanwhile, private insurers and payers are supporting more comparative studies, as seen in the growth of the Drug Effectiveness Review Project operated by Oregon's Center for Evidence-based Policy Support. The project is providing 12 states and other organizations with head-to-head comparisons of drugs that treat common conditions such as diabetes, migraine, and elevated cholesterol. The objective is to help health plans select the most effective, cost-effective drugs for formularies, but in today's climate, analysts are paying close attention to safety as well. 

The safety issue is contributing to the clamor to revamp FDA drug regulation. Many old proposals are back on the table after languishing due to a lack of funding. Now Congress may be more willing to ante up the money to expand post-approval monitoring and other initiatives. Look for proposals to: 			

 to limit product distribution, curb marketing, and enforce safety requirements as alternatives to pulling a risky drug off the market completely. The aim is to give FDA more clout to compel companies to expand label warnings and to revise misleading advertising. 

Establish an independent drug safety office.

 A major debate is expected over proposals to separate the review of safety and efficacy data and to give safety officers veto power over risky new drug applications. Manufacturers and many FDA officials believe it is important to consider safety and efficacy data together to fully evaluate risks and benefits, and FDA is proposing internal changes designed to avoid a major reorganization.  

Switch to a "conditional approval" system

 with a regular schedule to reassess safety and efficacy data in order for a drug to remain on the market. 

Expand post-marketing study requirements.

 All parties acknowledge that many drug effects emerge only after many thousands, even millions, of patients have used a medicine for many months. Thus, there is support for giving FDA more authority to compel manufacturers to conduct post-approval studies. 

 and study disclosure. Manufacturers are expanding data posting activities voluntarily, but some members of Congress believe that mandated disclosure is needed to ensure that all important safety information reaches prescribers and patients. (For more information, see "See-Through Research".) 

 reporting system to capture and analyze adverse drug event reports more quickly and more effectively. FDA needs additional resources to conduct more prospective safety analyses and to utilize health system databases that collect information on a broad range of drug effects. The new Medicare drug benefit could provide HHS with a gold mine of drug prescribing and utilization data on a fairly vulnerable patient population, which may enhance FDA post-marketing capabilities considerably. 

 and other marketing activities, particularly for new products and those that raise safety concerns. Critics claim heavy advertising and the resulting inappropriate prescribing of Vioxx and Celebrex turned drugs designed for fairly targeted patient populations into blockbusters, creating serious health problems and boosting healthcare spending.  

Washington Report

One response to today's safety concerns is particularly alarming: The research community has become skittish about conducting clinical studies involving pain medications and other high-risk treatments.

Side Effects

It is already passé to say that 2004 was a year of disappointments for the pharmaceutical industry. The recall of Merck's Vioxx (rofecoxib), the concern over other COX-2 inhibitors, new drugs that did not live up to expectations, and Chiron's failure to ship flu vaccine from its UK supplier—all bricks in the wall of worry. As industry observers can attest, the escalating anxiety took large unexpected bites out of the market value and reputations of many companies.   

But amid the damaging press reports, pharma executives and industry analysts—in response to Rating Research LLC's (RRC) third annual insider survey—say they still view pharma companies as "excellent" and are, for the most part, still willing to personally invest in them. (See "About the Survey")  

In an industry dependent on partnerships and licensing agreements, internal reputation is critical to success. In 2004, some of the brightest stars in past reputation surveys—most notably Merck and Pfizer—lost some of their luster. But others—Eli Lilly, Genentech, and Amgen— rose with equal and opposite flair to take their place and to keep industry averages at or above previous levels. 

In the 2004 survey, executives responded to more than 50 general industry questions and assessed 19 leading pharma companies individually. An average of 62 percent of the executives polled said they agreed or strongly agreed that each of the 19 pharmas is an "excellent company." That percentage was about even with the results of two previous studies. (See "Reputation Trends.") 

And despite the uncertainties of 2004, a slightly greater percentage of executives this time (49 percent) said they would be willing to invest in pharma compared with past years (46 percent in 2002 and 2003). And their willingness personally to support those companies in times of controversy remained stable on average (32-34 percent). At the same time, the scores on "willing to invest in" and "willing to support" were substantially lower than the scores on "excellence." That represents a vulnerability for some pharma companies. The latter measure indicates whether industry constituencies are willing to give a company the benefit of the doubt, an issue that may be critical for companies suffering from continued negative press. 

That said, there was one important sign that executives were willing to be circumspect about the events of 2004. An analysis of the executives' responses shows the Vioxx recall did not have a statistically significant impact on their opinions of pharmas in general. Regardless of whether executives were interviewed before or after the October recall, the overall pattern of opinions was essentially the same. As insiders committed to partnering with others in the pharma industry, it appears that executives who have a long-term view give less weight to current events and surprises. Not financial analysts.   

Analysts view the industry from outside and are able to shift their investments rapidly to capitalize on perceived short-term opportunities. So it is not surprising that their opinions of pharma companies deteriorated rather sharply following the Vioxx withdrawal. Before the news, 64 percent of analysts agreed that Merck "is an excellent company." After the announcement, only 13 percent still felt that way. The number of analysts willing "to invest in Merck" showed a similar pattern. (See "The Vioxx Factor.") 			

