After almost two decades of blockbuster-driven prosperity, the model for success in pharmaceuticals has broken down. Growth
and profitability have declined across the board. In fact, the sector as a whole has created no value in the past five years.
The sources of this stagnation are many: higher development costs, declining R&D productivity, increased competition for in-licensing,
higher marketing costs, generics, pricing pressure, and increased political and regulatory scrutiny. The path forward, once
clear, is no longer obvious.
Stagnant Value Since 2000
In the face of such challenges, pharma is not yet experimenting with new business models. For the most part, top companies
are clinging to their traditional strategies. Fifteen years ago, pharma tried to play everywhere possible. Industry pipelines
were full. Industry leaders maintained vast discovery, development, and marketing organizations. They pursued medicines in
a similarly broad footprint in all of the major disease areas. No longer: Integrated pharmaceutical companies are likely to
migrate to areas of strength, be it a particular disease area, customer group, or value-chain position.
Segmenting Disease Areas
But deciding where to focus today is complicated by the fact that the pharmaceutical world could evolve in very different
ways. The most optimistic view sees a new wave of innovation solving a myriad of medical problems for an aging global population
that is eager to pay for a new era of medicine (or to secure public funding for it). At the other extreme, pessimists see
a descent into commoditization: a world in which innovation stalls, pricing challenges persist, and competitive pressure mounts
from consumer products, generics, and India and China.
Playing to Win Everywhere
"In selecting where to play it is important to ask how the industry is evolving," says Reinhard Ambros, managing director,
Novartis BioVenture Fund. "What disruptive events could reshape the industry? How can you ensure that your company will survive?"
Growth Rate Increases as R&D Focus Narrows
What's right for a business pursuing life-saving cancer medicines will likely not work for a company in mature segments like
allergy, ulcer control, or fertility control. But the choice of model is not obvious for either company. Because the business
models of the largest pharma companies have been virtually indistinguishable, there is far more to be learned from a different
cohort of companies—mid-cap pharmas and biotechs with sales between $1 billion and $5 billion.
We segmented the mid-cap companies along three dimensions of business-model choice: disease-area footprint, the breadth of
focus, and customer and channel mix. We found that the choice of "where to play" drives differences in the financial performance
and value-creation profile of these companies.