Big pharmas are reaching the tipping point. How can they survive?

"The global pharmaceutical industry is one of the great success stories in recent history." That's the opening line from management consulting firm A.T. Kearney's report Pharmaceuticals Out of Balance: Reaching the Tipping Point. The industry, the report continues, has created technologies, vaccines, and medicines that have significantly improved people's health and saved countless lives. And the industry's been successful on the business front, too, today generating revenues of more than $700 billion.

So what could be the problem? "Something is going wrong in today's pharmaceutical industry. Its current model may become irrelevant in the context of the 21st century's global healthcare needs."

The report lists the industry's well-documented problems: an unprecedented number of blockbuster drugs going off-patent, with a thin pipeline of new products to replace them; drug sales forecast as flat in most developed markets; waves of consolidation that have concentrated the problem but not solved it.

And as for the solution? Pharmaceutical companies, the report says, need to respond to changes in health-care systems by changing how they do business. The report identifies three tipping points:

A shift from therapies to service models. Drugmakers have always focused on the prescribing doctors. Now they need to start concentrating on the increasingly important payers: insurance companies and governments. And as payers begin to better understand what drives health-care costs, and how to reduce them, pharmas need to market drugs as part of a comprehensive treatment including better diagnosis, non-drug-based therapies, and patient compliance.

A shift from rich niches to global mass markets. Because the U.S. dominates the pharmaceutical industry, pricing and research-and-development often focuses on this market. But developing markets are emerging as the industry's engine of growth, the report says, so the industry will need to move away from high-cost Western niche markets to serve global mass markets at lower costs.

A shift from integration to making connections. Companies will need to focus on addressing real-world health issues and prove they can create system value, rather than marginal improvements in efficacy. For this to work, researchers and marketers will need to integrate closely. Sales force and supply chains will have to change to address the lower margins.

No doubt, the report is a little discouraging. And while it lists five steps pharmas can take, emphasizing the importance of timing as well, it ends with a quote from the former Chief of Staff and retired U.S. Army General Eric Shinseki: "If you don't like change, you're going to like irrelevance even less."

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