Drug prices have gone up significantly in the last several decades. According to an analysis conducted for Bloomberg, since October 2007 the price of brand-name medications has jumped, with prices doubling for dozens of recognized drugs that aim everything from multiple sclerosis to cancer, blood pressure, and even erectile dysfunction while the consumer price index rose just 12 percent throughout the interval. Per the article, the pharmaceutical sector made spectacular margins well before banks, autos, oil & gas and media businesses. The society expects the industry to save lives and relieve suffering rather than profiteering from the old and weak. But this profit trend may not last long. There are fundamental challenges faced by the industry that could be why it’s hoping to shore up its short-term profitability.
What are these changes?
The business model for pharmaceutical firms relies on developing and launching new drug products every few years. In the interim years, they prolong the life of the existing patented products through extensions. This method of product development is no more sustainable. Look at some of the pharmaceutical and biotech company’s product pipelines; you’d find that the revenue and profit potential is considerably lower than what was 10 to 15 decades back. Why is this happening?
- Expensive to develop drugs for peripheral diseases: Medications for the majority of the common conditions have been discovered. R&D investments are focused on uncommon Take for example Ebola, it is a terrifying disease but just infected a small population. Drug development and testing for such small disease incidence are costly as a result of the difficulty in getting adequate patients for clinical trials. Also, these medications have reduced earning potential as just a small population will require it. A recent study found that new drugs are twice as expensive to develop and are likely to generate half the revenue of earlier blockbusters.
- Pushback from regulatory authorities on product extensions: A large number of drug patents have active components (primary ingredient) which are out of patent. Pharmaceutical companies attempt to extend the patent protection by changing delivery device or adding some ingredients to make it faster acting. Though regulatory bodies have been happy to provide patent extensions on those previously, there is now increased pushback from the customer groups and regulatory authorities on such practices.
- Declining demand for pricey / patented drugs: Though pharmaceutical firms seem to increase their prices at will, governments, insurance providers and patients are moving away from expensive medications.
- Move towards generics: Generics are becoming popular as more and more drugs are coming out of patent. With competition from generics, the revenue of drugs drop by 90% and following the patent expiry. There’s a concern about generic producers increasing their prices as the sector consolidates. This is most likely a short-term issue. Since the product know-how can be obtained, nothing is stopping other generic firms from entering the market if they find the pricing attractive.
- Dip in government reimbursements internationally: Government reimbursements are a vital source of revenue for pharmaceutical companies. It not only determines how far Governments are willing to pay for different drugs but also sets benchmarks for insurance companies.
- Difficulties in penetrating developing markets: With most countries signing WTO agreements, pharmaceutical companies were anticipating increased revenue from emerging Developing countries are concerned about the impact of patented products on their budgets and the ability of their citizens to afford such costly drugs. To deal with these issues, many nations have created restricted drug list that keeps the patented drugs outside. Pharmaceutical companies have managed to become part of the personal insurance market, but these are not having a significant effect on their revenue and bottom line results.
How is the industry reacting?
The industry is attempting to tackle these issues through traditional ways. There is a general focus on cost-cutting. Headcount reduction is usually the first and has been happening for some time. Additionally, there is a good appetite in the market for merger and acquisitions. Pharmaceutical companies are buying start-ups to strengthen their product pipeline. Though these steps can help in bolstering short-term profitability, they’re not sufficient to cover the core challenges facing the business.
How to bring back glory days for the pharmaceutical industry?
There’s a need for pharmaceutical companies to think out of the box, by listening to their customers and stakeholders. Increasing short-term pricing and lowering structural expenditure through consolidation or transfer to low-cost countries is not likely to give the desired competitive advantage against generics. It is going to alienate the goodwill they will need in the market. Perhaps they could think through their business design and come up with a fresh means of doing business. Key areas to concentrate are:
- Innovation: The market isn’t asking for drugs for newer ailments. The days of thousands of people dying from the plague, cholera, or other epidemics are long gone. People live longer, and they are more health conscious than before. What’s required now is an overall focus on affordability. Pharmaceutical companies gain by focusing on how best to decrease the total cost of the drug (total treatment cost instead of only the drug price). It might require them to partner with medical care providers to identify means of reducing the cost to patients and authorities.
- Sales & Marketing: Traditional heavy focus on sales and branding are not working. Some of the tactics have reduced the credibility of the sector bringing in constraints from the regulatory bodies. There’s a need to rethink the value of the money spent on marketing.
- Manufacturing and Distribution: Drugs are produced through big batch processes. The focus is on control and ability to explain it to regulatory bodies. There’s a reluctance to introduce the newest practices in manufacturing and supply chain. The hesitation comes from the anxiety that change will present new variables that can cause poor regulatory reviews if something goes wrong. In turn, it has created an industry culture that can’t react to market changes quickly thereby producing colossal waste (expired medication and raw materials). The industry would benefit by introducing smaller / distributed manufacturing and demand-driven planning (instead of mostly relying on forecasts).
- Sourcing: Pharmaceutical companies spend a lot of money on services. These include wholesale arrangements, contract manufacturing, and marketing services, . Due to the sensitivity of those relationships, sourcing teams are typically not involved. Pharmaceutical companies will benefit by using latest sourcing techniques than employing conventional negotiation strategies.
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