The Connection Pharma is Not Making in Cannes
Who Wins the Award for Health System Value?
A billion here, a billion there, and pretty soon you’re talking about real money.
Herein lies the rub for the pharmaceutical industry:
It’s a commercial model where the center-of-gravity for growth and innovation -- as well as year-end bonuses, shareholder value and the professional fates and personal livelihoods of an entire economic subsystem -- is predicated on creating demand and promoting the technical potential of a drug. This is the Standard Model defining and giving direction to the ‘drug market’, the base layer upon which everything and everyone sits and depends.
It’s pretty much unchanged since the pharmaceutical industry was founded roughly 200 years ago, right around the time the first Model T began rolling off the assembly line in Detroit. And it’s the thing now at the heart of the industry’s pricing problems, market access issues and reputational fragility worldwide.
The Standard Model isn’t "wrong" so much as it's reached its productivity frontier.
Promotional push of technical potential, alone and requiring ever-increasing media spend just to get traction, has stopped making sense creatively, tactically and operationally. As strategy, it’s the sound of one hand clapping: without economic innovation and infrastructure investment on par with technical innovation and marketing investment, the storyline of value from a drug pipeline is fuzzy logic: market forecasts are one thing; market reality is something else entirely.
To wit:
Last week, Blue Cross Blue Shield of Michigan, the state’s largest insurance company, said it will begin eliminating coverage of weight loss drugs next year. In a statement to CBS News Detroit, the company said it is ending coverage of GLP-1 drugs "for large group fully insured members beginning January 1, 2025." Additionally, the company said it will change prior authorization requirements for Saxenda, Wegovy and Zepbound beginning Aug. 1.
An $80 billion opportunity for GLP-1s? We’ll see.
Last week, the Congressional Budget Office forecast that from 2024 to 2032:
National Health Expenditures will increase 52.6%: $5.048 trillion (17.6% of GDP) to $7,705 trillion (19.7% of GDP) based on average annual growth of: +5.2% in 2024 increasing to +5.6% in 2032
NHE/Capita will increase 45.6%: from $15,054 in 2024 to $21,927 in 2032
Physician services spending will increase 51.2%: from $1006.5 trillion (19.9% of NHE) to $1522.1 trillion (19.7% of total NHE)
Hospital spending will increase 51.6%: from $1559.6 trillion (30.9% of total NHE) in 2024 to $2366.3 trillion (30.7% of total NHE) in 2032.
Prescription drug spending will increase 57.1%: from 463.6 billion (9.2% of total NHE) to 728.5 billion (9.4% of total NHE)
The net cost of insurance will increase 62.9%: from 328.2 billion (6.5% of total NHE) to 534.7 billion (6.9% of total NHE).
The health economy is big and getting bigger. But it’s less obvious to consumers in the prices they experience than to the three customers who now matter most to pharma brand teams because they fund the majority of healthcare spending: employers, state and federal government.
That a drug “works” as advertised is now almost table stakes.
Even developing a “cure” is no guarantee of commercial success. A gene therapy cure priced at $3-$4 million may represent a cost-saving compared to many years of standard treatment (keeping in mind that those many years of standard therapy translate into the consumption of many services, which is a source of revenue for hospital systems), but the bigger question for market access innovation: who “cares” over the long term? Who is the customer that pays?
See above for the answer.
Writes Steven Pearson, founder of ICER, in a guest column for The Economist a few days ago:
“In recent years biotechnology and pharmaceutical science have produced quantum leaps that both offer great opportunity and pose great risk. Gene therapies for rare conditions and obesity drugs for larger segments of society could transform health for the better.
But for that to happen, policymakers and the companies behind these new treatments need to adapt quickly to the daunting cost challenges associated with them.”
Which brings things back to the Cannes Lions International Festival of Creativity, “home of the world’s most prestigious advertising awards where every corner of the creative marketing community comes together for a week of world-class networking, learning, and history-making creativity.”
It’s happening this week. Tickets are still available.
Ben Adams from Fierce Pharma sets the stage:
"Glitz, glamour, creatives, sun and blue seas: It must be time for the Cannes Lions International Festival of Creativity," he wrote yesterday.
"This year, Big Pharma has a strong showing in its own Pharma Lions section, while Moderna and Johnson & Johnson are the only pharma companies represented in the much broader Health & Wellness awards shortlist. All will be hoping for success when the award winners are announced Monday evening. Check back at Fierce Pharma Marketing Tuesday to see who took home the medals and who left empty-handed."
