The Pharmaceutical Industry: Innovation Management and New Perspectives in HealthCare
Marketing
Author: Katrin Reber Supervisor: dr. J.E. Wieringa
University of Groningen September 2007
Abstract: Innovation is key for pharmaceutical companies. Currently, they are facing serious pressure. The pipelines are running dry, but costs of development are steadily rising. Also, new challenges for pharmaceutical marketing appear with a growing number of people influencing product choices. Advances in modern communication technologies facilitate information gathering about health-related products and services. Hence, healthcare payers and patients will become more empowered, demanding a bigger say in healthcare decisions. To better target their marketing activities pharmaceutical companies need to know the specific characteristics of their customers, especially in the context of e-communication. A study will give insights in discriminating factors between online and offline health information seekers.
Key Words: Pharmaceutical Industry, Innovation, Healthcare Marketing, E-Health
Summary
The first chapter of the paper deals with innovations management in the pharmaceutical industry. Part 1.1 is very general, highlighting some aspects about innovations and research and development. Part 1.2 outlines the importance of innovative activities in the pharmaceutical sector.
The second chapter goes into detailed characteristics of the pharmaceutical industry and its innovation/R&D-process. It starts with the historical evolution of the pharmaceutical industry, and provides the specific characteristics of the pharmaceutical market environment. Parts 2.3 and 2.4 highlight the complexity of drug discovery, namely the different phases of the pharmaceutical R&D-process – from pre-clinical trials to clinic development – as well as the market introduction. The challenges the pharmaceutical firm faces today concerning its pipeline and the importance of effective and efficient pipeline management are also discussed.
The third chapter addresses the pharmaceutical life-cycle. It deals particularly with the role that marketing plays in the life-cycle of drugs. The changing environment and the growing e-environment foster the trend towards individualized health management. This creates opportunities and challenges for manufacturers and the pharmaceutical industry, by enabling them to enhance their traditional offerings and to exploit entirely new market spaces (e.g. direct-to-customer-advertising, e-pharma, etc.). As the consumers/patients get more empowered and active as well as more demanding in their health care decisions pharmaceutical firms have to react on this by providing better information about medical treatments, personalized treatment, and choice. Pharmaceutical companies can benefit from these changes by adapting their marketing strategies and exploiting the potential of online marketing.
By targeting such customers who look for health information online and create partnerships with them pharmaceutical companies may find potential allies in them, create value and thereby safe money.
The first part of chapter four is directly linked to the last part of chapter 3. The following parts of chapter four are dealing with e-health in particular. They start with a short outline of the opportunities and dangers of e-health. Yet, in order to effectively target those customers who seek information via online channels and provide them (individualized) information about treatments and health, it is essential for pharmaceutical companies to know the characteristics of such customers. A discriminant analysis is performed to examine the characteristics of online and offline health information seeker. The analysis is designed to partially replicate a recent study on factors discriminating between online and offline health information seekers by Cotten and Gupta (2004). Data for our analysis stems from a survey conducted in a Dutch hospital.
The chapter closes with a discussion of the results and its implications for policy makers.1
1Remark: Parts of the present paper are taken from the author’s diploma thesis on innovation in the pharmaceutical industry which she wrote during her studies in Germany. The interested reader can contact the author for a full version
Table of Contents
1 Innovation Management in the Pharmaceutical Industry
1.1 General Aspects of Innovations 4
1.2 Innovation as a Key Factor in the Pharmaceutical Industry 5
2 Characteristics of the Pharmaceutical Industry and its Innovation 2.1 Historical Development of the Industry 6
2.2 Conditions of the Pharmaceutical Market Environment 8
2.3 The Different Phases of the Pharmaceutical R&D-Process 11
2.4 The Pipeline Management Challenge 14
3 Managing the Pharmaceutical Life-Cycle 3.1 The Role of Marketing in the Pharmaceutical Life-Cycle 16
3.2 A New Perspective in Healthcare 18
3.3 Marketing to the Individual 21
4 The E-Health Opportunity 4.1 Pharmaceutical Marketing and the Internet 22
4.2 A Definition of E-Health 25
4.3 Consumer Use of the Internet for Health Information Search – A Replication Study 25
4.3.1 Advantages and Disadvantages of Online Health Information Seeking 27
4.3.2 Characteristics of Health Information Sources and Consumers 29
4.3.3 Discriminating Factors of Online and Offline Health Information 32
4.3.3.1 Analytical Approach 33
4.3.3.2 Data and Sample 35
4.3.3.3 Key Measures 37
4.3.4 Results 38
4.4 Discussion and Implications of the Study 44
5 Concluding Remarks 46 Bibliography
Innovation Management in the Pharmaceutical Industry
General Aspects of Innovations
The need for developing innovative products is incontestable in most industries.
Numerous studies in the area of innovations research have shown that continuous, long-term research and development (R&D) activities and the creation of novel product concepts have substantial influence on a firm’s competitiveness. To create successful innovations, R&D activities need to be embedded in a broader innovation process. However, R&D is a core sub-process of a firm’s innovative activity and the firm’s innovative efforts are often expressed by its R&D intensity (Hauschildt, 2004;
Pfeiffer, 2000; Brockhoff, 1999).
