Pharma: Can the Middle Hold?

By Bastianelli, Enrico; Eckhardt, Jurg et al. | The McKinsey Quarterly, Winter 2001 | Go to article overview

Pharma: Can the Middle Hold?


Bastianelli, Enrico, Eckhardt, Jurg, Teirlvnck, Olivier, The McKinsey Quarterly


Midsize companies need to think small--before the big ones do.

Pharmaceutical companies dream of blockbusters: drugs that quickly run up sales of more than $1 billion. But developing and marketing such drugs has become so expensive that only the largest companies can afford to do so; hence, the recent string of mergers within the industry. Notwithstanding such high-profile combinations as those between Glaxo Wellcome and SmithKline Beecham and between Pfizer and Warner-Lambert, the pharmaceuticals industry hasn't consolidated very much: the 20 biggest competitors combined still have less than 60 percent of the global market. The next SO or so companies, with revenues of $500 million to $3 billion, increasingly look like candidates for acquisition, mainly because their performance trails that of the leaders. If current trends continue, the global market share of midsize companies could shrink from 20 percent in 1999 to just 10 percent by 2010 (Exhibit 1, on the next page).

Yet the midsize pharmaceutical companies do have a shot at reviving themselves. A clutch of emerging technologies would make it rewarding for them to develop and market drugs that tackle the less prevalent diseases big companies tend to overlook. At the same time, it will become easier--and more profitable--for midsize companies to in-license drugs developed by other companies for small-scale markets and to out-license potential blockbusters to big companies, which can market them more effectively.

Over time, of course, these developments should affect the economics of big companies too. They might respond by moving into the new territory of the midsize companies, which must therefore stake claims before the rush.

Blockbusters: Out of their league

In recent years, midsize pharmaceutical companies, on average, have had smaller operating margins and produced lower total returns to shareholders than have their larger counterparts. Although the individual situations of midsize pharma companies differ considerably, they do have a common predicament: an inability to play today's blockbuster game. If you include the cost of projects that fail during development, researching and developing a new drug costs, on average, $700 million--three times what it did 15 years ago. The number of participants in clinical trials has tripled in 20 years. And the cost of launching a blockbuster has more than quintupled in only six years, from $75 million in 1993 to $400 million in 1999. Today, for a midsize pharma company, financing a full-scale blockbuster means betting the business.

Not surprisingly, the attempts of midsize pharmaceutical companies to launch their own blockbusters on the cheap have fared rather poorly: their drugs for depression and ulcers won only a few points of market share--not enough to recoup even a relatively meager investment. Midsize companies that happen to own a leading drug in a large and growing disease area now find themselves threatened by big companies attracted to the area's potential profits.

But big pharmaceutical companies too are in a fix. The investment community has punishing expectations of their future earnings growth, as the sector's high multiples indicate, and their R&D costs are spiraling upward. Competitors' products can reproduce the effects of newly launched drugs within six months, instead of the two years it took to catch up a decade ago. And as soon as a patent on a drug from a big company expires, generic-drug manufacturers swamp its markets with cheap copies.

Only the revenues and profits from a steady flow of blockbusters can alleviate all of these pressures simultaneously. Consequently, blockbusters are increasingly the focus of big companies. The share of total pharmaceutical-industry revenues attributable to them grew from 6 percent in 1991 to 16 percent in 1998, and for some big pharmaceutical companies that share has reached more than 50 percent. …

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