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In Defense of Pharmaceuticals: Novartis CEO Speaks to HBSers

Daniel Vasella, M.D, chairman and CEO of Swiss pharmaceutical group Novartis AG, was on campus last Tuesday to address HBS students in an event jointly hosted by the HBS Healthcare Club and the Strategy Unit. As the first CEO of Novartis, Dr. Vasella had a leading role in the merger of Sandoz and Ciba-Geigy and has repeatedly been lauded as a model of corporate citizenry. He was voted the most influential European businessman over the past quarter century in a 2004 Financial Times survey. And in addition to receiving the HBS Alumni Achievement award and an honorary doctorate from the University of Basel, the Ordem Nacional do Cruzeiro do Sul from Brazil, he has also received the French rank of Chevalier in the Ordre National de la L‚gion d’Honneur.

Interposing his half-hour presentation with wry, self-deprecating remarks, Dr. Vasella touched on three main areas during his presentation: myths surrounding the pharmaceutical industry, challenges facing the industry and the trends pharmaceuticals are capitalizing on.

Dr. Vasella was quick to defend the value of medicine for patients and society. Quality of living has improved as a result of innovations in drug therapy, and the death rate for diseases treated with pharmaceutical products has dramatically dropped (particularly early-childhood diseases, which have declined 80 percent). Cancer mortality has declined for both adults and children; 65 percent of adults now survive beyond their fifth year, compared to 50 percent 25 years ago. Similarly, child cancer mortality has declined close to 50 percent over the same period.

The cost of drugs was the next myth Dr. Vasella tackled. He fared decently against the complaint. While acknowledging that prescription drugs now account for 10 percent of U.S. health expenditures, an increase from previous years, he maintained that hospital costs have risen at a faster rate compared to drugs. On a more interesting note, he postulated that even if the profits of all pharmaceutical companies were eroded, global healthcare costs would decrease by three percent at best.

Competition, research and development costs and negative publicity are the three pressing concerns for pharmaceutical companies. Sales are being eroded by the aggressive penetration of generic drugs in the U.S. and also by cheaper parallel imports in Europe. Research and development costs have rocketed as quality standards improve and the approval process lengthens, but the risk of failure remains high – if not higher – than before.
More galling, perhaps, is the negative public image pharmaceutical companies have seen generated by the press. In a Gallup poll in October 2005, only nine percent of those polled rated pharmaceutical companies as being honest and trustworthy, compared to 34 percent for hospitals. Dr. Vasella stressed that much has been done to improve pharmaceuticals’ perception problem. There has been an industry-wide drive toward transparency and access, which culminated in the following: creation of a code of conduct within the industry, creation of access programs for the uninsured who cannot afford drugs and the development of partnerships to bring drugs to the developing world. For instance, over 500 million treatments have been donated by the industry as a whole to the developing world since the millennium.

As Dr. Vasella expounded on the trends driving future growth in the industry, one yields to the sense of the inevitable: pharmaceuticals need incentives to develop and produce drugs, and growth comes from where the money is. An aging population in the developed world will demand more drugs to cope with increasing health needs. The population in developed countries is also focusing on lifestyle needs, which require more innovation in research and development. Emerging economies such as China and India will demand more drugs. Dr. Vasella estimates that one-percent economic growth in these economies will yield a more-than proportional increase in pharmaceutical sales.

For the largely RC audience, which has been immersed in numerous pharmaceutical cases since the first semester (most recently the strategy case covering dynamics in the industry), this was an opportunity to hear from the pharmaceuticals’ side. While chalk-full of statistics, Dr. Vasella’s talk remained grounded in the need to achieve balance between financial incentives and humanity in dealing with patients who cannot afford drugs or do not have access to them.

February 13, 2006
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