For decades, blockbuster product development has driven the pharmaceutical industry. Under that model, a handful of products-and, in some cases, a single product-produce the lion's share of revenue and dictate a company's strategic direction. As companies get larger, they rely more and more on blockbusters to sustain their growth. The high cost of developing major, successful drugs only reinforces the need to focus on blockbusters. It's a vicious cycle that remains firmly in place for most Big Pharma.

Big pharma's product pie

Although the blockbuster approach has served well for many years, it is now under pressure on several fronts:

Genomics and the promise of personalized medicine. These powerful trends raise the possibility of fragmented, smaller markets, unsuited to the blockbuster model.

Increased speed of "fast follower." The time between product innovation and second-generation has dropped from years to months, limiting pharma's ability to maintain a premium price for innovative therapies.

Reimbursement and cost pressures. Payers are trying to reign in healthcare costs, and pharmaceuticals are a prime target. Some states have refused to pay the high price of innovative drugs and threatened such actions as limiting reimbursement levels.

Tightening of regulatory pressures. FDA and other regulatory agencies are raising the bar for both getting new drugs approved and keeping existing ones on the market.

As those pressure points converge on Big Pharma, it becomes clear that the existing blockbuster model will not survive unchanged in this decade. This article offers lessons from medium-size pharma companies that have pursued alternative approaches with comparable success and from other industries that have had to reinvent their blockbuster strategy in the face of changing economic and competitive imperatives.

Message from the MiddleResearch from the Tufts Center for the Study of Drug Development and PRTM Consulting demonstrates that the product development experiences of medium-size pharma companies carry important implications for their larger counterparts. The study defined big pharmaceutical companies as those spending more than $1 billion annually on research and development and medium-size companies as those spending between $500 million and $1 billion on R&D.

Researchers conducted a comparative analysis of big and medium pharmas by looking at the financial performance of the two sectors during the last few years. That involved comparing the two populations statistically across such key measures as gross margin; net margin; cost of goods sold (CoGS) over revenues; selling, general, and administrative expenses (SG&A) over revenues; and capital expenditures over revenues.

The Size/Performance Issue

One prominent strength is their ability to act with flexibility, nimbleness, and speed. With less bureaucracy in their organizations, they can make decisions quickly. Moreover, they can more easily and effectively shift direction and re-deploy resources as needed. A timely no-go development decision, for instance, is more likely to result in the rapid and complete re-deployment of resources off a project.

Medium-size companies don't often have the luxury of hedging their bets. Consequently, they are more likely than Big Pharma to focus their resources on the best bets. Furthermore, the big companies tend to approach the product development process sequentially, while their mid-sized counterparts show a willingness to run development activities in parallel. And, although the approach entails some risk, it can significantly reduce time to market.

Another strength of successful medium-size pharmas is their willingness to engage in collaborative relationships. They are more likely to outsource key parts of the product development process. They also display a greater openness to ideas originating from outside of their own organizations and are more likely to incorporate approaches and processes that they did not create. In some sectors, they have established a better track record of adopting new R&D technologies than their larger counterparts, especially in the areas of drug delivery and, in biotech, product discovery.

Collectively, those strengths have had a positive impact on the business performance of medium-size players, who close a higher number of business deals relative to their size than do big companies. Furthermore, they have lower overall developments costs. By going after targeted markets with narrowly defined drug characteristics, they hold development costs in check while obtaining comparable results overall.

As they reassess the blockbuster model, Big Pharma may want to consider those strengths. By managing certain processes concurrently, by aggressively incorporating new technologies, and by leveraging more collaborative opportunities, the big companies may be able to more efficiently manage their R&D investments. The approach may also help them identify and kill failure-prone products earlier in the development process-a capability that can translate to huge cost savings.

Big pharma also can learn from other business sectors that have been forced to modify their original blockbuster orientation. The successful efforts of the automotive and movie industries as well as the unsuccessful attempts of the personal computer sector offer several important lessons. In each case, the dominant companies had to change their blockbuster mentality in response to a changing business environment. The transition required companies to

• generate a higher degree of cooperation with the competition
• share risk across multiple elements of the development and supply chains
• grow their business through next-generation products that complemented, rather than fragmented, the core market.