Pharma overhaul under way ahead of challenges

By Lewis Krauskopf

NEW YORK (Reuters) - Leaders of the world's largest drug makers are all under the hood working to overhaul a rusty business model, even as they differ over the right new parts.

Investors have accused pharmaceutical companies of failing to change sufficiently in the face of looming patent expirations to major products and lackluster returns on their research pipelines.

But chief executives at the Reuters Health Summit in New York this week bristled at charges of inaction.

"I do get upset when people say, 'Well, they have to change their business model,'" Merck & Co (MRK.N) CEO Richard Clark said. "There's not a part of Merck that's not changing as we speak."

"I definitely think there needs to be reinvention. I think it is being reinvented," Joe Pieroni, head of the U.S. commercial operations for Japan's Daiichi Sankyo Co (4568.T), said of the overall industry.

The industry expanded its infrastructure to sell mass-market blockbuster drugs, Pieroni said. Now pharmaceutical companies are switching their focus to specialty products while cutting expenses.

Indeed, AstraZeneca Plc (AZN.L) CEO David Brennan told Reuters the company has "more to go at" in slashing costs, as the Anglo-Swedish drug maker announced 1,400 job cuts this week.

The industry already sustained revenue losses due to generic competition, but the most severe period is yet to come. From now through 2012, many of the world's largest-selling medicines, including Pfizer Inc's (PFE.N) Lipitor, are set to lose patent protection which will pave the way for generics.

"Sometimes something truly drastic has to happen for meaningful change to take place, and that 2010-2011 (patent) cliff might be it," said Tim van Biesen, a partner at Bain & Co.

That change may be consolidation brought on by "mega-mergers" among weaker players in the industry -- a situation some believe inevitable, if undesirable.

"I can't see any logic in combining two poorly performing businesses when at the heart what keeps it sustainable is innovation," said Bayer BAYG.DE HealthCare's chief, Arthur Higgins.

Of the pharmaceutical business model, Higgins said: "It's very broken and very challenged."

No pharmaceutical executive may be more challenged than Pfizer's Jeff Kindler, who faces the loss of Lipitor, the biggest-selling medicine in the world. But the CEO played down making a big splash with an acquisition or merger just for the sake of making a deal.

"Business development, whether it's a small deal, a medium-sized deal or a large deal, is an enabler for strategies," Kindler said. "It's not a strategy in and of itself."

Kindler underscored Pfizer's new streamlined organizational structure which centers on five business units, including emerging markets, as critical to propelling growth.