Strategies for Pharmaceutical Company: Risks and Diversification

This report examines the strategies employed by a pharmaceutical company, focusing on diversification through research and development (R&D). It acknowledges the high risks associated with R&D, including substantial investment costs, long timelines, and the uncertainty of success, citing the $2.6 billion cost for a cancer drug and the low probability of drug approval. The report also discusses the challenges of drug imitation and its impact on recouping investments. To mitigate these risks, the company is advised to diversify further through mergers and acquisitions to expand its portfolio across different therapeutic areas. The report also suggests tapping into new markets and geographic expansion as interim solutions. The analysis emphasizes that although R&D is a long-term strategy, it is crucial for the company to consider other approaches for sustainable growth.

Running head: PHARMACEUTICAL COMPANY STRATEGIES 1
Suitability of Strategies for the Pharmaceutical Company
Student’s Name
Institution Affiliation

PHARMACEUTICAL COMPANY STRATEGIES 2
Suitability of Strategies for the Pharmaceutical Company
The company utilizes diversification through research and development as its core
strategy. Although this approach has its pros it also has significant associated risks. R&D is an
investment in a prospective long-run stream of revenues arising from the successful sale of
innovative drugs. The success of an investment in pharmaceutical R&D is highly uncertain and
its realization may take long. Additionally, although the costs for R&D vary they are
significantly high. For instance, a cost estimate of $2.6 billion is required for R&D activities
associated with development and approval of a specific cancer drug (DiMasi, 2018). What is
more, the probability of failure of drug projects is also high. For approval for use by the FDA a
drug ought to undergo three stages of human clinical trials. In the first stage the safety tests are
conducted in small sample of healthy individuals. In the second phase the efficiency of the drug
is assessed further in a larger sample of individuals suffering from a specific condition targeted
by the drug. Lastly, large-scale clinical trials are conducted to determine its effectiveness and
side effects in the last phase. As such, only a small proportion of drugs qualify for approval. As
(Ding, Xue, Liang, Shao, & Chen 2011) outlines, drug R&D is a risky corporate endeavor
characterized with long duration, high technical spill over, reduced success ratios, and large
investments. The risk is aggravated if the business environment is not innovation oriented
allowing for imitation of drugs. The costs of drug imitation are low and it is easy and convenient
for rival companies to make a copy of the same drug without spending huge investments on time
and money. This means that the R&D Company will be less likely to recoup the investments
since prices would be driven down by competition (Frank & Ginsburg, 2017). However, the need
for new and improved medicines persist necessitating development of innovative products. As

PHARMACEUTICAL COMPANY STRATEGIES 3
such, great investment in R&D is a risky process but if appropriately handled and success
achieved may be a long-term strategy.
However, although investing in R&D is an appropriate strategy for long-term growth the
company should realize that it may take long periods of time for a successful innovation to be
realized. The company should thus consider intensifying their scope of their portfolio across
different areas through mergers and acquisitions. For instance, if the company has limited
presence in therapeutic area, building capabilities through R&D may not be possible in the short-
term. Therefore, to be successful in becoming a player in a major market through innovative
capabilities the company should consider acquisition as a swift approach of improving their
presence in a certain area.
The company appears to have alleviated the impacts of risk accompanying R&D by
adopting other diversification approaches. For instance, in addition to R&D it uses tapping into
new markets as a means of boosting incomes from the drugs already in existence. This is an
interim approach and solution for the company considering that their R&D efforts have not been
able to come up with a blockbuster drug. Additionally, through the strategy of geographic
expansion the risk created by fragmented and uncertain markets will be dissolved.

PHARMACEUTICAL COMPANY STRATEGIES 4
References
DiMasi, J.A. (2018). Assessing pharmaceutical research and development costs. JAMA Intern
Med. 178(4), 587.
Ding, J., Xue, Y., Liang, H., Shao, R. & Chen, Y. (2011). From imitation to innovation: A study
of China’s drug R&D and relevant national policies. Journal of Technology Management
and Innovation.
Frank, R.G. & Ginsburg, P.B. (2017). Pharmaceutical industry profits and research and
development. Health Affairs. Retrieved from
https://www.healthaffairs.org/do/10.1377/hblog20171113.880918/full/