Mind to Market

Tuesday, February 26, 2008

Shifting Pharma Business Model

Marc-André Gagnon's recent article in Genetic Engineering News is an observation of a trend in the big Pharma business model, a trend that he feels particularly disappointed with. That trend is one in which big Pharma does less drug research and development and more marketing. Although Gagnon is a bit peeved with this, it is nevertheless inevitable and irreversible.

In a talk two years ago, Steven Burrill went so far as to predict that the big pharma R&D labs of not too distant future would be empty while the marketing department would be booming. The economic reality of rising risks and corresponding costs of developing new drugs along with the shrinking size of markets due to segmentation of diseases has left big pharma without a clear future. One thing is clear: pouring ever increasing amounts into internal R&D is not yielding the returns they used to.

A new long term business model may indeed be one in which smaller, more agile biotechs perform the early stage drug development, out-licensing to larger pharmas once success has been shown. Large pharmas could then leverage their brands, sales and marketing and distribution systems to commercialize these drugs. This is in fact what Gagnon is observing; R&D budgets are shrinking relative to sales and marketing.

The driver behind this trend is the investment community; what business model can big pharma adopt to continue the returns they have achieved in the past? The Dow Jones US Pharmaceutical and Biotech Index continues to drop as the industry searches for a model. Extending the life and markets of existing drugs through promotion and minor modification may offer an interim solution until a more sustainable solution is reached.

But assuming that big pharma will continue to innovate scientifically simply because they have been successful with it in the past or that it has been a compelling marketing message is steering toward an economic downfall. The innovation must be within the business strategy; to capitalize on the current and future strengths of the industry.

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