Pharmaceutical Branding Leave Them Vulnerable to Generics

Pharmaceutical companies have historically been product focused. While the companies might talk about marketing, they are really sales organizations. Sales companies view themselves as product developers who push their products at a market. Drug companies take products from R&D and detail them to doctors. A marketing company would be more focused on customer needs and relationships and would measure themselves not by sales, but rather by customer satisfaction and retention.

Obviously, pharma companies are heavily regulated and the concept of customer attraction and retention might be a bit alien. Some would argue impossible. I would argue the opposite. Because of the way pharma companies see their value, they brand products with no connection to the parent company, which leaves them highly vulnerable when their patents expire and generic companies enter. When that happens, the market immediately becomes commoditized, i.e., dependent on price.

Pharma companies have screamed for years about the fact that they develop the drugs, investing, on average, $800 million and 12-years to bring a drug to market. Those are those that succeed through Phase III. There are many failures along the way. The heavy investments by drug companies in R&D has made the US the leader in pharmaceutical innovation.

Think about the intangible asset value of a research-based pharma company. They have the organization, the people, the resources and the ingenuity to develop life-saving drugs. It bewilders me, then, that these companies do build their corporate reputations and instead focus on product branding. Product branding is typically done because the scope of brands of the company and the number that compete with one another lend themselves to letting the product carry the value. This is a consumer products model. There is little value in the company. The value is with the product.

In more scientific companies, we typically find masterbranding or endorsed branding, where the company associates itself with the product because the customer finds value in the company behind the product. One would think that this would be the case for pharma companies. If there is significant intangible value in Merck, Novartis, Pfizer, Genentech, AstraZeneca, etc., etc., would it not be smart from a branding perspective to utilize that equity in their branding strategy?

This has not been the case in pharma. So, when the patent expires, generic companies can seize more value than they should be able to grab because the value was almost totally within the product. If there were association to the parent, it would be more difficult for the generic company to take as much value. There could be an opportunity by the original manufacturer to differentiate on value rather than price alone. Pharma companies always try to make the claim that they were the original discoverer and distributor of the drug. Why would they not invest in bringing that value to the market more forcefully? It could prove to be a turning point for many companies that creates a barrier to generics. While they would likely still loose the patent to a generic company, they would be able to maintain more of the real value in the drug for a longer period of time.

Stop Playing the Price Game

I am in Toronto visiting friends. Yesterday, I had a really interesting discussion with a fellow who imports household goods, spices, and other things. We were talking about value and brand over price. The gist of the discussion was that North Americans have become convinced that the only way to keep or attract new customers is through lowering price. This might bring in customers, but it also undermines the perceived value of the offering and undermines the brand.

The Wal-Mart impact is being felt in every sector of the economy. Many businesses look to Wal-Mart's success and conclude that they cannot succeed without having the lowest price. There are many ways to show value to the customer. Price is just one.

Consider that there is a continuum between high price, high differentiation and low price, commodity. These are the extremes of the continuum, not our only choices. Between these extremes we have many ways to show increased value--customer service, relationships, partnerships, etc.

It is a good thing to cut costs. But, that should be done to allow the firm to provide value in other ways. It should not be done so that price can be lowered. If it is, the margins are squeezed and the entire market become a war of attrition.

Let's consider Southwest Airlines or Porter Airlines (if you are not familiar with Porter, you should fly them to Toronto from one of the cities they fly from in the US--Chicago, Boston, Newark). Both airlines gained efficiencies by having only one type of place and flying only point-to-point. This means that all staff are qualified on all planes and they do not have to deal with hubs. This speeds flight arrivals and departures. But, at the same time, they used these cost efficiencies to create value differentiation--Porter actually pushes carts with free wine and provides food. Southwest does not charge for bags. These are things that drive up perceived value. But, they also do things that other airlines could do for free but do not--they smile, they act like they enjoy and appreciate having you on board. They make the experience enjoyable. This builds perceived value and increased loyalty.

We have to get control for companies back from the accountants and finance folks who think that everything comes down to price and start looking for ways to enhance perceived value. There are so many ways that companies can do it--it will enhance the brand and, if the entire organization is engaged, it also will grow the reputation.