Huffpost Business
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Inder Sidhu Headshot

Pharma's Surefire Formula: Simultaneous Optimization and Reinvention

Posted: Updated:
Print Article

Do you have fireproof shoes?

If you work in the pharmaceuticals industry these days, you've probably thought about buying a pair. Rarely has there been a time when so many legal, demographic and scientific changes have occurred at once. Taken as a whole, they constitute a burning platform that the industry cannot stand on much longer.

Take prescription drugs. Between now and 2016, nearly a dozen top-selling, brand-name pharmaceuticals will lose their patent protection, meaning other drug makers will be able to sell generic equivalents of Lipitor, Plavix, Zyprexa and other products at greatly reduced prices. According to a report from EvaluatePharma, more than $267 billion worth of sales are at risk for drug makers Pfizer, Eli Lilly, Merck and others.

Talk about an impetus for change. Throw in healthcare reform, increased regulation and other factors and you can understand why the pharmaceutical industry is feeling the heat all around it. So why aren't the nation's largest drug distributors sweating bullets?

The answer has a lot to do with the management of these organizations, and the dual ways they react to business challenges and opportunities, in particular. McKesson, Cardinal Health and AmerisourceBergen are three of the nation's largest drug distributors and each is enjoying a strong year despite the upheaval. How? By successfully navigating the ups and downs of their industry through a coordinated series of efforts to optimize and reinvent their businesses simultaneously.

Doing both is extremely difficult, especially for companies that have market share, a revenue stream or a business model to defend. Companies tend to do whatever it takes to preserve these -- often through a series of process and product refinements. While vitally important for improving efficiencies and correcting mistakes, optimization exercises can consume a company and prevent it from recognizing moments that call for greater transformation.

Despite the discomforts, an organization must step outside its comfort zone every now and then. This is precisely what the Big Three in drug distribution have done and why they are prevailing in the market and on Wall Street. Shares of all three companies trade near or at their 52-week high. And each has posted recent quarterly earnings that have exceeded expectations. How? By simultaneously fine-tuning and transforming.

Take Cardinal, the United States' 19th-largest industrial company, according to Fortune Magazine. Last year, the company racked up $98.5 billion in sales of drugs and related products and services. Not bad for a company that started off in another industry altogether -- food distribution. For nearly a decade in the 1970s, the company focused on the low-margin food distribution business before entering the pharmaceutical business through an acquisition. Since then, the company has acquired scores of companies, broadening its product portfolio and expanding its geographic reach.

In the past two years, the company made two moves that will reshape it significantly. The first was the 2009 spin-off of the CareFusion medical technologies business, which has allowed Cardinal to focus on its supply chain operations. The second was the 2010 purchase of Zuellig Pharma China, the largest pharmaceutical importer in the world's fastest-growing drug market.

During its various reinventions, Cardinal has continually optimized its operations with a series of process and technology improvements that have made the company one of the most inventive, responsive and competitive drug distributors today.

Ditto for AmerisourceBergen. Like Cardinal, AmerisourceBergen has grown through a series of acquisitions that have transformed the company from a sleepy Valley Forge, Pa., wholesaler into an industry powerhouse. Last year, AmerisourceBergen racked up nearly $78 billion in sales, which put it No. 27 on the Fortune 500.

To bolster profitability, AmerisourceBergn has invested heavily in "specialty drugs." These advanced medications for treating chronic or rare conditions such as cancer or multiple sclerosis require more sophistication to sell and more expertise to administer. Like McKesson and Cardinal, AmerisourceBergen expanded its capabilities through new training and education. It's also developed new business models that differ significantly from its traditional, branded-products business. As a result, the company has been able to move from the industry's burning platform in a bold way.

And changes continue. Later this year, company president and COO Steve Collis will replace current CEO R. David Yost when he retires in July. A longtime company veteran, Collis has already made significant changes in an effort to streamline decision making and better coordinate product development. Among other things, he's consolidated the company's reporting structure and eliminated many of the silos that separated different business functions.

So are the big drug distribution companies done reinventing? Hardly. The passage of the Patient Protection and Affordable Care Act of 2010 is major catalyst in the drug distribution business, one that will usher in even more change. "With 1,083 pages of legislation in the final bill to interpret and implement, this legislation marks the beginning of the reform process, not the end," says Cardinal chairman and CEO George Barrett.

His response? Bring it on. Like his peers in the drug distribution business, he's not afraid of a little reinvention now and then. Along with ongoing optimization, it makes life more interesting, not to mention more rewarding.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: Capturing Today's Profits and Driving Tomorrow's Growth. Author proceeds from sales of Doing Both go to charity. Follow Inder on Twitter at @indersidhu.