Someone once said, “No company ever downsized its way to greatness.’ The traits that are vital to long-term success – innovation, customer loyalty, etc. – aren’t achieved by reducing staff. Yet all Pharma appear to be in downsizing mode. A report by the Institute for Policy Studies in 2012 reported that 119,000 Pharmaceutical jobs have been lost since 2008….and yet the downsizing continues.
The problem may be that leadership within these companies is mistaking increasing share price value with value creation. If a company really wants to be successful, they need to put real value first.
Pharma companies need to make a conscious decision to focus on value creation and then make a thorough examination of where, how and why value is created in their sectors and businesses. By gaining an understanding of the sources and drivers of value creation, they can then begin to create a platform for sustainable and profitable ongoing growth.
I have been thinking a lot over the past few years about value – what it is, where, how and why is it created in a company and market – and I’ve come to the conclusion that Pharma is giving its value away.
How We Got to This Point
Our value was our drugs. We discovered, developed, manufactured, marketed and sold drugs that treated all manners of illness, from annoying to life threatening. This was definitely an expensive process and with all the difficulties in the environment, we needed to ensure we used our available funds effectively.
Clinical trials represented an enormous cost in the process, so when CROs (such as Covance and Parexel) sprang up, Pharma companies jumped at the opportunity to outsource. This was still costly, but the infrastructure around them was variable and, therefore, Pharma was able to save money overall.
Then Pharma outsourced R&D, then discovery, and then manufacturing, distribution, sales and marketing. There are thousands of companies that do just about everything the Pharma companies need.
These days Pharma companies are more like project managers, overseeing everyone else doing their old roles. Nothing is left that is really theirs. In fact, 30% of drugs on the market come from other companies that sold the license to them.
It reminds me of Dell. If you’re not familiar with the tale, Dell was a leader in the computer market when Asus (full name ASUSTeK Computer Inc), a Taiwanese company that manufactured circuits for their PCs, proposed producing the motherboards as well for 20% less. Seeing an opportunity to cut costs, Dell agreed. Later Asus came back with a similar proposal for taking over assembly. Next came supply chain management. This continued until Asus was controlling everything but the brand.
So when Asus entered the market on its own, they had a more affordable computer that was basically identical to Dell. In essence, Dell had trained, funded and created its new competitor.
The results for Dell were disastrous, nearly putting them out of business. It was a hard lesson, and one that Pharma companies don’t seem to be learning. Asus is currently the 5th largest PC vendor in the world (from 2014 data) and it was a tiny little company just helping out the ‘big boys’ originally with small components.
There’s nothing to stop expanding CROs from doing the same thing as Asus. Indeed, Covance has grown its capabilities beyond a clinical trial company and is now a drug development company with services for every stage of drug development.
Expect More Competition
The outsourcing of everything has brought down the barriers to entry. There are thousands of drug discovery outfits, and across much of the entire Pharma chain, most can be outsourced to thousands of players.
In 2009, Eularis did a consulting project for a Japanese Pharma company that was setting up a virtual operation for Europe. It was entirely possible with an in-house team of less than 10 people and everything else outsourced. That was a good few years ago, so there are plenty more outsourcing options today.
Even more alarming, the years of outsourcing and cost-cutting leave Pharma companies vulnerable to all this new competition. The approach made sense at the time; however, precision medicine is changing the game. If your goal in an initial trial was to understand the biomarker subtypes in your patients and pair them with a diagnostic to work with the drug, then the final approval clinical trial process would require significantly less patients, take a maximum of 2 years and cost considerably less. I cover this in greater detail in Part 2 of this series.
If companies could weave trials into development more to do this, they would be far more successful in their efficacy results and outcomes for patients…and profits. Companies that outsource these activities are unable to do this effectively.
Value Creation Must be the Most Important Focus of a CEO
Pharma companies have taken their eyes off the ball – discovering, developing and bringing life-saving drugs to market – and others are really beating them hands down because of it.
The future for Pharma is in dire straits given that precision medicine will be more about the diagnostic linked to the therapeutic piece and because most big Pharma companies have sold off their diagnostics units because it was seen as a small market (around 26 billion compared with 500 billion for therapeutics).
Pharma leadership must adapt to this new reality. They need to stop putting profit margin ahead of growth and innovation and get back to creating value for the market. If they don’t, there are thousands of companies capable of beating them at their own game.
