Challenges Facing the Pharmaceutical Industry

By Piachaud, Bianca | Contemporary Review, March 2002 | Go to article overview

Challenges Facing the Pharmaceutical Industry

Piachaud, Bianca, Contemporary Review

THE pharmaceutical industry is faced with the challenge of surviving and succeeding in an environment that has become more complicated and uncertain, and one that is characterised by rapid developments in science and technology, and organisational change. From the standpoint of the pharmaceutical industry, the impetus for change is the result of a combination of political, economic, technological and social factors; all of which have helped redefine the dynamics of this particular industry.

Over the past number of years, the growth of the worldwide pharmaceutical industry has been slower than the increases in Research (R) and Development (D) costs, and this has led to a cost-earnings differential that cannot be sustained indefinitely. Firms have found it increasingly difficult to sustain historical levels of growth principally because of two converging factors. First, the earnings of the pharmaceutical industry are being increasingly squeezed between pricing constraints due to government policies and generic competition; and second, through the rising costs of R and D due to increasing legislative requirements and growing technological sophistication. As a consequence of these pressures on pharmaceutical earnings, combined with that of rising R and D costs, pharmaceutical firms have been forced to adopt a number of cost containment measures in addition to those pertaining to the safety and efficacy of drugs. The need to demonstrate 'value' to the consumer has now become imperative.

Traditionally, the pricing methods adopted in the former producer-driven environment for pharmaceuticals was essentially based on what was considered to be 'fair returns' for the high costs and risks associated with innovation. Today however, much of that has changed. The deregulation of generic products has helped to bring about a much greater acceptance of product substitution, which in turn has led to changes in consumer choice -- an event that has acted as a catalyst for change within the marketplace. Therefore rather than being producer-driven, the market for pharmaceuticals today is essentially customer-led. Price has become the key indicator of how the marketplace truly values the products that are discovered, marketed and sold. Consequently the price that a company charges for a product is the culmination of every decision made along the chain of discovery from discovery through to marketing. Therefore in order to be able to survive this challenging environment, pharmaceutical companies can no longer permit their internal processes to determine price levels, as this has now become the privilege of the customer.

The demand for innovation in an increasingly complex, global business environment has necessitated new approaches to organisation because the requirements for success in the marketplace have changed in a number of profound ways. In addition to demands for efficiency, quality and flexibility, pharmaceutical companies are also required to simultaneously cut costs, improve standards of quality, shorten product development times, and introduce innovative products that customers value. As a result, companies have been forced to re-examine every aspect of how their businesses are implemented and conducted, and this has given rise to a number of important issues that question the long-held and accepted ways of managing pharmaceuticals. It also raises a number of critical questions that are pertinent to five key areas of business.

The discovery, development and marketing of new pharmaceutical products is the essence of the research-based pharmaceutical industry. As a result of the transformation toward a customer-led marketplace, important issues have been raised which present a number of challenges to many pharmaceutical companies. Of greater significance is the issue of cost.

The total cost of bringing a new product to market from discovery through to launch, including the cost of capital with a risk premium and the cost associated with failures, is estimated to be approximately $500 million, over a 10-12 year period. …

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