Small, Niche Players Will Have Increasingly Important Role In The Pharmaceutical Industry Of The 21st Century

Editor's note: This excerpt from Boston Consulting Group's recent report, The Pharmaceutical Industry into its Second Century: From Serendipity to Strategy, discusses the benefits of and strategies for partnering with small companies to help bring products to market.

Information technology and the pressure to increase productivity are encouraging the emergence of smaller, niche-player companies which can act as subcontractors. A growing group of companies now limit their focus to narrow elements of the pharmaceutical industry, from clinical trial to specialty manufacturing to genomic databases and screening capabilities. Increasingly, one "focused" company can identify a new compound, another company can match the compound to a target, a third company can carry the compound through clinical development, a fourth can launch the drug, and still another company can bear the financial risk of bringing the product to market. BCG refers to this phenomenon as "deconstructing the value chain," wherein traditional, vertically-integrated companies no longer need to own or perform internally every activity from discovery to marketing.

Many of these smaller, specialized companies are "service providers," "technology players" or "consumer gateways":

• Service providers can deliver essential services to larger pharmaceutical companies with greater speed, reliability, credibility and expertise than could be achieved internally. Service providers also tend to do the job at a significantly lower cost. In addition, service providers help level the playing field for start-up companies by being an access point to a range of world-class capabilities that a start-up can tap into.
• Successful technology players take a unique (chemical/biological) innovation and transform it into defensible and cash-generating intellectual property. In short, technology players will increasingly hold the intellectual property needed by larger players.
• Consumer gateways are a new breed of company that tracks consumer needs and bundles together "suites" of products or services for a target audience. This target audience could be a patient group, such as Type 1 diabetics.

As we move into the 21st Century, many of these focused players will eclipse the capabilities of larger, integrated pharmaceutical companies. Superior capabilities, lower costs and proprietary technology will help nimble niche players outmaneuver many of today's larger, integrated pharmaceutical giants. While some of the very strongest pharmaceutical companies may survive as vertical integrators, most will make the transition to being an "orchestrator," managing both their internal activities and their external relationships with niche suppliers. Striking the right balance between internal operations and outsourced services will be critical for the largest pharmaceutical companies as they seek to maximize efficiency and profitability.

Boston Consulting Group concludes that major pharmaceutical "orchestrators" will need to do five things to compete successfully in a networked, deconstructed environment:

• Adopt a New Mindset. Companies should no longer view themselves as monolithic, independent organizations. They need to shift their frame of reference to this new, deconstructed environment.
• Assess Internal Capabilities Critically. Companies need to evaluate themselves critically and objectively. They must measure their performance not only against one another, but also against these newer, focused players.
• View All Functions as Modular Units. Companies need to be able to manage their business modularly, so that some segments can be carved off and outsourced.
• Develop Networks. The most successful orchestrators will be those that stay abreast of and even anticipate developments in biotechnology within academia and among competitors. The larger players able to identify and evaluate new technologies will be best positioned to optimize their portfolio of alliances.
• Hire and Retain the Right Talent. Especially in the areas of scientific research, finance, information management and service, orchestrators will need to re-think their approach to attracting, rewarding and retaining the best people—including redesigning compensation systems to allow employees to share in the financial success of their innovations.

  For previous installments in this series, see:

  The Pharmaceutical Industry Into Its Second Century: From Serendipity To Strategy.
  Financial Challenges For Pharmaceutical Companies.

For more information: Gayatri Sondhi, vice president, Boston Consulting Group, 135 E. 57th St., New York, NY 10022. Tel: 212-446-2800. Fax: 212-754-4424.