Pharmaceutical companies at pains to diversify their drug portfolios

The pharmaceutical industry long ago farmed out much of its human resources, information technology and marketing work.

But the research and development (R&D) at the heart of the business remained largely untouched.

While other departments shrank, in-house scientists continued as they always had, staring into their microscopes and poring over data in the hunt for the next Lipitor or Prozac.

That is beginning to change.

As the industry comes to grips with the expiration of about $130 billion in patented products over the next four years, its executives can no longer bank on a single drug like Lipitor to drive earnings.

Instead, they are aiming to diversify their drug portfolios, hoping to develop products for far less than the $800 million-plus figure often cited as the price of bringing a new drug to market.

“There’s a recognition that current models have a lower rate of return than they used to,” says David Blumberg, principal and advisory sector leader for KPMG’s pharmaceutical industry practice in Philadelphia.

Firms are stepping up the pace of smaller acquisitions and licensing deals, outsourcing more R&D work and creating programmes to develop so-called “orphan drugs,” products that help relatively small numbers of patients.

The biotech industry raised a record $55.8 billion in 2009, an 86 per cent increase over 2008, according to San Francisco investment firm Burrill & Co. Licensing deals—in which a pharma company pays money for the rights to market a certain compound developed by another firm —drove much of that jump.

The last few months alone have seen a rush of partnership announcements.

In December, Pfizer licensed the worldwide rights to a treatment for Gaucher’s disease, a rare genetic enzyme deficiency, from Protalix Biotherapeutics, an Israeli biotech company, for around $60 million.

The news caught the attention of the entire industry because it meant the world’s largest drugmaker was considering drug candidates that might help just thousands of people at a time— rather than the millions that were typically targeted under the old blockbuster model.

In January, Swiss drugmaker Roche outsourced some of its drug discovery work to Belgian biotech company Galapagos.

Under the deal, Galapagos could get as much as $573 million for applying its discovery technology to identify drugs to fight chronic obstructive pulmonary disease (COPD).

At the time, Galapagos CEO Onno van de Stolpe told investors that he was confident big pharmaceutical companies would send more work his way.