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BIO 2000 Economic Forum
Monday, March 27
The Molecular Biology Revolution:
How Can We Turn Promise Into Reality
Speaker: Gary P. Pisano (Harry E. Figgie Jr. Professor of Business
Administration, Harvard Business School)
The economics of the pharmaceutical
industry is in the process of changing dramatically, the change is accelerating,
and this will demand new approaches to management and strategy in the
years to come. Specifically, the promise of biotech for rapid technological
innovation and target identification is leading to four transformations
in the industry:
1. Development (as opposed to discovery)
is becoming the bottle-neck of production.
2. Product life-cycles (the period
a product is valuable, before a successor or competitor effectively replaces
it) are shortening.
3. The presence of many more competitors
for the same "blockbuster" areas, in addition to the prospect
of tailoring new drugs to individuals, will lead to market fragmentation
-- where many players are going after many smaller niches. The "billion
dollar drug" may soon be a thing of the past, as each $billion market
is broken into many $100 million markets.
4. There will be a blurring of the
distinction between "product" and "service".
1. Development
Historically, research and discovery
was the bottleneck of the pharmaceutical industry's pipeline. Today,
we see an ever burgeoning discovery capacity, without a comparable growth
in development capacity. This means that more "inventory"
will build up, in the form of new projects in process (See
Figure). While a certain amount of compression is certainly
possible -- Pisano notes that most of the "wait-time" lost in
clinical trials is not due to the FDA but to the inefficiency of decision
making and execution on the part of the drug companies, themselves --
there doesn't seem to be a way around the basic fact that the efficacy
and safety of drugs must ultimately be demonstrated in many people, over
relatively long periods of time.
2. Product Life-Cycles
Over the past forty years, a ten-year
life-cycle for drugs was common. Today, and increasingly in the
future, a common interest in hot areas of product development, along with
new enabling technologies, is resulting in competing products being
generated more quickly and in greater numbers than ever before.
Pisano cites the COX2 inhibitors as one recent example of this emerging
trend.
Implications:
Pisano believes that the biopharmaceuticals
industry will begin to look a lot like the electronics business:
- Price competition will increase
dramatically.
- Product obsolescence (think of your PC from 3 years ago) will replace
patent expiration as the key determinant of a product's lifetime value.
- Operational excellence, in terms of cost-effective development and faster
lead-times, will be required in order to compete over time.
3. Market Fragmentation
Genomics seems to be leading, ultimately,
to "pharmacogenomics", where drugs and therapies are tailored
to the genotype of the patient. Since side-effects are thought to
result from slight variations in peoples' genetic makeup, this seems like
a good thing -- no more side-effects. And it is a good thing --
for the consumer. For the drug companies of the future, however,
this doesn't bode quite so well -- at least not for the companies in search
of the "blockbuster drug" Why? Because if you tailor
a drug for me, you're less likely to be able to sell it to my neighbor.
In other words, pharmacogenomics would seem to lead to market fragmentation
-- one market has become many.
Implications:
- The billion-dollar
drug will be replaced by a bunch of 100-200 million-dollar drugs.
This will make the traditional model of driving growth through huge products
($500million+ in sales) -- exploiting scale economies in research, development,
and distribution -- unmanageable.
- In order to address the newly fragmenting market, companies will
have to focus on decentralized growth through multiple, targeted, opportunities
(not one blockbuster) -- reducing fixed-costs, in the process, in order
to fight off smaller, more nimble companies' "attacker's advantage".
Pisano goes on to note that the recent
spate of mergers and acquisitions activity in the biopharmaceuticals industry
flies in the face of this, as the newly formed behemoths will actually
have higher, not lower, fixed-costs.
4. Blurring Distinction Between
Product and Service
The current business-model in the
biopharmaceuticals industry is that of a vertically-integrated (performing
all steps necessary for production) company that sells product.
Increasingly, the service component is becoming more and more important
for this industry. Specific areas that are, and will continue to
be, involved include: disease management, customized treatments (stem
cell, tissue engineering, etc...), and genetic-based diagnostics and treatment.
Implications:
- It's no longer a game of pushing
high volumes of product through standard distribution channels.
- New distribution and operational capabilities are necessary for
interfacing with patients, including the ability to customize, respond,
and give fast turnaround. It will be product AND service.
- The Web will play an important role and will be central to this
strategy.
- The big question is: who will become the Dell Computer of the
biopharmaceuticals industry?
Conclusion
Pisano notes that smaller, innovative
firms may, indeed, have an attacker's advantage. However, one way
he sees for larger companies to try to compete is to create smaller sub-units
to deal with these emerging niche markets. He sees a need for new
development and distribution capabilities to "exploit the promise
of the molecular biology revolution."
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