The Pharmaceutical Innovation Crisis

I used to read a lot of management books.  Or rather, buy a lot of them, then take a quick look — and promise myself to get around to reading them someday.  When (and if) I finally did, I’d often find the information dated and the advice stale.

Not so with most of Peter Drucker’s work.  In Drucker I find things that sound timely — sometime prophetic — even today.

The productivity of knowledge

Drucker spoke of the productivity of knowledge, and how firms, industries, and even countries who managed to excel at it would over time come to dominate their respective sectors.

When I first heard him use that term, it sounded abstract — and not immediately relevant to my work in business strategy. That changed recently when I conducted a study of the innovation crisis in the US pharmaceutical industry (which represents 80%  of the industry’s R&D worldwide.)  This is widely known in the press as the patent cliff that affects most major pharma manufacturers to some extent.

How pharma creates value

pillsIn a nutshell, a significant portion of the industry’s revenues and profits depends on branded drugs — the more successful of which you see advertised on TV.  Most of these are discovered by rapidly scanning lots of molecules, or computer models of the molecules, for potentially beneficial properties.  The most promising of these are first matched with diseases for which they might be useful, then registered under patents.  Then they are developed by being rigorously tested, first on animals, then on humans in a range of clinical trials.

The data from all these tests are presented to the Food and Drug Administration (FDA) for approval.  Drugs that are approved, and that are added to the ‘formularies’ of insurance companies and government payers who will reimburse patients for their use, can becomes wildly successful.  Lipitor, the statin used to control cholesterol in the blood, is the most successful drug to date, with total sales over $125 billion.

These blockbuster drugs (generally defined as those with annual sales over $1 billion) command prices in the marketplace much higher than their cost to manufacture.  Their gross margins can be as high as 75-80 percent.

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