Old Model in New Clothes

2007 was the year that the major pharmaceutical companies accepted the fact that their traditional business model is terminally ill. That model, characterized by large vertically integrated companies developing small-molecule compounds pushed by large sales forces, failed to produce robust results for much of this decade. Efforts to rescue it such as Pfizer's attempts to leverage economies of scale through huge acquisitions, did not have much therapeutic effect, as promised economies proved difficult to deliver and promising pipeline compounds failed in late clinical trials. So the major pharmaceutical companies have embarked on large-scale restructuring efforts, including massive layoffs, site closings, divestitures, and cost-reduction efforts aimed at goods and services procured externally.

Jim Miller

Fresh pharma face

In place of their old business model, major pharmaceutical companies are touting a new direction, one that tries to meld the successful features of the small/virtual biopharmaceutical company model with the scale, development expertise, and marketing muscle that remain their sources of long-term advantage. Details vary from company to company, but the key features of that new model share major characteristics, outlined below.

Favoring biologics in place of small-molecule compounds. The major pharmaceutical companies are building up their large-molecule portfolios, including monoclonal antibodies, vaccines, and recombinant proteins, through technology, candidate in-licensing, and acquisitions.

Focusing on specialty indications rather than primary care. Therapies targeting broad indications such as cholesterol levels are losing favor because new generation drugs are proving difficult to develop, and insurers aren't willing to pay for them. Major pharmaceutical companies are targeting specialty areas such as oncology and autoimmune diseases where price points and margins have generally been much better.

Increasing presence in new markets. The rapidly growing economies of Asia and Eastern Europe, with their burgeoning middle classes, promise more rapid growth than the traditional North American and European markets. Companies are expanding their research and development (R&D), manufacturing, and sales presence in countries such as India and China.

Offshoring of R&D/manufacturing. The quest for lower costs is driving companies to source more of their manufacturing and R&D needs from low-cost countries. Big Pharma is establishing new R&D and manufacturing operations in these countries, as well as procuring more inputs and services there.

Making the cost structure more flexible. A lower fixed-cost structure means fewer staff and manufacturing sites and greater use of contract research and manufacturing organizations (CROs and CMOs).

In-licensing of candidates. Rather than depending on in-house laboratories alone, companies are looking to smaller companies to identify targets, develop leads, and take candidates to proof of concept. In-licensing opens the way to more potential candidates while keeping R&D costs and staffing more flexible.

Business as usual?

This "new" bio/pharmaceutical business model seems to address a lot of the problems facing major pharmaceutical companies. There, however, are real reasons to consider whether, in fact, the new model really is all that different or whether it will solve the critical issues facing these companies.

For instance, the full picture indicates that Big Pharma isn't giving up manufacturing. It is simply rationalizing its small-molecule infrastructure, for which it has less use, while building a network of biomanufacturing operations. Consider the case of Bristol-Myers Squibb (New York). In December, the company announced plans to shut down 19 of its 38 manufacturing sites, but it is investing nearly $1 billion in new biomanufacturing capacity in Devens, Massachusettes, and in its injectables manufacturing operations in Manati, Puerto Rico. Merck (Whitehouse Station, NJ) and GlaxoSmithKline (London) have aggressive plant divestiture programs, but are investing heavily in new vaccine capacity. Throughout Big Pharma, companies are investing nearly $10 billion in new manufacturing capacity to support new strategic priorities, and their large-molecule programs will be as vertically integrated as their small-molecule programs have been.

Winners and losers

Although it is uncertain whether the "new" bio/pharmaceutical business model will really deliver long-term benefits to its adherents, there is little doubt that it will greatly benefit CROs and CMOs. Clinical CROs are already benefitting as major pharmaceutical companies outsource more of their clinical-study and clinical-data-management requirements. Clinical research is people-intensive. The need for staff waxes and wanes according to what is in the pipeline at any given time, so clinical CROs clearly contribute to the goal of keeping costs flexible. Further, clinical CROs have been at the forefront of introducing cost-saving innovations, including new data-management technologies and conducting studies in low-cost geographies. So, they will continue to be winners as major pharmaceutical companies implement the new model.

The picture is somewhat less clear for CMOs. The move to divest small-molecule manufacturing operations will create new opportunities for CMOs to pick up the manufacture of older active pharmaceutical ingredients and dosage forms, and undoubtedly some of the new small-molecule launches as well. However, the decision by most companies to invest in vertically-integrated manufacturing operations for their most strategic product areas suggests that CMOs could be shut out of the most promising new opportunities.

CMOs will need to come up with more innovative strategies and offerings if they really want to leverage the opportunities that will be created under the new Big Pharma business model. For instance, few CMOs have adequately addressed how to deal with the threat and opportunity of manufacturing in low-cost countries such as India and China, and only one—Lonza (Basel, Switzerland) in its deal with Genentech (SouthSan Francisco, CA) to build new cell culture facilities in Singapore—has come up with a truly innovative new business model. Most CMOs are still trying to appeal to the old Big Pharma business model.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.comwww.pharmsource.com.