After WW II the proprietary drug industry developed a blockbuster model supported by the patent system. Global markets and monopoly rents fueled these firms' stock prices for years, despite the growth of generic competition. But its model is becoming unglued. As blockbusters come off patent, the revenues and earnings from these drugs are becoming more difficult to replace. Some drugs have failed and have been scrapped. Pfizer's recent decision to scrap its hoped-for insulin inhaler blockbuster Exubera after investing more than $2 billion developing it was unprecedented, according to the Wall Street Journal. The patent system itself is under political and legal pressure.

So now these firms are going back to the drawing board and seeking ways to innovate their way out of the mess. Outsourcing, long the bane of the industry, is coming into vogue. Marketing is also being rethought. Big pharma spends one-third or more of its revenues in the U.S. on marketing compared with less than a fifth on R&D. Are sales reps and ad agencies really that innovative?

In addition to changing their R&D focus to encompass personalized medicine and other innovative techniques, proprietary firms are diversifying into generics, diagnostics, biotechnology, and other areas. In diversifying their portfolios, they are hedging their risks, but also increasing their chances of finding new innovations and markets.

Call it the Goldman Sachs model. That firm has prospered by having a good management team, by innovating, and by venturing into new markets. If one market get into trouble, it's so diversified and well managed that it can keep chugging along, innovating as it goes.

The Economist reports in "Beyond the Pill".