The pharmaceutical sector is struggling: costs have increased 30x in 40 years and the industry’s internal rate of return – a metric of its financial health – is a pitiful 1.2%. Without a major rethink, the industry is not unlikely to run out of investment capital.
Increasing industry output is the obvious answer. The industry has long looked to mergers and acquisitions as a source of innovation. But this has created confused and bloated organizations, lacking focus and direction, which are impossible to manage.
Could divestitures – and a refocusing on a sharper corporate core – be answer? Killian McCarthy and I, say yes.
We studied the performance of 349 pharmaceutical firms, that announced 1,784 acquisitions, 842 divestitures, and 6,088 strategic alliances, and filed 63,523 patent applications, over a 15-year period. We found that those firms that divested more produced more and better patents, and those that divested in a way to create corporate focus, produce more ‘trajectory-altering’ breakthroughs too. We conclude, therefore, that cutting distraction, and focusing on the core, could be the winning strategy that the pharmaceutical industry needs to embrace, if it is to survive the innovation crisis that it finds itself in.
Killian McCarthy and I had this study was published in Drug Discovery Today, a top journal that is in the top 2% of scientific journals in term of scientific quality and practical impact.