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 / Spring 2012 / Issue 66(originally published by Booz & Company)


Big Pharma’s Uncertain Future

The business model that drove the major drugmakers’ success isn’t working anymore. The survivors will be those that make smart strategic bets supported by winning capabilities.

In the pharmaceutical industry, nothing is quite as exciting as a new molecule in the pipeline — especially one that has a chance of solving some major human health problem. In the last few decades, pharma companies have consistently developed and launched new proprietary drugs, bringing hope to sick or at-risk patients, and providing enviable financial returns for the companies’ shareholders. Indeed, global pharmaceutical companies have been built around the idea of discovering blockbuster drugs that solve medical problems common to tens of millions of people. They have supported that approach with huge investments in their innovation programs and marketing and sales operations.

But the era of the blockbuster drug is nearing an end. In the U.S. alone, branded pharmaceuticals accounting for some US$120 billion in annual revenues (including Lipitor, Zyprexa, Plavix, and Seroquel) will be coming off patent in the next few years, opening the way to generics and eroding a major source of the industry’s profits. To be sure, there is still plenty of room for improvement in the medications people take, and no shortage of human suffering to alleviate. But it is doubtful whether big pharmaceutical companies will be able to pursue these goals within the old model of developing exclusive new pills that they can sell under patent protection. For one thing, pharma companies in the past were able to develop drugs for health problems that had never before been addressed. When anti-cholesterol drugs were first launched, for example, they created entirely new, multibillion-dollar markets. Today, in contrast, few such unaddressed categories remain, meaning most newly developed drugs will be competing with existing ones.

In addition, the pharma companies are feeling pressure from every direction — from regulators setting the rules for drug effectiveness and safety, from managed care organizations and employers pushing back on prescription drug costs and reimbursement, from competitors coming to market with alternative brands or generics, and from disgruntled shareholders. Internally, the number of molecules in pharmaceutical company pipelines is shrinking, and the risk/reward ratio for research and development outlays is worsening. Overall, these trends have resulted in lower revenue, reduced profitability, and declining P/E valuation ratios for most major pharmaceutical companies.

The question, however, is more fundamental than what pharma companies will do for an encore in the post-blockbuster era: The question is whether they can survive at all in their present form. There is no consensus about what comes next, as evidenced by the different strategic moves the major companies have made with mergers, acquisitions, and divestitures in recent years. A few have chosen to double down on branded pharmaceuticals, betting that the bad times won’t last and that by adding new therapeutic areas or becoming more adept at using technology they can continue to generate large profits from formulations they own exclusively. Many others are looking elsewhere, and have expanded into such sectors as diagnostics, consumer health, generic drugs, biosimilars, nutrition, and wellness.

“I don’t think there’s been a time in recent history where the industry has had a more divergent approach to the future,” says Cavan Redmond, group president of corporate strategy at Pfizer Inc. “It means that we’ll have different ways of dealing with healthcare, especially on the pharmaceutical side, and less homogeneity.”

The next decade for the pharmaceutical industry is shaping up to be not only a period in which the leading companies don’t know what’s going to happen, but one in which they can’t know what’s going to happen, because so many of the conditions under which they operate are in such an unusual state of flux.

None of the new businesses into which the pharmaceutical companies are expanding have the same margins as branded drugs, and that raises doubts about whether pharmaceutical companies will be able to maintain their past levels of profitability. (See Exhibit 1.) “Some will, some won’t, because there won’t be as big a proprietary market to go around in the near term,” says Miles D. White, the chief executive of Abbott Laboratories, which is in the process of separating into two companies, one focused on diagnostics and medical devices, the other on prescription drugs.

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  1. Ram Charan and Michael Sisk, “Strategic Bets,” s+b, Summer 2011: Another view of make-or-break shifts in direction when facing uncertainty.
  2. Matthew Herper, “Rallying Pharma’s Rebels,” Forbes, August 3, 2011: Former executive at Eli Lilly and Company offers a blueprint for fixing the broken system of pharmaceutical industry R&D.
  3. Peter Loftus, “Pfizer Looks at Lipitor over Counter,” Wall Street Journal, August 4, 2011: How the U.S. Food and Drug Administration has stood in the way of allowing statins to be sold over the counter.
  4. Eva Von Schaper, “Novartis’s Jimenez Has Blockbuster Plans for Diovan after Patent Expires,” Bloomberg Businessweek, August 5, 2011:A discussion with the CEO of Novartis on how the company is maneuvering to avoid having its best-selling drug be destroyed by the expiration of its patent.
  5. Duff Wilson, “Drug Firms Face Billions in Losses in ’11 as Patents End,” New York Times, March 6, 2011: Why the scramble is on for pharmaceutical companies to reinvent themselves and shed their dependence on blockbuster drugs.
  6. For more thought leadership on this topic, see the s+b website at:
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