Big Pharma’s risky future

Big Pharma's risky future

The future of Big Pharma is looking more uncertain. As this piece in Booz & Company's Strategy & Business journal points out, it's going to be a lot harder and the big question is whether they can survive at all in their present form.

"For one thing, pharma companies in the past were able to develop drugs for health problems that had never before been addressed. When anti-cholesterol drugs were first launched, for example, they created entirely new, multibillion-dollar markets. Today, in contrast, few such unaddressed categories remain, meaning most newly developed drugs will be competing with existing ones. In addition, the pharma companies are feeling pressure from every direction – from regulators setting the rules for drug effectiveness and safety, from managed care organizations and employers pushing back on prescription-drug costs and reimbursement, from competitors coming to market with alternative brands or generics, and from disgruntled shareholders. Internally, the number of molecules in pharmaceutical company pipelines is shrinking, and the risk/reward ratio for research and development outlays is worsening. Overall, these trends have resulted in lower revenue, reduced profitability, and declining P/E valuation ratios for most major pharmaceutical companies … There is no consensus about what comes next, as evidenced by the different strategic moves the major companies have made with mergers, acquisitions, and divestitures in recent years."

The Lab Soft News blog concurs and points to several reasons. The companies are spending an increasing share of their budget on governmental regulatory processes; the large staff devoted to this area provides large companies with a competitive advantage over smaller ones but is useless when their drug pipeline dries up. Big Pharma is also comprised of large bureaucratic organizations that tend to stifle innovation. The managers in such an organizational structure protect their budgets dedicated to established products and tend not to favor new, risky drugs. Big Pharma tries to sustain the earnings and growth demands of the stock market by merger which is not a long term strategy. The companies have also developed broad expertise in marketing. As a result, they are eager to sell consumer products with predictable profits and less risk than prescription drugs.

Big Pharma is now turning to the automotive industry for advice. As reported here, the car industry has gone through similar upheaval and has drawn insights from the experience. "The trend may stem from the rising pressures on the pharmaceutical industry, as patents for big name brand drugs expire and the regulatory landscape makes it increasingly difficult for new drugs to enter the market. "The good old days of the pharmaceutical industry are gone forever," according to a report issued by management consulting firm McKinsey last week. The situation parallels that of the automobile industry not too long ago, which is precisely why pharma companies are coming here for advice. The depressed economy forced car manufacturers to streamline the process and cut significant costs by outsourcing and down-sizing. While carmakers once did much of the work in-house, they now take on a more administrative role, coordinating contractors and suppliers who do the bulk of the work."


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