Missing From Starboard’s “Extensive Slide Deck” to Turn Around Pfizer
Takeaway: Cost-cutting logic is devouring the pharmaceutical industry. The new “turnaround skill” is market innovation.
Updates since original publication on October 10
October 23 to integrate Starboard’s presentation at the 13D Active-Passive Conference in New York
Listen to Hardcore Zen
Escaping McKinseyland is Hard
The Classic Story in pharma revolves around basic narrative plots, frameworks that are recycled again and again in the drug market, regardless of the brand telling them.
These stories may be populated by different settings, characters, and conflicts, but the dominant themes are The Big Miss (i.e., completely misreading the demand environment); Promotional Tonnage (i.e., the standard model); The Quest (i.e., squeeze the standard model even harder); The McKinsey Method (i.e., restructure operations to make the standard model run cheaper); and finally Panic at The Disco (i.e., the patent cliff and, now, having to negotiate price with the United States government as part of the Inflation Reduction Act), completing the loop.
All of this rotates around scientific achievement — technical potential of a drug — as the center-of-gravity for growth and the how "innovation" is defined and communicated to The Street.
But as any brand manager and sales leader will tell you, gaining regulatory approval to promote the feature/benefit story of a drug is no guarantee of strategic success in the pharmaceutical industry. If anything, it’s almost incidental as a guide for decision-making, table stakes in an operating environment marked by mushrooming complexity, hyper-fragmentation, hyper-commoditization and competitive convergence. Missing this point has become a painful, recurring and expensive lesson in commercial model innovation, one that often comes too late for many product marketing teams at drug manufacturers, including the advertising agencies, technology vendors and strategic advisors advising them on product marketing and extensive PowerPoint presentations to the ELT (for more on this, see Why the Pharmaceutical Industry Needs to Think Like Quentin Tarantino).
In July when GsK shared quarterly results that included cutting its forecast for vaccine sales, CEO Emma Walmsley said that “with a best-in-class data profile, we are confident Arexvy will return to growth next year and longer term can achieve more than £3 billion in peak year sales.”
Theoretically.
Except that demand for flu shots and vaccines is evaporating, falling out of favor in a post-pandemic world. While uptake for flu shots has never been stellar, vaccine fatigue, politics, information overload and boredom, a “miserable pharmacy experience” and lowered public trust are all part of the ‘growth problem’ for these products. And all the promotional push in the world, for the products themselves and for the galaxy of disease awareness campaigns the industry funds to create demand, won’t stop The Big Miss from happening [for a good read on this, check out Stop Raising Awareness Already in the Stanford Social Innovation Review.]
"When we saw this [reduced demand for vaccinations] for the first year .... we were like, 'OK, it's just coming out of the pandemic. There's all these COVID vaccines. This feels like a blip,' " said Stefan Merlo, vice president of commercial operations at vaccine maker CSL Seqirus. "We don't believe that anymore."
One could ask: Why did you believe it in the first place?
All of this is also a problem for the collapsing retail pharmacy market generally, and collapsing Walgreens specifically — part of its “turn around strategy” to increase shareholder value (the stock is at a 27-year low) is premised on the assumption that the fuzzy shopper-as-patient-as-consumer segment will be coming into their neighborhood miserable experience to wait in line for a flu shot, presumably administered by the dwindling supply of overworked pharmacy technicians. A big flu market? The vision makes linear sense, at least as a bullet in the PowerPoint: the global influenza vaccine market is forecast to grow at a rate of around 7 percent from 2024 to 2030, and should go north of $12 billion by 2030.
But the map, as they say, is not the territory.
The reality problem -- the 'ground truth' for all the US Army veterans reading this -- is deeper, wider and more complex. Groupthink has become an almost virus-like infection that's been reproducing itself in all the pathways for decades, self-generating the code for its own survival.
