Senior Management Programs
Ally or Buy: How Collaboration is Reshaping Pharma
As the pharmaceutical business has become more complex and competitive, collaboration has become increasingly critical to success. Developing new drugs has become more expensive and risky, with an estimated pricetag of $1 billion or more as regulatory agencies continue to raise the bar. The model of the vertically integrated pharmaceutical company — which created, manufactured, and sold its own drugs — is fading fast. Companies now have to look outside to reshape their "organizational DNA" in order to keep up with rapid and fundamental changes in science and markets.
To build flexibility, gain access to new drugs and technologies, and share risks, pharma companies have turned to partnerships. "Alliances have become absolutely essential to all pharmaceutical companies," says Roger Longman, managing partner of Windhover Information and academic co-director of the Wharton/Windhover Program for Pharmaceutical and Biotech Executives. "No company can survive without them."
As large companies have become less vertically integrated, they have specialized in different areas. Some excel at marketing. Others have strengths in discovery, manufacturing, or distribution. But all companies need to be skilled at collaboration. "One of the key skills that differentiates companies is managing relationships well," Longman says.
"Business Development is R&D"
In developing new drugs, the deal table is replacing the lab bench. Companies connect with new drugs and new capabilities through alliances and acquisitions. As Longman points out, "No Big Pharma company, even after all the consolidation, has shown itself capable of creating a sustainable pipeline of new products from its internal R&D organization."
The slowing pipeline of new drugs is a critical concern for Big Pharma. In 2007, the U.S. Food and Drug Administration approved just 16 new molecular entities — the lowest single year total since 1983, when there were 14 approvals. When the scientific pipeline runs dry, managers look outside for deals to give them access to new drugs. As Longman says, "Business development is R&D."
Large Molecules
The science is changing rapidly. One of the biggest shifts has been the move from small molecules to large molecules such as proteins. These "biologics" are expected to account for more than half of the industry’s growth from 2004 to 2010.
Building such capabilities takes years of work and significant investments. By the time the major pharma companies recognized the shift, it was too late to grow them organically. They looked to smaller companies for access to capabilities in large molecules, resulting in a series of large acquisitions or alliances by companies such as Amgen, AstraZeneca, Bayer, GSK, Merck, Novartis, Pfizer, and Wyeth.
"The pharmaceutical industry has never been particularly good at innovating on the really big new technology platforms," Longman says. "The entire pharma industry was built around small molecules. To get into large molecules, they had to ally or buy. It is the fastest growing business in pharma, and the major companies would have been shut out without alliances or acquisitions."
Shifting Power
With the rise of collaborative models, some mid-sized companies have found tremendous success. Companies such as Gilead Sciences, Genzyme, or Cephalon have been able to put together interesting deals in part because their smaller size has given them greater leverage. "They engage in significant kinds of alliances where they have been able to exploit their financial and structural flexibility through partnerships and acquisitions," Longman says
Given the central role of these new partners, the pricetag for acquisitions and licensing deals continues to rise. In-licensing deals for drugs, for example, are much more expensive than they used to be, and higher price is just the beginning. "Small companies want more of a role in the development and commercialization of products," Longman says. "The larger the role, the more complex the transaction needs to be and the more complicated it is to manage. There are many different committees and every decision has to be approved by two people. You are cutting back on the financial risks but you are adding to the management complexity risk."
While Big Pharma still has a more vertically integrated approach than biotech, all the forces in the industry are pushing for less integration and more collaboration. "The multiple pressures of returning cash to shareholders, financial disclosure, and management complexity will force Big Pharmas, like biotechs, to disaggregate," Longman says. "They will have to derive maximum value from segments of the value chain in which they have significant advantage and experiment with option-based external R&D models. In other words, Big Pharma will look more like biotech."
Pharmaceutical dealmaking is just one of the topics covered in the Wharton/Windhover Program for Pharmaceutical and Biotech Executives, a program for senior pharmaceutical executives, which Longman leads with Wharton Professor Patricia Danzon. The program also covers topics such as drug discovery, managing drug development, marketing and pricing, and financial tools. It is designed to develop an understanding of key business tools and approaches with a specific focus on the pharmaceutical industry. "We are trying to tell people not just what is going on in the industry but why it is going on and why it is important to them as executives to understand," Longman says.
