By Ranjit Jose, Model N
While the organizations holding reign as the top pharmaceutical companies have remained fairly consistent over the years, the nature of these companies is seeing significant shifts. Post-recession strain on budgets, the steepness of the patent cliff and the expansion of opportunities in the cost conscious emerging markets are among the many factors that have influenced the dynamics of the market. The big pharmaceutical players, and the small ones alike, are making adjustments to their businesses in order to remain competitive and we’re likely to see some dramatic alterations to the lists of the top players in the coming years.
The pharma companies that find the right mix of products to serve the needs of patient populations, meet payer expectations and, ultimately, make a profit will top the list. Getting there requires these companies rethink pharma as they know it and control their ability to price. Let’s first take a look at the key factors that are driving widespread change in the pharmaceutical industry.
Mature Markets Cut Pharma Spend
Rising healthcare costs, pressure from increasingly cost-conscious payers and the ongoing financial crisis have caused cuts to pharma spend in many mature markets. This is a trend that first shown as slowing spends in mature markets, but it has finally reached the point where cutting spend is the new normal. This has resulted in a renewed focus on emerging markets, and the promise of sales growth in up-and-coming countries. Drug sales in emerging markets are expected to grow by 12 percent a year on average to 2016, compared to the global pharmaceutical market at 4.5 percent annually. However, emerging markets are not without their own challenges as national payers view pharma companies under a microscope and impose stringent price controls and look for ways to scale value-based pricing.
Abundance Of High-Profile Generics
The protected small molecule segment of the industry used to be more attractive because they were growing faster and returning higher profit margins than anything else. But this is no longer the case. Loss of exclusivity (LoE) of blockbusters has led to more high-profile generics and austerity measures have spurred the push for their usage. As a result, generics are now growing much faster than the protected sector. In fact, according to IMS, it’s typical for greater than 50 percent of market spend in high-growth emerging markets to come from generic products. Naturally, the leading pharma companies are broadening their portfolios in an effort to combat the impact from LoE of their key blockbusters. Their attempts at diversification include generics, diagnostics and devices and consumer health products aimed at boosting the bottom line.
Fewer Blockbusters And The Move To Specialty Care
In addition to focusing on a more diverse portfolio, pharma companies are simultaneously moving away from pure innovation. Traditionally, pharma leaders have been R&D based companies, but investing in the next blockbuster is not a viable strategy any longer. The unmet needs where pharma companies can truly innovate are not likely to be in primary care because low-cost generics generally meet the needs of patients from the payers’ perspective. What this translates to is a greater focus on specialty care products for smaller patient populations.
Future top pharma companies will not be the research-led players that historically dominated mature markets. Though their names may remain the same, the companies will undergo formidable change to survive these market shifts profitably. In short, pharma companies will need to reinvent their business models to varying degrees. Some may focus on partnerships to bring specialty care products to market, while others may turn to mergers and acquisitions. Still others, may concentrate on expanding their footprint.
Pricing Pressures Will Persist
Whatever their business models, one universal truth will remain—pricing pressures will permeate the global market and impact margins.
Along with the market shifts that are driving pharma companies to reinvent their businesses, they are concurrently dealing with increasingly complex pricing and discounting situations. All things considered, price erosion can propagate now much faster worldwide than it used to. In addition, with the rise of complex discounting and contracting schemes being pursued, many of these companies have difficulty having a holistic picture of their Gross to Net and margins by product, segments, geographies etc. Half of pharma companies self-report that they are under-equipped to enforce their global pricing and discounting strategies. This is exacerbated by the fact that in many of these cases, they don’t have the needed visibility and control processes to help with their business decisions.
Transitioning From Macro View To Systems
To maintain market leadership, pharma companies need better controls in place that will aid them in making the transition from a macro view of their markets and products to a systems approach. When looking at how your organization will adjust its business model moving forward, it’s crucial to plan for these controls. Let’s take a look at some key factors to consider.
First, pharma companies need to strike a balance between being nimble and having absolute control over pricing. In this fast changing market, it’s often beneficial to launch as quickly as possible. However, quick commercialization should not come at the expense of hastened negotiations that result in reduced reimbursement levels. Success hinges on maximizing value of your product at each stage of its lifecycle, which means pharma companies need carefully planned and executed price negotiations. This is something that needs attention paid at the global geographic level and also at the local contracts and tenders level. Having access to information at the tip of your fingers will be key in how well you are able to react to changing conditions.
Rebates and discounts are also widely used with distributors and payers for cost-containment, especially in emerging markets. These discounts are often viewed as an alternative to decreasing list prices. While, these back-end discounts ensure that you pay only for demonstrated performance, they also can be a significant source of revenue leakage. To stem the flow, pharma companies need to unify the view of upfront off-invoice discounts with back-end rebates in order to achieve better visibility and control of the discounts they are paying out to customers. Ultimately, you need to understand performance of these incentive programs and accurately measure customer compliance and operational process efficiency.
Few activities are as important as the creation of pricing, negotiation and management of contracts, and the execution of incentive programs. But, it is common to find poor hand-offs between pricing, contracts, and settlements processes, and gaps in regulatory monitoring that lead to significant revenue leakage and regulatory compliance exposure.
Most pharma companies suffer from disjointed processes and systems spread across multiple departments in the organization. These critical determinants of corporate revenue are the last bastion of spreadsheet automation and manual integration. Faced with increasing government regulatory oversight and unprecedented competitive pressures, pharma companies can no longer afford to manually manage sales and revenue. They must automate commercial and regulatory pricing on a global scale with systems that are purpose-built for complex contracting and reference pricing.
Those pharmaceutical companies that not only evolve their business models to respond to changing market drivers, but also proactively address the need to control pricing and discounting while pursuing the right opportunities will be the top players in the industry moving forward.