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drugsis no longer a viable market strategy for many if not the majority of firms. This chapter explores the urgent need for pharmaceutical executives to redefine their strategic and operating model in order to sustain their firms into the twenty-first century. |
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Look at the income statement of any one of the major drug firms. The vulnerability of this industry is obvious. The operating model that grew out of a continuous breakthrough strategy typically results in R & D expenses at 10% to 20% of sales and sales and marketing expenses at 30% to 40% of sales. You can argue (as some will) that these percentages are distorted by financial reporting practices. But in the end it simply will not be viable to continue spending this amount of money on R & D in a climate of fast follow-ons and generic substitutes or to finance armies of sale representatives calling on physicians with decreasing decision influence on prescription. The fundamental strategies and operating models of this industry must change radically. |
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II. Embracing an Unknown Future |
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If our perception of the need for fundamental change is correct, or at least if it is shared by senior industry leaders, you might expect to hear more firms talking about fundamental change to the paradigm that says we invent, then go to market. Everyone in this industry knows things are changing dramatically and quickly. A generation of blockbusters will come off patent in the next five years with little in the pipeline to replace them. Generic substitutes take markets overnight. Even patent-protected drugs face competition within two to three years after launch versus, historically, seven or more years of exclusive claims. As consolidated distribution networks decide which formulations will be sold and which will not, superior clinical performance will no longer be an overriding factor for market success. Government and other powerful third-party players who will not accept a $65 billion national drug bill will increasingly exert downward pressure on prices and margins. European-style price regulation is not unthinkable here. |
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But the biggest threat to the continued prosperity of drugs firms is not external change. It is the unwillingness to give up what created success in the past, the inability to define our new business, and the understandable reluctance to embrace an unknown future. Like GM, which grew too bloated and complacent to see the competition; like IBM, which misunderstood the effects of cloning its technology; like Sears, which miscalculated its ability to sustain premium prices under siege from discount housesthe more successful a firm has been in the past, the harder it is to embrace an unknown, less desirable future. |
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