Big Pharma Herd: Diversify, It's the Wave of the Future

InPharm reported on a Roland Berger (RB) Strategy Consultants survey of leading pharmaceutical company executive's views of the current business environment, their firm's business model, and implications for their future strategic response.  RB characterized "diversification" as the most popular intended response by surveyed companies and listed three ways to accomplish this - innovation, integrate and de-risk - with the latter two being most popular.

This is what I'm alluding to as the herd mentality in my headline - basically the majority are opting for the less differentiated strategy and avoiding the tougher innovation strategy - which is likely to be more valuable.  Let's look at the survey.  RB went to 25 companies, with more than 40% of WW revenues, including 7 of the top 10 companies, and interviewed 50 executives iincluding CEOs and board members.

The survey says:

• 65% characterized the industry as being in "strategic crisis"
• 67% see diverisification as the answer (I just want to say one word to you. Plastics! )
• 78% perceived generics to be the most important area for diversification (somebody ought to alert PhRMA!)
• This one blew me away.  Almost 50% expect anegative ROI on their current R&D investment and are losing faith in traditional patent-based protection
• The industry expects margins for innovative products to come under attack by goverment managed healthcare
• R&D will not bring required level of returns with companies outsourcing to cut costs

The prediction then was that the industry would become more diverse - ranging from highly focused innovative players to fully integrated healthcare conglomerates.  It seems most are opting for the conglomerate model at this juncture - and are focusing towards generics - I don't see how 65% of the industry can go that route and all survive. Now it's a race to see who can move to conglomerate status first to stake out a position that may be defendable before the herd comes charging along.

I'm reminded of the Ernst & Young Pharma 3.0 report earlier this year that addressed perceived changes the industry would need to make going forward and defined the challenge thusly,

The core of this industry has been innovation and it will stay innovation, but the bulk of the money and the effort has been in the innovation of the product pipeline. What we are seeing going forward is the need for innovation of the commercial model in order to be able to respond to the mega changes of healthcare reform globally.

The consultants say innovation of the business model. The bulk of the industry players prefers cost cutting and product innovation toward generics.  Where is the disconnect here among the herd?

 

Posted by Bruce Lehr October 26th 2010.

 

 

 

 

Comments

[bigredbruce]

Jason Chew of Seeking Alpha gives his take on this survey/article
http://seekingalpha.com/article/233592-big-pharma-embraces-branded-generics

[k]

Your remark about plastics seems to be indicative of the general way the industry is headed - 'diversification' through conglomeration, '60's style. Very few of those companies are left now: United Technologies and Dana are the only two I can think of. It's up to the small shops woth big ideas, the smart people that the big players thought were over the hill but have lots of experience and aces up their sleeves. These are the people that are goimg to be the source of new growth, IMHO.