It's a 'linear-hope-followed-by-expontental-scramble' form of management, of which Pfizer is far from alone: GSK and Moderna and Walgreens and 23andMe and Teladoc Health and CVS Health and Nestlé are but the latest victims in an industry ecosystem that has proven impervious to "transformation" and "disruption" (Note: Walgreens reports earnings next week; CVS Health, its shares down almost 25 percent so far this year, is meeting with activist Glenview Capital, which has amassed a sizable stake in CVS Health, to “lay out its plan for value creation”).
An entire corpus of thought in the West is bankrupt, education and experience that starts in kindergarten, works its way through high school, gets reinforced in college and then culminates with a selfie posted here on LinkedIn, showcasing an Executive Leadership Certificate from completing a program taught by similarly collapsing Harvard Business School, or similarly collapsing McKinsey, or similarly collapsing Google.
The thing that's not working in the pharmaceutical industry — and what Starboard misses, misunderstands and misreads in its slide deck published this morning — is the same thing that everyone else in the ‘drug market’ is struggling to grasp: It’s the base layer, the foundational model governing an entire industry, that’s The Problem: business potential premised on the technical potential of a drug has reached its ‘productivity frontier’ as a storyline of value. Just ask Sarepta’s CEO, as reported by STAT today (Sarepta’s gene therapy is fully approved, but its stock has tanked. Here’s why Plus: Can the company avoid being ‘Betamaxed’?)
Sarepta Therapeutics CEO Doug Ingram is upset about the company’s slumping stock price.
Investors who have interacted with him this summer, including during a whitewater rafting trip, told me Ingram has been venting his frustration to anyone who will listen. The full approval in June for Elevidys, Sarepta’s gene therapy for Duchenne muscular dystrophy, was a spectacular moment for the company and the trigger for an expanded commercial launch that will deliver years of growth, Ingram has argued. Yet the stock acts like it’s all gone wrong.
Or more precisely a fragmentary worldview subdividing itself in an infinitely recursive loop, unable to break the hold of a massive flywheel sustaining the kinetics of The Standard Model of thought and action, one that is led by a misplaced fixation, if not obsession: cut costs to juice profits. You literally don’t need to see the PowerPoints to “know” what they say, because they all say the same thing the same way, guided by a cost-cutting logic that has stopped making sense.
You can’t invent the automobile if you’re trying to make the horseless carriage run more efficiently. When it comes to constructing a better American Way of Healthcare (or British Way of Healthcare, for that matter), you have to remake logic itself, shift psychologies, reshape environments with a larger vocabulary.
More bluntly: If we're serious about "fixing" healthcare with a market-based approach, executive leaders will need to escape from McKinseyland, where cost-cutting logic (i.e., operations) is being confused with smart strategy.
Strategy Shifts Start With Psychology Shifts
Pure “strategy” is the relationship between means and objectives. And means can never be considered in isolation from their purpose.
Operations isn’t strategy.
Where “extensive slide decks” prepared by the PowerPoint Powerhouses tend miss in their math and mass of analysis prepared by junior analysts is the framing, the bigger storyline: everyone is searching for “strategic fit” to a world where all the usual landmarks have disappeared. Everyone. Things are going off the rails in the first slide: “healthcare” is not investing enough intellectual and creative energy positioning the objective that gives direction to the strategic direction.
What’s needed, then, is originality, a market-maximization theory to replace the profit-maximization one that dominates and eviscerates and is now determining the fates of hundreds of millions of people in the United States alone. And that new market theory needs patience by Wall Street to prove it out (for more on the patience thing, see Walmart Checks Out published recently on Fresh Paint).
You never cut your way to growth.