The term innovation is derived from the Latin word “novus“ (= new) and “innovare“
(= to renew). Although there is no universal definition of the term innovation is almost always associated with change and novelty of a process or situation (Hauschildt, 2004; Pleschak & Sabisch, 1996). Closely connected with novelty is the aspect of uncertainty inherent in all innovative activities. Innovations are oriented towards the future, and they usually involve huge investments but at the beginning of an innovation project it is oftentimes uncertain whether it will lead to success. At the same time, uncertainty exists about the costs and time involved, as well as the economic usability of the innovation. The time aspect is very important, as in a dynamic environment technology leaps and changing regulations can render innovation projects obsolete (Vahs & Burmester, 2005).
Innovations whether they are radical or incremental do not go without creative ideas and knowledge. The creation of knowledge within a firm is seen as an ongoing process intensifying individual knowledge and anchoring it in the knowledge network of the firm (Nonaka & Takeuchi, 1997). In this regard, the technological and theoretical knowledge base that is created through research and development plays an essential role. In attempting to define R&D, the Frascati Manual of the OECD identifies R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge,[…], and the use of this stock of knowledge to devise new applications”(OECD, 1993). Harnden et al. (1990) categorise research into three groups, including basic research (also called fundamental or pure research), strategic
research and applied research. Basic research has its objective in the advancement of knowledge and the theoretical understanding without any practical end in mind.
Strategic research is conducted with eventual practical application in mind although at the beginning it cannot be clearly defined. Applied research is aimed to solve specific practical problems rather than to acquire knowledge for knowledge’s sake.
All three types are part of the R&D activity (Reger, 1997).
In the context of the pharmaceutical industry, R&D activities usually refer to the entire process whereby a drug is brought to market, although the innovation process is often separated into research/pre-project and development phases. Research refers more to basic experimental research, involving the identification of possible chemical compounds and theoretical mechanism whereas development refers to the exploitation of discoveries, and is concerned with proofing the concept and testing the safety (Pfeiffer, 2000). While this separation of the innovation process increases transparency, the introduction of the product into the market is often insufficiently considered. Within pharmaceutical R&D highly differentiated phase concepts are commonly accepted and applied. Although the strictly sequential execution of the different project phases is sometimes regarded impractical, it is a sine-qua-non in medical innovation (Gassmann et al., 2004).
Innovation as a Key Factor in the Pharmaceutical industry
Few other industries are as driven by science, research and development as are pharmaceuticals. Innovation and new product development are central to competition in the industry. However, several developments and changes of the last years have raised the question whether the virtuous pattern of innovative introductions which had been the norm for a long time can be revived. Today, the industry faces a lagging R&D productivity: the number of new drug introductions is well below historical trends while the average R&D costs as well as the average drug development time are constantly increasing (see e.g. Grabowski, 2004). On a positive note, the advances in genomics and biomedical sciences provide promising opportunities for new lead substances and targets for new medicines, but the industry is also beset by structural and economic changes, and policy uncertainties. The growing role of managed care
networks as buyers of drugs, increasing competition from biotechnology entrants and generic manufacturers, increasing patent challenges and growing political pressure to contain pharmaceutical prices and expenditures, as well as government reforms in health care provision have far-reaching implications for developing, manufacturing and marketing new medicines (Pisano, 1997).
The demand for innovation in a complex and dynamic business environment has changed the requirements for success in the marketplace. The market for pharmaceuticals is today customer-led, rather than producer-driven. Product price has become a key indicator of how the market values the products that are discovered, marketed, and sold. In addition to demands for efficiency, high standards of quality and flexibility, pharmaceutical firms are also challenged to contain costs, shorten time to market, and customize innovative output that matches the needs of a value-driven customer-base (Piachaud, 2002, 2004).
Innovation, although essential, is no longer the only determinant to reach the goal of long-term profitability and business success. The degree of innovation success that is a function of how well the market perceive a product to offer new or better solutions to clinical needs requires a stronger market-orientation in R&D. This in turn calls for a stronger business orientation of research managers and scientists in pharmaceutical R&D. Knowledge is no longer restricted to research but includes knowledge about important market players, potential cooperation partners as well as customers and patients. Consequently, this necessitates the establishment of an effective and collaborative interface between R&D and marketing. Finally, the more intensive market-orientation is hoped to shift the focus from a product- to a patient-driven strategy (Gassmann et al., 2004).
2 Characteristics of the Pharmaceutical Industry and its Innovations
2.1 Historical Development of the Industry
The modern pharmaceutical industry originates from two sources: apothecaries that moved into wholesale production of drugs in the middle of the 19th century, and
chemical companies that were producing organic chemicals, especially dyestuffs before they begun to manufacture drugs (Drews, 1995).
Although today the pharmaceutical industry might be considered as a science-based industry it did not begin as such. Until the 1930s drug companies put only little formal research on new drugs. While the medical profession was already well- established in Europe and the U.S., the pharmaceutical industry was only in its early stages developing medicines to treat pain and diseases. Most medicines were made locally by pharmacists and sold without a prescription. Direct application of chemical research to medicine showed good promise but most new substances were not more effective than the treatments already available. Nevertheless, at the crossroads of science, medicine and growing health care markets the pharmaceutical industry was predestined for explosive growth (Daemmrich & Bowden, 2005).
