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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Flipping the “Switch”: Big Pharma’s Biggest Challenge

That figure, however, understates the risks and costs of actually attempting a switch. Switching a prescription drug is among the most expensive endeavors a consumer health-care company can undertake. Switch candidates can spend upward of five years in the clinical-trial pipeline, accumulating evidence that consumers can indeed diagnose and treat the condition themselves. A routine switch can end up costing $30 million to $50 million to shepherd to market. Considering that even a successful OTC company, such as the Johnson & Johnson–Merck joint venture that markets Pepcid AC, reaps only about $200 million in total revenues from switched products, development costs of this magnitude are very, very real.

We now have a convincing best-case scenario for total switch revenues over the next five or so years. We have seen how an assessment of switchable drugs whose patents are expiring yields a potential revenue pool of $15 billion. We have seen how this $15 billion drops to $3 billion because of OTC economics. All that remains is to translate this incremental revenue into a growth rate. The bottom line: Switches could yield at most an incremental 2 percent in annual top-line growth to the consumer health-care industry, with net profit growth being substantially lower. Added to recent historical growth rates, this 2 percent bumps the figure up to 5 percent — still far short of the pharmaceutical industry’s expectations.

Nimble Winners
Is the switch, then, a quixotic quest, a drug-fueled dream? Perhaps not. Although we have shown that switches will not “save” the OTC industry, a handful of nimble players with top-tier switch capabilities — the Johnson & Johnson–Merck joint venture, say, or Wyeth Consumer Healthcare — could move fast, execute precisely, and win a larger share of the wealth. In addition, our analysis rests on a number of assumptions, including a presumption of stability in pharmaceutical-industry economics, that could be proved false. If, for example, the government mandates (or insurers adopt) some form of full or partial reimbursement for nonprescription drugs, the OTC upside — and the prospects for switches — could improve dramatically.

What are the implications of this analysis for the consumer health-care industry? We believe all consumer health-care companies must aggressively ramp up their switch capabilities while pushing into innovative growth platforms. Platforms most often mentioned during the course of our study included expanding into “specialty pharmaceuticals” (i.e., niche drugs), focusing on disease state management, and inventing novel delivery mechanisms and “organoleptics” (i.e., the feel and texture of the drug itself). Best-in-class survey participants were actively investing in multiple platforms quite different from their historical line extensions and new flavors.

Although our study could not prescribe a silver bullet for the consumer health-care industry’s ills, it did make one clear diagnosis: Accelerating real growth will not be as easy as flipping the “switch.”

Reprint No. 02401

Minoo Javanmardian, [email protected]
Minoo Javanmardian is a senior associate with Booz Allen Hamilton in Chicago. She focuses on growth and innovation strategies in the health-care industry, including pharmaceutical, insurance, and consumer health-care companies.

Alex Kandybin, [email protected]
Alex Kandybin is a principal with Booz Allen Hamilton in New York. He concentrates on operations and innovation strategy in the consumer products and health-care industries.

Martin Kihn, [email protected]
Martin Kihn is an associate with Booz Allen Hamilton in New York. He has worked in the consumer products, retailing, and media industries. His articles have appeared in the New York Times, New York, and Forbes.
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