Monday, August 3, 2015

Pharma at the Rubicon

One way of viewing the drug industry's current situation involves asking whether pharma possesses the innovative skill to discover and develop new offerings or, alternatively, prop up its legacy business and lose another trillion dollars of capitalization by 2020.

Pharma at the Rubicon


by Daniel R. Hoffman, Ph.D.

One way of viewing the drug industry's current situation — underperforming the S&P 500 by more than 790 basis points this year — involves asking whether pharma possesses the innovative skill to discover and develop new offerings or, alternatively, prop up its legacy business and lose another trillion dollars of capitalization by 2020, the same amount it lost over the past decade. 

Large, multinational corporations seldom have to face that sort of choice. Internal functions at big companies such as strategic planning, business development and others typically scan the horizon to preempt such do or die situations. Then if management gives these groups the attention they deserve, the companies stick separate fingers into emerging opportunities that may emerge.

Small businesses that achieve some success, on the other hand, often find themselves facing this sort of dilemma. Having found a way to make good money, they are loath to let go of it or even de-emphasize it in favor of something altogether different.

Yet that is exactly the situation in which pharma finds itself. The pace of the sciences underlying pharmaceutical drug development, together with the political economy of health care, make it unlikely that pharma will continue to enjoy future profitability comparable to its record over the past 30 years.

For Big Pharma in particular, future sales volumes or economic "throughput" seem unlikely to warrant the high fixed costs that justify the economy of scale on which they are premised. Absent a substantial correction, their very basis for attracting capital would come under jeopardy.

Yet the broader health care field remains a dynamic one that holds challenges even as it comes to occupy a growing percentage of our nation's GDP. As a result, this growing part of the economy offers opportunities, almost on a daily basis, to generate returns on capital. The question for pharma is whether it will continue to recognize but dismiss these opportunities because they offer only limited prospects for embellishing the legacy drug business.

Apple under Steve Jobs represents the best-known, alternative approach. Instead of clinging to a highly profitable, albeit minority share of the personal computing business, Jobs leveraged Apple's expertise there to drastically change the recorded music industry and then the telecom business. As a result, Apple ascended to the highest market value of any company in the world.

Pharma might well continue in this fashion and suffer the same fate as the railroads in the 1940s and the print media in the 1990s. As with pharma, both of those industries remain necessary parts of a modern economy, but does anyone want to buy a railroad or a newspaper?

Perhaps pharma can take the appropriate lessons here and move ahead in a new direction.

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President, Pharmaceutical Business Research Associates
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Check Up covers regional health news and a wide array of healthcare topics from pharmaceutical happenings to patient safety. Read about some of our bloggers here.

Portions of this blog may also be found in the Inquirer's Sunday Health Section.

Michael R. Cohen, R.Ph. President, Institute for Safe Medication Practices
Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
Hooman Noorchashm, M.D., Ph.D. Cardiothoracic surgeon in the Philadelphia area
Amy J. Reed, M.D., Ph.D. Anesthesiologist and Surgical Intensivist in the Philadelphia Area
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