Given the publicity surrounding the recall and the questions raised about other anti-inflammatory drugs, it is not surprising that the event also had a strong effect on analysts' opinions of other companies in the industry. Among analysts interviewed before the announcement, an average of 64 percent said they agreed (or strongly agreed) that the 18 pharmas (excluding Merck) were excellent companies. After the announcement, the average dropped to 53 percent.   

It is important to note, however, that analysts' opinions of both company excellence and investment willingness were more sanguine in 2004 before Vioxx than they were in the 2003 study. At that time, only 45 percent of analysts said they would be willing to invest in pharma companies. In 2004, 50 percent of analysts interviewed before the Vioxx event were willing to invest in pharmas. Analysts interviewed after the announcement were significantly less willing to invest (39 percent), but that only brought the 2004 average down to equal that of 2003. Researchers speculate that before Vioxx, analysts tended to feel that the industry had passed through the challenges of 2003 and were ready to reconsider investment in this traditionally strong industry. 

Although the industry averages didn't change much, the reputations of individual companies fluctuated greatly between 2003 and 2004. (See "Overall Reputation Ranking.") To generate the Reputation Strength Scores (RSSs) for each company, researchers analyzed executive responses (no analysts) using a proprietary reputation strength model that incorporates factors such as behavioral measures and the current drivers of reputation strength.  In 2004, the metrics, listed in order of relative importance, were: 			

 was the biggest winner in the overall reputation rankings for 2004. The company took the top slot, and its score jumped nine points from 63 in 2003 to 72 in the current survey. That made Eli Lilly one of the highest ranked firms during the 2002-2004 period, nearly reaching the record score of 74 set by Johnson & Johnson in the 2002 study.  

RRC researchers believe Lilly's strong revenue growth from new product sales may have helped to lift its 2004 score. But equally important, survey respondents pointed to significant improvements in the company's commitment to R&D, the quality of its employees, and its financial transparency as key elements of reputation strength. Said one executive: "Eli Lilly is a world class pharmaceutical company focused on many key treatments."  

 also rose sharply in the RSS rankings to claim the second place position for 2004, up from seventh a year earlier. The company registered an eleven-point increase—from 60 in 2003 to 71 in 2004. RCC believes the successful launch of Genentech's Avastin (bevacizumab) colon cancer drug and its strong growth prospects in pharmacogenomics (personalized medicines) helped to boost its reputation last year. This premise is based on respondents' references to the innovativeness of Genentech's products, the quality of the company's employees and regulatory relationships, and its strong corporate governance. As one executive commented, "Genentech is a highly innovative and creative organization and is well positioned for the future." 

 also made a strong showing in 2004, moving up to third place in the overall ranking with an RSS of 70, up five points from 2003. Respondents pointed to improvements in Amgen's employee retention and work processes, along with its ability to execute strategic alliances and successful acquisitions. One executive's comment that Amgen is "a technical leader and very creative" is typical of respondents' views of the company.  

Troubling events of 2004 led several of pharma's biggest and best-known companies to lose status among industry insiders. 			

, to no one's surprise, moved from its top-ranked position in 2003 down to eighth place in the current study. Respondents in 2004 were significantly less enthusiastic about Merck's strategic direction, its financial security, and its management team. It is important to note, however, that even though the recall occurred in the middle of the 2004 survey, Merck's RSS remains at a respectable 60. Without the strong corporate reputation Merck had built up in recent years, its slide down the RSS scale could have been far more severe. Reflecting the immediate uncertainty, comments from respondents varied widely. Some asserted that Merck continues to be "a diverse, quality company," while others pointed to "a questionable future given Merck's weak pipeline and the Vioxx recall."   

's score made the most precipitous decline of any company in the study, dropping 14 points to 45. Ranked 17th in the 2004 poll, Bayer's overall reputation was hurt by a sharp drop in insider perceptions of its ethics. The company's ranking in what is currently the most important reputation metric, ethical behavior, dropped to last place in 2004, down from fourth place in both 2002 and 2003.  In particular, respondents cited issues with company leadership, trustworthiness, treatment of employees, and relations with vendors and suppliers. One said, "Bayer is overextended and too diversified to know what it is doing." 

also had difficulties in 2004. After sharing a first-place ranking with Merck in 2003, the company slid to sixth place in the overall reputation rankings. Pfizer maintained a still relatively high RSS of 66 in 2004, thanks in large part, RCC believes,  to the reputation capital it had built in earlier years. Nevertheless, the firm was affected by the same issues that are troubling Merck.  

Pfizer's Celebrex (celecoxib) arthritis drug competes with Vioxx and may have similar negative side effects. Given its size, analysts believe Pfizer faces difficulties in developing enough new drugs to fuel future revenue growth. Industry executives gave the company lower marks this year in financial transparency, work process innovation, and treatment of employees. At the same time, Pfizer achieved higher marks for its competitive differentiation, earning the top rank in that metric. "Pfizer is a strong company," said one respondent, "but there are questions about its pipeline longer term." 

