The Pharmaceutical Industry. Some Analysts Suggest That the Industry Is Facing the Perfect Storm. Why?

The Pharmaceutical Industry. Some analysts suggest that the industry is facing the perfect storm. Why?

The core business model of the pharmaceutical industry has not changed in decades, with majority of profits fueled from drug sales. Global pharmaceutical spending has been steadily increasing, projected to reach new heights ($1.3tn) in 2018 (Ward,2015) with positive R&D returns for the first time since 2010 (Deloitte,2014). The outlook of big pharma might seem positive, but the new age of digital technology and changing demographics does expose significant issues and challenges.

        A significant majority of pharma incumbents still utilize an outdated shareholder approach, maximizing drugs sales. Aging population, with number of 65- year olds projected to triple by 2050 (Ward,2015) and growing wealth in the developing world creates insatiable demands for accessible modern medicine. Furthermore, this shareholder strategy utilized incurs costly, protracted and risky drug development. Only 7% of drugs reach early stage trials, and only 25% of total health spending, according to Jimenez, actually focuses on the patient. The drug prices keep soaring and are at unaffordable levels for patients. Indeed, according to Chas Bountra, “the industry is financially falling apart because we don’t know how to discover drugs in an affordable way”.Big pharma companies act like corporate institutions, hiding their insufficient and incapable business model through M&A, when a large part of actual innovation and development comes from independent companies and startups.                                        

The challenge lies within the fact that large pharma companies are yet to figure out how to create value by shifting their R&D and innovation towards the patients and communities (stakeholder strategy). R&D infrastructure is currently complex and fixed, with 60% of pipeline revenues still coming from acquiring technology and know-how of startups via acquisitions (Deloitte, Julian Remnant). Almost a half of FDA’s approved (2015) medicines came from small biotech companies, where medicine is treated differently, focusing on patient (stakeholder) health. In this context, pharma companies need to focus strategy on structure in their business model. Prioritising in this regard and in the context of Porter’s five forces (Porter, 2008), could alleviate pressures from new entrants and substitutes, while at the same time significantly save on R&D investment.