Response of Pharmaceutical Companies to Biotechnology: Structure and Business Models

Using the framework of the business model developed in Rasmussen (2007b) this paper presents an outline of the traditional pharmaceutical company business model, and how it has responded to the new biotechnology. Biotechnology is a radical innovation which has a very different technological regime from the traditional pharmaceutical one. The manner in which biotechnology has been applied to the search for, and development of, biopharmaceuticals is quite different from the traditional approach. This new regime has resulted in the innovation process being substantially conducted by small specialist firms. However pharmaceutical companies have remained innovative, both with respect to the traditional small molecule based technological trajectory but also in their adjustment process to the new technology. The process of drug development is lengthy, uncertain and costly. Work by DiMasi and Grabowski (2007) indicates that to date neither the cost, nor the development period, of biopharmaceuticals was much different from than that for traditional pharmaceuticals. Accordingly the economics of biopharmaceutical development remains much the same as for traditional pharmaceuticals. To the extent that the economics of traditional pharmaceutical production have encouraged large fully integrated firms, then the economics of biopharmaceutical production may similarly favour large firms.