Pharmaceutical Firms: Heal Thyself

Pharma executives have a lot to fret about these days.  Blockbuster drugs like Lipitor and Prozac representing $130B in revenue will soon come off patent.  Even though new drugs cost up to $1B to develop and market, there are no home runs in the launch queue that can easily close the gap.  Furthermore, tighter guidelines around marketing and educational practices are making it difficult to introduce new – too often me-too – drugs. As a result, the traditional pharma business model is increasingly being seen as broken.  David Blumberg, leader of KPMG’s pharmaceutical industry practice has said, “There’s a recognition that current models have a lower rate of return than they used to,” A recent newsletter from the Wharton Business School has some interesting thoughts on the challenges and possible fixes for the pharmaceutical industry:

Diversify drug portfolios

Pharma companies are moving beyond blockbuster drug strategies to include smaller patient populations and more specialized ailments.  One quick way to build the product portfolio is through drug licensing and marketing partnerships with IP-rich yet cash-poor firms.  For example, Pfizer recently licensed the worldwide rights to a treatment for Gaucher’s disease, a rare disease affecting thousands (not millions) of patients, from a small Israeli company. 

Extend R&D outsourcing and collaboration

Given its high cost and modest success rate, big pharma R&D is beginning to change. Breaking with historical practice, Eli Lilly now allows outside contractors to test the company’s most promising molecules.  GlaxoSmithKline has decided to let its smaller biotech partners do more of its early-stage development work.  GSK has also taken the additional step of using the venture capital model to allocate investment funding; GSK scientists now must pitch their ideas to panels of company executives and external  experts to secure project funding.

Improve M&A and partnering capabilities

If partnering is expected to propel future R&D and marketing success, drug companies need to improve two key capabilities.  First, firms need to adopt M&A best-practices in identifying, evaluating and engaging high-potential, synergistic equity partners.  These competencies can be crucial to securing first-mover advantage for key IP that best addresses product and R&D gaps.  Part of this approach could involve placing several small equity bets on early stage companies in order to secure early exposure into promising science.  Furthermore, to enter new markets, protect existing market shares and leverage scale economies, big pharma firms should pursue more ownership of complementary generic drug manufacturers.  Secondly, more partnerships will require pharma companies to get better at integrating and working with smaller or dissimilar companies who often bring very different operating styles and business requirements. 

Change the research paradigm

Today, billions of research dollars are targeting a host of big market diseases including Alzheimer’s and Cancer.  However, it may all be for naught as a historically-successful research model may not be suitable for some of these disease’s scientific challenges.  According to Daniel Hoffman, an industry consultant, “It’s questionable whether the scientific paradigm of medicinal chemistry that has resulted in huge successes in areas like cardiovascular drugs can be as productive in the future.”  To address these challenging illnesses, a new R&D paradigm will be needed to find, germinate and leverage critical IP and processes wherever it is found globally. 

Although many pundits contend it will be difficult to develop meaningfully better drugs than the current blockbusters, some firms still believe that concentrating on well-understood science offers the best return vs risk trade-off as compared to big market drug R&D.   Specifically, Novartis AG has abandoned a “big market” disease strategy in favor of ailments where the science is well understood, thereby improving the chances of finding treatments that work.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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