With the outbreak of the Second World War the need for penicillin and antibiotics has tremendously risen and the US government organized a massive research and production effort putting its focus on commercial production techniques. This also spurred the transition to an R&D-intensive business. The period between from 1950 to 1990 is seen as the golden age for the pharmaceutical industry, marked by the industry’s rapid and profitable growth (Pisano, 1997). New analytical techniques and advanced scientific methods found their way into research laboratories to help on the determination of molecular structures. The adoption of new instruments and computers facilitated the process of drug discovery enormously. Computers were used to perform complex calculations, or to aid in drug design and compound screening. All these advanced have had a strong influence on pharmaceutical research (Daemmrich & Bowden, 2005). Double-digit rates of growth in earnings and return on equity were the norm for most pharmaceutical companies. In the U.S., the pharmaceutical industry as a whole was among the most profitable industries (Pisano, 1997). During the past two decades breakthrough medicines were made by the combination of rational design and fortuitous discovery. Computational and combinatorial chemistry and high-throughput screening were speeding up the processes, and large electronic databases assisted in generating the structure of possible lead candidates (Drews, 2000). In the late 1980s mass production of
compounds that have been systematically varied appeared as the most productive way. The competitive advantage lay in the efficient syntheses of the most promising candidates. Alongside computational and combinatorial chemistry, genomics and biotechnology revolutionized the discovery and manufacturing for therapeutics.
Beside its laboratory impacts biotechnology evolved into a distinct entrepreneurial business sector (Daemmrich & Bowden, 2005). As a result, the pharmaceutical companies found themselves in a changing competitive environment, and the strategies and competences that had proven well for almost forty years were challenged by new competitors in the biotech industry, by generic manufacturers, and end users.
In summary, the pharmaceutical industry has been dramatically transformed since its early beginnings. From being a conservative, science-based business, the pharmaceutical industry has now turned into mature, large-scale industry in which the launch of new product in a timely manner is crucial to maintain profitability. Similar to other industries (e.g. automotive, telecom) the focus is on efficiency and cost- effectiveness, on streamlining research and making it more productive (Pisano, 1997).
2.2 Conditions of the Pharmaceutical Market Environment
The pharmaceutical industry is influenced by the external environment in which it operates, and its strategies need to respond to a number of external pressures and determinants. Economic, technological, political and social forces largely define the industry’s scope of action. Economic forces involve rising cost of R&D, product risk, and generic competition. Technological forces mainly encompass the emergence of new technologies. Political forces are regulatory requirements, price controls, and a decrease in the effective patent life. The changing demographics, a closer scrutiny of prices, and the emergence of alternative medicines form part of the social forces.
In the following the different forces will be discussed in more detail.
Rising R&D costs: R&D expenditures account for a large share of the overall cost structure in pharmaceuticals. Over the last decades R&D expenditures have grown constantly, but the launch of new molecular entities on the market has decreased or at best stayed constant (Gassmann et al., 2004). The rising R&D costs can be ascribed to
a number of factors, for example: The increased complexity of global clinical development due to the fact that most companies try to achieve simultaneous submission in all major markets; the rising costs per patient because of more stringent requirements of Good Clinical Practice (GCP); research on chronic diseases is given greater priority leading to more complex, time consuming and cost-intensive clinical tests; a growing complexity of therapeutic targets entailing more expensive and complex development programs (Piachaud, 2004). At the same time the average duration of developing a new drug has risen, especially due to the increased time the new drug spends in clinical trials (Gassmann et al. 2004). Consequently, the drug development costs per new drug approval have also been constantly increasing.
Product risk: Developing a new drug is risky business. The large investments required to bring a new drug to market do not always guarantee any return.
Oftentimes, the drug is not suited to the medical conditions it was initially designed to treat and will therefore not enter final stage of clinical testing, but eliminated before.
High attrition rates are very common in pharmaceutical practice. Moreover, new drugs can fail to meet commercial expectations due to adverse drug reactions, market forces or obsolescence. Drug companies therefore became more selective about the candidates and projects which they will further develop and promote, and accordingly they have streamlined their R&D pipelines.
Greater Generic Competition: Developing a generic product is far less costly than launching an original discovery, and without patent protection generic drugs would be even a greater threat to novel therapies. Many pharmaceutical firms have patented their products to defend them against generic competition, but as soon as a patent expires the product may no longer recoup R&D and marketing expenses (Piachaud, 2004). It has been found that after the first year of patent expiration, up to 20 generic copies may come into the market, and after five years penetration rates of generics approximate 80% (NIHCM, 2002).
New Technologies: The emergence of new technologies (biotechnology, nanotechnology, etc.) present new challenges to pharmaceutical companies. New skills in different scientific disciplines are required, and knowledge and competences in these new domains need to be developed (Pisano, 1997). Advances in the field of
pharmaco-genetics and pharmaco-genomics provide enormous opportunities for pharmaceutical discovery and the possibility to design drugs for specific diseases based on the human genome. However, these new branches of science also increase rivalry. In the past years, Biotech start-ups and other specialized firms have entered the market quickly, and have changed the established competitive environment.
Regulatory requirements: the pharmaceutical industry is exposed to rigorous and complex regulations and public law. The regulative force influences pharmaceutical innovation on several levels. Before being marketed each product has to undergo extensive pre-clinical and clinical testing and registration procedures. Huge amounts of data are required to provide evidence of the drug’s safety, efficacy and quality.
