do big pharma and big oil share a common goal?

In the pharmaceuticals industry, as in the oil and gas industry, reaching long term economically sustainable businesses in challenging times can be a complex business. The significant hurdles in getting a drug to market mean that pharmaceutical companies invest more heavily in research than any other industry – £11.5 million every day.[1] Only 1 in 5000 drugs being tested by companies end up ultimately receiving FDA approval and being certified for market use, because researchers have to test thousands of compounds before they can find a few with a potential clinical use against a particular disease.[2] Even drugs which show promising results in the early stages of development can easily run into terminal problems in later trials, which amounts to an enormous waste of time and money for pharmaceutical companies.

The high attrition rate of drugs in the pharmaceutical industry is very similar to the myriad of wasted time and sunk costs that seem to be the norm rather than the exception in our own industry. Given that projects in both industries already take years of hard work to come online and often have tight profit margins, oil and pharma companies need to rigorously plan ahead to avoid sunk costs and over-blown budgets wherever possible, or face the prospect of substantial losses.

This is something that they have not always done well. Like the oil and gas industry, Big Pharma went through a period of high spending without meticulous regard to forward planning. ‘Bigger is better’ was the guiding precept for several huge deals in the early noughties, as was the case with GlaxoSmithKline and Pfizer’s acquisition of Warner-Lambert for $90 billion in 2000.[3] Such deals done on the grand scale would often leave the acquiring company with an unfocused and ill-fitting collection of assets.

More recently, pharmaceuticals mergers and acquisitions have been more targeted, something the oil and gas industry will also be looking to achieve as it looks to M&A to boost exploration and replenish reserves, particularly if the oil price settles around $50 and / or demand for oil starts to rise.[4] Last year’s $20 billion asset swap between GlaxoSmithKline and Novartis was an example of ‘precision’ M&A, with both companies successfully strengthening core areas while simultaneously trimming excess ‘fat’. In an industry where so much investment can unexpectedly be marooned by external causes, Big Pharma appears to be moving to an understanding that planning business ventures with the end in mind and having a lean and supple business model are key factors in ensuring long-term growth and profitability.

The same goes for innovation. The pharmaceuticals industry has been quick to realise that cutting-edge digital technologies offer exciting new opportunities for improved service quality and business growth. The McKinsey Global Institute estimates that Big Data strategies in the pharmaceuticals industry could generate up to $100 billion a year across the US health-care system by helping companies to better identify new potential drug candidates and develop and approve them more quickly.[5] In Big Pharma as in oil and gas, the simplification of processes and reduction of costs which cloud-based computing can bring the industry, can help companies not only to survive, but also to thrive.

For us, the io way means being able to identify where cost-efficiency measures can be made. Maximising efficiencies is an integral part of streamlining oil and gas companies’ business models and allowing them to prosper in challenging industry conditions. Even the most bullish oil analyst will concede that the golden days of $100 oil are over for now, and companies need to focus on undertaking projects which can deliver results whatever the level of the oil price might be.

This is not to deny that in this era of low prices, oil companies are having to contend with new financial challenges which compound the already staggering complexity of the extraction process. But with new challenges also come new opportunities. io believes that being able to meticulously plan ahead by identifying cost-saving strategies for both oil exploration and production will not only make oil firms more resistant to the industry challenges of today, but will free up more capital for the proverbial rainy day tomorrow. In both the pharmaceuticals and the oil industry, getting it right at the start will reap rewards further down the line.

[1] http://www.fdareview.org/03_drug_development.php
[2] http://www.medicinenet.com/script/main
[3] https://www.ft.com/content/
[4] http://www.bloomberg.com/news/articles/2016-09-20/oil-majors-must-count-on-m-a-to-replenish-reserves-woodmac-says
[5] http://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights