Op Ex & Lean Six Sigma

Advancing Your Career in a Changing Industry

An advance excerpt from a draft of the upcoming white paper, “The Continuing Evolution of the Pharmaceutical Industry: Career Challenges and Opportunities” by Michael Steiner et al. of RegentAtlantic Capital.

The pharmaceutical industry is on the verge of entering into a new era because a series of forces have made pharmaceutical companies’ current business models obsolete. These forces can be grouped into three categories:

1. Revenues Are Under Pressure
  • Patents on numerous high revenue drugs are expiring. The major pharmaceutical companies find themselves in the unenviable position of having to rely on a small number of drugs for much of their revenue and the preponderance of their profitability. However, the patents on many of these treatments will expire over the next five years and 36 treatments that generated nearly $47 billion in U.S. revenues in 2006 will have to compete with low-cost, generic alternatives.


  • Pipeline for new drugs looks uncertain. It does not appear that the drugs in the development pipelines of major pharmaceutical companies will generate anywhere near as much in revenue as those with expiring patents.


  • More powerful payers. A series of mergers has created a handful of very powerful payers. Today only 10 firms control nearly 56% of the managed care market. While in the past, physicians were the key decision makers as to which drugs were used by patients, these larger payer organizations now influence which treatments their insured will use by manipulating patient copays.


  • Lower cost medications – such as generics and those treatments sold by pharmaceutical companies at a below market cost so that the payer will include them in its formulary – are provided to patients at a very low out-of-pocket cost.

    For all other treatments, patients must pay much more, for some drugs nearly 10 times as much as the generic alternative. Consequently, pharmaceutical companies now face the unappealing choice of having to discount even branded medications or effectively be excluded from large segments of the potential patient population.
2. Costs and Risks of Developing New Drugs Are Increasing

At the same time that the pharmaceutical industry’s revenues are under pressure, the costs and risks associated with the development of new drugs are increasing for a number of reasons.

First, many of the drugs currently under development are aimed at treating conditions that have more complex and difficult targets, increasing the costs of the research process and reducing the likelihood of ultimate success.

Second, unlike in the past when the R&D process was frequently driven by obvious commercial applications, today’s R&D is often driven by new scientific discoveries, a process that is far less predictable from a commercialization perspective.

Third, the regulatory approval process has become significantly more complex and costly. The regulatory agencies are more sophisticated and capable in evaluating drugs than in the past. Consequently, their standards for approvals are significantly higher. This, in turn, is forcing pharmaceutical companies to test their new treatments in larger, more comprehensive and more expensive clinical trials.

Fourth, the current plaintiff-favorable litigation environment continues to be a drag on pharmaceutical company profitability. Since 2000, 65,000 product liability lawsuits have been filed against prescription drug makers, more than in any other industry. This should come as no surprise given certain features of the U.S. tort system: plaintiffs do not need to incur any out-of-pocket costs to hire contingency fee lawyers; prescription drug users represent a convenient group for class action certification; and unsophisticated juries are frequently willing to give exorbitant awards. Further, even if a pharmaceutical company successfully defends a suit without merit, it will incur significant legal costs in the process.

Finally, payers are slowly shifting to an “outcomes-based” analysis of treatment alternatives. Under outcomes-based analysis, payers focus not on a treatment’s ability to address any particular symptom but rather its long-term effect on overall health. Consequently, predicting the potential revenue from a new treatment has become much more difficult and it is less certain that companies who spend the hundreds of millions of dollars necessary to develop new treatments will generate a sufficient return on their investments.

3. Globalization

The most powerful force sweeping through the industry, however, is the globalization of this industry. What had historically been a U.S.- and EU-focused business, now is shifting to developing countries both for the development of new treatments and as potential markets for products.

The role of these countries in the development of drugs has been aided by several factors. These countries’ laboratories are becoming more sophisticated as they become populated with U.S.- and EU-trained scientists and their research costs are a small fraction of their developed country counterparts.

These labs also operate under regulatory regimes that encourage development through less adversarial approval processes. And the intellectual property laws of these countries are maturing.

The great economic growth experienced by developing countries has also created a much larger demand for health care and prescription medications than in the past. Although much of their near term demand for drugs will be for generic treatments, the sheer size of the populations in these countries makes them potentially enormous markets for the industry.

