Developing a Growth Strategy under Constraints

As R&D costs rise rapidly and new drug approvals remain almost flat, companies face an increasing R&D burden to achieve growth. Although declining R&D productivity has been partially mitigated by increasing sales of existing products, that trend is now being slowed by the encroachment of generics and declining returns on marketing investments. Few companies are now expected to achieve 10 percent growth in the next five years.

Our work for a large pharmaceutical company illustrates the strategic bind many such companies find themselves in today. Despite a thin pipeline, our client was targeting double-digit growth in the coming decade. We used a variety of data-rich approaches to test strategic options specific to our client's situation. Building on our financial model of the client's current business and pipeline, we examined the dynamics of underlying drivers and competition, and modeled outcome uncertainties of the vast range of options in its R&D portfolio.

We found that:

• The limits to growth lay in companies' operating models rather than in macro-economic and payer effects
• Price inflation contributed only 3 percent annual growth in the 1990s
• Volume per product, not number of products, drove growth

To close the revenue gap, we determined that our client needed an additional two to three product launches per year beginning in 2007. Our analysis showed that although licensing the compounds of others might have some impact, more than 50 Phase II licenses would be required. Similarly, although acquisitions were warranted, we concluded that most would hurt rather than help. However, by changing the economics of development -- through a focus on biologics in areas of high unmet need, investment in new screening technologies, and "small pharma" investments rather than acquisitions -- the company could implement a global pharmaceutical strategy that would meet its ambitious growth target.