Good things can’t last forever. Commerce is constantly changing, with ebbs and flows in revenue a natural part of conducting business activity. Unfortunately for the pharmaceutical industry, one of these low periods has emerged again. Due to an assortment of factors, slow revenue growth appears to be the norm throughout the industry for the next five years.
Several variables play a role in this pessimistic projection. Increasing price and cost pressure, regulatory changes and expiring patents are all culminating to shrinking margins in the industry. “Pharmaceutical markets such as Europe and the United States are stagnating due to rising price pressure, regulatory changes in the healthcare system and more stringent admission requirements for new drugs,” explains ‘Roland Berger’ consultant, Martin Erharter. Research and development costs, for instance, have risen by more than eighty percent globally over the past ten years. This is exacerbated by the fact that the number of new product launches has dropped by forty-three percent. Therefore, nearly half of the drug companies surveyed believe that the Return on Investment (ROI) in the area of R&D is relatively negative. Until greater efficiency in research and more collaboration with third-party providers arises, revenue growth is unlikely to follow.
Expiring patents will also increasingly hurt the prospects of the sector’s biggest and most influential firms, such as Pfizer. Like many other drug makers, Pfizer is suffering as less expensive generic versions erode the sales of their older drugs, which are no longer protected by patents that once brought in billions of dollars yearly. A case in point is the cholesterol drug Lipitor; this drug lost patent protection in November 2011 after nearly a decade as the world’s top-selling drug. Pfizer’s third-quarter profits accordingly dropped nineteen percent as competition from generic drugs decreased sales and lower operating expenses failed to offset higher taxes and charges.
According to a study by Roland Berger Strategy Consultants, nearly three in four companies believe their industry is in a strategic crisis. For this reason, 78% of the study participants are of the opinion that pharmaceutical companies must adjust their business models to fit the new market requirements. This includes focusing investments on the high-growth emerging markets, which will make up almost 40% of the global pharmaceutical market by 2016. This view is shared by many pharmaceutical companies: Almost half of those surveyed are willing to relocate their administration, R&D and sales departments to emerging markets. In this context, Roland Berger’s new study shows four constellations driven by market type (mature or developing) and lifecycle of the products (established or innovative).
A lack of funding further stands as a challenge towards revenue growth. This is particularly true for start-ups firms in emerging markets. The most likely sources of funds in emerging markets are government grants and venture capital; this is the case in the relatively new industry in India. This is problematic because government grants are difficult to secure; and due to the expensive and uncertain nature of pharmaceutical research, venture capitalists are reluctant to invest in firms that have not yet developed a commercially viable product. So while the major players may be keen on making inroads in emerging markets to drive growth, local firms will not be as successful in capitalizing.
“The global pharmaceutical industry is facing a major structural shift. The ways to drive growth in the past will not be as effective in the modern market. It will take time for the majority of drug firms to take the appropriate steps to adjust to the new business requirements. This means re-aligning business models to fit the various product/market constellations and their requirements is imperative for ensuring business success.” says Michael Dohrmann, Partner at Roland Berger Strategy Consultants.
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