Pharma firms need to focus on a few key areas to prosper


Last year was a tough one for the pharmaceutical sector. Top line sales for sanofi-aventis, GlaxoSmithKline and Johnson & Johnson actually declined by 4.1%, 2.8% and 0.5% respectively. Meanwhile the revenues for Amgen, AstraZeneca, Bayer, Bristol-Myers Squibb, Eli Lilly and Roche grew, but in the 1-6% range.

In the U.S., pharma's largest, single national market, sales increased only by 3.4% over 2009. A look at net operating income causes even more concern. The net profit of the world's 15 largest pharma companies declined by a surprising 20.1% last year. At the same time the cost of production for these 15 companies increased by 16.6%, while their selling, marketing and administrative cost rose 12.3% and R&D expenditure went up 15.5%.

These financial results provide a context for all the publicity pharma is generating this week from results presented at the Clinical Oncology meeting in Chicago. While various cheerleaders in broadcast and online media claim that favorable results for drugs to treat cancers of the skin, lung and other body areas indicate the industry has finally discovered the long-sought gold mine of personalized medicine, more seasoned observers from industry publications such as In Vivo looked behind the publicity. In doing so they concluded that despite claims of pharma having "turned a corner," the new compounds receiving all the attention confer only marginal improvements. Even more disappointing, the data to support these compounds appears suspect, while the most substantial change created by these new drugs consists of their exorbitant prices.

Clearly pharma has its challenges. One veteran journalist, Fran Hawthorne, concludes that the array of challenges to pharma in the changed health care environment means the industry can no longer conduct business in the same manner. Specifically, she believes that the key elements of pharma's business model must all change. This means research will no longer be a defining competency of the pharmaceutical industry. The problems representing the frontiers of knowledge are so large that any significant future research must be "open-source," meaning that pharmas, universities, biotechs and other participants must collaborate and share proprietary information instead of maintaining their traditional secrecy. At the same time pharma must learn to outsource substantial parts of its of sales, marketing, and manufacturing.

What Hawthorne is forecasting here for pharma is a full throttle adoption of what I have called the Hollywood model. Of the four, five or six key functions that define the pharmaceutical industry, each company must forget notions about integrating all of them and retrench to one or two core areas. Different companies will have different areas of strength. "Some may become little more than general contractors that gather the work of their subcontractors to submit to the FDA...[while others] may survive only as a brand name behind a distribution machine."

Several writers have pointed out the need for pharma to diversify into related fields such as diagnostics, devices, consumer products and animal health as hedges against the ups and downs of the prescription drug business. Others claim pharma must stake its claim in the neo-imperialist competition for the developing world. As they see it, the rising sales and low cost production that are available in countries such as China and India will propel pharma's growth through much of this century.

I have previously expressed my skepticism about both courses, but in an Inquirer op-ed this week Professor Steven Conn cogently explained why China is an unlikely place for pharma to find inspiration.

China's economic success, according to Conn, demonstrates "the importance of government infrastructure projects of all kinds." Part of the way in which the Chinese government leads the private sector consists of creating such infrastructure in transportation (subways, roads, high-speed rail, a state-run airline, state of the art shipping ports), education and research. China's success, in Conn's words, "directly contradicts American conservatives' free-market orthodoxy." According to these right wing ideologues, "China's booming economy simply can't exist."

So here before us is this great anomaly where a bureaucratic, state-controlled economy grows by leaps and bounds while the pride of oligopoly capitalism, Big Pharma, has trouble deciding what business it should be in and how it should organize itself.

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