In this article I would like to discuss how an enterprise needs to manage its appetite for risk. Risk management is part of business and those leaders that do a great job at managing risk create enormous shareholder value but it is important to put some boundaries around risk management so that you do not destroy the enterprise. Merck is one example where poor risk management may mean that Merck may not exist any more. The second example could be that of Pfizer, where in my opinion, risk appetite is out of control.
The day Vioxx was recalled by Merck, Pfizer reaffirmed the safety of its two drugs (Celebrex and Bextra) that compete with Vioxx and belong to the same Cox-2 inhibitors category. During the following weeks, Pfizer embarked on an aggressive marketing campaign for Celebrex. Then came the first setback in early December. The Food & Drug Administration (FDA) asked that Bextra carry a stronger warning. Before we could even digest the new information, came another study that expressed doubts about the safety of Celebrex. The FDA asked Pfizer to stop direct-to-consumer advertising for Celebrex. Pfizer agreed to the agreement with the FDA but still refused to recall the drug. On the other hand, the company started a round of statements and television interviews touting the safety of Celebrex.
Within a matter of days, another study showed that Celebrex was not as dangerous as Aleve. Pfizer took that piece of data and issued another press release with a "We told you so!" attitude reaffirming the safety of Celebrex. It is important to point out that not only the FDA but similar agencies in other parts of the world are very skeptical of Cox-2 inhibitor drugs in general. A large number of doctors are also uncomfortable with the conflicting data on Celebrex, and if they have a choice, will simply not prescribe it. Many are calling for an outright ban on all Cox-2 drugs till further research is conducted.
So why is Pfizer so aggressive about Celebrex? As a management consultant, I think that the strategy is being driven out of the CEO's office rather than the CEO consulting with his risk management group. Secondly, it is a blockbuster drug for Pfizer and provides as much as 10% of their revenues. But what is making many experts wonder is why is Pfizer taking so much risk at this point? The answer: Pfizer's enormous appetite for risk. Pfizer executives argue that by taking a bold stance, they may be able to push FDA into just adding a warning to Celebrex rather than asking for its recall, and as long as Celebrex is on the market, Pfizer will not lose all of its sales though the company admits that the controversy will definitely lower its sales.
But what happens if Celebrex is another Vioxx? Like Merck, Pfizer will be dead. All because both companies did not know how to manage risk.
How to manage your risk appetite?
The day Vioxx was recalled by Merck, Pfizer reaffirmed the safety of its two drugs (Celebrex and Bextra) that compete with Vioxx and belong to the same Cox-2 inhibitors category. During the following weeks, Pfizer embarked on an aggressive marketing campaign for Celebrex. Then came the first setback in early December. The Food & Drug Administration (FDA) asked that Bextra carry a stronger warning. Before we could even digest the new information, came another study that expressed doubts about the safety of Celebrex. The FDA asked Pfizer to stop direct-to-consumer advertising for Celebrex. Pfizer agreed to the agreement with the FDA but still refused to recall the drug. On the other hand, the company started a round of statements and television interviews touting the safety of Celebrex.
Within a matter of days, another study showed that Celebrex was not as dangerous as Aleve. Pfizer took that piece of data and issued another press release with a "We told you so!" attitude reaffirming the safety of Celebrex. It is important to point out that not only the FDA but similar agencies in other parts of the world are very skeptical of Cox-2 inhibitor drugs in general. A large number of doctors are also uncomfortable with the conflicting data on Celebrex, and if they have a choice, will simply not prescribe it. Many are calling for an outright ban on all Cox-2 drugs till further research is conducted.
So why is Pfizer so aggressive about Celebrex? As a management consultant, I think that the strategy is being driven out of the CEO's office rather than the CEO consulting with his risk management group. Secondly, it is a blockbuster drug for Pfizer and provides as much as 10% of their revenues. But what is making many experts wonder is why is Pfizer taking so much risk at this point? The answer: Pfizer's enormous appetite for risk. Pfizer executives argue that by taking a bold stance, they may be able to push FDA into just adding a warning to Celebrex rather than asking for its recall, and as long as Celebrex is on the market, Pfizer will not lose all of its sales though the company admits that the controversy will definitely lower its sales.
But what happens if Celebrex is another Vioxx? Like Merck, Pfizer will be dead. All because both companies did not know how to manage risk.
How to manage your risk appetite?
- Make risk management a shared responsibility. Decisions should be made by consensus.
- Make the risk management group diverse by including executives from strategy, finance, marketing, legal, and sales groups.
- Have metrics in place for risk management so that they are not developed when you are actually managing a risk. By adhering to these metrics you can make sure that no one makes the rules about how much risk appetite is right.