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Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.
Current productivity initiatives may be too little, too late ? a more drastic overhaul may be required.
The annual ritual of year-end presentations by major pharmaceutical companies to Wall Street analysts had an interesting twist in 2003. Companies were not just trying to gin up excitement about their new product pipelines (which have generated precious little excitement lately); some were bragging about their efforts to increase their operational efficiency.
In the product-driven pharmaceutical industry, this spotlight on efforts to improve productivity — including the re-engineering of R&D operations, restructuring supply chain and manufacturing operations, and reducing the size of sales forces — is unusual. It reflects the realization by pharmaceutical executives that they must show investors a response to the challenges posed by weak new-product pipelines and a growing consumer resistance to high drug prices. Among the productivity enhancements companies boasted about:
The productivity improvements have some interesting implications for CROs and contract manufacturers. As companies succeed in pushing more candidates into the pipeline, we can expect demand for development services to grow. At the same time, however, the improved productivity will establish higher benchmarks for CRO performance. Tripling the number of IND filings without increasing staff, as Wyeth claims to have done, is equivalent to tripling internal capacity and reducing per-unit costs by two-thirds! For an industry built on providing supplemental capacity and whose mantra is "price is not the major determining factor," productivity performance improvements at major pharma could be a major strategic threat.
A growing chorus of analysts say that the vertically-integrated, blockbuster-chasing big-pharma business model is no longer viable. They argue that pharmaceutical companies must focus on a few therpeutic areas where they can leverage their in-depth knowledge of diseases and relationships with physicians and patients and use partnerships more effectively to reduce costs and risks.
A recent study by consulting firm Bain & Company estimates that discovering, developing, and launching a new drug now costs $1.7 billion. The study says the expected return on investment for a blockbuster drug has fallen to just 5%, well below a company's cost of capital.
One of the Bain study's key recommendations is that pharmaceutical companies break up their operations into focused business units and abandon their insistence on full functional integration. Ashish Singh, a vice president at Bain and one of the study's authors, points out that at most major pharmaceutical companies, "the only P&L [profit and loss] statement is the corporate P&L statement."
By contrast, most major US corporations are broken into multiple business units, each accountable for its own financial performance. Each one must compete for capital based on its ability to deliver strong financial returns. In the pharmaceutical industry, there are only a few examples of the business unit model, such as the Novartis Oncology business unit.
One reason why outsourcing of manufacturing and other functions has not expanded more rapidly in the pharmaceutical industry is the lack of diffused P&L accountability. "The CEO is the only person in a position to be making the decision" about outsourcing major functions, Singh says, "and he has a lot of other responsibilities."
In an organization where business unit executives were accountable for their respective return on assets (not just return on sales, which is where pharmaceutical executives focus today), Singh argues, there would be a greater incentive to outsource capital-intensive functions like manufacturing and activities like information technology, where pharmaceutical companies have no special expertise.