Strong R&D will continue to spur the development of great new pharma therapies and molecules. But to make those advances marketable, pharmaceutical companies will have to remain profitable. As these authors write, the surest road to future profits will not be the traditional one of innovation, but rather the ability to orchestrate partnerships and make sense of complexity.
Of the top ten global pharmaceutical manufacturers in 1981, five no longer exist. By 2020, a few of today's top ten will be acquired. Clearly, there will be winners and losers, making it reasonable to ask what will differentiate the former from the latter. For the past 30 years, the deciding factors have been innovation and savvy marketing, as patented new products have driven outsized revenue growth and direct-to-consumer advertising heightened brand awareness. But several profoundly disruptive forces at work in the industry today will likely halt that trend.
Instead of innovation and savvy marketing, excellence in operations will distinguish tomorrow's leaders. The rising profile of operations excellence will be driven by two emerging industry realities. First, vertical integration is dead. Tomorrow's pharmaceutical industry will be a world of virtual partners, where orchestration is the essential competency. Second, pricing pressures will demand operational efficiencies. Rapid commoditization will erode the once-solid path to wealth via research and development (R&D). By 2020, the top pharmaceutical companies will be so efficient that they will be able to achieve profits even in the absence of glittering new innovations.
SIX DISRUPTORS OF THE PHARMACEUTICAL LANDSCAPE
Most pharmaceutical executives know about the fundamentally disruptive forces shaping the future of their industry. Yet they too rarely think holistically, about how the confluence of these forces under various scenarios could turn their current world on its head. Briefly, the transformative forces reflect these realities:
1. Innovation has lost its punch. The profit window from patents is shrinking, and average development costs are rising. Price-to-earnings ratios have been falling, despite rising revenues and R&D expenditures, highlighting stockholders' lack of confidence that current innovations will deliver reliable future cash flows.
2. Complexity is up, visibility down. Complications arise in research (product science and the genesis and sourcing of ideas), manufacturing (outsourcing and increasingly varying controls and regulations), and the supply chain (a diversified supply base, complex portfolio, and worldwide sourcing network). Yet in today's global networks, the ability to get a picture of that that complexity is limited. 3. Clinical data are the new frontier. Cost-conscious payers are diving into data on performance to determine which treatments get approved for reimbursement. In addition, regulatory scrutiny is heightening, as evidenced by the recent marked increase in the number of warning letters to pharmaceutical companies. 4. Market power is shifting. Decision-making authority is shifting from physicians to payers, and branded medications will increasingly lose out to generics. Meanwhile, as markets globalize, regulation is becoming more of a "black box." Pharmaceutical companies are thus facing more uncertainty. 5. The funding model is broken. All developed countries have a structural inability to fund health care under existing models. The eventual solution will necessarily involve lower prices-the only question is whether they will be market driven or government mandated. 6. Emerging markets will drive growth. Emerging economies represent huge potential demand-if pharmaceutical companies can figure out how to capture that demand, given the underdeveloped infrastructure and comparatively lower incomes.
How are these forces interacting with each other to change the criteria for success in the industry? Many thoughtful people have sought to plan for the future of their business based on their knowledge of the forces individually. …