Pharmaceutical companies at pains to diversify their drug portfolios

For much of the last decade, big drug firms have let outside companies or university scientists conduct clinical trials and do some research.

But letting them screen molecules at early stages means sharing company secrets — a highly unusual strategy for the cautious pharmaceutical industry.

Lilly is not the only company making such moves.

GlaxoSmithKline has decided to let its smaller biotech partners do more of its early-stage development work, and it has taken the additional step of mimicking the biotech-venture capital model.

Glaxo scientists now must pitch their ideas to panels of company executives and outside industry experts to win funding for new projects.

Meanwhile, Swiss drugmaker Novartis AG has jettisoned the old model of pursuing drugs that could fight “big market” diseases, such as Alzheimer’s or cancer, in favour of ailments where the science is well understood, improving the chances of finding a treatment that works.

Investing in or doing licensing deals with other companies also requires skills that pharmaceutical firms may not have honed, he adds.

Cisco, for example, has become famous for its disciplined approach to acquisitions, which focus on understanding which new technologies are likely to pay off.

In order to have success in these ventures, “you have to focus on due diligence,” Hrebiniak says. “You must find appropriate partners— solid candidates for acquisition or joint ventures. You must have an absorptive capacity, which is the ability of a company to discover, understand and integrate new technologies that are out there.” Some pharma firms have proven they can do this well:

Last year, in a move that appeared strategically sound, Roche agreed to acquire 44 per cent of San Francisco biotech Genentech, consummating a partnership between the two companies that had resulted in Roche’s three top-selling drugs, the cancer medicines Avastin, Herceptin and Rituxan.

Generally speaking, however, big pharma companies seem to be playing “follow the leader” too much, says Wharton management professor Saikat Chaudhuri, whose work focuses on mergers and acquisitions.

“They don’t do a good job of portfolio management. They tend to all go after the same things. They tend to be conservative and place their (M&A) bets on (a narrow range) of drugs.”

But now big pharma has little choice but to try, Hrebiniak notes.

“Competitive pressures in the industry are quite high.”

Large drug companies simply can’t afford to keep spending as much as they are now, when about 10 per cent to 20 per cent of revenue goes to R&D, he says.