Make It New - Pharmaceutical Executive


Make It New
To fix pharma's business model, nothing less than big, bold, and risky fits the bill. Two radical new visions focus on getting back to the roots of innovation—and letting a thousand flowers bloom.

Pharmaceutical Executive

A Model That Fails to Scale

Still, rumors of Big Pharma's death are greatly exaggerated. Among many undeniably gloomy trends, one instructive red thread shines through. "Global demographics are totally in the industry's favor," says Carolyn Buck Luce, Ernst & Young's global pharmaceutical sector leader. "In both existing and emerging markets, there are more older people, more middle-class people, and, therefore, more middle-class diseases. That means the demand for healthcare, and in particular medicine, will continue to grow."

Bernard Munos
The problem, of course, is that giant companies are no longer growing—at least not fast enough for Wall Street. According to a new Accenture report, $1 trillion in enterprise value has vanished from the industry, thanks to investors' black view of future profitability. A Bain drug-economics model reveals that return on investment fell from 9 percent between 1995 and 2000 to less than 5 percent between 2000 and 2005. Meanwhile, the cost of taking a drug from discovery through launch rose 50 percent over the same period, to as much as $1.7 billion. Only one of every six new products is due to deliver returns above the cost of capital.

Industry members can recite in their sleep the reasons why. The major mergers of the past decade saw the consolidation of the big pharmas into Big Pharma, and Big Pharma has failed, in a Big Way, to sustain Big Profits. On paper, consolidation made sense, promising to yield advantages of scale—lower costs, more products, higher profits. But contrary to popular opinion, big pharmas were not simply lazing about, doing deals, and getting fat in the '90s. Firms were busy divesting themselves of extraneous plants, offices, R&D sites, low-end products, non-strategic divisions, and any other good and services unlikely to yield major margins. (They were also investing hand over fist in the sales-force arms race.) One unintended consequence was what economists call "the unraveling of the value chain." This collective casting off of opportunities stimulated the growth of a far field of commerce, from contract research, manufacturing, and sales organizations to specialty and generic drug makers. Many of these new, nimble companies were soon outperforming Big Pharma at their function of choice. The economic reality in which consolidation was designed to prosper no longer existed.

Derek Lowe, author of the In the Pipeline blog, caught the current zeitgeist perfectly in a post bemoaning the rumored merger of Bristol-Myers Squibb and Sanofi-Aventis: "Research productivity is the thing that doesn't scale in these mergers, and research productivity has to increase eventually, or the whole mighty monument is going to topple over. You have to have something to sell, and it should come from your own research. Going out and just buying the good stuff ends up raising its price. You can't buy your way out of trouble in research. More people and more money, after some point, can actually make things worse."

To their credit, pharma companies are doing more than buying their way out of trouble. They are also (finally) cutting sales forces and operations. As for more strategic transformations, the current trend among big pharmas is to try to streamline R&D to ramp up that elusive research productivity. GlaxoSmithKline pioneered this approach in 2003 with its far-flung seven Centers of Excellence for Drug Discovery (CEDDs), plus a virtual number eight to do deals outside the company. Roche, Merck, Novartis, and AstraZeneca have each, in their own way, followed suit. If Pfizer's recently announced restructuring—housing medical, marketing, and sales under four therapeutic areas—proved underwhelming to Wall Street, who can blame the analysts? The sight of this vast, innovative, and deeply troubled industry responding in follow-the-leader lockstep—and calling it a new strategy—is not especially inspiring.


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