The current Economist has an article on the overhaul at Pfizer, the biggest and the most conservative of drug firms. Believe it or not, this got me worked up about the enterprise software industry. You must me wondering what the connection is. For that we need to start with Lucent.
Who killed Lucent?
Was it Cisco? No, because initially Lucent fell sick on its own accord. This happened because the growth in the landline telephone network business, which was bread and butter for Lucent, just leveled off. And did the growth dry up because of Cisco? No, the real reason was that the landline tele-density had effectively peaked in the late-90s.
The action had shifted to new segments - data networks and wireless networks. Cisco had staked out a position in the data network segment and there were several players, including Lucent, supplying equipment to the wireless operators. Eventually the much promised convergence between telephone networks and data networks started happening. This pitched a vibrant Cisco against a weakened Lucent. Cisco clearly won that battle.
This was not surprising as Clayton Christensen had predicted just this kind of outcome in his 1997 book, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”. This Cisco versus Lucent battle was really about industry modularity versus vertical integration. We know that Lucent’s centrally funded Bell Labs-based product development model (of which I was a part then) lost out Cisco’s venture-backed product development model.
The reason I share this story is because it is a template for what is happening in the pharma/biotech industry now.
Now onto to Big Pharma
Now Big Pharma is being weakened steadily, not by nimbler competitors but by the blockbuster drug model becoming less relevant. A recent Economist article, “Billion dollar plus pills” (subscription needed), describes these changes. It quotes Henri Termeer, Chief Executive of Genzyme, a big biotechnology firm, saying that “the blockbuster model becomes less important over time as specialized therapies take off.” We are moving from the era of “one size fits all” blockbusters to “micro-doses” of innovative drugs in real time.
The current vertically integrated model of Big Pharma is not suitable for making drugs for the practice of “personalized medicine”. To do this one needs a disaggregated model where the firms focus on a few core areas of competence, such as drug discovery, development or marketing. Many activities can be outsourced to the growing legion of biotechnology start-up firms, contract research organizations, independent drug-development firms and freelance sales organizations. The changes involved are significant. More cross-company collaboration is needed at the drug discovery stage; a new drug delivery system is required; and it entails having a new sales model.
This brings us back to old telephone networks and data networks analogy. Lucent remained trapped in the telephone network market because it failed to make the needed business model changes. It’s not that it didn’t try; it just that the changes didn’t take hold. The same kind of challenge stares at Big Pharma today. New growth is in personalized medicines which the old vertically integrated business model can’t deliver easily.
Will Big Pharma do better than Lucent in making the needed orbit shift? Orbit shifts are hard to do and success rates are poor (just look at the retail industry and the airlines). Among the big pharma, J&J is probably the furthest along. I think Pfizer also has a shot at making it largely because Jeffrey Kindler, the new Chairman of Pfizer, is an outsider. I am pretty pessimistic about Novartis for reasons that will become clear in a minute. If you have been with me so far, stay a little longer.
The parallels with the enterprise software industry
The interesting thing is that the big enterprise software firms and big pharma have uncanny parallels. In both cases, new growth has become hard to come by around the existing business models (involving large license deals and blockbuster drugs respectively) despite heroic efforts. Consequently there is a sales and marketing arms-race taking place in both industries with sales and marketing expenses far exceeding R&D outlays. What’s more, open source and generics, respectively, are adding to the pain.
As with any big change challenge, you can classify the players into “denial”, “acceptance”, and “take leadership” stages. The quicker a company moves through these stages, higher are the chances of success.
In retrospect, it’s easy to see that Lucent moved too slowly through the stages. Rich McGinn, the former Chairman of Lucent, kept asserting that the landline slowdown was temporary/cyclical and not structural for far too long. But at that time the ideas around value-chain evolution were new and untested. That’s all changed now. So one would imagine that firms would move faster through the denial, acceptance and take-leadership stages than before. That doesn’t seem to be happening.
In the pharma industry, Daniel Vasella, Chairman of Novartis, is still firmly in the cyclical slowdown camp. He reminds me of Rich McGinn who reacted way too late. Not good news for Novartis.
The enterprise software industry also seems to be stuck right now. I think it’s moved past the denial stage but it’s not yet at the take-leadership stage. SAP, Oracle and others are making some noises but credible efforts at making substantive business model change are still not evident. By now an orbit change should have been in progress. Is history about to repeat itself?
[Two earlier posts Questioning Orbit Change in Pharma/Biotech Industry and Indian Drug Discovery Partnerships: Fad or Long-term Trend are also relevant to this discussion]
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