FOR IMMEDIATE RELEASE
Contact: Cheryl Krauss
Bain & Company
HAS THE PHARMACEUTICAL
BLOCKBUSTER MODEL GONE BUST?
A New Bain & Company Study Reveals New Drug Commercialization
Costs Have Now Reached $1.7 Billion While ROI Has Plummeted To Just
York, NY - December 8, 2003 - The pharmaceutical
industry's blockbuster approach to developing new drugs that
created a trillion dollars for shareholders may now be broken. And
the demise is being fueled by a heftier-than-thought
commercialization price tag - this according to a new study from
Bain & Company, the global management consultancy. When the
costs of failed prospective drugs are factored in, the actual cost
for discovering, developing and launching a single new drug has
risen to nearly $1.7 billion. That's a 55% increase over the
average commercialization cost for the five years from 1995 to
These rising costs of commercializing a new drug are also
expected to substantially drive down investment returns. Based on
recent investment levels, success rates and forecasts of commercial
performance, Bain expects the current blockbuster drug model to
deliver just 5% return on investment - significantly lower than the
industry's risk-adjusted cost of capital. This suggests that only
one out of six new drug prospects will likely deliver returns above
their cost of capital, an unattractive prospect for investors.
What's needed now, the study concludes, is a new, integrated
model that effectively brings together planned experimentation,
aggressive use of partnerships, and eventually, a far-reaching
transformation in the way most pharmaceutical companies organize to
So what happened to the blockbuster model that proved so
successful in the past?
Several factors can be held accountable for driving down returns
from the blockbuster model to 5%, including:
- Declining R&D productivity - only one compound now reaches
the market for every 13 discovered and placed in pre-clinical
trials, compared to one for every eight between 1995 and 2000.
- Rising costs of commercialization - as detailed above, new data
reveals a significantly higher cost than previously thought for
discovering, developing and launching a new drug.
- Increasing payor influence - mounting payor price pressures and
aggressive patent challenges limit the total revenue potential of
the average drug.
- Shorter exclusivity periods - increasing competition from
'me-toos' (i.e., they are easier to create, receiving FDA approval
and MCO coverage) and patent protection increasingly under attack
(i.e., increasing country and EU pressures, state and federal
backlash against perceived pharmaceutical company exploitation, and
related societal pressures
"The choice is stark," said Ashish Singh, director of Bain's
Global Healthcare Practice and co-author of the study. "With
fewer resources to drive primary care products and to invest in the
'arms race' in R&D, sales and marketing, most pharmaceutical
companies must take steps to proactively replace their blockbuster
However, even with stagnating blockbuster strategies and market
values already shifting to smaller pharmaceutical industry players
- the likes of Novo Nordisk AS, Genentech, Inc, and Forest
Laboratories Inc. - the Bain study suggests few pharmaceutical
'majors' are abandoning the blockbuster
"The pharmaceutical industry is a prisoner of past successes,"
adds Singh, "most executives are still in a state of denial."
So what should 'Big Pharma' do?
Despite its current inertia, the laws of risk and return still
apply to the pharmaceutical industry. Companies will need to
experiment in order to create a new model, managing the inherent
risks through a sound strategy and a thoughtful approach to
No one-size-fits-all solution is likely to emerge. Instead,
companies should craft a tailored model constructed from four
inter-related building blocks, all of which, according to the Bain
study, are being used today by niche companies to compete
successfully among the giants of the industry.
1. Shift From Opportunism To Focus
Every company has had its own 'Viagra experience' - creating one
blockbuster from an R&D program focused on an altogether
different therapeutic area. Breakthroughs like these have led
pharmaceutical companies to gear their sales and marketing
investments for "the big one," and to see an opportunity cost in
scaling back. Today, these approaches have simply become too
In fact, history has overemphasized these lucky breaks.
Seventy percent of all "blockbusters" have been created by
companies with significant prior experience in the relevant drug
category. Prior experience helps companies design better trials and
launch products more effectively, which in turn delivers more
compelling economic results - increased probability for launch
success and dramatically lower costs of developing and
commercializing a drug.
2. Use Partnerships To Manage Risk And
Today, 'Big Pharma' is largely based on a 'FIPCO' model, with
each company running its own discovery, development, manufacturing,
marketing and sales for the majority of its product pipeline and
portfolio. External relationships tend to be opportunistic, but
trying to do everything carries a high risk and investment.
On the other hand, partnerships can lower risk and volatility. 'Big
Pharma' can learn a lesson here from the oil and movie industries,
where players use partnerships aggressively, picking those elements
of the business model that can build competitive advantage and
entering collaborations to combine skills and diversify risk. The
majority of "blockbuster" movies are brought to market by a
partnership of multiple studios, and with large number of
independent contractors providing support in key capabilities
required (screen writers, directors, actors, special effects and so
on). While the studio shares the rewards of blockbusters, it also
shares the cost of failures, and shares in more profitable movies
"Going it alone may no longer be practical," said Singh.
"Coopetition among 'Big Pharma' could pave the way for a new
industry model and continued value creation."
3. Develop A Customer-Driven Approach
Historically, the pharmaceutical industry has focused on selling
pills that address the patient's disease, but don't necessarily
cure their disease or meet the patient's full needs in managing
their disease. The high profitability of pills suggested that
incremental investment should always focus on maintaining existing
brand franchises or on discovering the next blockbuster. But
the declining fortunes of the blockbuster model argue that this
strategy may no longer be valid.
And pressure for better solutions is growing with increased
payor and consumer influence over treatment. For the next several
years, the pill itself will likely retain the most profit. But over
time the industry can expect to see some shift in profits, just as
profits in the computer industry shifted into ancillary products
and services from the traditional boxes.
4. Develop An Integrated Business
Traditionally, 'Big Pharma' has organized itself along
functional lines, with separate functional units for each stage of
the drug development and marketing process. In such an
organization, each function aims to operate efficiently, making the
best use of scale, building competence and coordinating with other
This functional structure maps well to the blockbuster model.
R&D operates with a distinct focus on creating blockbusters,
which are then handed off to a flexible, commercial operation for
launch. Other functions work to support R&D and commercial
functions effectively and efficiently, with marketing serving as
However, as 'Big Pharma' grows to an unwieldy scale the industry
would do well to look at companies such as Dell, GE and Johnson
& Johnson to assess the advantages of more decentralized
organization models based on discrete business units. These units
are held accountable for making integrated, cross-functional,
customer-focused decisions rapidly. They also push down P&L
accountability, and put in place new metrics which shift the focus
from mainly product revenue to business area profitability, return
on investment and functional productivity.
So what's the outlook?
While each building block can create value by itself, their full
value is likely to emerge when companies integrate them coherently.
Experience from other industries suggests that companies should
experiment in a controlled fashion before committing fully.
Inevitably, there will be failures along the way. The study
suggests that the key is to contain the risks within the
experimental phase and to learn quickly for the next
But once the experimental phase is complete and capabilities are
in place, organizations must commit fully to their new direction.
Executives who act now to build a new strategy constructed from
tested building blocks and making best use of their companies'
capabilities, stand the best chance of emerging from the coming
period of change as winners. For as we've seen, smaller players,
out of necessity, have moved ahead of the majors in finding
successful new business models that make use of these four building
blocks, and the results are beginning to show.
For more information or an interview with authors Ashish Singh
or Preston Henske, please contact: Cheryl Krauss,
e-mail: firstname.lastname@example.org or
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