Missing from Starboard’s “Extensive Slide Deck” to Turn Around Pfizer

Cost-cutting logic is devouring the pharmaceutical industry. The new “turnaround skill” is market innovation.

October 8

“Pfizer chief executive Albert Bourla plans to meet Starboard Value, said people familiar with the matter, as the activist investor’s $1bn stake in the pharmaceutical group puts pressure on its board to revive its share price.

Bourla and at least one other director will hold talks with Starboard next week, after it emerged this weekend the fund had taken a $1bn stake, equivalent to about 0.6 per cent of the $165bn company. The Financial Times previously reported the activist investor is calling for a strategy shift.

While engagement between companies and activist investors is not unusual, the planned meeting shows Starboard’s demands are getting a hearing at the highest levels of the company. It has created an extensive slide deck on its turnaround plans but has yet to circulate it.

Some analysts doubt Starboard can transform the valuation of Pfizer, which has already announced $5.5bn of cost cuts through till 2027 to help restore investor confidence."

— from Pfizer Chief Albert Bourla to meet activist investor Starboard Value, by Oliver Barnes, Maria Heeter and James Fontanella-Khan for the Financial Times

October 9

"Two of Pfizer’s former executives have pulled out of hedge fund Starboard Value’s campaign to shake up the pharmaceutical company after previously lobbying for the activist investor’s turnaround plan.

Former chief executive and chair Ian Read and former finance chief Frank D’Amelio have decided not to be involved in Starboard’s campaign targeting the drugmaker, they said in a statement on Wednesday.

“We are fully supportive of Pfizer Chairman and CEO Albert Bourla, senior management and the board, and we are confident that over time they will deliver shareholder value,” said the former executives in a statement issued by Pfizer’s longtime adviser, investment bank Guggenheim Partners."

-- from Former Pfizer Executives Pull Out of Activist Investor Starboard’s Campaign by Maria Heeter and Oliver Barnes for the Financial Times yesterday

**********

Listen to the audiocast (13:25)

The Classic Story in pharma revolves around basic narrative plots, frameworks that are recycled again and again in the drug market, regardless of the brand telling them.

These stories may be populated by different settings, characters, and conflicts, but the dominant themes are The Big Miss (i.e., completely misreading the demand environment); Promotional Tonnage (i.e., the technical push model); The Quest (i.e., squeeze the push model even harder); The McKinsey Method (i.e., restructure operations); and finally Panic at The Disco (i.e., the patent cliff and, now, having to negotiate price with the United States government as part of the Inflation Reduction Act), completing the loop.

All of this rotates around scientific achievement — technical potential of a drug — as the center-of-gravity for growth and the how "innovation" is defined and communicated to The Street.

But as any brand manager and sales leader will tell you, gaining regulatory approval to promote the feature/benefit story of a drug is no guarantee of strategic success in the pharmaceutical industry. If anything, it’s almost incidental as a guide for decision-making, table stakes in an operating environment marked by mushrooming complexity, hyper-fragmentation, hyper-commoditization and competitive convergence. Missing this point has become a painful, recurring and expensive lesson in commercial model innovation, one that often comes too late for many product marketing teams at drug manufacturers, including the advertising agencies, technology vendors and strategic advisors advising them on product marketing and extensive PowerPoint presentations to the ELT (for more on this, see Why the Pharmaceutical Industry Needs to Think Like Quentin Tarantino).

In July when GsK shared quarterly results that included cutting its forecast for vaccine sales, CEO Emma Walmsley said that “with a best-in-class data profile, we are confident Arexvy will return to growth next year and longer term can achieve more than ￡3 billion in peak year sales.”

Theoretically.

Except that demand for flu shots and vaccines is evaporating, falling out of favor in a post-pandemic world. While uptake for flu shots has never been stellar, vaccine fatigue, politics, information overload and boredom, a “miserable pharmacy experience” and lowered public trust are all part of the ‘growth problem’ for these products. And all the promotional push in the world, for the products themselves and for the galaxy of disease awareness campaigns the industry funds to create demand, won’t stop The Big Miss from happening [for a good read on this, check out Stop Raising Awareness Already in the Stanford Social Innovation Review.]

"When we saw this [reduced demand for vaccinations] for the first year .... we were like, 'OK, it's just coming out of the pandemic. There's all these COVID vaccines. This feels like a blip,' " said Stefan Merlo, vice president of commercial operations at vaccine maker CSL Seqirus. "We don't believe that anymore."

One could ask: Why did you believe it in the first place?

All of this is also a problem for the collapsing retail pharmacy market generally, and collapsing Walgreens specifically — part of its “turn around strategy” to increase shareholder value (the stock is at a 27-year low) is premised on the assumption that the fuzzy shopper-as-patient-as-consumer segment will be coming into their neighborhood miserable experience to wait in line for a flu shot, presumably administered by the dwindling supply of overworked pharmacy technicians. A big flu market? The vision makes linear sense, at least as a bullet in the PowerPoint: the global influenza vaccine market is forecast to grow at a rate of around 7 percent from 2024 to 2030, and should go north of $12 billion by 2030.

