Major pharmaceuticals have developed and commercialized blockbuster drugs. However, they have not retained these drugs in their portfolio after the patents expire, as they have been busy developing new drugs. Producing “patent expired” drugs has not been part of their strategy.
Due to high profit margins, Generics have taken over the patent expired drugs and have lately made every effort to take over the patented drugs through litigation. With aggressive entry of Generic producers from
With the drying of blockbuster pipeline, escalating clinical trial costs, and relentless pressure of Generics to capture the market, Ethical drugs producers are trying to implement strategies to reduce their costs and retain their stronghold on the drug development chain. Some of the strategies being implemented are as follows:
- Outsource drug development·
- Outsource active pharma ingredients (API) manufacture and formulations
- Synergize small molecules and/or biotech combinations
- Acquire small biotech developers
- Whatever else works i.e. collaborations
Some of these strategies might work as a short term fix to retain profits. However, the long-term impact of these strategies is going to be significant. The biggest consequence is going to be the shift, disappearance, and/or reduction of knowledge base from “Major Pharma” companies to the outsourced companies. Since the “outsourced companies” are in low cost countries, they have dual benefit of the above relationships. It makes them intellectually and financially stronger to become formidable generic competitors. We are beginning to see the happenings of this.
Generic pharmaceuticals are enjoying what I will call best of all worlds. They are basking in an unprecedented growth. I do not believe any of the financial analysts and pundits would have predicted this in the beginning of 2005.
Customers would like to have drugs at lower prices. Generics are able to fulfill this need in every market as a result the demand for generic drugs has increased. This surge has increased generic business dramatically in the recent years.
They have used these profits to grow organically and acquire sites that are being shed by API producers and formulators at significantly low costs. They have also been beneficiary of technology and intellectual property that comes with these acquisitions.
Strategies (1) being implemented by the Generic companies are unconventional and this is causing additional turmoil in the Pharma field.
Future and strategies:
Pharmaceutical companies have achieved handsome profit margins by inventing new drugs and by producing generics. Customers have paid for every inefficiency in the development, clinical testing, manufacturing, and supply chain. Since the pharma companies have been able to make respectable profits, they never saw a burning need to minimize costs of each step. Everyone has been comfortable in their respective arenas. However, the drying of the blockbuster pipeline and Generics trying to encroach on the playing field of Ethical companies is changing the market dynamics.
The price we pay for the drugs in US and some other countries are not market driven but driven by what the market can bear. Many consider these prices high and are getting low cost drugs every way they can e.g.
If the major pharma companies are not able to develop new blockbuster or biotech drugs, they could start making generic drugs. This could lead to consolidation and formation of “Mega” companies. My definition of “mega” merger is combination of an Ethical and Generic company to be players in both markets. These mega companies not only will develop new drugs but they also will have to make every effort to retain the patent expired drugs as part of their portfolio. If this happens, every step of the supply chain (especially manufacturing technologies) would be critically evaluated and methods implemented to reduce costs. The business model of mega companies could be a combination of market and consumer driven companies trying to maximize their market share. This should reduce global healthcare costs.
Government of India (2) has announced an innovative drug discovery program combining global IT firms (Sun Microsystems), researchers (Royal Society of UK, Imperial College of London, Medicine Sans Frontiers etc.), companies, and young minds at India’s scientific laboratories to invent drugs at a fraction of the cost of a multi national company (MNC) developed drug. An open platform of drug research like Linux development is an interesting and innovative concept and path. Success here would genericize and commoditize pharmaceuticals and add additional pressures on pharma companies to implement technology improvements to reduce costs. Other business models will emerge and it would be interesting. I expect that better than 50% of the pharmaceutical market would be a commodity market in the next five years and we will see prices drop.
(1) Generic Antidepressant May Affect Wyeth http://www.forbes.com/feeds/ap/2007/12/20/ap4461011.html?partner=alerts accessed Dec 20, 2007
(2) Govt to rope in young minds to invent cheaper drugs http://economictimes.indiatimes.com/News/News_By_Industry/Healthcare__Biotech/Govt_to_rope_in_young_minds_to_invent_cheaper_drugs/articleshow/2635842.cms accessed Dec 20, 2007Girish Malhotra