Are Pharmaceutical Firms Innovative?
The premise of the article isn't surprising - the pharmaceutical industry is at an inflection point. The old models that built the industry aren't as relevant any more. Developing new blockbuster drugs is exceptionally difficult, as a lot of the "low hanging" fruit is gone. However, the author of the article postulates that pharmaceutical firms are, or were, innovative. Well, I guess I disagree. This may be simply a matter of semantics, but pharmaceutical firms are, and were, relatively good at research and development, and are increasingly good at partnering and business development, but on the whole were exceptionally cautious and avoided risk. The firms created a tremendous amount of intellectual property, but have failed to create network effects that stimulate a larger market.
Compare and contrast the business models of software and pharmaceuticals. Microsoft and Big Pharma have both created a tremendous amount of intellectual property and value, and both are very protective of their rights. However, even though Microsoft is a relatively closed system, there's enough of an infrastructure created by them that other firms can develop on top of and extend the value proposition - sponsoring and creating even more innovation. Let's not even get into open source or more open operating models in software. The point is that the intellectual capital of many innovative industries creates additional value and innovation opportunities for secondary and tertiary industries. In pharma, it's going the other way. Most innovation now is done by smaller firms that feed the pharma firms or are acquired by pharma firms.
Beyond product innovation, research and development, what other innovations are possible in the pharma space? Pharma firms use relatively old fashioned methods to inform doctors and sell their products to physicians, relying on a very large population of detailers to explain the drugs and convince physicians to write scripts. There's been some advance in these methods, but there's still a very heavy reliance on what amounts to door to door sales. Pharma firms are locked into a fairly poor business model, in which all of their products almost by definition have to be blockbusters or the firm can't pursue them. Pharma firms are also one of the largest direct marketing and advertising industries, using television and print advertisements to drive demand. There's not a significant advance in sales, in marketing, in distribution or in advertising from the pharma industry.
Now comes the news in the Economist article that some firms are considering outsourcing their manufacturing. Now, pharma manufacturing isn't complex, just heavily regulated, and no pharma firm wants to manage a recall of its drugs, so trusting a third party to do manufacturing has taken some time. However, doesn't the fact that you can outsource the manufacturing indicate that that skill is a commodity?
The article suggests that the pharma industry may begin to experiment with different kinds of integration - horizontal or vertical. Actually, that's old news. Pfizer did that years ago, acquiring firms for animal health, human health, medical products and so forth. About ten years ago it spun off its Animal Health and Medical devices divisions.
I think there's a range of innovation options open to the pharma firms, but it will require a rethink of the business model. Certainly there are markets for useful drugs that aren't blockbusters. Teva Pharma in Israel has made a good living on generics, so there's got to be a business model that creates value from smaller market drugs. It would seem likely that there's a lot of room for innovation in the product offerings starting at food supplements moving to over the counter medication and eventually into pharmaceuticals. I know the medical industry needs more options rather than simply writing more scripts. It would seem likely that partnerships between large health insurers and pharma companies to target specific conditions and new solutions is possible.
The pharma firms historically have done well by creating a tremendous amount of IP, protecting it well and charging a lot for that IP. The model may have run its course. Now we'll see which firms are really innovative and which were riding the wave.