Contributor Of the entrepreneurial innovation in medicine.
I was surprised by the harsh reception that greeted Merck ’s announcement today that it has launched a new weight management business in partnership with a private Boston-based firm called Health Management Resources; the new business will operate as a unit of Merck. (See this MedCity News post and this WSJ article for useful background and context.)
The immediate reaction was not uniformly enthusiastic.
Merck “needs to focus R&D carefully, and they decide to get into weight management. Where do they get this advice?” asked Fierce Biotech’s John Carroll on Twitter, adding. “It’s nothing more than a distraction.”
“I’m neutral on it,” Forbes colleague Matthew Herper tweeted. “It’s noise.”
I suspect it may be more significant.
For starters, Merck’s new weight-loss business doesn’t appear to have anything to do with drugs. Weight loss medicines are also absent from Merck’s disclosed pipeline; in fact, since the discontinuation of taranabant in 2008, Merck’s R&D organization seems to have steered clear of this space.
But if the goal isn’t to sell more drugs, what’s the purpose?
My guess is that figuring this out is exactly the point. The debate raging within the industry for years has been whether the existing business model is sustainable – especially given the challenge of discovering approvable new drugs (a problem with which Merck is unfortunately quite familiar), and the increasing difficulty of selling approved drugs to ever-more-aggressive payors.
No one expects drug price graphs like these to continuing climbing this steeply forever – yet such increases are arguably what’s been sustaining the productivity-challenged industry.
So, while pharma companies continue to optimize returns for existing products, they are mindful that the current business model may not endure indefinitely, and are understandably anxious about what they might do if or when things seriously go south.
While many pharma executives appear to be exceptionally optimistic, or so overwhelmed they’ve descended into denial, or else have cynically embraced an IBGYBG mindset, some medical product companies have started rising to the challenge.
As I discussed in August, Medtronic MDT -0.49%’s acquisition of patient monitoring firm Cardiocom seemed like a clear effort by the company to explore new business models – a goal Medtronic CEO Omar Iskrak explicitly emphasized at the company’s annual meeting a few weeks later.
I’d place Merck’s new investment in a weight management company in a similar strategic category.
The first question, of course, is why Merck? What makes Merck think they have any business mucking around in something that’s arguably so far afield from their core business of making and selling new medicines.
That’s pretty easy: many big pharmaceutical companies have a range of skills and competencies. They understand better than most what it means to deliver value in healthcare (even if they often struggle to achieve this), they spend a lot of time thinking about patient populations, a lot of time evaluating evidence, and are also generally good getting complex processes to operate at scale.
Perhaps the more difficult question is whether it will work – meaning not only will this side business in weight loss make any money, but will it (can it possibly) make enough to move the needle at a colossus like Merck?
In the short term, the answer is: obviously not (presumably why Herper described it as “noise”). A hot blockbuster drug can bring in billions of dollars a year (and cost nearly that much to discover and develop, including the resources spent on failures); that kind of revenue is hard to come by.
But the real value to Merck is probably what it’s teaching the organization about alternative business models, especially those related to healthcare services rather than products.
Moreover, while selling pricey drugs might seem like a bad place to be (at least long-term) in our evolving healthcare ecosystem, selling customer-focused health services perhaps associated with documented improvements in health seems like a great location to set up shop; the positioning is forward-thinking and sensible.
My guess is that if Merck does this right (and, as the MedCity News article points out, they aren’t the only ones – besides Medtronic, J&J, in particular, seems to be looking quite seriously at new healthcare business opportunities), they may progressively develop a stable of healthcare companies that over time account for an increasing amount of revenue, to the point where collectively, it becomes material.
Add in an external shock or two, and the need to evolve quickly could occur a lot sooner.
Consequently, the real question in my mind isn’t why Merck is doing this; I ask myself, where is everybody else?
Perhaps it’s only fitting that an organization built on leadership in innovative science may now show the industry how to reinvent itself by pioneering the innovative exploration of healthcare business strategy.