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Changing Landscape of the Pharmaceutical Industry

The rules, by which the Pharmaceutical game is played across the world is more or less the same but the variations are determined by the country and the culture in which the game is played. It must be noted, however, that the model of marketing Pharmaceutical products has not changed drastically over the last 3 decades.

There are five groups of players in this game; Patients with one or more health conditions; Physicians who diagnose the condition and recommend treatments; the Pharmaceutical companies who research, manufacture and market drugs for treating different conditions and the private insurance companies and the like and in some locations, Government funded National Health Schemes who may pay the bills, and the Pharmacies who dispense the drugs to the patients. In countries that do not have a well-developed Insurance or National Health Scheme, the burden of paying for the medication falls on the patients. Developing countries fall under this category and therefore a large proportion of the population in such countries are not able to afford the cost of drugs which invariably can be high, due to patent protection.

Discovering and marketing of drugs is an expensive business, both of which are mainly carried out by the Branded Pharmaceutical companies. The companies discovering drugs are given patent protection to recover their investment and usually make healthy profits for the company's shareholders. Once the Branded drug goes out of patent, any other player in the industry can manufacture and market the generic equivalent. According the US FDA, once a drug goes out of patent, the generic competition can lower its value up to 80% of patented drug values.

This model has worked well for the Pharmaceutical Industry globally for the last 3 decades, but since 2011 the Pharmaceutical landscape has been changing drastically. These changes have had a substantial impact on most Pharmaceutical companies and have led to a need to change the rules by which the game be played as the whole industry make necessary adjustment to adapt to the changing environment.

What are the factors that are driving the need for change in the traditional Pharmaceutical model of researching and marketing of drugs?

1. Patent Cliff:

Perhaps the most important factor that is putting maximum pressure on Big Pharma is the number of block buster drugs that have gone out of patent or likely to go out of patent by the end of this decade. This is creating the Patent Cliff. It is estimated that by 2018, block buster drugs with combined value of $290 Billion will go out of Patent. Assuming maximum drop in revenue of 80%, this impact would seriously affect the growth big Pharma have been used to in the past. Increasing trends of Market capitalization is likely to fill the gap to some extent. However, the randomness of the share market events cannot be relied on to continue to fill the growth gap in the long term. While the Generic Companies are the beneficiaries of the block buster drugs going out of patent, the shrinking revenues of the branded companies will necessitate structural adjustments.

What structural adjustments would Pharma companies be likely to make to weather the storm?

To a large extent, the Pharma companies are already addressing the issue of patent cliff and the growth gap in multifaceted ways and will continue to do so. For example, cost cutting measures which have already been a feature, may extend further in reducing resources from large ticket items like sales and marketing resources, administrative support services infrastructure, IT infrastructure and other expenses like the cost of flights and accommodation for both domestic and international travel. As far as reducing the costs of resources are concerned, the biggest ticket item is reducing the size of the field force. Historically reducing the size of field force has resulted in losing market share to competitors who continue to maintain their field force levels. Synergising sales and marketing for driving productivity is likely to become the main focus for driving growth. As far as the rise of generics competition is concerned, big Pharma companies could continue to make generic companies of their own or partner with existing generic companies.

2. The rise of Biotechnology companies:

The quest of discovering new block buster drugs is shifting to Biotechnology as more R&D investments shifts to Biotechnology. There is a lot of hope placed on the discovery of block buster drugs by the Biotechnology companies for the treatment of chronic conditions. The Big Pharma companies may be able to fill the growth gap if they are able to partner with these companies. Biotechnology companies have performed well in the area of discovering new block buster drugs as well as in market capitalization. While the top 10 Bio Tech companies have had phenomenal growth, reaching combined revenues of $130 Billion in 2013, a growth rate of 2.1% in 2013 appears to be only modest. However, some analysts have predicted that by 2020, as much as 50 of the top 100 drugs will be products of research by the Biotech companies. If this comes true the fortunes of the Big Pharma companies will depend on their capacity to either acquire or create mergers with these companies.

3. Cost containment initiatives:

While the Pharma industry is going through some structural adjustments in order to continue to keep the shareholders' value, the cost of pharmaceuticals has been sturdily rising from $300 Billion in 1996 to $600 Billion in 2005 and $962 Billion in 2012.

In 2011, the US alone accounted for one third of total global cost. The combined sales of the US, Japan and Europe were 61% of total global revenue. The escalating prices of new drugs in these countries have led the regulatory authorities and the insurance companies to question the cost benefits of the new drugs being approved. The Affordable Care Act in the US expects the Pharmaceutical companies to deliver cost benefit justification that would reduce costs with better health outcomes. Similar initiatives in Europe and Japan are likely to add downward pressures on new block buster drugs as they make their way from the pipeline to the markets.