When it comes to big market innovation -- the 'next hundred billion' from the largest and most lucrative market on Earth -- the roadmap doesn't start with the conventional frame, the journey doesn't start alone, and the 'impact horizon' for vision should extend beyond three years. It starts with strategy at a system level, vision to construct a new industry ecosystem in an organized and persistent way. (To see how China understands 'direct contracting with employers' with an ecosystem-centered market strategy, check out Ping An Healthcare and Technology Stock Soared 10% - Managed Care Takes Center Stage in Corporate Health Management)
The thing this moment needs is a new orbit for economic competition, a different physics, where 'gravitational pull' comes from market maximization through new economic systems, continuous health engagement as an organizing idea for 'corporate health management' and "shareholder value", not efficient "utilization management" determined automatically by artificial intelligence. And the whole things needs to rotate around a better pharmacy reimbursement-provider model as the keystone. [Note: Back-to-back years of increases in premiums have added to the average cost of family coverage, reaching roughly $25,500 this year for employers and workers, per the Wall Street Journal yesterday].
There’s a balance between integrative and disintegrative processes in the natural world — an edge of chaos, so to speak — where adaptation, especially self-organization, tends to occur. Big market innovation works similarly. What the extensive PowerPoint Starboard has prepared misses in its analysis is synthesis. The ‘drug market’ and the ‘retail pharmacy market’ and the 'telehealth market" are not separate and distinct. You have to understand them interactively, as one system of thought.
Healthcare is an N-sided market. Recombination is where the novel action is.
So when it comes to a “strategy shift,” think Pfizer + Walgreens collaborating on new ‘pivot region’ around which to link strategy with imagination, a bigger vision to reshape the practice of medicine around the production of affordable health. Starboard again, as covered by Barron’s (An Activist Makes the Case Against Pfizer. CEO Bourla Is in His Sights).:
The activist fund targeting Pfizer laid out its case on Tuesday, and it is increasingly looking like it is taking aim at the company’s CEO, Albert Bourla.
Starboard Value CEO Jeff Smith didn’t explicitly call for Bourla’s ouster in slides he presented at the 13D Active-Passive Conference in New York Tuesday. But the text of his deck calls on Pfizer’s board to “hold management accountable,” and asserts that “management has failed” to deliver on important commitments.
"We measure success in producing blockbuster drugs and we all get measured by our track records. The track record here is not great," said Jeffrey Smith, speaking at the 13D Monitor Active-Passive Investor Summit in New York. Smith did not make any specific prescriptions for Pfizer or its management at the presentation. In an interview on CNBC, he said a change at the top of the company could make sense, but stopped short of calling for Bourla to step down.
"Something material needs to change. They can't just close their eyes and assume it's going to get better," he said.
That “something material” thing that needs changing is the thinking about how to roadmap success, not just in the drug market, but a $5 trillion system of markets whose “management” fails every year. To with The Failing U.S. Health System published as an editorial in the New England Journal of Medicine earlier this month:
“The United States is failing to fulfill one of the most basic responsibilities of any country: preventing needless suffering and death. The United States falls short when it comes to both protecting the health of individual people and promoting societal well-being [i.e., ‘the production of affordable health’ as the basis for economic competition]. These shortfalls are glaringly apparent in Mirror, Mirror 2024, the Commonwealth Fund’s eighth report since 2004 comparing the health systems of 10 high-income countries: Australia, Canada, France, Germany, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and the United States. This edition of the report, which we coauthored, is the first to account for the effects of the Covid-19 pandemic on the comparative performance of health systems.
The study is based on 70 measures of health system performance, grouped into five domains: access to care, care process, administrative efficiency, equity of care, and population health outcomes.
The United States ranks last overall on these measures of performance and last or nearly last in four of the five domains. This record is all the more distressing because of the country’s exorbitant expenditures on health care, which far exceed those in any other high-income country. As the graph shows, Americans get much less value for the money they invest in their health system than people in other high-income countries….”
For drug manufacturers — and activist investors like Starboard — the elephant in the room is the room itself, an approach to business and product marketing unchanged sine the “modern pharmaceutical industry” began around 1849, when Pfizer was founded in Brooklyn.
/ jgs
John G. Singer is Executive Director of Blue Spoon the global leader in positioning strategy at a system level. To engage with a mind stretch: john@bluespoonconsulting.com