Business Strategy Figure 1: Patent Expiries Are Punching a Big Hole in Pharma’s Revenues
80 70
60 50 40 30 20 10
Abbott 0
AstraZeneca Patent expiries (2010)
Bristol-Myers Squibb
Eli Lilly GlaxoSmithKline Johnson & Johnson
Sources: Thomson Reuters, company financial statements, and IBM Institute for Business Value analysis March 2011. Total revenues in 2010
Patent expiries (2011–2014) of chronic disease is rising.3 Patients are becoming more demanding.
Plus new technologies and treatments are driving already high healthcare costs even higher.
Many governments have responded by trying to curb the soaring healthcare bill while improving access to care. Countries with socialized systems are transferring a bigger share of the burden to individual citizens. For example, in 2010, Germany passed a law increasing premiums for the country’s 72 million people with state health insurance.4
Conversely, countries with market-based systems are digging into the public coffers. The US is one such instance; the Affordable Care Act 2010, which aims to help the poor and elderly, will cost an estimated US$938 billion.5
Meanwhile, the medical community is pioneering new modes of healthcare delivery based on the continuous management of disease rather than expensive episodic care. Healthcare providers everywhere are also investing in electronic medical record systems, which will enable them to study how genetic variations, differences in treatment, and the like, have a bearing on disease.6
In addition, new entities—many of them from industries that have not previously played a role in healthcare—are entering the arena. Some of these entities, such as 23andMe,7
changed hands.9 But M&As have not proved a panacea. On the contrary,
one recent study shows that 50 % of mergers and 70 % of acquisitions involving large pharma companies have actually reduced the output of new molecular entities.10
Many firms have also invested heavily in developing treatments for cancer and rare diseases. There are now more than 1,900 cancer medicines in the pipeline.11
Plus, in 2006–2008, Big Pharma produced
more than half the orphan drugs approved by the US Food and Drug Administration (FDA)—up from a third in 2000–2002.12
However, this intense focus on a few therapeutic areas presages other problems. For example, there were some 12.7 million new cases of cancer in 2008.13
Merck Novartis Pfizer Sanofi
If all the oncology treatments in earlier stages of development were to reach Phase III, the number of patients required to test them—at about 5,000 per trial—would thus account for 59 % of the market. Moreover, therapies for very small populations cannot deliver the returns produced by mass-market medicines unless they are sold at extremely high prices—prices many healthcare payers cannot afford to pay.
are changing the way in which diseases
are identified and treated. Others are creating value through new business models, one such example being Dossia, a consortium of US companies that uses its collective influence to give employees better access to health information.8
Choices Past and Present
So how has the life sciences industry responded to these changes? It has been consolidating, repositioning itself both therapeutically and geographically, and cutting costs. Between 1999 and 2010, there were 70 mergers and acquisitions (M&As), with an individual value of more than US$1 billion, in the sector (see Figure 2). In all, some US$607 billion
104
Recognizing the limited commercial potential of specialized treatments, some traditional pharma companies have therefore hedged their bets by building generics subsidiaries, and some of the acquisitions they have made to beef up these businesses have served a dual purpose, as they have also given them better access to the growth markets where demand for good medicines is rocketing. (IMS predicts that sales in the 17 fastest-growing markets will increase by US$90 billion between 2009 and 2013.14
) Pharmaceutical companies have also wielded the axe. In the two years to December 2010, pharma laid off some 111,277 people.15
In short, many life sciences firms have consolidated to create larger, more complex organisations; piled into the same therapeutic areas; and cut back on investing in innovation. So, far from solving their challenges, such firms have quite possibly increased their risks.
iHEALTH CONNECTIONS
US$ billions
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