Price regulation: Mostly, prices are regulated directly or indirectly by federal authorities. In some countries, fixed prices exist in accordance with the social cost of society (Gassmann et al. 2004). National health care systems usually have the primary and most direct impact on drug prices that are (partly) reimbursed by health insurance companies.
Patent life: The objective of patent law is to support research and guarantee the satisfaction of all interests. That means, innovations should be made available in the interest of the public; but innovators should also have an incentive to innovate in that their inventions are protected against unlawful imitation. During the past decades the time between marketing a drug and the expiry date of its patent (= effective patent life) has continuously gone down. Hence, pharmaceutical firms did successful attempts in lobbying for an award of special patent status to some pharmaceuticals.
However, despite such extension periods pharmaceutical firms still encounter difficulties in recovering the high cost of their R&D over a declining product life- cycle (Piachaud, 2004).
Changing demographics: In the industry nations the level of life expectancy has substantially increased over the past century. Furthermore, there is a steady increase of the elderly population, partially due to falling birth rates and improved healthcare for the aged. This presents health systems as well as pharmaceutical industries with significant challenges. Pharmaceutical firms face the opportunity to develop new
therapies to target this age group, but at the same time healthcare systems are faced with growing healthcare expenditures.
Closer scrutiny of prices: Healthcare expenditure has constantly grown over time. As a result, a number of policies have been implemented in order to control and these expenditures. The assessment of cost effectiveness, cost utility and quality are a few measures that are now demanded.
Emergence of alternative medicines: Studies show a remarkable increase in alternative and complementary therapies, indicated by the growing number of visits made to such practitioners and the growing portion of patients seeking for such alternative therapies (Eisenberg et al., 1998). The increased turn to alternative medicines is indicative to the changes in socio-demographic factors, and entails significant implications for the pharmaceutical industry (Piachaud, 2004).
Pharmaceutical products also possess unique characteristics. They cannot be seen as consumer goods in the conventional sense. The patient’s or customer’s sovereignty is restrained in that the decision of choosing a particular product is usually made by the prescribing physicians and not by the patient, except for OTC-products. Only few patients have to pay the full cost of the consumption of medical products; a big part of the costs is paid by health insurance. Moreover, the demand for pharmaceuticals is a derived demand. Pharmaceutical products are demanded due to a demand for healthcare (Piachaud, 2004). Finally, hardly any other product group has such high ethical requirements with regard to quality, effectiveness and tolerability. Hence, before launching them into the healthcare market all pharmaceutical products have to be approved (Kotzian, 2003).
2.3 The Different Phases of the Pharmaceutical R&D-Process The R&D-Process of a new medicine is illustrated in Figure 1.
Figure 1: Phases of the R&D-Process
Pre-project Pre-clinical Clinical Approval &
Commercialization
The different phases of the R&D-Process
Budget Goals Costs Process Results Fin.Risks
low medium high
vague detailed specified
low high high
Not structured structured predetermined
unclear defined negotiated
small medium/high high
Criteria
The very early innovation process is characterized by the research and discovery phase, also called pre-project phase. The purpose of the research stage is to define the research project and carry out basic research. The objective is to look for existing molecules which could serve as targets for new substances. In the screening stage so- called lead-substances, which are able to influence the target in the desired way are identified. During this stage almost 90% of all potential substances will drop out because of lacking desired impact and/or effect. The most promising remaining substances will be tested in the following pre-clinical trials (Gassmann et al, 2004).
During the preclinical development phase the firm’s goal is to gather sufficient data on the candidates, to explore their efficacy and safety to guarantee the much more expensive and risky phases of testing in humans.
In this phase varying drug doses are tested on animals or in vitro and diverse types of safety studies, like toxicity tests, must be conducted to detect unwanted effects.
Additionally, biological studies are performed to investigate drug absorption,
subsequent distribution, drug metabolism as well as the excretion of the compound and its metabolic products (Piachaud, 2004). Such studies are referred to as pharmacokinetic and pharmacodynamic studies (Kaitin & Houben, 1995).
The preclinical phase is also the phase where the technical development of a new medicine begins. The technical development is continued in subsequent clinical phases, and involves chemical development, analytical development (quality assurance of compounds), pharmaceutical development or drug formulation (administration and dosage forms), the use of excipients, and packaging (Kaitin &
Houben, 1995).
The clinical trials are separated into three different phases, clinic I-III. During phase I it is tested whether the candidate’s positive animal properties may be extended to humans. Fifty to eighty healthy volunteers are used to determine compatibility and the pharmacokinetic profile of the drug candidate. This phase can take up to two years (Gassmann et al., 2004). Phase II trials aim at demonstrating the drug’s effectiveness on patients in controlled studies, and collecting dose-response information in order to explore the optimal dosage. Therefore the drug is administered to a group of patient who actually suffer from the disease which the drug is meant for. The trials also monitor the safety of the drug and collect additional information about eventually occurring adverse effects (VFA, 2004).
Phase III studies typically involve large scale trials on a heterogeneous patient population to better reflect the actual population (Piachaud, 2004). The purpose of this phase is to generate definite data on the safety and efficacy of the drug in long- term, multi-site trials. So, a more precise definition of the proper dosage and a refinement of indications for use can be established. To get objective results the trials are often double-blind, which means that neither the persons administering the drug nor the patients know whether they receive the drug, a placebo, or an alternative. By the time a drug has come to Phase III, there will be an 85% probability to get launched to market (DiMasi et al. 1994). This phase is also a milestone in the sense that the drug moves nearer towards regulatory approval and with it the development options and changes become more and more limited. It is therefore essential to hold unchanged as many product and process specifications as possible to achieve good
validation of the drug’s effects (Pisano, 1997). Moreover, late changes can become very expensive. However, there is still the chance that rarer side effects that are unpredictable from the pharmacology will not be detected at this stage. It is therefore important to continue monitoring and documentation in subsequent phases and even after the drug has been brought to market (Piachaud, 2004).
