[The following articles reflect not only that scientific and technical research and development costs/risks are particularly high in the life sciences sector, but also that the market cost/risk of innovation/commercialization of basic R&D can be much greater and subject to myriad regulatory requirements and obstacles in the marketplace during the normal course of introducing new medicines. It is clear that these costs and risks are significant enough to cause companies to reconsider their business models when they are unable to earn a fair rate of return on investment (ROI). The choice to consider new business strategies and/or business models becomes easier, however, when international regulatory and market risks are added to this calculus.
Indeed, global pharmaceutical companies, whether based in Europe, Japan, or the United States, are quite aware of the growing threat to their IP assets and overall economic interests as the result of developing country foreign government efforts, led by Brazil, to broaden their international human right to issue more 'compulsory licenses' in order to secure the patented medicines created and commercialized by such companies for less than fair market value. Such companies recognize that these foreign governments are being supported by the political and policy advocacy efforts of US and foreign nongovernmental organizations (NGOs) and liberal law professors, which eventually over time work together with such governments to transform 'soft' law declarations into hard law obligations. For example, these groups recently sought the assistance of the Special Rapporteur on the Human Right to Health housed within the Offices of the United Nations High Commissioner for Human Rights to commence an investigation against the Office of the US Trade Representative for international human rights law violations, allegedly committed as the result of the USTR's publication of its 'Special 301' Report and its continued efforts to ensure that foreign governments recognize and protect US citizens' patent rights abroad, consistent with the US constitutional and international trade law protections afforded patents and trade secrets. See Liberal Law Professor Files at UN Formal Allegations Against US Government's 'Special 301Program' Claiming US Laws Protecting IP Violate 'International Human Right' to Access to Medicines, ITSSD Journal on Intellectual Property Rights (Oct. 28, 2010) at:
http://itssdinternationaliprights.blogspot.com/2010/10/liberal-law-professor-files-at-un.html The ITSSD recently attended the 15th session meetings of the World Intellectual Property Organization (WIPO) Standing Committee on the Law of Patents (SCP) during October 11-15, 2010, where it observed firsthand and reported how Brazil and a group of developing countries (the "Development Agenda Group" - (DAG)) had been quite vocal in calling for broad use of compulsory licensing and other government intervention (regulatory) flexibility mechanisms to reduce the scope and the strength of patents internationally. See ITSSD 'Geneva Diary' of the Proceedings of the 15th Session of the WIPO Standing Committee on the Law of Patents Reflects Developed Country IP Rights Under Third World Assault, ITSSD Journal of Intellectual Property Rights (Oct. 27, 2010) at:
http://itssdinternationaliprights.blogspot.com/2010/10/itssd-geneva-diary-of-proceedings-of.html .Indeed, with these industry concerns in mind, the ITSSD convened and moderated a side-bar panel event during the WIPO SCP meetings that emphasized the added legal and economic uncertainties triggered by these and other recommended government intervention mechanisms which have the effect of dampening R&D and innovation efforts undertaken by high technology companies, including those in the life science, cleantech and information and communication technology sectors.
SEE:
ITSSD Event Flyer:
ITSSD Event Handout Materials:
http://www.itssd.org/ITSSD%20WIPO%20SCP%20Side-bar%20Geneva%2010-12-10%20-%20Handout%20Materials.pdf
ITSSD Event Précis:
The following articles which report about the recent biopharmaceutical sector survey (see below) corroborate industry concerns and the ITSSD's research and observations.
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http://www.inpharm.com/news/101025/two-thirds-pharma-companies-face-strategic-crisis
Two thirds of pharma companies face 'strategic crisis'By Ben Adams
October 25, 2010
The pharma industry is moving away from traditional in-house innovation and toward a more diversified business model, but will encounter problems on the road ahead.
A survey by German analysts Roland Berger found that 65% of companies are facing a “strategic crisis”, with diversification the most common ploy to avert it.
The analysts’ Fight or Flight? study identifies three dimensions of diversification - innovate, integrate and de-risk, with the latter two proving most popular.
“Big pharmaceutical companies are at a turning point,” says Stephan Danner, partner and pharmaceutical expert at Roland Berger Strategy Consultants.
“With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis.
“In this context, 67% of pharma executives see diversification as a potential way forward.”
Roland Berger conducted a ‘high-level’ survey across 25 pharma companies representing over 40% of global pharmaceutical revenues and including 7 of the global top ten firms. The analysts also conducted 50 chief executive and board level face-to-face interviews.