4. The Physician-Patient relationship:

The rise of the Internet accompanied by various platforms to share knowledge is perhaps the most significant change that is stretching the paradigm in Physician-Patient relationship, which has direct implications for the Pharmaceutical Industry. A significant proportion of patients are likely to research not only the product prescribed by their physician but also the diagnosis. It can be assumed this number will continue to climb over time with increasing access of people globally to the Internet. One has to just type a medical condition or a name of drug on Google search, and get a list of 100's or even millions of matches. The popular sites to look for information are the Wikipedia, company websites, Blog sites on the subject and chat rooms. YouTube is also gaining popularity due to its audio-visual contents.

The Internet search engines are the primary place where the patients are looking for drug or conditions related information. The quality of information may vary from good to misleading. More often than not, such patents return back to the physicians to question the prescription on the strength, the side effect profile or with the virtues of another drug that they think is more promising in treating their condition. Looking at this change from a behavioural point of view is the fact that there is a human tendency to look for the negatives far more than the positives about a product prescribed. As a consequence, the side effect profile of a drug becomes prominent.

The Patients are becoming an important factor in the marketing mix. Increasingly, therefore, the Pharma companies will have to engage with the patients particularly those diagnosed with chronic conditions to ensure brand loyalty. Technology will be able to help achieve this. This will then become arguably, the next biggest challenge and indeed opportunity for Pharmaceutical Marketing, if they get it right.

I have in the past argued that there is no room for Closed Loop Marketing (CLM) in the Pharmaceutical Industry in the classic sense of creating leads as far as the doctors are concerned. All companies are aware of the physicians in the marketplace. The creation of leads therefore has very little relevance to the industry, I had argued. The practice of Closed Loop Marketing, however, will acquire a special significance as Big Pharma companies add a new dimension of engaging with the patients, to educate them about disease states and treatment for such conditions and the like, especially if they are using one of their drugs. And, as this relationship evolves, so too will trust and in turn, brand loyalty of patients. Better informed about their medications and expectations of them, patient focus may well take a very “positive” turn in ensuing dialogue between themselves and their physician. Renewed understanding by patients and consequent brand loyalty may well manifest itself at the point of dispensing, with patients resisting any moves toward brand substitution. Moreover, with the use of mobile and web technology, Closed Loop Marketing platforms are not only useful in driving deep Patient Engagement, but of recent times, have proven to be a valuable adjunctive tool to current resources and programs used to engage with Physicians. Such technology can now help bridge some of the gaps highlighted earlier in this paper that the Pharma industry in particular faces as they relate to “smaller” pipelines of block buster drugs coming through, increasing focus on ROI, need for specific quality Outputs and maybe most importantly, the building of longevity of Brand awareness and Value.

My observations are that today, these are universally common factors in the “new game” that has emerged for the Pharma industry. In concluding this paper, I cannot resist the temptation to reproduce some predictions I made in September, 1995, as a speaker at the APMRG (Australian Pharmaceutical Marketing Research Group) conference in Melbourne. The topic was “Future of Information Technology and its implications to the Pharmaceutical Industry”. These predictions were made when only two Pharma companies anywhere in the world had websites - each of the two companies sites was just one page. The Internet had just been released to the public.

Only some relevant sections are listed as points I elaborated on as changes Pharma companies can expect will become common on the Internet:

Relevance to Pharmaceuticals
1. Product launches and corporate information.
2. Diagnosis and Prescription.
3. Information on product, side effects, training on delivery system and service.
4. Health Authorities control and National boundaries.
5. Third party evaluation on price, quality and performance.
6. Emergence of conditions towards perfect competition.
7. Mail order houses.
8. Two-way exchange of Information and collection of data.
9. Pharmaceutical shift from treatment to prevention.

“The Internet is not simply a protocol but the foundation on which the future generations will construct the new global structures, exchange ideas, conduct business and shape the destiny of the unified world.”

Almost 20 years later, IMS in 2014, made the following comments: “A study - Riding the Information Technology Wave in Life Sciences: Priorities, Pitfalls and Promise - found that life sciences companies are aggressively shifting their technology-based approaches to align cross-functional activities, optimize their organizations and improve the effectiveness and agility of commercial teams. In addition, new investment is being focused on enabling greater patient engagement”.

Pramod Khisty
Zero Corporation.Com

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