I checked. Of the more than 220 entries for the Pharma Lions, five were selected for Silver Cannes Lions or Bronze Cannes Lions. Here for the curious is the list of winners, announced 11 hours ago.
Gradually then Suddenly: The Problem That’s Arrived for Pharma
A basic problem confronting structural change is vision to see new aspects of reality. This includes surfacing deep assumptions and challenging the conventional view. Pharmaceutical companies are generally trying to solve problems of efficiency and optimization around better drug development and promotion.
This is the wrong set of problems. The pharmaceutical industry, like many other industries and governments throughout the world, is flailing to find fit because it has not adapted to the breakdown of Industrial Age ideas.
Everyone is trying to navigate the Great Fork, in managing the systemic tension and risk between defending the past and constructing the future, even McKinsey. Bob Sternfels, McKinsey’s global managing partner, sat down with Chip Cutter at the Wall Street Journal last week for an exclusive interview at a critical junction for the century-old partnership.
"These days, Sternfels splits his time equally between internal meetings [on partnership modernization] and conversations with leaders of McKinsey clients. When chatting with a client CEO, Sternfels will often ask: What can McKinsey do differently?
Many CEOs respond that the firm should keep telling them what others don’t. Sternfels said he views this as a reminder that McKinsey must keep evolving and be distinctive.
Then, summing up the challenge, he returns to a favorite word.“How do we bring orthogonal ideas to the CEO?”
[Disclaimer: I had to use my Google prompt skills to look up the definition of "orthogonal" -- it’s a condition of independence between different dimensions or objects.
Which, now that I think about it, an "orthogonal idea" would only seem to reinforce the fragmentary worldview that's at the heart of the creative problem blocking modern strategy. Shouldn't we be coming up with ideas that create interdependence?]
The challenge for leadership is positioning vision with a modern strategy, a unique roadmap to transform the airplane into a helicopter while flying and loaded with passengers.
At a system level, the strategic effect on PhRMA of spending somewhere around $30 billion a year on DTC advertising in the United States, woven into the fabric of society over decades, has been to embed and sustain a feedback loop of deep mistrust and commercial withering, with tangential impacts globally.
It's a factor influencing how the US government is negotiating with commercial teams over the IRA, the Chinese government demanding 'mega-price' discounts, and the pharmaceutical reform legislation just passed in the European Union.
Sanders, Subpeonas and Systems
In a letter last month to Senator Bernie Sanders, who has been on a campaign of his own pressing Novo Nordisk to lower the cost of Wegovy, the company said, correctly, that "the US health care system" -- 'out there' somewhere in the ether; marked by mind-bending and mushrooming complexity; locked in structural stalemate; tolerant of groupthink at a staggering level -- is to blame.
Novo believes, rightly, that it’s misplaced to focus on the list price of a drug — an independent variable — because a portion is paid to middlemen in the complex US health care system.
"Looking only at the disparity between what it costs to make the drugs and their cost to payers is unfair," the company said, "because it had to invest billions of dollars up-front to develop the medicines, a process that often takes more than a decade, involves thousands of volunteers in patient trials and can fail after years of work."
Novo said it is prepared to work with lawmakers to address “systemic issues so that everyone who can benefit from its medicines is able to get them." Left out of the letter is what those systemic issues are precisely, who assumes ‘total system leadership’ to fix them, and the framework for constructing a better system of markets, where the pieces and parts cohere on the production of affordable health.
As it turns out, Sanders was moving to subpoena Doug Langa, Novo’s EVP of North America operations, to testify before Congress. A vote to issue a subpoena was scheduled for today, the same day the winners of the Cannes Pharma Lions were announced.
Which would have been really weird.
But that vote has been canceled because Novo CEO Lars Fruergaard Jørgensen has agreed to testify before the Senate sometime in September (of note: the DTC media spend on weight loss and diabetes drugs alone topped $1 billion in 2023). It would actually be a little funny if the commercial breaks on the news coverage of his testimony was filled with DTC advertising.
The takeaway is this: Big Pharma's Big Marketing spend is showing. And it's costing the industry more than it’s returning in terms of Strategic EBITDA. We have reached Peak Value from Promotional Tonnage. It’s time for a new industry narrative, a different investment thesis: is there something other than DTC advertising that $30 billion/year can buy?
As I scrolled past the flood of selfies from the South of France in my LinkedIn feed this morning, the question that kept turning over in my mind was this: Who won the award for health system value?
/ jgs
John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy at a system level. To work with a unique brand of creative leadership: john@bluespoonconsulting.com