Will Big Pharma Adapt Or Die?

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

I recently had the opportunity to meet a former CEO of a top 10 pharma company. During our meeting, we discussed the concept of “adapt or die,” something they know a little bit about from personal experience. Throughout this person’s career, they developed the ability to adapt to working in both the public and private sectors. Prior to gaining the top spot, this executive held positions with other Fortune 500 companies in totally different industries. This person continues to adapt, serving on company boards, working as a venture capitalist, and consulting. The pharmaceutical industry could learn a thing or two on the importance of adaptation.  

Innovation, Price & Pathways No Longer Enough

Historical growth in pharma was driven by prior innovation, price, and new pathways. In 1989, revenues in pharma equaled $338 billion. In 2010, these had climbed to $720 billion. Not bad. However, in 1989 there were 84 companies competing for this profit pool. In 2010, though the profit pool had increased by 113%, so had the number of companies competing for that pool, to 192, a 128% increase — meaning more companies competing for a smaller piece of the profit pie. It would seem generic pharmaceutical manufacturers are one of the largest beneficiaries of this changing dynamic. . In 2006, companies experiencing a patent expiration could expect to maintain above a 50% market share for their drug for nearly 9 months. Even at 12 months, the branded company still maintained a share only slightly below 50%. Fast forward four years to 2010, and IMS Health’s National Prescription Audit paints a rather bleak picture for branded pharmaceuticals. By the third month, after having lost patent exclusivity, branded pharmaceutical products can anticipate plummeting to around a 25% market share. At 12 months the picture is much worse with branded pharmaceutical companies approaching a near 0% market share. One of the reasons for the rapidity with which generic incursion takes place has been pharma’s diminished pricing power. In Germany for example, companies must prove a new drug’s value compared to alternatives. In the United States a government board evaluates Medicare reimbursement payment rates. In Spain, doctors must prescribe generics over brands. Other countries have similar government pricing initiatives. The past solution was to increase innovation so as to create more branded products. In 1980, it took seven years and cost $200 million  to get a drug approved . Twenty years later, the R&D time has increased to 15 years, and the cost > $1.5 billion. Even with the exponential increase in R&D spend which began to take place in 2006, the output of 39 new drug approvals (NMEs) in 2012 mirrors the number of approvals in 1997. Though this is nine more than in 2011, the prospect of spending more, getting less, and getting less sooner is a rather dismal prospect for pharma. Adapt or die.

Where Are The Opportunities?

There are a number of opportunities pharma can target for adaptation. For example, the changing roles of patients and doctors. In the past, patients were passive in their treatment, with no access to their own medical records, dependent upon family history and doctors as sources of information. In the very near future, patients will be more involved in their own healthcare, serving as active managers with access to their own health records, genetic risks, technology that provides ongoing digital monitoring, and unlimited expert information via the Internet. Doctors are moving from the position of unquestioned authorities to health advisors. No longer will trial and error be the means of treatment, but decisions by physicians will be more data driven than ever. Can Big Pharma capitalize on these changes? Yes and are already doing so. As patients take on a greater role in managing their own health, they will increasingly seek information through a variety of means, including social media (SM). Though the FDA has been reluctant to provide any guidance on how pharma can use SM prior to July of 2014, both Merck and Pfizer have Facebook pages and Twitter handles. This is a great start. But to truly be able to connect with patients requires a more personal approach. Some Pfizer folks, such as Craig Lipset, are doing this very thing. But I often wonder if a big company can truly be social. I recently had an interaction with an executive at a Big Pharma company who couldn’t get written responses to questions for an article through their legal department. This type of bureaucracy in Big Pharma is one of the problems preventing them from being able to connect with patients and doctors in a truly human fashion. I think Big Pharma needs to shed a few pounds. That is why the recent announcement by Pfizer (NYSE: PFE) to split operations three ways did not come as a shock to me. In July, the company announced it will be splitting up its three major internal businesses and shuffle management as part of the company’s preparation for a further break up. Pfizer CEO Ian Read stated, “This represents the next steps in Pfizer’s journey to further revitalize our innovation core.” Personally, I like the Pfizer move. On the whole, smaller companies can react more quickly to a rapidly changing market, and are typically more innovative. Time will tell if it will make them nimble enough to capitalize on the changing demands of patients, needs of healthcare providers, and demands of shareholders.