Once the trials have been successfully carried out a new drug application will be filed with the regulatory authorities to get permission to sell the drug. Such an application has to contain all experimental data, protocols and statistical analyses of the preclinical and clinical studies which will be review by an expert committee. This process can last up to two years (Pisano, 1997).
After the new drug application has been filed postmarketing surveillance (the so- called phase IV) starts. This phase aims at the provision of long-term data on drug safety and efficacy. Studies are also intended to collect information on the impact of the drug on quality of life parameters (such as functioning and well-being), pharmaco-economic statistics (assessment of the drugs’ value for money compared to other therapies), or long-term adverse reactions.
As soon as the drug has been approved and launched, new clinical trials are set up to develop new indications or formulations (Piachaud, 2004).
Overall, new drug development is a lengthy and expensive process. According to the Tufts Centre for the Study of Drug Development the time between the research begins to develop a new prescription medicine until it receives marketing approval is about 10–15 years. In the course of this time period a drug company typically spends approximately $800 million. Of every 5000 medicines tested, on average only five reach clinical trials, and only one of these five is approved for patient use (Tufts CDSS, 2001).
2.4 The Pipeline Management Challenge
The pharmaceutical pipeline may be best defined as what a pharmaceutical company potentially has to offer, namely potential drug candidates or genetic derivatives. It is important to highlight the term “potentially” as there is no guarantee that it will actually succeed. The pipeline is so to say the umbrella term for everything ‘under
construction’ or the “maybe’s” (Breton, 2003). As Gassmann et al. (2004) point out, the drug development pipeline is “the engine that drives pharmaceutical companies”.
Prospective new drug approvals and the expected revenues of new drugs are the basis for market valuations of pharmaceutical companies.
Today, there are more than 2000 drugs in development (PhRMA, 2007).
Pharmaceutical companies are in the need of delivering between two and four new drugs every year in order to maintain or exceed the implied growth expectations.
Because of the high attrition rate in drug development their R&D pipelines have to be filled with as many new drug candidates as possible. However, although a pipeline of solid and predictable innovations is a highly desirable goal of most pharmaceutical companies the industry is suffering from a lack of genuine innovation (Gassmann et al., 2004; Reuters, 2003). Oftentimes, pharmaceutical companies rely more on patent protection of existing drugs from generic competition instead of inventing new ones.
Although this may be a successful short-term strategy, it generates only incremental revenues in comparison to the potentially large gains from new and innovative drugs.
Reliance on blockbuster drugs has long been seen as an uncontestable growth strategy and as the most viable way to achieve high returns. However, according to an analysis by Reuters (2003) the blockbuster market is substantially declining. Due to patent expiration and maturing product portfolios, many blockbusters no longer contribute to the required revenues. In 2008, the blockbuster market will be worth only 1.4 times of the market in 2000. Thus, pharmaceutical companies cannot simply rely on blockbuster products alone to drive revenue growth but will have to think of other means to compensate for blockbusters’ declining growth. Yet, to keep up sales for blockbuster drugs throughout their life-cycle is vital to effectually realizing returns on R&D investment, as well as to fill the gap in the revenue stream when late-stage pipelines are weak or potential new blockbuster products are missing (Gassmann et al., 2004). The challenge is to reassess traditional development strategies and come up with new ones. For example, smaller pharmaceutical companies or biotech companies successfully pursue a niche strategy, targeting niche indications.
Additionally, the emergence of new technologies for drug discovery, like genomics and proteomics, has created new opportunities to develop products of higher and
more selective efficacy. The trend to individualized and customized medicine, and expanding networks with biotechnology companies increase the probability of commercial success and offer great chances for the future.
Moreover, different strategies exist to keep pharmaceuticals at the market.
Pharmaceutical companies can support their drugs’ popularity over a prolonged period of time by continuous improvements, e.g. through reformulations or line extensions. Also different (innovative) ways of drug promotion and advertising can be an option. However, even huge investments in pipeline management and novel technologies do not ensure a blockbuster hit. Instead, a great number of blockbusters have been the result of serendipitous discovery and unplanned spill-overs. The prediction and measurement of the efficacy of pharmaceutical R&D is still almost impossible, despite decades of intensive research efforts (Gassmann et al., 2004).
3 Managing the Pharmaceutical Life-Cycle
The Role of Marketing in the Pharmaceutical Life-Cycle
Due to intensified market conditions the strategic importance of life-cycle management in the pharmaceutical industry is considerably increasing. As there are only few genuine innovations in the pharmaceutical pipeline, but escalating costs of product development it is vital for the industry to maximize the profitability of their products they already have. Indeed, industry experts assume that in the short run a sophisticated life-cycle management is the only way to survive. Moreover, managers confirm that only a proactive life-cycle management can lead to success. The challenge is to balance both, the efforts in pursuing new chemical entities to develop novel drugs, and line extension to capture the value of the existing products.
