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Pharmaceutical companies were once the darlings of Wall Street. With patent protection guaranteeing steady billion-dollar revenue streams, very high margins on drugs, and armies of top notch scientists working to keep drug development pipelines full, it was no surprise that shareholders courted pharmaceutical companies. But the charm seems to be fading lately. The data clearly shows that pharmaceutical companies need to act now and act innovatively to regain their preferred position with investors.

Generic drug companies are posing a big challenge. They have become stronger in light of rising healthcare costs in the US and the awareness of the lack of drugs in third world countries


R&D productivity is at an all time low. According to Sanford Bernstein, an investment bank, $64B was spent on R&D in 2006 and only 13 drugs were approved by the FDA


Cost-conscious politicians are talking about cost controls. Many experts estimate that if price controls are put in place (as proposed by leading democratic presidential candidates), the profits of the industry will disappear

While pharmaceutical companies are losing their charm, medical devices companies are becoming Wall Streets new darlings. According to the BCG ValueScience center, the TSR (Total Shareholder Return) of medical device companies outperformed the TSR of pharmaceutical companies by almost 2X in the last decade. If you ask why, the answer is clearly innovation.

Medical devices companies have led the healthcare sector in innovation. Innovation not only focused on superior outcomes outcomes defined traditionally as better treatment of the condition but on other performance metrics. We at Innosight, define a product along multiple performance dimensions for a particular stakeholder. For example, for a patient, the performance dimensions can be: treat the illness, price, ease of delivery, recovery time (time away from work), impact on appearance (does it leave a scar on the body) etc. These are discovered once you understand the Jobs of the stakeholder. Medical devices companies have innovated around dimensions other than just "treat better and have created excellent returns for their shareholders.

Companies need to reach a threshold for performance on the "treatment outcome performance dimension," which we at Innosight call qualifying jobs, but beyond that threshold, the market will reward performance on other dimensions, which we call differentiating jobs. Innovation in medical devices like insulin pumps, heart stents, laparoscopic surgical equipments (now even going to natural orifice) are not necessarily best in terms of outcome, but satisfy other important patient jobs of "getting back to work quickly, leave no visible scar on the body etc.

So what can a pharmaceutical company do? Here are some thoughts:

Think beyond outcome: Superior outcomes are not the only dimension capable of driving drug sales. Ease of administration, enabling higher compliance etc. will help sales. Pfizer's Exubera was a right move in this direction (it got the functional job of ease of administration right but failed on emotional jobs like not being socially conspicuous and hence failed). Decreasing the number of times one has to take a drug (say once a day from three times a day), or making drugs chewable for people who dont like to swallow pills would be rewarded in the market

Think beyond blockbuster: The rise of technologies like high throughput screening, genomics etc. creates an opportunity to play in "personalized or "customized (say for particular segments of the population) medicines

Manage the full life cycle of drugs: Face the threat of the generics industry by playing in the generics market (for example, Novartis has entered generics)

Manage the full life cycle of conditions: Currently pharmaceutical companies mainly focus on the treatment phase. There is an opportunity to play in diagnosis (e.g. Novartis has entered the diagnostic market), care management (e.g. disease management) etc.

Innovate the business model: There are multiple ways pharmaceutical companies can change their existing business model to increase revenue or decrease cost

Innovate around sales and marketing: Pharmaceutical companies still have huge sales forces selling drugs. Using technology can decrease the cost. The need is to segment the market on jobs of physicians. Some doctors will still require interaction with the sales force but many can do with e-detailing, company sponsored seminars/ conferences etc.

Move manufacturing offshore

These ideas are not new but not many pharmaceutical companies have ventured into these areas because of their tendency to anchor on the sustaining curve. They still cling to a blockbuster mindset; on any excel model, the NPV of any of the above ideas will not compare to the NPV of the next blockbuster drug.

Pharmaceutical companies need to start by busting the blockbuster culture in order to reclaim their status as darlings of wall street. They need something different than the traditional way of doing business or in other words, something INNOVATIVE.