Some Encouraging Trends on the Pharma Radar

Pharma's fundamental challenge in recent years has been an inability to develop enough new products that confer substantial benefits over what's already available. This slowdown comes at a time when third-party payers have grown stingier in covering me-too products and a spate of big-selling brands are set to lose patent protection. At this same time, the bigger companies -- organized to heavily promote their products to individual physicians -- are starting to operate on a dis-economy of scale because the consolidation of medical practices makes larger institutions the decision makers over drug selection. All of these factors have hammered stock prices, propelled massive layoffs, and led many companies to wink at questionable practices in an effort to bolster revenue.

Most of the "new business model" initiatives appear as either diversionary moves to appease shareholders or as inadequate measures within a traditional business model that is obsolete. But one pattern within pharma's culture that would normally be dysfunctional during a period that requires fundamental change may offer some hope here.

In so many functional areas, pharma is an incredibly reflexive, follow-the-leader industry. That's normally a curse to innovative thinking and new programs. Fast-moving industries such as IT and consumer packaged goods constantly seek to outflank their rivals and change the bases of competition, rather than follow one another in lock step. So it may be useful to point out some auspicious paths that two, very different pharmas are following, with the idea that others can either emulate them or gain inspiration to blaze their own trails.

Bristol-Myers Squibb (BMS) is a Big Pharma company that appears to be negotiating its way forward in a back-to-the-future fashion. While many pharmas seek to transform themselves, either overtly or stealthfully, into diversified companies that can balance downturns in branded drugs with some combination of generics, consumer products and other health care ventures, Bristol recommitted itself to a pure-play pharma course. Under chairman Jim Cornelius and CEO Lamberto Andreotti, BMS sold off its consumer products, orthopedic devices, baby formula and other businesses not directly tied to pharmaceuticals. Although some derided BMS's strategy as pursuing "Amgen circa 1995," BMS decided to focus on specialty areas within the prescription drug business such as oncology and virology. At the same time they decided they would partner the development and marketing of primary care drugs within their portfolio that showed high promise.

In recent weeks the BMS strategy appears to be working on several fronts. Analysts forecast its newly approved product for advanced melanoma, YERVOY (ipilimumab), will eventually approach $2 billion in annual sales, while the pipeline compounds for hepatitis-C appear likely to become top competitors in a growing category. Meanwhile the study results for an atrial fibrillation product partnered with Pfizer, Eliquis (apixaban), suggest that its annual sales may exceed $2 billion by 2015.

While some companies seek success by broadening the definition of their business to expand laterally and horizontally, BMS's managers decided that smaller is better and the best way to grow lies in narrowing their scope.

Valeant is another company making interesting efforts to emerge from pharma's doldrums. While BMS focuses on what was pharma's historic mission of developing new products that advance the standards of care, Valeant proudly announces that it does no research and never will.

Valeant started life as ICN Pharmaceuticals, a company founded in a Los Angeles garage by an eccentric from the Balkans, Milan Panic. In 1992 Panic lost the presidency of Serbia to Slobodan Milosevic but he persisted in running ICN until 2002 when a shareholder revolt, sexual harassment charges and SEC investigations drove him out. The new managers created a spinoff company, Ribapharm, and then discovered that ICN's condition was worse than they expected. ICN morphed into Valeant, reacquired Ribapharm and then, last year, the Canadian company Biovail acquired them but retained the Valeant name. CEO J. Michael Pearson, whose main business experience was at the McKinsey consultancy, promptly announced that the company will do no clinical research as long as he's in charge.

Valeant's products cluster around the categories of dermatology, neurology and infectious diseases. Instead of launching research programs in those areas, Valeant operates more like a venture capital fund that buys other companies with products and research programs. This year alone they bought the dermatology businesses of Sanofi and Johnson & Johnson.

As a quasi-VC, the Valeant managers are not really drug men, but instead possess the souls of bean counters. Drugs merely provide the intermediaries that lubricate financial transactions. The organization operates with a bare minimum of full-time employees and its spending on even the basic, business support items common to pharmas remains miserly. Unlike pharmas that seek to build businesses over time by burnishing relationships with top clinicians, researchers and third-party payers, Valeant operates with a finance manager's time-value-of-money mindset. If sales volumes and margins can't meet designated levels within a short, predetermined period, Valeant will dump an entire therapeutic franchise as reflexively as going to the bathroom.

So if one shouldn't look for Valeant to cure cancer or viral infections, that's OK because they're not in that business. They just want to deliver returns to shareholders and, for several quarters now, that's what they've been doing. There's no point in saying Valeant isn't really a pharma or that they stand for a degraded form of the industry, because they represent a way of surviving by doing well until the scientists figure out a way to do good.

Are there some other, clever ways of redefining the pharma business? Most certainly there are. It would be interesting to hear about some of them that are below the radar.

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