The search for patent extensions, new formulations and indication expansion should be already initiated in early phases of the development process as these early decisions will have strong influence on further development and preparatory marketing activities (Seiter & Illert, 2004). Notably, in recent years pre-launch promotion has become more important. The acceptance of a new product can be remarkably enhanced if the market is well prepared for it. Therefore, investments aim at raising awareness among physicians and consumers which is particularly important
when a product is first to market or when there is little awareness of the disease (Gassmann et al., 2004). To ensure the access to a targeted customer-base pharmaceutical product design has to meet the specific needs of the market. Thus, a close co-operation with marketing experts is crucial throughout the R&D process.
Indeed, Gupta et al. (1986) have noted that in product development process the R&D – marketing interface is one the most critical ones, and the integration of R&D and marketing is essential for innovation success. It has been further argued that there is a positive feedback process from marketing to R&D. Calfee (2002) argues that successful marketing will provide motivation and guidance to R&D, enlarging the incentives to pursue research and development for products that benefit consumers and conform to their preferences. This, in turn, increases the returns from pharmaceutical R&D.
The unique pharmaceutical market environment strongly impacts pharmaceutical marketing and its consequences. First, the marketing strategies used in the pharmaceutical market contrast with those typically employed in other markets. A primary reason for this difference is that the traditional buying decision process does not apply to the prescription drug market: The physician makes the decisions about which drug to prescribe out of an array of alternative therapies, but it is the patient who receives the drug and in the end pays (either out of pocket or through health insurance coverage) for the choice made by the doctor and not by himself (Gönül et al., 2001). The definition of the customer appears to be more difficult in such transactions because the chooser is not the user, and the intermediary role of the physician cannot be ignored.
Because of their involvement as a key decision makers physicians play a dominant role for pharmaceutical marketing. The physician is not simply a gatekeeper, but gives advice to patients on the effectiveness of drug therapy and usage in the treatment of illnesses. This is the reason why the main part of promotional efforts of pharmaceutical companies is directed at physicians (Rosenthal et al., 2002). There are several channels by which physicians may be influenced, including self-influence through research, peer influence, health insurance companies, or direct interaction
with pharmaceutical companies. Traditionally and still today, sales representatives regularly provide detailed information to physicians and free drug samples for direct assessment of the effectiveness of a drug. However, a study by Gönül et al. (2001) found that exposing a physician to personal selling beyond a certain amount of detailing time and frequency, or beyond a certain number of free samples can become counterproductive. Therefore, pharmaceutical companies should be carefully reviewing their personal selling strategies to not waste promotional resources.
Second, the products marketed are unusual. They are helping to save lives and reduce human misery, but at the same time they can be very harmful to health when misused.
Consequently, pharmaceuticals are increasingly governed by federal regulations, also covering drug marketing and promotions. Manufacturers and wholesalers have to be registered, retailers to be licensed, and distribution is often limited by law to certain outlets. Moreover, because of the drugs’ special character, namely their involvement in health, discussions about health matters are very personal, as well as emotional.
Pharmaceutical marketing is therefore open for strong and immediate criticism for any mistake (Smith et al., 2002).
At present, pharmaceutical marketing undergoes radical changes. The industry is faced with cut-throat competition, a shortened timeframe for exclusive commercialization, as well as increased consumer emancipation and empowerment.
These pressures are causing the pharmaceutical firms to rethink their traditional marketing strategies. The product alone is no longer sufficient, but additional value has to be created for being successful in the market. Customer/patients orientation – spanning from research to clinical trials to marketing - becomes a key success factor (Harms & Druener, 2003).
A New Perspective in Healthcare
Consumer empowerment, advances in information management, technology and science have deep impacts on our health care system, transforming the way one defines health – the right of better quality of life, not just a privilege - , and opening new challenges to all participants. Healthcare has to adapt to the individual-centric
environment, offering individualized, informed, interactive, immediate, and integrated health management.
Indeed, in recent years there has been enormous growth of direct-to-consumer (DTC) advertising of drugs. In 2005, pharmaceutical DTC advertising expenditures have reached $7 billion compared to about $2.5 billion in 2000 (Narayanan et al., 2004).
Furthermore, the increased use of on-line technology has created new commercial opportunities. In particular, the Internet represents an attractive channel for both, consumers and pharmaceutical companies – for the latter to distribute information about diseases, symptoms, medication etc. at low cost, and promoting their products;
for consumers to gather information about health issues, or purchasing healthcare products (Gur u, 2005; Kanungo, 2004). In the following both aspects are discussed in greater detail.
DTC advertising is defined here as any promotional effort by a pharmaceutical company to present prescription drug information directly to the general public via lay media, and the Internet (cf. Conti et al., 1999).
Direct-to-consumer advertising is not a new phenomenon. The first recorded advertisement of a pharmaceutical product dates back to the early 18th century, although it became practice not until the 20th century (Wilkes et al., 2000). For a long time, manufacturer promoted drugs and medical devices exclusively to physicians, and only in recent years the industry announced changing its marketing approach to include customers/patients. Since the end of the 1990s, not only the number of drugs advertised had increased, but also the companies’ advertising budgets directed at customers have grown largely. The simple provision of information about pharmaceutical products to the customer is no longer adequate. Advertisements have become more sophisticated, also using well-known celebrities to recommend the products (Wilkes et al., 2000).
