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Friday, January 14, 2005

How to avoid distractions in business?

I will use Pfizer/Celebrex case study to highlight two major points:
  • Distractions are disastrous for any business, particularly when senior level executives are distracted.
  • A strategy that is developed in a hurry without proper input from independent thinkers may actually result in a "strategy vacuum".
Pfizer's poor Celebrex strategy

Let us go back to September when Merck recalled Vioxx. Tempting as it was, Pfizer aggressively started to court Vioxx patients through direct to consumer advertising. This was a poor choice made since it was not only Vioxx that was being scrutinized, the whole class of drugs (called as Cox-2 inhibitor) was under investigation by the FDA and other agencies worldwide. To make things even worse for Pfizer, at least two reports were released in December 2004 pointing out to adverse side effects of Celebrex and another Cox-2 drug sold by Pfizer called Bextra. At that time, at the request of FDA, Pfizer agreed to pull of all direct-to-consumer advertising for Celebrex. This week, FDA has issued a warning to Pfizer about its misleading advertisements for both Celebrex and Vioxx. The European Medicines Agency (EMEA) is scheduled to review Cox-2 drugs in January 2005 while the FDA is organizing a similar review meeting in February. While Pfizer expects that Celebrex will get away merely with a stronger warning, many analysts and doctors say that they will not be surprised if the drug may need to be recalled.

What has Pfizer done wrong?
  • Pfizer did not control its risk appetite. In other words, Pfizer has taken way too much risk. Taking too much risk is not inherently bad if it means high rewards are highly likely. That is not the case here. Let me explain. There are only a finite number of arthritis patients who can use a drug like Vioxx or Celebrex. These patients had few choices. If Pfizer had worked with drug agencies and doctors closely, disclosed all the risks associated with the drugs and then marketed it to that segment of arthritis patients that would get the maximum benefit from using Celebrex, it would have developed a solid business that it could own over time since Vioxx, the major competitor, was already withdrawn. On the other hand, Pfizer went after market share (as a CPG company would), and now it faces the strong possibility that if at any time in the future Celebrex is found to be unsafe, the Celebrex class action lawsuits will literally make it bankrupt (many management consultants expect that Merck may need to file for bankruptcy in 2005/06).
  • Pfizer did not recall Celebrex on its own. That would have been not only the right thing to do as far as creating value for your customers is concerned, it would also be the right strategy for long-term shareholder value creation. Analysts and investors understand that pharmaceutical is a high-risk sector and that risk is typically priced into the stock price. Expectations related to lawsuits compensation/settlements and product recalls are also priced into the stock. A voluntary recall prior to a major catastrophe (like that committed by Merck with Vioxx) would significantly reduce its legal liability.
  • Pfizer operates without a well thought out risk management strategy. I was hoping that the McKinnell would have inspired by the lessons learned by Gilmartin from recall of Vioxx. In fact he committed the same mistakes that were committed by Merck.
  • Pfizer strategy is not working. Celebrex's share of new prescriptions for arthritis drugs dropped to 7.4% for the week ending Jan. 7, 2005, down from 15% three weeks earlier. Bextra's share of new prescriptions also fell to 4.3%, down from 8.4%.

What does it mean for you?

  • Distractions at the top-most level in the organizations should be avoided. A CEO should never get into the firefighting mode. The role of a CEO is to provide strategic vision and direction to the enterprise, not to get on television claiming that the drug was safe when doctors and scientists were saying that the science was not perfect. There was no need for Pfizer to rush into pushing Celebrex the day Vioxx was recalled. Similarly, there was no need to defend Celebrex as strongly as Pfizer has done since studies disclosed adverse side effects. Cox-2 drugs are still new and a lot is unknown about these drugs. Since doctors were not convinced about the half-baked science that Pfizer and Merck had, they simply stopped prescribing Celebrex. Or in other words, Pfizer could have avoided so much backlash if it had simply taken the time to respond and come out with more patient-friendly announcements.
  • Do not let tactics come before strategy. Indeed, development of a robust strategy takes time and product recalls do not always give you the freedom to do so, but it is much better to take the time to think of all dimensions of an issue before reacting. Now it is pretty obvious that for the next few months, Pfizer has no choice but to react to external developments rather than drive the strategy forward.

Recommended article: How to develop winning competitive strategy?