A Strategy for Pharma Diversification

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In response to myriad challenges and with the hope of renewing double digit growth, the question becomes whether pharmaceutical firms should hold on to a pure pharmaceutical business model or embrace a more aggressive diversification strategy, says Roger Fournier, a senior executive working at a global pharmaceutical company. Some companies are reducing the breadth of their portfolios via a series of strategic divest ments, according to Mr. Fournier. He cites Pfiz er, for instance, which seems to be refocusing its core business around novel drugs primarily cen tered on large disease areas and targeting aging populations; the company has made the discov ery of products aimed at the specialist market, such as oncology, a priority. Mr. Fournier says other companies are going in the opposite direction, expanding their port folios through diversification. Pharmaceutical giants such as Novartis, Johnson & Johnson, and Abbott are fueling their business growth and profitability through the pursuit of more aggressive diversification strategies. When assessing if strategic diversification is a desirable strategy, Mr. Fournier says leaders must answer three fundamental questions. First, can the company achieve higher profit margins over time with moderate diversifica tion? Second, can the company create value and sustain competitive advantage within the tradi tional and new markets being targeted? Third, what are the potential barriers and costs of entry and exit into the targeted markets? “In several cases, diversification attempts have destroyed rather than created shareholder value,” he says. “Consequently, pharmaceutical compa nies must carefully examine their particular situ ation while appraising strategic diversification options. Keeping an eye on the present, they must successfully anticipate the disease areas and winning healthcare market conditions that will prevail in the next decade. Armed with this insight, they must make strategic choices now that will favorably position their companies to reach the desired endstate tomorrow. Within that strategic vision, diversifi cation may or may not play a critical role in formulating their line of attack.” DECIDING ONTHE RIGHT STRATEGY Several studies performed in various industries over the past 30 years indicate that firms that have successfully attained moderate, related diversification have surpassed both focused and highly diversified companies. And they have achieved consistently higher shareholder returns over the years. Therefore, pharmaceutical compa nies might want to conceive a corporate strategy that supports related diversification methods. “Value creation and competitive differentia tion resulting from a moderate diversification strategy might be achieved through leveraging a range of opportunities,” Mr. Fournier says. “One opportunity consists of optimizing and sharing resources and core competencies across a set of related businesses and functional areas, such as R&D, sales, marketing, supply chain, manufac turing, or distribution. Another tactic is to lever age economies of scope, such as eradicating duplication between businesses through the cre ation of global shared facilities. Related economies of scope can occur by consolidating basic research activities into more focused R&D labs, taking advantage of breakthrough research platform technologies.” Additionally, he says firms can leverage intangible assets such as corporate image and brand equity. These can be leveraged advanta geously across businesses in a costefficient man ner. Another possibility is to leverage stateof theart health science technologies enabled by highly differentiated knowhow practices. Related diversification might equally be pur sued to acquire new core capabilities that the company does not have yet, but that might be essential to exploit longerterm opportunities. “Diversification, in such a case, is used as an accelerated organizational learning stratagem,” he explains. “Diversification is then primarily focused on honing new resources and core capa bilities with the purpose of achieving competi tive differentiation as well as sustainable, prof itable growth in the future. For instance, the growing convergence between drugs, diagnos tics, and medical devices will lead to the creation of innovative combined products that drastically improve the prevention, diagnosis, and treat ment of various diseases. But to reap the full ben efits of this upward convergence trend, compa nies must hone new core capabilities.” Mr. Fournier says to capitalize on these core capabilities it will be essential for companies to create, from the bottom up, groundbreaking combined product pipelines that have a tight integration between these three core technologies. “Companies with existing capabilities in I Roger Fournier Armedwith the right insights,pharmaceutical leaders must make strategic choices now that will favorably position their companies to reach the desired endstate tomorrow. Within that strategic vision, diversification may or may not play a critical role in formulating their line of attack. ROGER FOURNIER IS AN EXECUTIVE AT A LEADING GLOBAL PHARMACEUTICAL COMPANYWITH HEADQUARTERS BASED IN THE UNITED STATES. THE OPINIONS EXPRESSED IN THIS ARTICLE ARE PERSONAL AND SOLELY THOSE OF THE AUTHOR. PHARMADIVERSIFICATION A Strategy FOR Confronted with an increasingly competitive landscape, global pharmaceutical companies are experiencing threatening pressures that defy their inner core capabilities. PV0308 LAYOUT 2/14/08 5:43 PM Page 64 more than one of these lifesciences sectors might have a competitive advantage,” he says. “For companies that do not have this expertise, it will be essential for them to build up new core capabilities to appraise and leverage emerg ing opportunities and technology platforms that will lead to the development of revolution ary combined products or new services.” CONSIDERATIONSTO KEEP IN MIND Besides increased market share potential, total industry revenue, and predicted overall profitability analysis, other considerations must be carefully weighed while contemplating relat ed diversification. “Important criteria such as proper timing for market entry, the rate and speed of diversifica tion, the awareness of existing or unanticipated competitors, the ability to rapidly scale up differ entiating capabilities in relation to the competi tion, and the use of complementary assets and core capabilities that can be leveraged synergisti cally between companies on a global basis, all must be carefully analyzed by the company,” Mr. VIEW on diversification strategies Fournier says. “Additional considerations include conducting indepth industry lifecycle analysis and competitive war game simulations.” While considering diversification, it is of the utmost importance to err on the side of caution because the cost of strategic miscalculation is significant, Mr. Fournier warns. “The company should not underestimate or overestimate its core capabilities and its poten tial for developing new ones,” he says. “Nor should it disregard the competitive landscape and the likelihood of potential retaliation from rivals, especially if the targeted markets are con solidated as opposed to fragmented.” A simple technique to minimize the risks of unconsciously developing internally focused biases is identifying reference classes. A refer ence class is defined as a set of comparable deci sions that other firms have made in the past in more or less comparable markets. “By analyzing these data carefully, the com pany derives valuable insights and learning from the successes and failures of similar firms,” Mr. Fournier says. “While performing these unbiased reviews, companies can often hedge a certain number of qualms. They might even discover unforeseen opportunities and change their trajec tory to exploit untapped value propositions.” POSSIBLE SCENARIOS Mr. Fournier suggests one diversification scenario that companies might consider is entering into the generic drug market. “Over the next decade, a combination of product patent expirations and payer costcon tainment strategies will drive respectable growth in the global generic drug market, including in the United States,” he explains. “Increasing com petition will lead to further consolidation, char acterized by intense merger and acquisition activities. This will lead to the emergence of powerful generic key players with strengthened global reach and extended core capabilities.” In such a context, firms might consider entering the generic drug market and leverag ing their sales, marketing, manufacturing, sup ply chain, distribution, and R&D core capabili ties. But if they want to remain competitive, large pharmaceutical companies must be able to operate their business with a significantly lower cost structure. This core capability is mandato PV0308 LAYOUT 2/14/08 5:43 PM Page

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