Yet, DTC advertising of prescription drugs is one of the most controversial issues in healthcare and subjected to ongoing debates. Proponents claim that good DTC advertising is not only informative and educational but also empowers patients in their relationship with their health care providers. By teaching consumers and physicians about health conditions, new treatment options, or new medicines DTC
advertising contributes to increased health/disease awareness and compliance with medical care (Shin & Moon, 2005). Further, those who advocate DTC advertising assert that it offers an opportunity to tackle under-treatment and thus lead to improved health outcome. Patients will be more informed and can therefore discuss with providers about under-diagnosed or under-treated medical conditions (Gellad &
Lyles, 2007).
Opponents frequently criticize DTC practices as inefficient. Of concern is the question whether drug advertising to consumers fills a needed educational gap, or whether it simply contributes to unnecessary use. Critics are concerned about information that is inaccurate, biased, or unbalanced and may therefore lead to inappropriate use of drugs, or inappropriate patient demands on providers. DTC ads are likely to emphasize the positive effects of a drug, attaching little importance to negative or unknown aspects. Even when information is accurate, consumers may miscomprehend DTC advertisements because of a lacking pharmacologic background. Moreover, it is argued that advertising can encourage the prescription and use of expensive brand-name medicines although there are cheaper and equally effective alternatives (Shin & Moon, 2005). Hence, it may distort prescription behavior of physicians, either directly or indirectly through pressure from patients, and thus raise costs and/or even worsen health (Hollon, 1999). DTC advertising has also been controversial in light of postmarketing revelations concerning drug safety problems. For example, after the withdrawal of Vioxx which has been heavily promoted to consumers, critics called for sharper regulations, placing limits on DTC advertising, especially for new drugs (Donohue et al., 2007).
Consequently, the opinions about DTC advertising are to a high degree polarized.
However, the total societal and economic effects of drug promotion remain unclear since the impact of DTC promotion is neither uniformly efficient nor inefficient.
Despite extensive arguments and numerous studies there is still not enough knowledge about the long-term impacts of DTC advertising (Auton, 2007). Short- term evidence suggests that in several cases DTC advertising promotes educational benefit for patients and consumers, and improves the patient/physician relationship (Shin & Moon, 2005). Studies have also shown that DTC advertising has a
stimulating effect on the demand for pharmaceutical products, an impact on physicians prescribing behavior, and it is likely to entail increased drug spending (Gellad & Lyles, 2007).
As the prevalence of DTC promotion may further increase within the next years it is of great importance that providers are encouraged in their role as advocates for consumers and patients. Providers need to understand that drug advertisements are not enough informative, and consumers may have a lack of adequate information about particular drugs, especially the potential risks of the drugs. Therefore, it is crucial to ensure a fair balance of the risks and benefits in all advertisements, and to provide all information that is necessary for consumers to make an informed decision.
3.3 Marketing to the Individual
For long, physicians and pharmacists have been the essential opinion leaders with respect to specific medication, but now patient are beginning to exert more pressure on physicians’ prescription habits. The patient is no longer a passive user; s/he wants to be informed and educated about the necessity, the risks, or the benefits of a certain therapeutic concept. Especially in the case of chronic diseases, patients do not just act alone, but are represented by well-informed, organized associations, which take actively part in the decision and opinion-forming process (Harms & Druener, 2003).
Empowered by better access to higher education, intensified use of the Internet as a source of health information, and greater personal wealth, consumers want to have a bigger say in their treatments. Patients can easily and quickly obtain information about innovative medical products or alternative via Web, and also confirm a diagnosis by an electronic second-opinion.
The forces of consumerism, information management, technology, and science foster the trend towards individualized healthcare. Individualized medicines based on individual outcomes will create new market opportunities, but will also require a different perspective. Pharmaceutical firms will have to alter their marketing and product strategies. Innovative therapeutic concepts and additional value-adding services are becoming a key success factor. The dual relationship between physicians and pharmaceutical companies are antiquated, and innovative relationship marketing
is needed, integrating all participants of the health care system (Harms & Druener, 2003). The reputation and the marketing activities of a pharmaceutical company, and with it, its interrelation with different pressure groups will become the most important strategic success factor. In this process, pharmaceutical marketing plays a crucial role.
One of the new challenges is the management of an individual’s health during the various stages of life, and a second is the management of an individual’s disease across therapeutic boundaries. Instead of focusing on just one dimension of a particular disease, a pharmaceutical firm may develop a variety of treatments that cover related illnesses or risk factors. Such a provision of continuous care can positively affect long-term relationship with a customer. However, one should recognize that only few companies will have the capabilities and competences to develop the full amount of products and services needed for an individualized health management portfolio by themselves. To realize such projects most companies will have to expand their range through joint ventures, mergers, licensing deals, partnerships with biotech firms, or outsourcing to contract research organizations (PWC, 2005).
Another point to mention is that every company may start from a different point, and it is a long way to realize the full potential of individualized healthcare management.
Apparently, developing blockbuster drugs and tailoring the information on those products for individual use is still common practice. However, industry experts argue that in the age of individual health management the demand for customized medicines will substantially increase. Hence, in the long run one-size-fits-all products are not able to generate sufficient revenues (PWC, 2005).
