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The Pharma Industry: Pressure to Reduce Costs Suggests Collaboration

         

The past decade has not been the kindest from a business cycle perspective for several industries.  Globalization and the continual migration of growth centers around the planet have required corporations to be nimble footed, able to switch strategies and make mid-course corrections, not always an easy task when size hampers the process.  One case in point is the pharmaceuticals industry, where many large companies enjoyed value appreciation nearing 3-digit multiples from 1985 to 2000, but now are facing enormous pressure to modify their business models to be successful going forward.

Healthcare reform and the recession have slowed growth prospects appreciably.  Current forecasts for growth over the next five years are in the mid-single digit range as current products that account for nearly $142 billion in revenue for the industry will come off patent and be subjected to intense generic competition.  The introduction of new products is not expected to fill the gap, thereby causing revenue growth to stall.  Large companies, if they have not already done so, will have to resort to cost cutting and off-shoring activities to remain competitive.  By 2020, most industry pundits believe that industry-wide collaboration is the only viable course to pursue for continued growth and profitability.

Like many others, the pharmaceutical industry is also focusing on emerging markets for promising growth potential.  International talent will be necessary in all disciplines, not necessarily ones that have taken a forex course or practiced for hours on a forex demo account, but ones acquainted with developing complex distribution networks in foreign markets and coordinating testing protocols with local healthcare providers.  “BRIC”, an anagram for Brazil, Russia, India and China, will become enshrined in Big Pharma terminology.  China alone is expected to experience annual growth in the pharmaceutical sector in excess of 20% for years to come.  Growth from emerging markets will go a long way to offsetting losses from the “patent cliff” over the next five years.

Challenges over the next decade will center on the following issues:

·         Healthcare Reform:  More coverage equates to more prescriptions.

·         The Economy:  Cost cutting and M&A activity must be absorbed.

·         Pharmacy Reimbursements:  Local payment models need revision.

·         Research & Development:  Collaboration needed due to huge capital needs.

·         Regulation:  Carve-out legislation related to generic drugs may constrain.

·         Drug Safety:  Recent episodes demonstrate that test compromises exist.

·         Technology:  E-prescribing can eliminate time-consuming process aspects.

The Pharma industry has benefited by deploying a fully integrated business model that allowed it to act alone and profit very handsomely.  This model is being subjected to enormous pressure and must change in order to succeed in the years ahead.  If the industry is to truly improve its testing protocols, reduce overall costs, and serve consumers in emerging markets more effectively, it must learn to transition from only producing medicines to also managing outcomes.  Healthcare payers, providers and patients are demanding this expanded role.  Collaboration with other organizations offers a potential solution for the road ahead.