Pharma's Next Top Model: Slimmer Business Models - Pharmaceutical Executive


Pharma's Next Top Model: Slimmer Business Models
The fat times are over. No excesses, no regrets. A slimmer business model makes any company beautiful.

Pharmaceutical Executive

The high-risk innovation for unmet needs targeted by the LifeSavers requires more costly R&D (up to 25 percent of sales) than for Incrementalists (10 percent), Integrators (15 percent), and LifeStylists (20 percent). But life-saving innovations are more likely to sell themselves once they are on the market, requiring only about 25 percent of revenues to be spent on sales, general, and accounting (SG&A). LifeSavers garner additional advantages, including more receptive regulators and less reluctant payers. Incrementalists face hurdles on every front: They pay up to 35 percent of revenues for SG&A, owing to the high-persistency marketing needed to justify their positioning versus OTC and generic products. LifeStylists, who spend up to 40 percent of revenues on SG&A, require an even greater investment in consumer awareness and physician education.

Bet Broad or Bet Narrow?

Second behind disease-area category is the question of focus: how a company deploys its capabilities. Even among our mid-cap cohort, there are relatively divergent attitudes toward focus. Some companies have chosen a relatively tight focus on one or two diseases or therapeutic areas, namely Biogen Idec, with more than 60 percent of its sales in immunology, and Novo Nordisk, with nearly 70 percent of sales in central nervous system drugs. Others have spread their bets, maintaining a significant presence in as many as four or more separate therapeutic areas.

"One of the challenges of focus is that, at some point, you need to broaden horizons again," says Howie Rosen, vice president of commercial strategy for Gilead. "When you get there, how do you maintain discipline, and at the same time get comfortable outside of the existing zone of expertise? Specifically for Gilead, we're good at drugs that are active against the virus, not the host. As we move out from this core, there is fundamentally different biology, and a different risk profile."

Companies often cite as a motivation for breadth the desire to hold diverse options for future growth. But, a narrow focus does not necessarily mean lower growth. In this mid-cap cohort, companies with fewer marketed franchises (one or two) have grown faster over the past five years (26 vs. eight percent average), sustained higher profitability (17 vs. 10 percent net margins), and launched twice as many products than companies with three or more franchises. Similarly, companies with fewer research areas, like Genentech in oncology and immunology, are expected to grow faster (17 percent compound annual growth rate through 2009) and launch more products than less-focused R&D companies, such as Taisho and Solvay (eight percent CAGR on average).

Focus provides value in several ways. In the commercial realm, continuity in a franchise area drives faster uptake of new products, creates barriers to entry for competitors, and improves appeal as a licensor. Valuable promotional assets are rarely stranded. In R&D, focus provides for products with a richer understanding of the biology of disease areas and of unmet medical needs. In clinical development, focus bolsters probabilities of success through increased knowledge of key pitfalls and disease dynamics, and strong relationships with opinion leaders and regulators to assure rapid enrollment and agency review. Other benefits include: cost synergies through common platforms, better leverage of historic brand positioning, and increased ability to attract the top scientific and commercial talent in a particular disease area. "Establishing focus is one of the most important things I do," says Joe McCracken, vice president of business development, Genentech. "Otherwise, you can spin your wheels and waste a lot of time in competing for business development opportunities."

With all those benefits, why do some spread their bets? The truth is: Drugs are rare, and focus only increases their scarcity.

Customer and Channel Focus

The final element we examined involved the channel focus and choices about the relative emphasis in marketing to patients, primary care physicians, or specialists. For some companies, disease-area and breadth-of-focus choices mean that only a narrow set of doctors must be targeted, as with Genentech in oncology or Gilead in anti-virals. For other companies, the customer and channel mix is much broader, as with Akzo Nobel (Organon), which targets a mix of patients, PCPs, and specialists.


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