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Internationalize and be innovative.

Internationalize And Be Innovative

It is generally considered that the pharmaceutical industry is a good industry to be in because it is making money; it is in a fast-growing market, one that will continue to grow; and it is a noncyclical industry, as opposed to such industries as chemicals or automobiles.

In 1990, the worldwide pharmaceutical market was about a $180 billion market, growing about 10% a year. North America remains the sales leader in the market, ahead of Europe and Japan.

There are several major trends that will influence the pharmaceutical industry for the decade, and century, to come: * People are getting older: The graying of the population means an increased need for medical services and, therefore, a higher consumption of drugs. * People in developing countries are becoming wealthier and, therefore, are able to spend more money on healthcare. They are viewing health more and more as a right. * We can see demand increasing because of greater healthcare coverage under national health systems, including in the U.S.

On the other hand, the industry has constraints that must be dealt with: * Increased pressure on prices as governments struggle to stop healthcare costs rising as a percentage of GNP. * Dramatic escalation in the cost of discovering and developing new medicines and the challenge to get a return on the investment. * An increase in over-the-counter sales as governments, to reduce their own budgets, encourage the switch from prescription drugs to self-medication.

Health expenditures as a percentage of GNP are rising everywhere. The current level is over 10% of GNP in the U.S. This growth cannot continue indefinitely, and governments must, and will, find ways to stop it. The first and easiest place for them to turn is the pharmaceutical industry, even though drugs accounted for only 10% of total worldwide healthcare expenditures, down from 12% in the 1970s. (Drugs represent only 8% in the U.S.) Drugs are generally the most cost-effective way to treat disease. This is not the place governments should look. They should encourage and reward innovation in finding medicines that improve human health in a value-added or cost-effective way.

Let us suppose that we have enlightened governments that do encourage and reward value-added new medicines. What does it take to develop them? Costs of developing a single new drug have increased from an average of $54 million in 1976 to an estimate of over $230 million last year. Who can afford this level of investment and how can a company get a satisfactory return on that investment? The answer to both questions is "only large global companies." Companies that, on the one hand, can afford to spend hundreds of millions of dollars a year on research and development and, on the other hand, have their own worldwide marketing capabilities so that they can get maximum return for themselves.

That is why we are seeing consolidation within the industry. We tend to think that our industry is dominated by large, global companies. Nothing could be further from the truth. There are literally hundreds of pharmaceutical companies in the world, and regional companies currently dominate.

We can look at this another way. How many companies today have the critical mass to compete effectively? How many companies can afford to spend enough on research and development to hope to have a consistent flow of valuable new products and, at the same time, have sufficient marketing muscle around the world to get the full return from those products? A rule of thumb for these objectives today is at least a 2% share of the world market. And that is a share of market that will not be sufficient in years to come.

Only about 12 companies have critical mass by that definition, and my company, Rhone-Poulenc Rorer Inc., is the latest to achieve it. The merger of Rhone-Poulenc SA's human pharmaceutical business with Rorer Group Inc. last year was driven by the recognition by both companies' managements that we could only hope to compete effectively by finding a partner that filled the gaps.

Rhone-Poulenc was very strong in Europe but did not have a pharmaceutical presence in the U.S. Rorer did. Neither company alone had a strong enough research and development capability. Together, with an expenditure this year approaching $500 million, we believe we have. Together, with sales of about $4 billion this year, we are around 10th in the world, are in the top three in Europe, have a good position in North America and the developing world, and have an interesting foothold in Japan. We are also driving costs out of the business which will strengthen our competitive position as a global pharmaceutical company.

There is a saying that only two things in this world are certain: death and taxes. But I believe there is a third - namely, change. And nowhere is that more true than in our industry. Our environment is changing and will continue to change at an accelerating pace. So, too, will our industry. Whenever there is change, there are winners and losers. Who will the winners be?

In my opinion, the winners will be those companies that, first, internationalize their business to compete effectively on a global scale and, second, are innovative in everything they do, especially in finding new, cost-effective drugs that satisfy important, unmet medical needs and improve human health.
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Title Annotation:Special Section: Being a Global Leader; views of Robert E. Cawthorn, Chairman and CEO of Rhone-Poulenc Rorer Inc.
Publication:Directors & Boards
Date:Sep 22, 1991
Words:889
Previous Article:Four essentials of leadership.
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