RRC's  reputation questions are designed to get at the drivers (or metrics) that respondents believe will add to or detract from a company's reputation strength. The answers, combined with researchers' assessment of behavioral measures, help provide a more accurate overall picture of each company's reputation strength. They also provide critical information that companies can use to assess their current status and to identify areas for improvement through operational changes, communications programs, or both. 							

Most questions were consistently worded in all three studies to allow direct comparisons over time. But analysis of the importance of key groupings of questions changes over time along with industry environment and respondent opinions. Essentially, changes in the key drivers each year can be seen as a reflection of changes in how the industry sees itself.   

It is notable, for example, that the multivariate analysis in both 2002 and 2003 revealed that competitiveness was the most critical driver of reputation strength for pharma companies. Amid the negative events and public relations pressures of 2004, things changed dramatically. Companies' ability to compete continued to be important, but respondents' opinions tended to focus more on factors relevant to long-term survival in a turbulent industry. In 2004, ethical behavior ranked as the most important driver, followed by workforce, financial stability, and leadership characteristics. (See "Reputation Drivers.") 

, driven in large part by the negative publicity over drugs' side effects and high costs, has consistently increased in importance over the past three years, rising from third place to first. Falling within this category are questions relating to a company's adherence to ethical business practices, its openness and honesty with the public, the transparency of its financial disclosures, and its ability to be environmentally conscious, among others.  

These elements of reputation can serve a company well during times of controversy and differentiate it from its competitors in the minds of its peers and the financial community. It is not surprising, therefore, that the same three companies that earned the top three positions in ethical behavior—Genentech, Lilly, and Amgen—also constitute the top three in the overall reputation ranking. (See "Ethical Behavior Ranking.") Respondents put Bayer in last place on this metric, a position that contributed to the company's low overall ranking for 2004. 

was the second most important driver of reputation in 2004, rising from fourth in 2002. (It was not specifically listed in 2003.) This metric encompasses elements such as attracting and retaining high performing and diverse employees and treating them well, paying competitively, and training. Again, Amgen and Genentech rank highly here—numbers one and two, respectively. Roche's third-place workforce ranking in 2004 helped give the company enough points to bring it to seventh overall in 2004, up from eleventh in 2003. 

has been a key metric for pharma companies in each of the last three years. Amid the growing financial uncertainties surrounding many drug companies last year, this metric rose to third most important in 2004, up from fifth in 2002. Key facets of financial stability, according to survey respondents, are a company's ability to be well positioned for the future, to survive downturns, and to generate innovative products. Respondents ranked Novartis in first place for this metric, followed by Pfizer and Amgen, respectively. 

, in fourth place in 2004, dropped in importance from third in 2003. Among the key elements for this metric, respondents gave most credit to companies with effective CEOs, a talented management team, clear strategic direction, and strong corporate governance. Genentech, Eli Lilly, and Amgen ranked first, second, and third respectively on this metric—the same rankings that they held for ethical behavior. (See "Leadership Ranking.") 

In times of turbulence, the industry can expect this metric to continue to be a key driver of reputation strength. For the same reason, it is likely that industry insiders and observers alike will continue to place the greatest emphasis on difficult-to-define but increasingly critical reputation factors such as ethics, trustworthiness, and workforce quality.  

For the third year, Ratings Research LLC (RCC) polled leading industry executives and analysts using a consistent survey methodology tailored to the pharma industry. This year, researchers conducted 30-minute interviews with 214 executives during the period of September 9 to December 9, 2004.  They used a questionnaire with more than 50 questions designed to test the reputation strength (on a five-point scale) of 19 leading pharma companies . More than three quarters of the executives polled were CEOs, CFOs, or other C-suite-level executives from a broad sampling of companies across the pharma industry, including many firms not analyzed in the study. 			

RCC also polled a representative sample of 60 financial analysts who specialize in the pharma industry. Each analyst interview lasted one hour, including questions similar to those posed to executives but tailored to the analytical audience. Because of the more volatile nature of analysts' responses, they were not included in the Reputation Strength Scores (RSSs). Using a proprietary model that incorporates respondents' answers, RRC generated a strength score for each company that reflects both behavioral measures of reputation and relative weighting of key drivers of reputation strength.

 is principal and rating committee chair, and 

 is chief research officer, for Rating Research LLC. They can be reached at  

As a reputation driver, ethical behavior has increased steadily in importance over the last three years.

The Rise and Fall of Pharma Reputations

It may seem unimaginable that patients with a condition as serious as HIV would fail to comply with their treatment regimens. Yet, according to a 2002 study led by Stephen Becker of the Pacific Horizons Medical Group, adherence to HIV treatments appears to be just as abysmal as it is for other conditions (around 50 percent).  

The flaw lies not in the lack of patient information, but rather in the way they process it.

Pharmaceutical Executive-02-01-2005