Diversification is one of the most prominent trends in the pharmaceutical industry
Almost 50% of companies expect a negative return on today's R&D investments
Big pharmaceutical companies are facing more and more challenges. The study "Fight or flight? – Diversification vs. Rx-focus in big pharma's quest for sustained growth" identifies diversification as one of the most prominent trends across the pharmaceutical industry. The participating companies include seven of the global Top Ten and represent over 40% of global pharmaceutical revenues. The Roland Berger experts also conducted interviews with top executives to validate the findings and derive strategic implications. The study identified three dimensions of diversification: innovate, integrate and de-risk. At the moment, the most important area for diversification is the generics business. With innovative medicines coming under increased cost pressure and more and more R&D investments yielding a negative return, pharma is embracing the diversified business model as a potential way out of the crisis. In a break with the past, the financial community supports this move.
Big pharmaceutical companies are at a turning point. Public cost containment measures, difficult market access as well as massive patent expiries require a fundamental review of the traditional business model.With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis. In this context, 67% of pharma executives see diversification as a potential way forward. For those companies currently pursuing diversification, the study identifies three dimensions: the de-risk path, the innovation path and the integration path.
Pharma focuses again on generics
At the moment, the industry seems to be focusing on the rather conservative de-risking strategy. 78% of executives perceive generics to be the most important area of diversification followed by consumer health (50%) and vaccines (42%). Acquisitions in this context aim for top-line growth while preparing for opportunities in the BRIC countries. Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics. Regarding the third dimension, integration strategies along the healthcare value chain would turn pharma companies into active healthcare solution providers. Most executives still shy away from this path due to the perceived magnitude of change required.
The art of managing a diversified business
Leveraging existing capabilities and realizing related synergies are key to creating value from diversification. Pharma executives are very cautious in this respect. The most successful transfer of skills and capabilities is expected in the areas of generics (45%) and diagnostics (43%). According to the managers surveyed, Rx companies lack capabilities for forward integration. In particular, despite huge investments, access to prescribers or branding concepts are not perceived as Rx capabilities to be leveraged in an effort to diversify.
R&D productivity crisis drives diversification
Among the executives interviewed, over 60% are reevaluating their traditional business model which focused on high margins and patent-protected drugs. There are two reasons for this. Firstly, the industry expects the margins of innovative medicine to come under tremendous pressure as government deficits need to be managed globally. Secondly, the massive R&D investments are no longer expected to bring the required level of return. Almost 50% of the participating executives expect a negative return on today's R&D investments. The ongoing restructuring efforts of R&D functions across the industry support this assessment.
The financial community and shareholders support diversification
Unlike in the past, diversified companies are no longer being penalized by the financial markets. With over USD 400 billion of market capitalization lost over the past 10 years among innovative pharma companies, the financial community has once again started linking high growth expectations to diversified companies. Today, the price-to-earnings ratios of diversified companies are already higher than those of more focused players.
Diversification is here to stay
Over 80% of pharma executives believe diversification is a long-term trend that will be pursued regardless of R&D productivity issues. For the rest, it will be a bridging strategy used to compensate for profit and growth shortfalls.
The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates. Companies considering diversification should start preparations today: the first mover advantage provides an excellent position to shape the future healthcare environment.
Big pharmaceutical companies are facing more and more challenges. The study "Fight or flight? – Diversification vs. Rx-focus in big pharma's quest for sustained growth" identifies diversification as one of the most prominent trends across the pharmaceutical industry. The participating companies include seven of the global Top Ten and represent over 40% of global pharmaceutical revenues. The Roland Berger experts also conducted interviews with top executives to validate the findings and derive strategic implications. The study identified three dimensions of diversification: innovate, integrate and de-risk. At the moment, the most important area for diversification is the generics business. With innovative medicines coming under increased cost pressure and more and more R&D investments yielding a negative return, pharma is embracing the diversified business model as a potential way out of the crisis. In a break with the past, the financial community supports this move.
Big pharmaceutical companies are at a turning point. Public cost containment measures, difficult market access as well as massive patent expiries require a fundamental review of the traditional business model.With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis. In this context, 67% of pharma executives see diversification as a potential way forward. For those companies currently pursuing diversification, the study identifies three dimensions: the de-risk path, the innovation path and the integration path.
Pharma focuses again on generics
At the moment, the industry seems to be focusing on the rather conservative de-risking strategy. 78% of executives perceive generics to be the most important area of diversification followed by consumer health (50%) and vaccines (42%). Acquisitions in this context aim for top-line growth while preparing for opportunities in the BRIC countries. Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics. Regarding the third dimension, integration strategies along the healthcare value chain would turn pharma companies into active healthcare solution providers. Most executives still shy away from this path due to the perceived magnitude of change required.
The art of managing a diversified business
Leveraging existing capabilities and realizing related synergies are key to creating value from diversification. Pharma executives are very cautious in this respect. The most successful transfer of skills and capabilities is expected in the areas of generics (45%) and diagnostics (43%). According to the managers surveyed, Rx companies lack capabilities for forward integration. In particular, despite huge investments, access to prescribers or branding concepts are not perceived as Rx capabilities to be leveraged in an effort to diversify.
R&D productivity crisis drives diversification
Among the executives interviewed, over 60% are reevaluating their traditional business model which focused on high margins and patent-protected drugs. There are two reasons for this. Firstly, the industry expects the margins of innovative medicine to come under tremendous pressure as government deficits need to be managed globally. Secondly, the massive R&D investments are no longer expected to bring the required level of return. Almost 50% of the participating executives expect a negative return on today's R&D investments. The ongoing restructuring efforts of R&D functions across the industry support this assessment.
The financial community and shareholders support diversification
Unlike in the past, diversified companies are no longer being penalized by the financial markets. With over USD 400 billion of market capitalization lost over the past 10 years among innovative pharma companies, the financial community has once again started linking high growth expectations to diversified companies. Today, the price-to-earnings ratios of diversified companies are already higher than those of more focused players.
Diversification is here to stay
Over 80% of pharma executives believe diversification is a long-term trend that will be pursued regardless of R&D productivity issues. For the rest, it will be a bridging strategy used to compensate for profit and growth shortfalls.
The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates. Companies considering diversification should start preparations today: the first mover advantage provides an excellent position to shape the future healthcare environment.
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