Q: What is a drug company when its patents begin to run out? A: Ten years too late!

Just look what happens when you don’t invest and protect the source of your competitive advantage.

AstraZeneca, the world’s fifth largest drugs company, measured by prescription drug sales, saw its revenues tumble by 14% in the first half of this year, down to $14Bn, mainly as a consequence of the loss of exclusivity on some of its core products: sales fell fastest in the second quarter, down by 18%. The loss of exclusivity on core products amount to 80% of this decrease and profit before tax fell 36% to $3.8bn in the first half. AstraZeneca seem particularly exposed to this problem with about half of its $33Bn annual revenue expected to disappear by 2016.

So, what is going on here then? As the competitive advantage of a drugs company is having patent protection for its products, so that it can squeeze maximum profitability out of its new drugs, shouldn’t it be focussed on making sure that when one core revenue stream dries up it is replaced by another one? Shouldn’t it either be R&Ding like crazy to ensure that is so, or buying other businesses, or patents, to achieve the same aim? Surely it shouldn’t be ignoring the issue and hope that no one will notice, or running the business off for cash without telling anyone, particularly its shareholder owners?

The company was formed in 1999 from the amalgamation of Swedish company Astra, started by 400 Swedish doctors and apothecaries in 1913, with bits of the old ICI packaged up as Zeneca. To be fair to it, since 2007 it has been busy buying-up complementary businesses – but not enough to do much to stop the “patent cliff” getting closer, which it has now begun, lemming-like, to slip over. That’s where my fairness ends I’m afraid because it was clearly neither adequate nor timely enough to save the business from ignominious decline, unless it can now pull off something of a miracle turnaround.

The elephant in the AstraZeneca boardroom, which no one seemed ready to tackle was that, relatively at least, AstraZeneca were just not good enough at developing new drugs and nothing was done to make sure that the new drug pipeline was full. OK, so it’s difficult, but others do it better. The company had several promising failures in recent years but alas that isn’t the name of the ethically challenging drug moneterisation game, you need successful products with patents at the end of the game, not just a big pile of report cards saying “did its best”.

As time goes on AstraZeneca have fewer and fewer options and investing in its own R&D was taken off the table a while ago as a solution to this problem. It now needs to buy big or it in turn will be bought, probably by a business that has a better grip on its new drug pipeline.

The salutary lesson for us all here is that it is not enough to know where your competitive advantage comes from but you also have to make sure you have all the competencies to deliver it; as soon as you doubt that you need to act to rebuild or replace them, something that the folk at AstraZeneca clearly didn’t know how to do.

Mark

 

 

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