Is diversification really such a great idea?

Datamonitor has struck a blow against diversification in pharma. The market research firm points out that many Big Pharma firms are putting more and more eggs in other baskets besides prescription drugs. And we all know that a distinct group of companies are relying on diversification to cushion the blow when pharma's biggest meds fall off the fast-approaching patent cliff.

But the problem with that strategy, Datamonitor says, is that the margins on prescription drugs tend to be higher than those on other products. Hence, companies whose 2008 revenues came mostly from pharmaceuticals--AstraZeneca, Eli Lilly, Pfizer and Merck--had above-average margins. Companies whose focus on pharma was "intermediate," such as GlaxoSmithKline, Roche, and Sanofi-Aventis, posted margins that were below-average. So did diversified firms such as Bayer, Abbott Laboratories and Novartis.

So, Datamonitor concludes, trying to offset lost pharma revenues by moving into other businesses could just bring down profit margins. Rather than diversifying away from branded meds, companies that are pharma-focused should grin and bear the patent cliff while working to boost their margins. Already companies are working on this by cost-cutting and restructuring, but the research firm suggests that M&A with other drugmakers and biotechs is a more powerful strategy.

"In broad terms, Datamonitor's analysis indicates that moving towards and remaining in the branded pharmaceutical sector offers the greatest rewards," report author Pam Narang said in a statement. "[H]owever, it should be noted that the path a given company takes will depend very much on their starting position."

- read the Datamonitor release