Big Changes for the Pharmaceutical Industry

The confluence of these forces is forcing pharmaceutical companies to reengineer their business models, identify their core competencies and focus on that they do best. Consequently, the following trends in the pharmaceutical industry will continue and even accelerate in the future:

1. Corporate Restructuring

  • Job reductions. With their revenues under pressure, pharmaceutical companies are reducing costs by shrinking the size of their workforces. In the last three years alone the industry has had nearly 70,000 layoffs. Several of the largest pharmaceutical companies have also announced plans for significant layoffs in 2007 and 2008.

    This trend should continue for the foreseeable future because these companies must find ways to lower their operating costs to offset their coming drop in revenues. No one can precisely predict how many additional people will be displaced. However, two different CEOs whom we interviewed believe that “an entire generation” of upper-middle and senior-level executives (as many as 50,000 individuals) will be displaced.


  • Further consolidation within the industry. The industry has already experienced significant consolidation. Between 1985 and the present, 51 large pharmaceutical companies consolidated into only 10 organizations. Mergers and acquisitions between large pharmaceutical companies will continue because they are an effective method of cutting costs. They allow the combined company to cut staffing redundancies in administrative support functions such as human resources, legal, marketing staff, senior management, and in research staff for similar product lines.


  • Refocusing on fewer business lines. Another cost cutting strategy is to spinoff non-core business lines. As pharmaceutical companies narrow their focus, they are selling off entire units for treatment areas that are currently unprofitable and using the proceeds to invest in areas with greater promise and near term potential for making money.


  • Outsourcing. In addition to identifying their core business lines, pharmaceutical companies will undertake extensive reviews of their operations. They will identify those functions that allow them to most efficiently add the greatest value and try to lower their costs by outsourcing the remainder whenever possible.

    A key element of this strategy will be to outsource large portions of the development of new treatments to the laboratories based in emerging countries. They currently operate at a fraction of the cost of those based in the U.S. and E.U. while their scientific sophistication is increasing rapidly.

2. Adoption of Risk Reduction Strategies

  • Acquisition rather than development of new compounds. Large pharmaceutical companies increasingly are recognizing that their strengths lie in the late stage development, commercialization and marketing of drugs rather than early stage research and development. Consequently, they increasingly are acquiring or licensing compounds developed by biotechnology companies, typically those backed by venture capital investors.

    Since 2001, more than $71 billion in such transactions have been completed. Today nearly 50% of the drugs marketed by large pharmaceutical companies were developed by companies or institutions other than themselves. Over time, we expect this percentage to increase significantly.


  • Use of joint ventures and research consortiums. Pharmaceutical companies also are increasingly sharing the risk of developing new drugs through the use of joint ventures and research consortiums. These partnerships involve other companies, universities, governmental agencies and not-for-profit entities.

3. Evolution of How Drugs Are Marketed

  • Increased focus on U.S. payers. As the ability of U.S. payers to influence which drugs are used by patients increases, marketers with access to physicians will have less value than those who are sophisticated in working with payer organizations. Similarly, branding strategies and direct-to-consumer marketing campaigns will focus less on a particular brand or drug than on the availability of treatments for selected conditions in general.


  • Market drugs globally. As the demand in developing countries for prescription medications grows, pharmaceutical companies will have to recruit international sales and marketing forces. They will have to develop strategies and programs that address the unique pricing and regulatory environments of each individual country.
What Does It All Mean to An Industry Professional?

As the pharmaceutical industry adapts to the forces changing its business model it will not only survive but will also thrive. However, the adaptation process it will need to undertake over the next five to 10 years will be very disruptive for many of its longer-term employees and will create far reaching consequences for any individual working in this field.

These changes will make working at a pharmaceutical company less predictable and individuals will increasingly need to think in terms of a career in the industry and not at just one company. And the skills in the highest demand by employers in the future will differ than those in the past.

The reshaping of the industry, however, will also unlock unforeseen opportunities for those individuals who are able to anticipate the changes and prepare for and take advantage of them. Many will start new careers as independent contractors, earning far more than they ever might as an employee of a large company. Others will either start or join a new company with a unique specialty or expertise and potentially earn millions of dollars should the company succeed. Still others will reposition themselves within large pharmaceutical companies to increase their importance to the enterprise and enhance their careers.

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