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Kellogg on Biotech

Strategic Alternatives in the Pharmaceutical Industry

Jeff Cohen KSM '05, William Gangi KSM '05, Jason Lineen KSM '05, and Alice Manard KSM '05

‘Big Pharma’ is facing a crisis. Not only are many blockbuster drugs for the world’s largest pharmaceutical companies scheduled to go off-patent in the next few years, but the pipeline of drugs that would help these firms to replace those lost earnings is distressingly empty. The small-molecule ‘blockbuster’ model for developing drugs is showing signs of weakness as companies find they have become increasingly dependant on blockbuster drugs to maintain the industry’s historically-high growth rates. These blockbuster drugs have become ‘double-edged swords’ as liabilities have increased dramatically over the last decade for companies with drugs that target large patient populations. It is quite obvious that the time has come for Big Pharma to re-evaluate its growth strategies in order to ensure the industry’s success over the next century.

This paper will discuss the decrease in R&D productivity within Big Pharma as it relates to the industry’s small-molecule, blockbuster drug discovery strategy, and how the industry has reacted by trying to boost R&D productivity through mergers and acquisitions, in-licensing, and strategic alliances. The weaknesses of this historical approach will be analyzed and alternative strategies for the industry will be recommended to improve the future productivity of R&D and achieve its goal of producing innovative and profitable drugs.

©2007 Kellogg School of Management, Northwestern University