Pharma vs. Pharma

Jan 01, 2009

Increasing numbers of low-cost and substitute products. Intense cost pressures. Falling prices and profits. Dramatically higher R&D costs. Fewer new, innovative products. High-quality products with little differentiation. Single-digit sales growth.

These are characteristics of several key US industries: automobiles, telecommunications, manufacturing, apparel, airlines—and pharma. Like products, industries go through life cycle phases. And in recent years, just like others, pharma has matured into the Competitive stage of its life cycle. Most pharmaceutical executives understand the importance of product life cycles for brand planning. Similarly, they need to recognize the drivers and implications of industry life cycle stages. Moreover, understanding industry life cycles can help companies anticipate and benefit from market changes, ultimately providing a competitive edge in an increasingly competitive field.

The S-Curve

Pharma: A Life in Stages
Experts identify four industry life cycle stages, though these vary from industry to industry. For pharma, the life cycle can best be characterized as Commencement, Commercialization, Competition, and Commoditization. (See "Pharma: A Life in Stages".)

The life cycle typically takes the form of an S-curve. The introductory stage is a relatively flat line, reflecting the challenges of gaining customer acceptance (Commencement). As customers appreciate and demand the product, explosive growth occurs (Commercialization). That growth eventually tapers off as customer segments become saturated (Competition). Ultimately, sales growth stops and begins to decline as cheaper substitutes and alternative products appear (Commoditization).

Characteristics of the Four Stages of the Pharma Life Cycle
The US pharmaceutical industry—the world's largest, with more than $286 billion in sales—is currently in the Competitive stage. What's the telltale indicator? A relatively consistent decline in sales growth over the past decade, from solid double digits to single digits. In 2007, US pharma's annual growth rate hit 3.8 percent, the lowest since 1961, when the Commercialization stage began. Other characteristics of the Competitive stage: increasing marketing and R&D costs, more sophisticated buyers, greater competition, and decreasing profits. (See "Characteristics of the Four Stages of the Pharma Life Cycle".)

Driving Forces

Industries mature at different rates, depending on market-and industry-specific forces. Using Harvard professor Michael Porter's Competitive Structural Analysis Model, we can identify five forces catalyzing pharma's transition to the Competitive stage.

Reduced R&D productivity The industry's impressive run of developing new products peaked in 1996, when FDA approved a record 53 new molecular entities (NMEs). But over the past decade, pharma's pipelines have dried up: In 2007, only 17 NMEs were approved, though R&D spend had doubled. This past year, the US branded pharmaceutical industry launched fewer products than in any of the past 30 years. The lack of new, truly innovative products is the root cause of most of pharma's other difficulties, including greater generic penetration, higher cost pressures, slowing sales growth, and reduced profitability.

Sophisticated payers focused on costs The increasing power of managed markets in the US has accelerated the transition into the Competitive stage. Private and public payers have dramatically influenced the prescribing, pricing, and perception of branded drugs, while employing techniques such as restricted formularies, product tiers, and prior authorization to control their use. By forcing companies to compete for reimbursement access, managed care companies have negotiated dramatically lower prices for pharmaceutical products. Moreover, managed market entities have highlighted to consumers the high costs of branded products by introducing higher copays and more out-of-pocket payments for non-reimbursed products, resulting in additional pressure on drug costs.

Branded and generic competition Twenty years ago, it typically took years for a branded competitor with a similar mechanism of action to enter the market; now it's not unusual to have multiple, same-class competitors at the same time. In addition, the explosive growth of generics has left branded products with less than one-third of the US prescription market. Generic intrusion has been hastened by generic companies that aggressively challenge patents and increasingly bring their products to market even at the risk of lawsuits. According to Urch Publishing, new generics will threaten more than $100 billion of brand revenues in the US and Europe in the period from 2007 to 2011, with the most dramatic changes occurring in 2010–2012. The branded market has been further eroded by non-prescription options, including over-the-counter products and alternative therapies.

Intensified scrutiny and criticism of the industry No other US industry has as many stakeholders as pharma. Virtually every American uses ethical drugs at some point in his or her life. A variety of healthcare professionals and other entities are involved in assessing, prescribing, distributing, managing, and dispensing pharmaceutical products. Numerous regulatory agencies regulate and monitor most aspects of the industry. Other government officials, policymakers, and payers have direct or indirect oversight and influence. These and numerous other stakeholders—such as the media, lawyers, and politicians—have forced pharmaceutical companies to spend enormous amounts of time, money, and other resources in responding to their demands, resulting in reduced efficiencies, sales, and profitability.

Intense competition for market share The lack of new products compels companies to rely almost exclusively on existing markets and products. Regulatory restrictions have made it increasingly difficult to expand markets. Payers limit pharma's ability to raise prices, while patent challenges and generic products have reduced the duration of product exclusivity. Consequently, companies are left with only one real option to generate sales: grabbing market share from competitors.

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