As unexpected activities at work preempted regular postings during the past several weeks, this piece will provide a catch-up on a prominent story that animated the pharmaceutical industry in October and November.
The board of French-based Sanofi, the world's fifth largest pharma (based on sales), surprised most people in late October whey they fired CEO Chris Viehbacher. Sanofi's recent financial results were roughly in the middle of the Big Pharma pack and their long-term challenges do not appear substantially more daunting than those of its major competitors. This led most commenters to speculate that Viehbacher had personal and/or cultural differences with the Sanofi board.
Some of that may be true, but without a well-placed, candid source on the board, there is really no way to directly assess the importance of those factors. Certainly, some of the stories that circulated after Viehbacher's firing seem at least questionable. For example, some contend he was dumped for being "insufficiently French" and for choosing to live in Boston. Granted, people get fired for less substantial reasons, but those factors seem implausible here.
In the first place, most chief executives have peculiarities that create difficulties for their respective organizations, but in business settings they are retained or fired for their numbers. It's actually surprising that corporate chiefs and their business unit heads are often despised by their superiors, but as long as those managers produce favorable numbers for the company's financial statements, they usually keep their positions. It often takes a quarter or two of stagnant or declining results before the companies show ornery execs the door. Sanofi's financial results in recent quarters haven't shown a glaring, downward trend and their prospects for long-term growth appear no gloomier than those of their major competitors. Their key diabetes franchise faces some challenges, but it isn't as if Viehbacher has repeatedly shown an ability to address that issue.
The "insufficiently French" issue appears even more perplexing since Sanofi hired Viehbacher precisely because his familiarity with the U.S./North American market, together with his work experience in Europe, seemed likely to reduce the company's insular, French parochialism.
For many years Sanofi operated with a Maginot line mentality, a term referring to a chain of fixed artillery placements that France built along its north-eastern border in the 1930s to deter any future German invasion. The country maintained a smug, self-assured complacency about its defensive preparation, despite the fact that as construction proceeded on the line, tanks, trucks and aircraft were making mobility the salient feature of armies. In the same way, Sanofi blithely assumed that first line approval of an oncology product in France would gain similar approval in the U.S. Alas, much as Germany overran France in four short weeks in 1940 by invading through Belgium, Sanofi's haughtiness often created major setbacks in the U.S. and elsewhere.
Viehbacher, a Canadian of German parentage, was brought in to change that attitude and his previous position as head of GlaxoSmithKline's U.S. operations provided reason to believe he understood the trends and dynamics of the world's most lucrative national market. His decision to live in Boston was actually consistent with that globalization effort.
Increasingly pharma companies are moving out of the suburban office complexes where they located their operations during the past forty years. Instead they are centering more of their operations in "medical research hubs" where medical schools and other research institutions are concentrated. London/Cambridge in the U.K. is one such hub. In the U.S., the big one is Boston/Cambridge in Massachusetts. Novartis, Pfizer, Merck, and Sanofi itself all have large R&D facilities in the Boston area and each site is bringing more functions within the respective companies into close proximity. The extent of biomedical research in the Boston area is so vast that GSK opened an office in Cambridge's Kendall Square to make it easier for pursuing partnerships with research programs and startups.
So if Viehbacher was no tougher to get along with than other CEOs and the insufficiently-French/lives-in-Boston explanations look unlikely, then why did Sanofi can him? Here Sanofi does show its commitment to maintaining an outdated tradition, but one peculiar to pharma rather than France.
At Sanofi's third quarter earnings release in late October, Viehbacher's management team admitted, in a pre-recorded video, that in an increasingly commodified, U.S. diabetes market, substantial price cutting will likely be necessary to retain market access. This was simply an acknowledgment of reality because competition has been increasing in the large diabetes and respiratory markets, even as payers have been more aggressively trying to control their drug spending. For Sanofi, these necessary price reductions mean its diabetes sales appear likely to remain flat through 2015.
This concession on Viehbacher's part collapsed a longstanding pillar of the pharmaceutical industry -- its pricing cartel. Unlike genuine markets, where product pricing freely results from such factors as overall demand, differentiation and unique benefits, for more than 65 years pharma companies have introduced me-too products (those without substantial benefits over older ones) at premium prices. Then as more expensive, me-too products enter a given category, existing competitors raise their prices to match the new competitors. When a third or fourth product enters a category without any important clinical benefit over existing competitors, and the company prices it at parity with the market leaders, this phenomenon usually indicates that a cartel rather than a legitimate market is operating.
By firing Viehbacher immediately after he let that cat out of its bag, the Sanofi board signaled its disdain for a legitimate market in pharma and its commitment to maintaining a cartel.
Chris Viehbacher was fired because he preferred to act as an honest businessman in a fair market, instead of a price gouger.
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