Another scenario might be that diagnostics will be among the essential pieces of the pharmaceutical tool kit in the future, a way of identifying patients who can be helped by particular drugs (and patients who cannot) and helping scientists aggregate data much more quickly. If this scenario develops in such a way that diagnostics services become proprietary, highly differentiated, and profitable, it will be essential for major pharmaceutical companies to develop advanced diagnostics capabilities. In that scenario, the combination of the diagnostics and pharma businesses would become an essential way to improve R&D effectiveness and clinical outcomes of disease treatment, and could become a profitable area of activity for the company. If, however, diagnostics becomes a commodity service offering that is readily available from multiple third parties, it will not be necessary to have these capabilities in-house, and expansion in diagnostics may not be necessary.
To date, most of the shuffling of parts in the pharmaceutical industry has involved portfolio diversification, not strategic bets. Consider Johnson & Johnson (J&J). This company, which has more than $60 billion in revenue and more than 250 global subsidiaries, has traditionally operated under the philosophy that business unit autonomy is the best way to ensure good decision making and accountability and to drive financial results. That philosophy has served it well in a deterministic environment. Recently, however, closer collaboration between J&J’s diagnostics and pharmaceutical businesses, as well as between its pharmaceutical and consumer businesses, suggests that J&J may be reexamining the strategic bets it is making to succeed in a stochastic environment.
A few companies’ M&A moves certainly come close to meeting our definition of strategic bets. One is the development of a generics business by Novartis AG, to coexist alongside a branded pharmaceutical business that has developed leading drugs in areas like heart disease and cancer. “Fundamentally, we are pro-patent,” says Joseph Jimenez, chief executive of Novartis. “But we believe that when those patents expire, it is our obligation to offer low-cost, high-quality generics to help lower total healthcare costs.”
Another move that has the look of a strategic bet is the focus on diagnostics at Roche Holding Ltd. In addition to now representing more than a fifth of Roche’s revenue, Roche says, its diagnostics technology has made its core pharmaceutical business more successful by identifying new therapeutic targets and screening out poor drug candidates.
How Pharma Can Move Forward
Strategic bets in pharmaceuticals, as in any other industry, must take into account what a company already does well. In other words, the bets should leverage the company’s capabilities system, made up of the three to six activities that truly differentiate the company and allow it to compete effectively both in the market position it has staked out and with the products and services in its portfolio. In our experience, companies that exhibit a high degree of coherence in these three elements (their capabilities system, market positioning, and product/service portfolio) tend to thrive in their industry sector; companies that exhibit lower degrees of coherence tend to have trouble keeping up. Coherence is an especially important discipline in stochastic times, because without it, companies tend to make unrelated investments and spread themselves too thin. (See “The Right to Win,” by Cesare Mainardi with Art Kleiner, s+b, Winter 2010.)
Hence, companies need to have the judgment to focus their strategic bets on areas that use capabilities that they already have — or that they could develop. A company that has a world-class system for communicating with doctors, for example, would want to make sure that its strategic bets take advantage of that capability (the generic drug business as a strategic bet would benefit greatly from this capability). A company that had world-class expertise in cancer therapy, with its many challenges, would want to make sure that its strategic bets took advantage of that expertise (as it might if the strategic bet were a nutrition line optimized for the needs of cancer patients). If a strategic bet suggests that new capabilities will be needed, they should be developed or acquired in such a way that the company’s overall capability system remains coherent. If the system is not coherent, the strategic bet will have a high chance of failure.