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SCRC Article Library: Problems Facing the New Pharmaceutical Industry - Part I

Problems Facing the New Pharmaceutical Industry - Part I

Published on: Jun, 19, 2003

by: Rob Handfield

SCRC

As the 21st century begins, the pharmaceutical and biotechnology industry has entered an era of explosive growth in innovation, investment and competition. At the same time, both established players and new entrants are facing significant challenges from the weak economy, downward pressure on prices, intense public scrutiny of ethical and business practices, and increasing regulation(1). Some of the problem areas resulting from these challenges include the following:

  • The costs of developing a New Chemical Entity (NCE) have been rising without a corresponding increase in Return On Investment (ROI). At the same time, the downturn in the equity markets has caused investors to focus more on business models and current earnings rather than innovation and the potential for future blockbuster products(2).
  • With a large number of new entrants at the low end of the industry and a trend towards mergers and acquisitions that has led to larger, more integrated firms with broad reach across the industry, there is an increasingly competitive business environment that has created further pressure on companies to quickly build successful product portfolios(3).
  • The need to satisfy the naturally different mindsets and cultural demands that exist between the scientific research and operational areas of a firm results in internal organizational pressure that can hinder the successful adoption of new technologies and development of new products(4).
  • The specific reasons for these problem areas are as many and varied as there are firms in the industry, but there are some common themes that can be seen:
  • Genomics, proteomics and other new information-based biotechnologies have helped make the drug discovery process more efficient, but implementing such technologies can require significant up front and ongoing investment. For example, a large pharma firm might be expected to spend $100M annually on genomics-related technologies(5). Despite the promise of these new technologies, true increases in productivity are often not realized. According to a senior IT director from a large pharmaceutical company recently, one reason for this is that much of the “low hanging fruit” has already been identified and picked, so tools such as High Throughput Screening (HTS) are not yielding the same results as they did earlier(6).
  • New technologies coupled with intense merger and acquisition activity in the industry has led to structural changes in the competitive environment(7). The seeds planted by genomics and biotechnology has begun yield a new crop of smaller companies that focus on a few instead of tens to hundreds of simultaneous NCE development projects. These companies tend to be more agile than the industry giants and can exploit their core expertise with a particular disease or therapeutic category. This has caused the industry giants to look at ways in which they can gain some of the advantages of the entrepreneurial environment that exists in these new biotech companies. For instance, GlaxoSmithKline has recently announced that it is re-organizing its R&D units to create six Centers of Excellence in Drug Discovery that will allow for more flexibility, better allocation of funding, and improved productivity(8).
  • Finally, the effectiveness of new technologies can be hindered unless the company has put serious effort into developing and implementing change management processes throughout their organizations(9). As a senior IT director we interviewed pointed out, there are essentially three types of people in a pharmaceutical company: the true research scientists, the sales force, and everyone else(10). The first two groups are usually the most demanding in their technology needs, and in fact are often looking for ad hoc solutions that can be quickly built to meet an immediate need. In the case of research scientists in particular, they typically take an experimental approach to problem solving where they discover a problem, ask a question, conduct an experiment, and once there is an answer, move on to a new question that will perhaps require a new set of tools. This contrasts with the traditional approach to building an information system or business process, where the primary goal is to design something that can be re-used for many different types of problems(11).

The bottom line for the industry was summarized by Steven Seget in his report on pharmaceutical innovation: “A company’s ability to innovate and effectively produce portfolios of innovation assets will determine its ability to generate premium returns in the future(12).” That is, a company must be able to use its entire value chain, which might include partnerships and outsourcing arrangements, to carry the innovation process from conception to production in such a way that profitability is maximized.

References:

(1) Devitt, Blake (2003). Executive Prophesies Vision for the Future. Pharmaceutical Executive. Retrieved March 14, 2003 from

(2) Armstrong, Brian M. (2002). Investors’ Ultimatum. Pharmaceutical Executive. Retrieved March 14, 2003 from

(3) Seget, Steven (2002). Pharmaceutical Innovation: An Analysis of Leading Companies and Strategies. Reshaping the Value Chain (p. 19). London: DataMonitor, PLC.

(4) Overby, Stephanie (2002). They Want a New Drug. CIO. Retrieved March 14, 2003 from http://www.cio.com/archive/101502/drug.html

(5) Seget, Steven (2002). Ibid. (p. 18).

(6) Interview conducted by C. Kesler with a senior IT director (name withheld per company policy) at on March 7, 2003.

(7) Seget, Steven (2002). Ibid. (p. 19).

(8) Devitt, Blake (2003). Ibid.

(9) Overby, Stephanie (2002). Ibid.

(10) Interview conducted by C. Kesler. Ibid.

(11) Overby, Stephanie (2002). Ibid.

(12) Seget, Steven (2002). Ibid. (p. 19).

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