Seventy-eight percent of executives questioned in the study perceived generics to be the most important area of diversification.
Pfizer and Novartis are two of the more recent examples of big pharma buying up generic companies to help offset looming patent expiries of their own.
This will come as a little surprise to the industry as almost half the pharma companies surveyed expect a negative return on current R&D investment and are losing faith in traditional patent-based protection.
Roland Berger said that there are two reasons for this. First, the industry expects the margins of innovative medicine to come under “tremendous” pressure, as government deficits need to be managed globally.
Second, the large R&D investments are no longer expected to bring the required level of return with many companies outsourcing their R&D to cut down on costs.
Danner said: “The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates.”
He advised that companies considering diversification should start preparations today, concluding: “The first mover advantage provides an excellent position to shape the future healthcare environment.”
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http://www.ft.com/cms/s/0/d6fb3f60-dc9d-11df-84f5-00144feabdc0.htmlDrugs groups diversify away from patents
By Andrew Jack
Financial Times
October 21, 2010
Two-thirds of large pharmaceutical companies are focused on diversifying away from patented drug development as they grow increasingly sceptical about the returns from future innovation.
A survey by Roland Berger, the strategy consultancy, of 50 top industry executives showed that 65 per cent considered their sector was facing a “strategic crisis” and 67 per cent saw diversification as a potential solution.
Almost half believed that current investments in research and development would yield a negative return, although two-thirds believed future scientific advances could yield positive returns over the next decade.
The negative perceptions towards innovation reflect the view of the financial markets, which are giving higher valuations to more diversified companies. “The industry does not trust its own innovative capabilities. We are burning money,” said one industry executive Roland Berger interviewed.
The report also highlights a growing divergence between companies.
Sanofi-Aventis of France placed greatest emphasis on diversification from 2004-2009, boosting non-patented drug sales from 5 per cent to 12 per cent.
Pfizer, Merck, Johnson & Johnson, Novartis and GlaxoSmithKline also moved in this direction. Groups facing a steep “cliff” of patents which expire in the coming years have generally moved furthest in diversifying in response, led by Sanofi-Aventis, which will soon lose exclusivity on its blockbuster Plavix.
Industry-wide, it estimates 57 per cent of 2008 sales will be off patent within three years and 75 per cent within five years.
But some companies with similar patent pressures, including Eli Lilly, have diversified far less, while Bristol-Myers Squibb has instead shed non-core activities to bet on enhanced innovation in its pipeline of experimental drugs.
A few other drug companies have also concentrated on pharmaceutical operations, led by Roche and – until recently – AstraZeneca, which since 2008 has also diversified a little and expressed some interest in generic drug sales.
The report stressed that there are significant variations in the approach taken to diversification, with the majority focused on de-risking through a shift into generics, consumer health and vaccines. While these tactics increase the scope to boost sales and expand into emerging markets, the report suggests greater value could come from diversification into more innovative areas, notably into personalised healthcare and diagnostics.
The report stresses the potential to increase efficacy and value in a way sought by healthcare systems and insurers – from integrating drugs with genetic markets, imaging and molecular markers, and with medical devices.
While integration into enhanced “healthcare value” could boost returns, Roland Berger concludes: “Most executives still shy away from this path due to the perceived magnitude of change required.”
One anonymous interviewee said the industry was a “victim of its own pipeline focus”.
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http://www.rolandberger.com/company/press/releases/Diversification_in_the_pharmaceutical_industry.html
"Fight or flight?": Roland Berger Study identifies diversification as one of the most prominent trends in the pharmaceutical industry
Press Release - Munich, Germany
Oct. 25, 2010
- 65% of the companies surveyed believe that the pharmaceutical industry is facing a strategic crisis
- Diversification is one of the most prominent trends across the pharmaceutical industry as a way out of the crisis
- Three dimensions of diversification can be distinguished: innovate, integrate and de-risk
- Today's most important diversification area is the generics business
- R&D productivity crisis drives diversification – almost 50% of companies expect a negative return on today's R&D investments
Big pharmaceutical companies are facing more and more challenges. The study "Fight or flight?" by Roland Berger Strategy Consultants identifies diversification as one of the most prominent trends across the pharmaceutical industry. The participating companies include seven of the global Top Ten and represent over 40% of global pharmaceutical revenues. The Roland Berger experts also conducted interviews with top executives to validate the findings and derive strategic implications. The study identified three dimensions of diversification: innovate, integrate and de-risk. At the moment, the most important area for diversification is the generics business. With innovative medicines coming under increased cost pressure and more and more R&D investments yielding a negative return, pharma is embracing the diversified business model as a potential way out of the crisis. In a break with the past, the financial community supports this move.
