Jim Miller
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2007 was the year that the major pharmaceutical companies accepted the fact that their traditional business model is terminally
ill. That model, characterized by large vertically integrated companies developing small-molecule compounds pushed by large
sales forces, failed to produce robust results for much of this decade. Efforts to rescue it such as Pfizer's attempts to
leverage economies of scale through huge acquisitions, did not have much therapeutic effect, as promised economies proved
difficult to deliver and promising pipeline compounds failed in late clinical trials. So the major pharmaceutical companies
have embarked on large-scale restructuring efforts, including massive layoffs, site closings, divestitures, and cost-reduction
efforts aimed at goods and services procured externally.
Fresh pharma face
In place of their old business model, major pharmaceutical companies are touting a new direction, one that tries to meld the
successful features of the small/virtual biopharmaceutical company model with the scale, development expertise, and marketing
muscle that remain their sources of long-term advantage. Details vary from company to company, but the key features of that
new model share major characteristics, outlined below.
Favoring biologics in place of small-molecule compounds.
The major pharmaceutical companies are building up their large-molecule portfolios, including monoclonal antibodies, vaccines,
and recombinant proteins, through technology, candidate in-licensing, and acquisitions.
Focusing on specialty indications rather than primary care.
Therapies targeting broad indications such as cholesterol levels are losing favor because new generation drugs are proving
difficult to develop, and insurers aren't willing to pay for them. Major pharmaceutical companies are targeting specialty
areas such as oncology and autoimmune diseases where price points and margins have generally been much better.
Increasing presence in new markets.
The rapidly growing economies of Asia and Eastern Europe, with their burgeoning middle classes, promise more rapid growth
than the traditional North American and European markets. Companies are expanding their research and development (R&D), manufacturing,
and sales presence in countries such as India and China.
Offshoring of R&D/manufacturing.
The quest for lower costs is driving companies to source more of their manufacturing and R&Dneeds from low-cost countries.
Big Pharma is establishing new R&D and manufacturing operations in these countries, as well as procuring more inputs and services
there.
Making the cost structure more flexible.
A lower fixed-cost structure means fewer staff and manufacturing sites and greater use of contract research and manufacturing
organizations (CROs and CMOs).
In-licensing of candidates.
Rather than depending on in-house laboratories alone, companies are looking to smaller companies to identify targets, develop
leads, and take candidates to proof of concept. In-licensing opens the way to more potential candidates while keeping R&D
costs and staffing more flexible.
Business as usual?
This "new" bio/pharmaceutical business model seems to address a lot of the problems facing major pharmaceutical companies.
There, however, are real reasons to consider whether, in fact, the new model really is all that different or whether it will
solve the critical issues facing these companies.
For instance, the full picture indicates that Big Pharma isn't giving up manufacturing. It is simply rationalizing its small-molecule
infrastructure, for which it has less use, while building a network of biomanufacturing operations. Consider the case of Bristol-Myers
Squibb (New York).In December, the company announced plans to shut down 19 of its 38 manufacturing sites, but it is investing
nearly $1 billion in new biomanufacturing capacity in Devens, Massachusettes, and in its injectables manufacturing operations
in Manati, Puerto Rico. Merck (Whitehouse Station, NJ) and GlaxoSmithKline (London) have aggressive plant divestiture programs,
but are investing heavily in new vaccine capacity. Throughout Big Pharma, companies are investing nearly $10 billion in new
manufacturing capacity to support new strategic priorities, and their large-molecule programs will be as vertically integrated
as their small-molecule programs have been.
