Big Pharma: - In Need of Treatment?

Some sectors of the pharmaceutical industry are teetering on the edge of serious trouble. Like other ‘Big’ industries of tobacco or banking before them, the big pharmaceuticals are under pressure. Product withdrawals, bad press, lengthening pipelines to market, shrinking profit margins, pricing dilemmas and generics... and so it goes. INSEAD’s Reinhard Angelmar, Professor of Marketing and industry expert, takes a look at some of the major challenges looming large on the ‘Big Pharma’ horizon and how they are being addressed.

by Reinhard Angelmar
Last Updated: 23 Jul 2013

For many years, pharmaceuticals was the top-ranked industry in the annual Fortune 500 industry profitability rankings. Not any more: in 2004, pharmaceuticals were ranked only number 3 in return on sales, number 12 in return on assets, and number 13 in return on equity. And loyal shareholders are in pain: the average total annual return to shareholders between 1999 and 2004 was -1.4%!

The industry's business model, which used to produce superior profits and happy shareholders year after year, consisted of the following key components:

· High fixed sunk costs for discovering, developing, and launching new products

· A regular flow of innovative new products

· Payers willing to pay high prices relative to the low incremental unit product costs

· Patent protection that kept competition out sufficiently long to make the R&D and launch investments profitable

This business model has been coming undone. To begin with, the R&D costs of bringing a new molecule to market have increased significantly over the years. A recent survey estimated the average cost to be $802 million on average, up from $467 million in 1990. At the same time, the flow of new molecules has declined from a peak of 62 in 1996 to 26 in 2002 (FDA approved New Molecular Entities and Biologics), with a rebound to 35/36 in 2003 and 2004 respectively.

The decline in the number of new molecules has been accompanied by a shift in the nature of new molecules, with biotechnology-based large molecules accounting for a growing share of both launched and pipeline molecules. And these biotechnology molecules generally do not come from the R&D labs of big pharma, but from small, specialized biotechnology companies...

Click on See Full Text (on the right hand menu) to access the complete article by Professor Anglemar detailing current and future challenges faced by Big Pharma and the efforts of the various players to ensure a pole position (or mere survival) in the highly competitive pharmaceuticals marketplace.

INSEAD 2005

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