Pharma in trouble
Most pharmaceutical players earn less than one fifth of their sales from their traditional market of prescription medicines.
The pharmaceutical industry is experiencing an unprecedented strategic crisis. Innovation (accounting for around 20% of drug companies' annual sales) is no longer creating the expected market impact due to a lack of results – such as a molecule with a suitable effectiveness profile compared to existing treatments – or more often, due to approval not being granted by the healthcare authorities, which are always focused on the benefit-risk ratio. At the same time, a growing number of patents are expiring, reinforcing competition from generic drugs. As an example, the sales at risk exceed USD 50 billion for just five blockbuster drugs with sales of over one billion dollars a year: the patents for Lipitor (Pfizer), Plavix (Sanofi-Aventis), Advair/Seretide (GlaxoSmithKline), Enbrel (Amgen) and Diovan (Novartis) will enter the public domain within three years. Finally, the growing pressure to cut budget deficits is fueling anxiety about these developments.
Against this backdrop, diversification seems promising. One strong indicator of this crisis is a lack of confidence among the financial community and managers themselves: "The current trend toward diversification is driven by plummeting confidence in our industry regarding prescription medicines and, in particular, specialist medicines, previously considered a goldmine," said the managers interviewed for Roland Berger's annual pharmaceutical study. Recent trends such as the takeovers of Alcon (ophthalmology) and Ebewe Pharma (generics) by Novartis or Oenobiol in France and of Chattem in the US (nutritional supplements) by Sanofi-Aventis, reflect the search for new growth areas in human and animal health, ranging from generics to self-medication products. Several drug companies have started to reduce their investment or workforces in R&D: Pfizer, GlaxoSmithKline, AstraZeneca and recently Roche have announced restructuring plans involving up to several thousand researchers in each case.
Against this backdrop, diversification seems promising. One strong indicator of this crisis is a lack of confidence among the financial community and managers themselves: "The current trend toward diversification is driven by plummeting confidence in our industry regarding prescription medicines and, in particular, specialist medicines, previously considered a goldmine," said the managers interviewed for Roland Berger's annual pharmaceutical study. Recent trends such as the takeovers of Alcon (ophthalmology) and Ebewe Pharma (generics) by Novartis or Oenobiol in France and of Chattem in the US (nutritional supplements) by Sanofi-Aventis, reflect the search for new growth areas in human and animal health, ranging from generics to self-medication products. Several drug companies have started to reduce their investment or workforces in R&D: Pfizer, GlaxoSmithKline, AstraZeneca and recently Roche have announced restructuring plans involving up to several thousand researchers in each case.
Diversification can take place in three ways. First, risk management: developing areas of activity that are less subject to regulatory constraints or dependent on R&D productivity. Some 78% of senior managers in the pharmaceuticals industry mention generics and nutritional supplements/health food as their preferred areas for diversification. The second way is to explore segments related to the drug companies' core markets, such as diagnostic products or medical equipment, in the search for a "therapeutic solution" rather than a "single" molecule. The final route is horizontal integration, moving the value chain toward sales or care provision. This still seems to be a marginal option particularly because of complexity and lower profitability.
But with the notable exception of Johnson & Johnson, most pharmaceutical players earn less than one fifth of their sales from their traditional market of prescription medicines. Roche is the most proactive, with 20% of business in new sectors (mainly diagnostics and personalized medicine), while AstraZeneca is the most reluctant, with just 3%. Between these two extremes, companies such as Sanofi-Aventis are exploring other paths: vaccines, animal health, self-medication and nutrition. Some major players are continuing to place their bets on concentration as the key to success. Thus, in contrast to Johnson & Johnson which is going for diversification, Merck, Novartis and GlaxoSmithKline seem to want to focus on their core business.
Supporters of diversification argue that it is essential to adapt the pharmaceutical industry's offerings in order to offer "health solutions" rather than just medicines. Medicines will become commodities, particularly in emerging countries where patients pay for their own treatment (if they can afford to). Drug companies now have to determine whether diversification really is a suitable long-term path, beyond simply making up for revenue erosion in patent-expired medicines. But in an industry known for being conservative, it appears that the two development models will continue to co-exist as the pharmaceutical industry reinvents itself to meet future challenges.
But with the notable exception of Johnson & Johnson, most pharmaceutical players earn less than one fifth of their sales from their traditional market of prescription medicines. Roche is the most proactive, with 20% of business in new sectors (mainly diagnostics and personalized medicine), while AstraZeneca is the most reluctant, with just 3%. Between these two extremes, companies such as Sanofi-Aventis are exploring other paths: vaccines, animal health, self-medication and nutrition. Some major players are continuing to place their bets on concentration as the key to success. Thus, in contrast to Johnson & Johnson which is going for diversification, Merck, Novartis and GlaxoSmithKline seem to want to focus on their core business.
Supporters of diversification argue that it is essential to adapt the pharmaceutical industry's offerings in order to offer "health solutions" rather than just medicines. Medicines will become commodities, particularly in emerging countries where patients pay for their own treatment (if they can afford to). Drug companies now have to determine whether diversification really is a suitable long-term path, beyond simply making up for revenue erosion in patent-expired medicines. But in an industry known for being conservative, it appears that the two development models will continue to co-exist as the pharmaceutical industry reinvents itself to meet future challenges.
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