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At PSA, Executives Tout the Benefits of Scale

Executive Summary

Even as the biggest pharmaceutical companies get bigger--and predict further consolidation to come--top industry executives advocate outsourcing more R&D.

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Why Doesn't Pharma Get Smaller?

Pharmas continue to diversify into lower margin businesses because CEOs and boards are betting on different requirements from a new system of health care delivery. They also figure their jobs will be safer. The choices: Is the likeliest avenue to growth through successful R&D, or through positioning appropriate for future health care delivery and payment systems? Bristol-Myers and Amgen have chosen the former - both because each is too small to diversify and because each believes it has a reasonable track record in innovation. Novartis and most other large pharmas want to take both roads at once--and are either dramatically expanding to enable product bundling or to give themselves enough time to prepare for what the health care system demands. Either way, the wild card of health care reform is making business strategy something of a crap shoot for companies both large and small.

Pfizer/Wyeth: Industrializing Pharma?

If Pfizer's acquisition of Wyeth is more than a merely stop-gap attempt to bridge the genericization of Lipitor -- and plenty of observers believe it is -- then it is in addition a tacit admission that its future will be patterned more on the value-based strategies of McDonalds and GE than the research-based Big Pharma model. The deal is the first step in creating a commercial organization which can cheaply add and sell a wide range of new products, with a range of margins. The moderate revenue growth provided by new products and new markets, thanks to dramatically slower growth in operating costs, will deliver what could be double-digit bottom line growth -- and do so with the kind of predictability of a large industrial business. Critical to the strategy: bolt-on acquisitions and licensing deals, allowing Pfizer to layer new products into existing infrastructure, keeping the growth of cost-of-goods and SG&A expenses as flat as possible. Gone will be the big growth spikes from major new products. But absent too will be the sharp drops that follow patent expirations. Pfizer, in short, is readying itself for industrial health care.

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