As marketers, our focus tends to be on innovation. Whether it be our products, the services around them or how we communicate with our patients, payers and professionals, we concentrate on staying at the leading edge for fear of being left behind. But to focus on one thing means to blur something else. Could we be neglecting something that will turn out to be mission critical? What could cause us to fail even while we launch advanced therapies, converge with information technology and create health economic value?
This fundamental, but not often considered, question was addressed as part of my research into the evolution of the life science industry. From interviews with senior executives and the synthesis of thousands of industry announcements there emerge four factors – so-called industry hygiene factors – that threaten our industry in general and your business model in particular. In this article, I’ll describe my findings about why these threats are emerging, what they mean for the life science industry and what steps we might take to mitigate or avoid them.
In scientific terms, all the threats that came out of the research are ‘emergent properties’ of the ‘complex adaptive system’ that is the life science industry. That means that, like a hurricane, they have no single cause but are the result of the interaction of many industry factors. This is most immediately obvious in the first – the threat of lost reputation. In recent years, our industry has gone from having a reputation for advancing social good to being associated with profiteering and, de facto, limiting access to new therapies. Fair or unfair, this shift has many roots. The pressures on healthcare systems, demographic- and lifestyle-driven epidemiological shifts and the ability to treat previously untreatable conditions are part of this. But when combined with incredibly expensive pricing regimes for new products, monopoly pricing tactics for mature products and legal slights of hand such as Allergan’s native American reservation trick, these market factors begin to destroy our industry’s reputation. The ultimate implications of this can already be seen in the tobacco industry, where a bad name has led to strict regulation, investor aversion and heavier taxation. But the early signs are also visible when journalists use ‘big pharma’ as a pejorative.
The threat of lost reputation is connected closely to a second finding of our research – the threat to employee commitment. More than most industries, life science depends on attracting and retaining bright, educated people who are emotionally committed to their firm’s goals, not just there for the money. This form of commitment – affective commitment in the academic jargon – drives productivity and innovation. But affective commitment depends on a belief in shared goals and values. When companies are seen to be overly profit-focused, restructure ruthlessly or use aggressive tax-avoidance, these feelings are eroded quickly. Combine that with population dynamics providing fewer young people and other attractive employment and self-employment options in other sectors and our industry cannot rely on attracting the people it needs. Firms that need highly numerate graduates have often complained of losing out to the financial sector and, under easily foreseeable conditions, this may easily extend to our industry losing out to a combination of technology companies, non-profits and start-ups.
The third threat to our industry is that of politico-legal constraints. All firms operate within a legal and regulatory framework in order to have a licence to operate but this is especially true of our industry with its regulated products, high compliance visibility and concentration on the taxpayer-cum-voter as a customer. Failure to comply means fines at least and revocation of licence to operate at worst. In a market that operates across borders, in an increasingly litigious business culture, the risk of inadvertent transgression will only increase.
To this can be added maturing markets, where defending and avoiding patents is now a routine business activity, and complex technologies, where intellectual property rights are impenetrably dense, and we have a recipe for a perfect storm of politico-legal constraints. The signs of this threat are everywhere, from off-licence marketing abuse to ‘pay to delay’ deals. It takes little imagination to anticipate governments placing more restrictions on how the industry operates.
The fourth and final industry hygiene factor to emerge from our research was the threat of cost of, or access to, capital. Historically, the life science industry has not found it hard to attract investment, especially for its larger firms. Often, it has been able to rely in large part on its own profit stream. When external finance was required, its high margins and counter-cyclical performance were enough to attract investment at rates that were low relative to the risk inherent in this business. This beneficial combination of factors seems to be changing however. Profit streams erode quickly with loss of exclusivity of blockbusters and even patented products face me-toos quickly. Margin erosion caused by price controls also makes life science companies less attractive to external capital. And truly innovative products now involve not only the technological risk that they might not work but also the market access risk that they might not be bought. Add to this the fluidity of global capital and the investment opportunities in areas such as information technology and alternative energy, then the industry’s access to capital begins to look less assured than it once was. Behind closed doors, Chief Financial Officers reveal these fears and their concerns are exacerbated by academic analysis of the industry’s equity returns.
These four threats are not mutually exclusive of course. It is not hard to imagine an industry with a tarnished reputation, struggling to attract talent, snarled up in regulatory and politically motivated restrictions and struggling to get access to the necessary capital at attractive rates. In fact, these four threats are quite likely to be mutually reinforcing. A complexity scientist would see the perfect ingredients for a negative feedback loop that leads to a much poorer, weaker, less innovative life science industry. These threats are real, but by definition almost impossible to quantify and schedule. Evolutionary science suggests that their effects may not be gradual but might occur in a spurt of rapid decline.
But forewarned is forearmed. Our research, as well as identifying the threats, also implies prophylactic action by the industry. In particular, the contributing factors of each threat suggest the actions that life science companies can take to mitigate the impact of each on their own company and the industry generally.
The threat of lost reputation can be mitigated by both positive and negative actions. Positive action by firms to improve access to products is an obvious step. At the moment, these are most salient in emerging markets but it may prove a good reputational investment to extend the same access programmes to the poor of advanced economies. However, media attention being what it is, no amount of positive action is likely to overcome the consequences of price gouging or legal chicanery. To maintain their own and the industry’s reputation, life science companies will need to consider the wider impact of their pricing strategies and their legal practices.
The threat to employee commitment can also be lessened but it will require less obvious, more culturally embedded, activity. Leadership, especially the transformational leadership that conveys mission and values and well as objectives and actions, will be critical. The industry’s leaders will need to convince their employees that their values are genuine and worth following. As part of this, firms will need to embed social contribution into their goal setting and their management systems. Equally, they will need to avoid thin veneers of corporate conscience, as we see in ‘greenwashing’ and some superficial, mercenary corporate social responsibility programmes.
Like all things political, the anticipation, pre-emption and avoidance of politico-legal constraints will be a messy task. It will require the broadening of the goals of Government Affairs departments from operational issues, such as reimbursement, to the strategic, such as socio-economic contribution. And even this will be useless unless firms support their lobbying words with actions in how they manage tax, avoid competition and price across borders. Already, we see in many countries placing constraints on pricing based on reference to other countries. The same concept will spread to tax management, competitive strategy and investment strategy. To avoid politico-legal constraints, firms will need to avoid offending the governments and voters who are also customers.
The access to capital threat is perhaps the most problematic and hard to mitigate. Hard-nosed investors will be swayed little by corporate relations people and contributions to society. They have little affective commitment to the life science industry or any other. The only palliative to this threat is to show investors what they want to see: good returns at well-managed risks. Although life science firms would argue they already do this, there is in fact much room for improvement.
The best firms excel at understanding and managing the various forms of risk inherent in their business – the technical, the political, the commercial and others. Crucially, they are also much better at demonstrating that better risk management too. Using techniques such as Marketing Due Diligence, they substantiate their promises of risk-adjusted ROI far better than most of the industry. This is an area where standard industry practice – smooth investor relations and detailed but poorly supported projections – is far behind the methodical, diligent techniques of the best firms.
In the original sense of the word, the life science industry is facing a crisis; that is, it is at a crossroads. Its social and technological environments have changed and are changing so fundamentally that four existential threats are emerging. If they combine as they might, it is hard to imagine a thriving future for the industry. Complexity science tells us that these threats can’t be forecast accurately any more than they be stopped. But our research into the evolution of the industry, which seeks to identify these emerging properties of the system, offers the chance to mitigate these threats and allow the industry to take the right road at the cross roads. All that is needed is the will of its leadership.