During the past five years, the global pharmaceutical industry has experienced a golden age of wealth creation, defined as total returns to shareholders—that is, the value of stocks and dividends (Exhibit 1). Swiss companies, which outperformed both the global stock market benchmark and their European competitors, participated strongly in this trend. Nevertheless, it was US companies that increasingly set the benchmarks, not only in stock value, but also in underlying performance, such as the innovativeness of new therapies, the number of licensing deals,¹ and sales of products launched.

McKinsey examined the prospects of the Swiss pharmaceutical industry and what it must do to remain competitive in an increasingly global economy. Exhibit 2 presents a measure of size (the worldwide market share of leading global pharmaceutical companies) on the horizontal axis and a measure of performance (market capitalization per market share point) on the vertical axis. Although Swiss pharmaceutical companies performed reasonably well along each axis, the exhibit clearly shows that their leading US competitors have meanwhile pushed further up and off to the right and thus gained a higher degree of market control.

A major factor likely to increase the value gap between the top league and the rest is the increasing importance of global blockbusters: the total global revenue of the top 25 prescription drugs is expanding rapidly compared with the rest of the market (Exhibit 3). By 2002, US companies will sell about 85 percent of the top 25, with revenue of $2 billion to $4 billion each. The major losers will be their European, including Swiss, competitors.

How should Swiss pharmaceutical companies respond? The first essential is to expand the marketing horizon toward co-development, co-promotion, and even out-licensing. The traditional mind-set was based on "selling my products out of my pipeline through my sales force in my markets." Now, however, leading pharmaceutical companies will have to position themselves as the preferred partners of both competitors and research firms.

Second, the rapidly increasing importance of the consumer-patient as a key health care decision maker will surely force European pharmaceutical companies to develop and apply new marketing approaches, such as addressing consumers directly through advertisements,² exploiting marketing opportunities on the World Wide Web, developing new uses for existing compounds, and managing much shorter product life cycles. Swiss pharmaceutical companies, for example, must lead the movement toward direct-to-consumer (DTC) advertising in Europe; weakness in this important area could leave even their regional home market wide open to competitors based in the United States.

Third, the Internet will revolutionize the delivery of heath care and drive major changes throughout its value chain. Swiss pharmaceutical companies must therefore develop innovative electronic-commerce strategies to exploit excellent value creation opportunities and to make the moves needed to defend traditional sources of value.

The most important threat these changes hold for Switzerland is the possibility that the country’s pharmaceutical companies might lose control of their destiny in the course of further consolidation and that their headquarters and important global functions could move elsewhere. Similar trends, it should be noted, are already having a serious effect in Scandinavia. To remain leaders in the pharmaceutical industry, Swiss companies should start to use external growth strategies such as licensing and comarketing, acquire skills in critical areas such as marketing, close the revenue gap in the United States (Exhibit 4), and selectively participate in the ongoing process of industry consolidation.

Moreover, though Swiss pharmaceutical companies operate on a global basis, they still rely heavily on Switzerland, where they locate their headquarters and much of their R&D, global marketing, and production resources. Whether it is still appropriate, strategically or tactically, for these companies to maintain such high levels of activity there remains to be seen. Production in other European countries has much lower factor costs, and regions such as New Jersey (in the northeastern United States) are prime choices for pharmaceutical industry talent.

Swiss pharmaceutical companies can respond to the challenge in several ways. Working together, they could increase the attractiveness of the Basle region for industry talent by developing pharmaceutical marketing campuses. They should also think harder about locating key activities in the United States, disaggregate infrastructure-related activities such as production and clinical development services, and either try to capture the leadership in these emerging service industries or allow other Swiss companies to do so.

At the national level, Switzerland should make itself the Continent’s best marketing training ground for pharmaceutical companies by deregulating its health care market more quickly than other European countries are doing. Finally, to make it easier and more attractive for talented foreigners to work in Switzerland, it should enhance the tax advantages it grants them and improve educational opportunities for their families.

If these moves are made in good time, Swiss pharmaceutical companies have a bright future in an increasingly competitive industry.