Taking a Hard Look at Pharma's Traditional Margin Model

For biopharmaceutical companies, it’s safe to conclude, based on expert sentiment and visible proof of colliding business and market forces, that margin pressure is no longer a cyclical concern to manage until more favorable conditions return. Instead, it is becoming a structural driver and one that is changing manufacturer decision-making on fundamental levels. That includes how they pay for innovation and allocate capital, for example, as well as strategies in shaping portfolios and preparing for increasingly unpredictable shifts in policy and regulations.

That is a central takeaway from AlixPartners’ 2026 U.S. Healthcare & Life Sciences Survey. Based on responses from 200 health care and life sciences operators, investors and advisors, the study found that regulatory uncertainty, intensifying competition, supply-chain disruption and weakening pricing power are straining the industry’s longstanding model of using high margins to support drug development.

“What we’re seeing more of is even some of the more profitable of our clients, at the higher end of the profitability segment, they are being more cost-conscious than they have in the past,” Chris Taber, partner and managing director at AlixPartners, tells Pharmaceutical Executive. “They’re starting to say, we need to look down the road at what is happening to margins and expect the pressure that’s happening today is only going to get greater.”

That does not mean companies are retreating from R&D. Rather, they are looking for savings across their operations that can be redirected toward higher-value pipeline opportunities. According to Duane Selby, also a partner and managing director at AlixPartners, the objective is “how do we find cost savings elsewhere in our business to reinvest in portfolio development?”

Artificial intelligence (AI) sits prominently within that equation. Pharma companies are exploring how proprietary data and AI models can improve target identification, increase the number of molecules entering development and sharpen decision-making before candidates reach expensive later-stage trials. Yet AlixPartners’ survey reveals a clear disconnect between adoption and returns: Nearly three-quarters of life sciences respondents identified AI integration as a priority, but fewer than 30% reported measurable return on investment across major applications.

For Taber, AI’s immediate strategic value may lie less in directly protecting drug prices than in “preserving optionality on margin.” If the technology improves development throughput or operating efficiency, companies can decide whether to reinvest those savings in R&D, expand into new markets or create greater commercial flexibility.

“The preference, at least right now, is getting more into the funnel is going to pay better dividends down the road,” adds Taber. “And so if you are able to take those cost savings and redeploy them into being more efficient with your operations from development through to the manufacturing and distribution, and into upskilling your labor force to be able to take advantage of the new tools that are available to them, I think that’s where we’re seeing the interest.”

The growing affordability debate makes such flexibility increasingly important. The Inflation Reduction Act, global reference-pricing pressures, payer and pharmacy benefit manager leverage and questions surrounding the sustainability of high-cost therapies are steadily limiting the industry’s traditional pricing freedom.

“We need to make sure that we don’t outrun the ability of the market to pay for these expensive therapies over the long haul,” says Taber. That tension is especially pronounced for highly individualized gene therapies, where the value delivered to a small patient population must be weighed against broader public-health priorities and limited health care budgets.

We need to make sure that we don’t outrun the ability of the market to pay for these expensive therapies over the long haul.

Policy volatility compounds the challenge. Nearly 45% of the survey’s respondents identified regulatory and policy uncertainty as a top sector distress driver. Yet fewer than half said they were significantly prepared for potential changes involving FDA policy, tariffs, most-favored-nation pricing, Medicaid or 340B.

Part of the readiness gap stems from the sheer unpredictability involved. Sudden shifts in FDA expectations can add time and unplanned costs to development. Changes in tariff policy can alter raw-material expenses and complicate the valuation of assets under consideration for acquisition or divestiture.

“When tariff policy comes in and you don’t actually know what your raw material costs are going to be predictably over the next couple of years, it is very difficult to price that asset,” Selby tells Pharm Exec. Such uncertainty can rapidly change expected earnings — and, by extension, the price a buyer seeking to in-license a product should be willing to pay.

That matters as pharma approaches another major patent-expiration cycle. The patent cliff anticipated in 2028 is also increasing the pressure to understand clinical-development economics earlier and more precisely. Companies need better forecasts of trial costs and commercial viability as exclusivity periods tighten, competitors multiply and pricing assumptions become less dependable.

Supply-chain strategy presents another balancing act. COVID-19 exposed the vulnerability of globally interconnected production networks, prompting efforts to onshore or regionalize selected capabilities. But the investment surge during the pandemic, Taber and Selby point out, also left the industry with underutilized manufacturing assets as vaccine demand subsided.

Across the challenges noted, AlixPartners found investors and advisors generally more optimistic than manufacturers about M&A, AI and transformation returns. Those closest to the execution recognize how difficult — and costly — closing the readiness gap will be.

According to the experts, pharma’s more entrenched organizations are not waiting for greater clarity.

“The better-run companies are trying to get ahead of this, expecting it to be permanent, and are being very aggressive in their cost management,” says Selby. “The ones that are waiting are going to get left behind.”