4 The E-Health Opportunity
Pharmaceutical Marketing and the Internet
The growth of e-commerce and the extensive discourse on e-based medical transactions, health platforms, or e-detailing set the context of applying the Internet for pharmaceutical marketing. As a consequence, the interface between the Internet and health care (e-health) is a prospering sector. For pharmaceutical firms, but also for insurance and retail companies, competitive considerations are of major interest, and play an important role when setting up e-health strategies. Despite the strict
regulations implemented by national authorities, the commercialization of medicines was successfully introduced on the web by a number of online pharmacies. Also other health care providers and pharmaceutical firms have articulated their commitment to the Internet as an important means of their marketing strategy, and its use as primary channel for reaching customers. The intensity of recent e-health activity, manifested by the fact that consumers are increasingly using the Internet as a source of health information, and by the proliferation of health-related websites, has far-reaching consequences for the health care industry (Lerer, 2001).
The Internet is increasingly used as a distribution channel for pharmaceutical products, and this exposure of the pharmaceutical value chain has both, advantages and pitfalls. The consolidation and vertical integration of pharmaceutical wholesaling, deregulations, and the emergence of pan-European distribution networks may indeed benefit the big players, but the traditional retail pharmacy will be faced with increasing critical scrutiny with regard to offerings and margins.
The Internet has also much to offer for physicians and consumers. Consumers may search for information prior to making a decision in order to handle the perceived risks that come along with the decision. According to economic theory, consumers will search for information as long as their perceived benefit from this search is larger than the search costs (Bettman & Luce, 1998). In this respect the Internet provides great opportunity for consumers to find a multiplicity of information.
An increasing body of literature refers to the shift of consumer attitudes that is taking place facilitated by an increasingly pervasive electronic environment. By offering illimitable opportunities the Internet speeds and promotes a change in the world of healthcare and the patients’ role in it (Anderson et al., 2003). Tremendous possibilities for obtaining general information about health as well as special information about rare health conditions and experimental or alternative treatments are provided online. The possibility of customizing and personalising content, interactive disease management tools, and value-added services, to the needs of small groups, can help to establish close and long-term relationships between a pharmaceutical company and its customers (Lerer, 2001). With offering such new opportunities the Internet does also bear some risks for customers. As there is still
insufficient health-content regulation or peer review, the credibility and quality of health web pages must come under scrutiny (Cline & Haynes, 2001).
The application of the Internet as a marketing channel for physicians remains debatable. Although there is a growing number of physicians that use their computers for different reimbursement transactions, information searches, or clinical trial participation, they are by far less enthusiastic as expected. The initial excitement about health portals as information providers to physicians has waned (Lerer, 2001).
However despite these difficulties, the Internet as a channel for advertising and promoting drugs to customers has become an attractive source for pharmaceutical firms. Yet, the introduction of e-detailing, and the use of web-based direct communication between physicians and sales representatives requires serious consideration on the effectiveness and return on investment (cf. Narayanan et al.
2004). To optimally align their online marketing strategies with their customers’
preferences and habits pharmaceutical companies need to know the characteristics of their online customer base. How individuals search for online information and what information they search for, is crucial for designing the content of a website, which information to provide and how detailed. Moreover, by knowing a customer’s profile pharmaceutical firms can directly address promotional activities to the individual customer, and thereby tighten relationships between the company and the customer.
The specific characteristics of offline searchers are also of interest. Health care providers should think of and develop strategies that could make online information search more attractive to them.
After all, by using online channels for health marketing the efficiency in the market is bound to the level of satisfaction of its participants. Hence, it is a key point to improve and raise customer satisfaction of online sources, e.g. by carefully examining the concerns about online health information, and develop strategies to mitigate these concerns (Erdem & Chandra, 2003).
In the following sections we pay special attention to the topic of online health information seeking with its advantages and disadvantages, as well as to the characteristics of health information sources and consumers seeking health
information. For this purpose a replication study has been performed, investigating the discriminating factors of online and offline health information seekers.
A Definition of E-Health
Apparently, e-health is on everyone’s lips. It has become a widely accepted neologism by many individuals, academics, professional bodies and institutions despite or just because of the absence of a clear, agreed-upon definition. Oh et al.
(2005) found 51 published definitions of e-health, including different concepts of health, technology and commerce. While the meaning of what falls within the scope of the term may vary with the context of use a continuous excitement around the benefits and opportunities of applying advanced information and communication technologies (ICT) in health information can be found (Alvarez, 2002). A broad definition of e-health is given by Eng (2001) who defines it as “the use of emerging information and communication technology, especially the Internet, to improve or enable health and health care.” Yet, the term encompasses not only a technological development but also “a new way of working, an attitude and a commitment for networked, global thinking” (Eysenbach, 2001; Pagliari, 2005). As such the “e” in e- health incorporates, beside “electronic”, several other “e’s”: efficiency, enhancing quality, evidence based, empowerment, encouragement, education, enabling, extending, ethics as well as equity (Eysenbach, 2001).
Consumer Use of the Internet For Health Information Search – A Replication Study
As already emphasized, today, one cannot imagine modern health care without the integration of information technology. In particular, the Internet is changing health care practice, providing new opportunities for consumers to obtain up-to-date health information in a timely manner.
It influences consumers of care through offering five main functions (Frank, 2000), which are: the provision and dissemination of specific health information e.g. with respect to prevention, diagnosis, health care providers or treatment options; the support of informed decision-making; the promotion of health; the provision of