"Big pharmaceutical companies are at a turning point," says Stephan Danner, Partner and pharmaceutical expert at Roland Berger Strategy Consultants. Public cost containment measures, difficult market access as well as massive patent expiries require a fundamental review of the traditional business model."With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis. In this context, 67% of pharma executives see diversification as a potential way forward," states Danner. For those companies currently pursuing diversification, the Roland Berger study "Fight or flight? – Diversification vs. Rx-focus in big pharma's quest for sustained growth" identifies three dimensions: the de-risk path, the innovation path and the integration path.
Pharma focuses again on generics
At the moment, the industry seems to be focusing on the rather conservative de-risking strategy. 78% of executives perceive generics to be the most important area of diversification followed by consumer health (50%) and vaccines (42%). Acquisitions in this context aim for top-line growth while preparing for opportunities in the BRIC countries. Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics. Regarding the third dimension, integration strategies along the healthcare value chain would turn pharma companies into active healthcare solution providers. Most executives still shy away from this path due to the perceived magnitude of change required.
The art of managing a diversified business
Leveraging existing capabilities and realizing related synergies are key to creating value from diversification. Pharma executives are very cautious in this respect. The most successful transfer of skills and capabilities is expected in the areas of generics (45%) and diagnostics (43%). According to the managers surveyed, Rx companies lack capabilities for forward integration. In particular, despite huge investments, access to prescribers or branding concepts are not perceived as Rx capabilities to be leveraged in an effort to diversify.
R&D productivity crisis drives diversification
Among the executives interviewed, over 60% are reevaluating their traditional business model which focused on high margins and patent-protected drugs. There are two reasons for this. Firstly, the industry expects the margins of innovative medicine to come under tremendous pressure as government deficits need to be managed globally. Secondly, the massive R&D investments are no longer expected to bring the required level of return. Almost 50% of the participating executives expect a negative return on today's R&D investments. The ongoing restructuring efforts of R&D functions across the industry support this assessment.
The financial community and shareholders support diversification
Unlike in the past, diversified companies are no longer being penalized by the financial markets. With over USD 400 billion of market capitalization lost over the past 10 years among innovative pharma companies, the financial community has once again started linking high growth expectations to diversified companies. Today, the price-to-earnings ratios of diversified companies are already higher than those of more focused players.
Diversification is here to stay
Over 80% of pharma executives believe diversification is a long-term trend that will be pursued regardless of R&D productivity issues. For the rest, it will be a bridging strategy used to compensate for profit and growth shortfalls.
Danner: "The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates. Companies considering diversification should start preparations today: the first mover advantage provides an excellent position to shape the future healthcare environment."
Danner: "The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates. Companies considering diversification should start preparations today: the first mover advantage provides an excellent position to shape the future healthcare environment."
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http://www.rolandberger.com/media/pdf/Roland_Berger_Fight_or_flight_Shortversion_20101025.pdf
Fight or flight? Diversification vs. Rx-focus in big pharma's quest for sustained growth
SHORT REPORT VERSION
- ...For those currently pursuing diversification, the study distinguishes three alternative dimensions: the de-risk path, the innovation path and the integration path
- At the moment, the industry seems to be focusing on the rather conservative derisking strategy. By acquiring particularly generics and consumer health companies, the industry aims at top-line growth while also preparing for the opportunities emerging markets offer.(p.5)
- Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics
Three dimensions of diversification can be distinguished
INNOVATE - • Continue on path of medical progress by investing into adjacent medical disciplines - "High risk, high fun"
INTEGRATE - • Defend existing top-line by forward integration along the healthcare value chain - "Maintain fun"
DE-RISK - • Reduce dependency on Rx business model by investing into other non-Rx life science businesses - "Low risk, still fun" (p. 13)
[CAVEAT: ITSSD research reveals that governments are now seeking to reduce the need for patented technologies in the area of SMART-healthcare - a/k/a - 'electronic health records and personalized health care.
See Lawrence A. Kogan, How SMART are Standards that Sacrifice Intellectual Property Rights?,presented at the American National Standards Institute (ANSI) Intellectual Property Rights Policy
Committee (IPRPC) (April 15, 2010), at:
http://itssd.org/How%20SMART%20are%20Standards%20that%20Sacrifice%20Intellectual%20Property%20Righ ts%20-%20Full%20Outline.doc.]
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