But the map, as they say, is not the territory.

The reality problem -- the 'ground truth' for all the US Army veterans reading this -- is deeper, wider and more complex. Groupthink has become an almost virus-like infection that's been reproducing itself in all the pathways for decades, self-generating the code for its own survival.

It's a 'linear-hope-followed-by-expontental-scramble' form of management, of which Pfizer is far from alone: GSK and Moderna and Walgreens and 23andMe and Teladoc Health and CVS Caremark and Nestlé are but the latest victims in an industry ecosystem that has proven impervious to "transformation" and "disruption" (Note: Walgreens reports earnings next week).

An entire corpus of thought in the West is bankrupt, education and experience that starts in kindergarten, works its way through high school, gets reinforced in college and then culminates with a selfie posted here on LinkedIn, showcasing an Executive Leadership Certificate from completing a program taught by similarly collapsing Harvard Business School, or similarly collapsing McKinsey, or similarly collapsing Google.

The thing that's not working is the base layer, the foundational model.

Or more precisely a fragmentary worldview subdividing itself in an infinitely recursive loop, unable to break the hold of a massive flywheel sustaining the kinetics of The Standard Model of thought and action led by a misplaced fixation, if not obsession: cut costs and juice profits.?You literally don’t need to see the PowerPoints to “know” what they say, because they all say the same thing the same way, guided by a cost-cutting logic that has stopped making sense.

You can’t invent the automobile if you’re trying to make the horseless carriage run more efficiently. When it comes to constructing a better American Way of Healthcare (or British Way of Healthcare, for that matter), you have to remake logic itself, shift psychologies, reshape environments with a larger vocabulary.

More bluntly: If we're serious about "fixing" healthcare with a market-based approach, executive leaders will need to escape from McKinseyland, where cost-cutting logic (i.e., operations) is being confused with smart strategy.

Strategy Shifts Start With Psychology Shifts

Pure “strategy” is the relationship between means and objectives. And means can never be considered in isolation from their purpose.

Operations isn’t strategy.

Where “extensive slide decks” prepared by the PowerPoint Powerhouses tend miss in their math and mass of analysis prepared by junior analysts is the framing, the bigger storyline: everyone is searching for “strategic fit” to a world where all the usual landmarks have disappeared. Everyone. Things are going off the rails in the first slide: “healthcare” is not investing enough intellectual and creative energy positioning the objective that gives direction to the strategic direction.

What’s needed, then, is originality, a market-maximization theory to replace the profit-maximization one that dominates and eviscerates and is now determining the fates of hundreds of millions of people in the United States alone. And that new market theory needs patience by Wall Street to prove it out (for more on the patience thing, see Walmart Checks Out published recently on Fresh Paint).

You never cut your way to growth.

When it comes to big market innovation -- the 'next hundred billion' from the largest and most lucrative market on Earth -- the roadmap doesn't start with the conventional frame, the journey doesn't start alone, and the 'impact horizon' for vision should extend beyond three years. It starts with strategy at a system level, vision to construct a new industry ecosystem in an organized and persistent way. (To see how China understands 'direct contracting with employers' with an ecosystem-centered market strategy, check out Ping An Healthcare and Technology Stock Soared 10% - Managed Care Takes Center Stage in Corporate Health Management)

The thing this moment needs is a new orbit for economic competition, a different physics, where 'gravitational pull' comes from market maximization through new economic systems, continuous health engagement as an organizing idea for 'corporate health management' and "shareholder value", not efficient "utilization management" determined automatically by artificial intelligence. And the whole things needs to rotate around a better pharmacy reimbursement-provider model as the keystone. [Note: Back-to-back years of increases in premiums have added to the average cost of family coverage, reaching roughly $25,500 this year for employers and workers, per the Wall Street Journal yesterday].

There’s a balance between integrative and disintegrative processes in the natural world — an edge of chaos, so to speak — where adaptation, especially self-organization, tends to occur. Big market innovation works similarly.

What the extensive and unseen PowerPoint Starboard has prepared likely misses in its analysis is synthesis. Healthcare is an N-sided market. Recombination is where the novel action is.

So when it comes to a “strategy shift,” think Pfizer + Walgreens collaborating on a new ‘pivot region’ around which to link strategy with imagination, a bigger vision to reshape the practice of medicine around the production of affordable health.

For drug manufacturers, the elephant in the room is the room itself, an approach to business and product marketing unchanged sine the “modern pharmaceutical industry” began around 1849, when Pfizer was founded in Brooklyn.

/ jgs

John G. Singer is Executive Director of Blue Spoon the global leader in positioning strategy at a system level. To engage with a mind stretch: [email protected]