Brand
Medicine: The Role of Branding in the Pharmaceutical Industry
By
Tom Blackett and Rebecca Robins
It seems extraordinary that one of the
world's largest consumer good markets - pharmaceuticals - should for
so long have flourished with little help from brands. In most other
industries, manufacturers, suppliers of services and retailers use
branding techniques to help secure competitive advantage. Indeed,
increasingly these days, it is the brand which provides the sole means
of differentiation, as 'Fortune' magazine famously has said:
"In the 21st century, branding ultimately will be the only unique
differentiator between companies. Brand equity is now a key
asset."
What 'Fortune' is asserting is that
sooner or later, given the increasing ubiquity of capital, technology
and skilled workforces, most companies in most industries will be
competing on a 'level playing field'. In these circumstances the
reputation encapsulated in their brands will become the chief
determinant of customer choice.
It has often been said that brands are the true expression of
democracy because they thrive in situations where choice is
unrestricted and 'perfect competition' exists. This is not so in the
pharmaceutical industry, where the relationship between the consumer
and the manufacturer is heavily mediated. Regulatory bodies sanction
and control the availability of medicines; governments and insurance
companies determine what the consumer must pay; and the drug
manufacturers themselves are severely constrained in what they can say
directly to consumers about their products and their properties. As
Rob Benson
says of the industry: "(it) is still heavily dependent world-wide
on government health expenditure for reimbursement sourced revenue and
product licence approvals, all controlled by powerful regulatory
forces resistant to anything that they perceive might upset the public
balance sheet". In most mature economies therefore the
pharmaceutical industry has been sucked into the maw of public policy,
and its well-being is subject to the reforming whim of political
parties to a very much greater extent than it is to the requirements
of the consumer.
These conditions are inimical to
brands. Brands thrive where the relationship between buyer and seller
is direct and open, where choice is transparent and availability
unrestricted. Few of these requirements exist within the prescription
pharmaceuticals market. Yet the industry is huge and has great value;
it has learned to cope with the extraordinary degree of regulation
placed upon it and would seemingly have no need for brands. Why is
this?
Quite simply because the industry is one where the power of invention
has been paramount in creating its wealth. The pharmaceuticals
industry is a science-based industry and its huge success has been due
largely to its ability to invent great new products for the benefit of
mankind. My friend and former colleague John Murphy, who founded
Interbrand in 1974, often used to chide drugs companies by saying that
the Coca-Cola Corporation, without a patent to its name but with one
of the world's oldest and most valuable trademarks, is a hugely
successful business - while the pharmaceuticals industry, flush with
patents but bereft largely of meaningful brands, expends huge amounts
of cash and energy in the development of intellectual property of a
comparatively evanescent quality.
In June 2000 Interbrand published its
list of the world's 75 most valuable brands. Not one pharmaceutical brand or company name featured
in this list. The majority of the brands featured have been in
existence at least since the Second World War, although it was notable
that compared to the same league table published in 1999, several 'new
economy' brands, like Yahoo, Amazon.com and AOL had come into the
reckoning. Perhaps this is not surprising - but for the pharmaceutical
industry it should be a matter of some concern.
Most analyses of the source of company
value nowadays point to intangible rather than tangible assets as the
chief wealth creators within a business. Investors place a high
premium on knowledge-based companies and on companies that own
distinct and defensible assets such as brands. Thus proprietary skills
and reputation will be the basis on which successful companies compete
in the future. How true will this be of the pharmaceutical industry?
If ever there was an industry where the biggest and most successful
companies depended upon proprietary skills and the mantle of patents
to create value, then this was it. The present round of mergers and
acquisitions taking place within the industry testify to the very high
value placed on innovation, and the sheer cost of achieving this.
There is a never-ending need for new and more effective products;
patent law exists to protect the interests of innovative companies and
virtually guarantees that, if the product works and the marketing is
good, then the company will more than recoup its investment and make a
handsome profit. But the rights conferred in a patent rarely last more
than twenty years, and as it can take up to ten years to get a new
product to the marketplace the patent owner has only a limited period
of exclusivity. The rights conferred in a trade mark, however, can
last indefinitely, subject to the regular renewal of the registration
and other rules of maintenance which are far from onerous.
While it is almost certain though that
patents will remain the chief source of corporate 'economic value
added' for many leading pharmaceutical companies, there are a series
of important and irreversible developments taking place which militate
in favour of brands.
Governments everywhere are seeking to
mitigate the cost of state-subsidised healthcare. This is already
huge, and with the forecast increase in the elderly population is
likely to grow to an unmanageable size. Transferring the cost of
medicine from the public to the private purse will help partially to
alleviate this, and encouraging the pharmaceutical manufacturers to
make more products available 'over the counter' (OTC) will be an
important plank in this strategy. But in order for this to be
effective, major changes will be required in consumer behaviour based
on wider understanding of the nature of the medicines becoming
available.
