Refilling drug pipelines requires bold thinking

Refilling drug pipelines requires bold thinking

Big players are hitting the limits of scale. Their strictly functional organization models worked well once, but no longer.

  • min read


Refilling drug pipelines requires bold thinking

There were smiling faces around Boston's growing pharmaceutical ''hub'' last week when Novartis named Cambridge the future site of its global research headquarters. But a key reason for the Swiss pharmaceutical company's move to a city with world-class laboratories was sobering—precious few new drugs in the pipeline.

Novartis isn't alone. The dearth of new drugs is hurting the long-term growth goals of many big pharmaceutical firms, such as Schering-Plough, Pharmacia, and Bristol-Myers Squibb. Even those turning in great earnings numbers—as GlaxoSmithKline did last month—are getting frowns from investors. In a sector that made up about a quarter of the value of last year's 50 largest-cap companies, the problem is aggravated by confusion about the real cure.

Big drug companies seem to think the best fix is another round of mergers. Wrong medicine. If they want to delight investors again, they have to think and act very differently, in not only how they create drugs, but how they market and sell them.

The big producers agree they need to pump out more than three new drugs a year if they're to hit 10 percent annual growth. They're at just over half that rate. The new approach means reorganizing internal research efforts, licensing more compounds more often, and focusing on research and development, sales, and marketing around a few therapeutic franchises.

Studies by strategy consultancy Bain & Co. show a big performance lead for drug firms with such focus: They increased revenues 1.5 times faster and drove market capitalization almost twice as fast as those with a broader presence across therapeutic franchises.

Two years ago, the industry's leaders swore that bigger must be better. But if recent merger mania proved anything, it's that joining two businesses with little in the labs is nothing but a pick-me-up. Sure, Glaxo Wellcome squeezed out millions in costs when it merged with SmithKline Beecham in December 2000, but it has been able to do little to deflect the pending loss next year of patent coverage on four drugs, including popular antidepressant Paxil, that bring nearly $4 billion in US sales alone.

The problem is that the big players are hitting the limits of scale. Their strictly functional organization models—centered on research labs that seed molecules across a wide swath of therapeutic categories to see which ones become blockbuster drugs—worked well once, but no longer. In fact, focus, not serendipity, led to earlier breakthroughs.

Some drug companies are trying to refocus. GlaxoSmithKline has restructured R&D around six centers of excellence in drug discovery. Each is autonomous, accountable, and entrepreneurial, as in a discovery biotech company. But Glaxo's efforts are fragmenting discovery rather than focusing the company on a few promising franchises.

Instead, Glaxo—and many other large pharmas—need to integrate commercial and development functions into ''mini businesses,'' with each business assembled around a therapeutic category or a customer segment. Run by a general manager, each unit would handle clinical development, sales, and marketing. Each would control global profit and loss, have its own sales force, and be free to license promising compounds—tapping the abundant innovation in outside labs or the company's own research division.

So where does that leave the R&D labs? For today's pharmas, it makes more sense to split R from D. Research will work better as a standalone organization, dealing at arm's length with the business units. A separate lab would increase discovery productivity. And its independence would let it license compounds that don't fit the company's needs, which would boost revenues—and researchers' morale. Novartis may be on the right track.

Some industry executives argue that such tight focus puts all the eggs in one basket. We argue it's far riskier in the long term not to concentrate—and riskier still to buy into the bad math behind renewed merger mania. We bet that once Novartis scientists join Cambridge's vibrant research community, they'll see the returns of focus as well.

Ashish Singh is a vice president with Bain & Co.'s Boston office. James L. Gilbert is a Bain director based in Munich. Both are leaders in Bain's health care practice.


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