Drug Companies May Be Forfeiting Market Value Due to Poor Brand and Reputation Strategy

The recent news that Pfizer planned to buy Wyeth was followed by news that Merck planned to buy Schering-Plough. In both cases, the acquiring company planned to drop the name of their partner, despite the fact that the acquisitions were deemed important to bolster the sagging market value and future of both Pfizer and Wyeth. In contrast, when Glaxo bought SmithKline, it adopted a new name of GlaxoSmithKilne; Astra and Zeneca merged to form AstraZeneca; or Novartis was created as a new name after the merger of Ciba-Geigy and Sandoz (the Sandoz name was actually retained for the Novartis generic products business).

Pfizer and Merck are American companies, while the others mentioned are European companies. The difference in the approach shows a greater recognition in Europe for intangible assets, such as brand equity, capacity for innovation, and human resources of corporate brand and reputation. In fact, many European and Asian countries allow greater flexibility in recognizing the value of intangible assets than do U.S. accounting rules. But, this is only part of the story. I think that much can also be found in the brand strategies followed by most U.S.-based pharmaceutical companies that lead to less value being seen in the corporate brand and reputation, and this should be a lesson to all other companies facing potential acquisition.

Most pharmaceutical companies operate with a brand strategy that is called a “house of brands architecture”. Procter & Gamble and Unilever are the two most famous companies using this brand strategy. They created this brand strategy so that they could have lots of products, some competing with one another, without having the consumer aware of all of the products from the same company serving the same market. Each product can be aimed at a specific segment of the market, and each can be supported by its own marketing mix of price, distribution, promotion and packaging.

Pharmaceutical companies have historically followed a similar brand strategy. While the products are presented (or, as the industry calls it “detailed”) to the physician by a sales person from the company, the focus of attention in the sales call is on the product, not on the value of the company that made the product. I was a pharmaceutical salesman in the early 1970s, and little has changed since that time in the way drugs are detailed. Moreover, most pharmaceutical companies have an over-the-counter (OTC) line of products that are well known by their brand names, but unknown for their connection to the parent company.

I believe that the brand strategies for non-consumer products companies need to be rethought and I have counseled a variety of companies on smarter ways to structure their brand portfolios. I believe that companies need to look at themselves from the market back into themselves, not from the inside-out the way they might like to organize brands or the way they have always done it. After someone first recognizes the need to buy something, they look at the alternatives, and then at evaluative criteria to narrow the choice. Brand names and corporate reputation help to influence alternatives and evaluation in many purchase situations. The corporate name and reputation is considered of little importance in the consumer products purchase.

Brands and reputation help to reduce perceived risk in the purchase. When there is a lot of perceived risk to a person’s health, security, social status, the amount of complexity in making a decision goes up. Again, the company behind the brand can help to lessen the perceived risk. When the risk and complexity are high, people tend to turn to outside sources for evaluation—other people, regulatory organizations, Consumer Reports, etc. Consumer products sales are heavily driven by advertising, direct mail, sales support and the distribution channel, to get us to recognize and recall the product when we are prepared to buy. High risk, high complexity products are driven by referrals and personal sales. We want to make certain that the company making such products are tops in their class, and we seek confirmation from other sources.

The marketing channel for a pharmaceutical brand is more similar to the non-consumer products market, yet the brand strategies adopted by pharmaceutical companies have more closely mirrored consumer products companies. The tide may have been turning against the brand strategies of the pharmaceutical companies many years ago. The Internet has allowed the patient into the information loop and many are looking up the companies behind their products to make certain they feel comfortable with them. In addition, PriceWaterhouseCoopers did a study in 2007, in which it found that about 78% of patients said that the reputation of the pharmaceutical company would matter to them in selecting a product or accepting a prescription from their doctor; yet, only 30% of the pharmaceutical executives in this study felt that corporate reputation was important. Why the continuing disconnect? Legacy thinking dies hard in many companies. Also, drug companies have for years thought of the physician as their customer. They have now realized that the patient is the customer and the doctor and pharmacist are distributors. Many have turned to direct-to-consumer (DTC) advertising is hopes of creating pull marketing, which hopes to bring potential patients into doctor’s offices asking about the product. Many of these DTC ads are now referencing the company behind the ads, not just the name of the drug.

Some drug companies have been changing the “rules”. AstraZeneca started to boost its corporate reputation a few years ago and they have seen very positive results. Barron’s did a study in 2009 amongst money managers of the most reputable companies globally and AstraZeneca was ranked #52 globally, despite being unranked in this study the year before. Wyeth was #37, after having been unranked the year before, while Pfizer dropped from #41 to #55 between 2008 and 2009. So, Pfizer, which has seen its reputation fall in recent years purchased Wyeth to become a biological company and then decides to drop the name of Wyeth.

According to studies by Cap Gemini Ernst & Young, between 80-85% of the market value of most companies is comprised of intangible assets. Yet none of these intangible assets appear on the balance sheet. This is another way of saying that the worth of a brand name like Toyota or Apple or GE or Wyeth does not exist. That’s certainly the way it seems the people at Pfizer looked at the world. One can only wonder how much more market value might be realized by pharmaceutical companies if they would invest more in their corporate brand and reputations. Shareholders should be demanding more attention to corporate brand and reputation. Without it, they are potentially leaving “money on the table” following an acquisition.