Pharma has come to the end of the blockbuster era. A new era that is beginning will reward focus and efficiency in R&D, commercial development, supply chain, and sales and marketing. Overall, there will be greater use of partnerships
and alliances, more outsourcing, and more effective use of information processes and technology. The result: A new business model that will require
the current industry to undergo a significant amount of operational right-sizing of costs and capacities (both human and physical).
End of the blockbuster
FDA drug approvals have fallen to the lowest level in years, with only 23 NCE approvals in 2007. Part of this is due to higher research costs and lower research productivity. But in addition, regulatory and safety concerns, along with increased payer focus on the value of new therapies, have delayed filings, or even caused them to be canceled outright. There is a genuine push toward drugs tailored to subpopulations. Such products can potentially have better outcomes for certain patient populations, but they are not likely to work well for broad populations. By definition, the markets for tailored drugs will be smaller—in patient numbers and dollar value. Finally, with major products going off patent, payers increasingly looking to control costs, and generics manufacturers
ramping up their efforts, the use of generic drugs is increasing. Biopharmaceutical
companies will find it hard to maintain profitable growth when replacing revenue from blockbuster products with multiple, smaller, and more personalized products.
Alliances and acquisitions
To improve pipeline prospects, major pharmaceutical
companies are supplementing internal R&D efforts with partnerships with smaller biotech firms. Many large pharmaceutical companies have restructured their operations to mimic the collaborative environment of the smaller biotech firms. There’s a trend among pharma companies toward acquiring rights to targets at an earlier date. The result: The number of deals has gone up this decade, while the average deal size is falling. Finally, non-US players, especially Japanese and European companies, are increasingly active, taking advantage of the current macroeconomic
situation with its lower market multiples and weak dollar. All these efforts have increased the number of compounds in early development, from 2,000 in 2000 to 2,700 in 2008. But despite the increases in pipeline size, we have not yet seen a rise in new product approvals.
Behind all of these trends—and compounding their effect—is the rising cost of bringing a compound to market, currently estimated by the Tufts University Center for the Study of Drug Development at $1.2 billion in 2008, up from $800 million five years ago. With the demise of the blockbuster model,
additional focus must be paid to costs, as revenues per product are expected to decline.
No functional area is immune to the pharmaceutical industry’s restructuring. Seeking to move products more quickly through the development cycle and regulatory approval, R&D organizations
are thinking about lifecycle management and portfolio issues earlier in the process. Most major pharmaceutical companies
are trimming staff, assets, and facilities costs while
increasing reliance on contract manufacturers, contract clinical research organizations, and contract sales organizations. Outsourcing
to low-cost regions such as India, China, and Eastern Europe will continue. Increased outsourcing will yield lower costs, but also will increase the potential for risk (less control of suppliers, materials, and training), as well as less flexibility when it comes to responding to business changes. Managing these networks will challenge the managements and business processes of leading companies. They will require more integrated
and more reliable information systems.
Finally, the industry will need to rethink how best to reach physicians (its traditional customers) while addressing the growing needs of managed care and hospital customers. And as patients and patient advocacy groups take greater interest in all aspects of managing their diseases, companies need to do a better job of reaching them. This means greater emphasis on brand planning and messaging. Overall, sales and marketing
activities will need to be refocused and restructured.
Pharma companies want more out of consulting firms than the ability to write reports. They want real results along with embedding
capabilities, tools, training programs, and management skills. They are looking for new models of engagement that demonstrate
flexibility in staffing, pricing, delivery, and the like—including staff augmentation and shared-benefit pricing models.
Michael Eckstut, Principal and Global Life Sciences Practice Leader and Nancy Bergsteinsson,
Manager, Life Sciences Practice at Archstone. They can be reached at email@example.com or firstname.lastname@example.org.