By guest blogger Daniel Hoffman:
Second quarter earnings for most Big Pharma companies were good. A couple of companies mentioned various one-time charges (e.g., restructuring) to explain why the numbers weren’t even better. The fact remains, however, that much of the earnings growth this year has come from expense reductions – SG&A and R&D – and pricing increases. Over the past year pharma raised overall prices approximately 10% during the worst recession in 65 years. More recently the European governments decided to close that door to pharma by reducing national drug prices.
Top line sales growth from premium-priced, branded medications will remain a problem as public and private payers increase the push to generics. At the same time, the science to develop appreciably better, new drugs remains thin.
The industry will eventually return to better fundamentals when new scientific approaches demonstrate their capacity to develop medications that create major advances. The forms of corporate organization and the business model at that time remain open to question. At present some keen observers suggest that pharma can enhance its growth and prosperity by redefining the business.
Pharma is a research-driven, manufacturing business that makes its money creating, manufacturing and distributing pills and injectibles. Some prefer to call it a “transaction” business. The key term here is “research-driven.” That component is currently in a down phase while tightening public and private budgets reduce demand. An emerging germ of thought holds that in order to enhance product sales, pharma must become more of a “relationship” business that partners with other healthcare segments – payers, providers and consumers – by offering a unique configuration of services.
Almost three years ago, Johnson & Johnson pursued that approach when it created its Wellness & Prevention division, ostensibly as a fourth leg of the company alongside pharma, devices-diagnostics, and consumer products. As part of its history, J&J is alert to new business approaches but, too often, if these fail to turn a desired profit within a short period, the company loses interest. That was the case here. Last year, J&J folded Wellness & Prevention into its Consumer Products division.
Big Pharmas now appear gun shy as far as relationship-based, service businesses, believing that if J&J couldn’t get it going, they certainly can’t. They’re probably correct, but the impediments are mainly the same ones that obstruct new drug development and some of their other operations. Basically, they are too slow, they lack the imagination and they’re wedded to familiar patterns.
Smaller pharma companies, on the other hand, are well placed to go in this direction. The assumption, of course, is that they are more agile, that they operate with a creative business vision, and that they don’t want to repeat the old ways of Big Pharma where they once worked. If they can avoid those pitfalls, look for some small pharmas to operate in highly unexpected ways.
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