This will necessitate a revolution in
communication, more widespread channels of distribution (including the
Internet) and regulatory changes. Many of these things are already
happening, such as the dramatic growth in direct-to-consumer (DTC)
advertising in the United States, and some are still years away.
Nevertheless there is an irresistible force in the market, driven
largely by government will, that means that consumers must be
encouraged to take much greater responsibility for their well-being.
For them to do so they will require unfettered access to information,
freedom of choice, first class products and good value for money. It
is in situations like these that brands thrive - yet the
pharmaceutical industry at large has little experience in creating and
managing brands.
Interestingly, these circumstances
could well bring about a transformation in the way the industry
creates value for its shareholders. The pharmaceutical industry is a
highly successful and wealthy one; the leading players have for many
years been the stars of the world's stock markets through
ever-expanding sales and profits. Sales growth to a large extent has
come about through huge economic improvements in the third world,
through increasing longevity and the demands of the elderly, and
through success in the development of drugs for the treatment of
hitherto intractable diseases. These factors will continue to drive
the growth of the industry, but there are signs that it is becoming
increasingly difficult to sustain the levels of innovation necessary
to deliver the successful new products of the future. Without these
products profit margins will fall and returns to investors will
suffer.
The industry is of course alert to this
threat and during the last few years we have seen several major
mergers (e.g. GlaxoWellcome and SmithKline Beecham, Astra and Zeneca,
Pharmacia and Upjohn) as companies have sought to improve the
productivity of research and development, widen product portfolios and
optimise sales and marketing costs. Many companies are now actively
pursuing the sale of OTC brands as a way of building sales,
recognising that in these brands they have potentially a new source of
business value. Many companies too are seeking ways to exploit
established Rx (prescription product) brand names in the OTC world,
with a view to leveraging the reputations of these names with
pharmacists and consumers. Others are seeking to introduce entirely
new brands to the wider OTC market and are faced with the formidable
task of building consumer awareness and confidence. Whatever the
strategy, brands have a central role to play in the future of the
industry.
And all this is happening at a time of growing awareness of and
interest in 'well-being'. Functional Foods (or nutraceuticals as they
are sometimes called) and alternative (natural) medicines have become
immensely popular with consumers who attach a high importance to
maintaining healthy lifestyles. A few years ago interest in such
products, would have been regarded as faddish. Nowadays their use is
considered perfectly normal - and indeed a very sensible alternative
to a visit to the doctor's surgery. Both functional foods and
alternative medicines are unrestricted in their availability, and the
power of choice lies entirely with the consumer. 'Conventional'
medicine still dominates in the West, but such is the interest in
natural remedies that it is not inconceivable that in many therapeutic
areas they may come to dominate.
The book Brand Medicine endeavors to comment on all
these major trends and provide some advice on how brands and the
branding process can be made integral to future business strategy. We examine the chief drivers of change, in particular the
Internet and
the growth of direct-to-consumer advertising; government policy; the
ageing population; the Rx to OTC 'switch'; and trends in communication
and brand building, together with the complex regulatory frameworks
that circumscribe these.
But throughout we have tried to focus
on the value-adding contribution that strong brands can make to
corporate performance. The pharmaceuticals industry possesses some
strong, well-established brands, a large number of which enjoy little
or no patent protection. Brands such as Ventolin, Claritin and
Canesten continue to be valuable to their owners because during their
years of exclusivity they created a momentum in demand. This momentum
helped cushion them against the effects of generic competition. Each
brand has now become so well known that it stands for a set of
distinctive characteristics and benefits, the net impact of which is
the belief on the part of prescribers, pharmacists and consumers that
the brand is superior to imitations. In a competitive situation this
belief may not be strong enough to justify paying more, but given
parity - or near-parity - in price then the tried and trusted brand
will usually enjoy an advantage. A strong brand, therefore, has the
ability to command reliable cash flows.
A patent also has an ability to secure
strong cash flows which, over its useful life, will be superior to
that of the brand. But once the patent lapses, so its economic value
to its owner evaporates. It seems to us therefore that the role of the
brand manager is to ensure that the strong reputation a successful
patented drug achieves during its period of exclusivity should,
through appropriate marketing and development, be absorbed by the
brand name. Then when the time comes, decisions can be taken on
whether to continue to market aggressively the branded generic,
exploit the brand's equity in the OTC arena or, as is increasingly the
case, implement both strategies.
Successful pharmaceutical companies are rich in intellectual property.
Historically this property has taken the form of patents. Now brands
can add layers of sustainable value to these hard-won assets, and the
skill in prolonging a good product's life lies in managing the
branding process. This we believe will be the future of value creation
in the pharmaceutical industry.
Excerpted from Brand Medicine: The Role
of Branding in the Pharmaceutical Industry. Edited by Tom Blackett and
Rebecca Robins (c) 2001 Interbrand
