Pharmaceutical companies dream of blockbusters: drugs that quickly run up sales of more than $1 billion. But developing and marketing such drugs has become so expensive that only the largest companies can afford to do so; hence, the recent string of mergers within the industry. Notwithstanding such high-profile combinations as those between Glaxo Wellcome and SmithKline Beecham and between Pfizer and Warner-Lambert, the pharmaceuticals industry hasn’t consolidated very much: the 20 biggest competitors combined still have less than 60 percent of the global market. The next 50 or so companies, with revenues of $500 million to $3 billion, increasingly look like candidates for acquisition, mainly because their performance trails that of the leaders. If current trends continue, the global market share of midsize companies could shrink from 20 percent in 1999 to just 10 percent by 2010 (Exhibit 1).

Yet the midsize pharmaceutical companies do have a shot at reviving themselves. A clutch of emerging technologies would make it rewarding for them to develop and market drugs that tackle the less prevalent diseases big companies tend to overlook. At the same time, it will become easier—and more profitable—for midsize companies to in-license drugs developed by other companies for small-scale...