Big Pharma Beyond the Headlines

Prescriptions for the Next Decade

In the next few years patents expire on three dozen high-margin drugs, including blockbusters like Lipitor and Plavix, representing a loss to pharmaceutical companies of nearly $70 billion in sales. At the same time, and despite enormous R&D budgets, big pharma is slated to bring fewer and less profitable drugs to market over the next decade.

In order to offset some of these losses, the major manufacturers are increasingly looking to the burgeoning pharmaceutical sectors in emerging markets, like India, China, and Indonesia. With drastically lower R&D costs, increasingly skilled labor forces, and rising health care consumption among a growing middle class, these markets can potentially offer much to salve the ailing pharmaceutical model. Additionally, several pharmaceutical companies are buoying their revenue by developing their own lines of generics.

Despite the heightened scrutiny of the pharmaceutical industry from analysts and the media, there remain under-reported elements of the future of pharma story. Ergo asked four leading industry experts to identify potential risks and opportunities for big pharma which have been either overlooked or misjudged.

Insights from the Ergo Network

• Expert 1: International pharmaceutical industry consultant

  Opportunity: Immediate prospects in Latin America
  
  

  "Latin America is a more near term opportunity. Big pharma ought to thrive [here], whereas the climate in India and China is not yet right for that to happen. I think there are other reasons why companies should be in India and China, like manufacturing, contract research, or even research facilities, but in terms of the local markets I think it’s too early."

• Expert 2: Pharmaceutical industry veteran and strategic marketing expert

  Opportunity: FDA easing the way in China
  
  

  "India has very inexpensive labor that is able to speak the language, but I feel the [U.S.] FDA has started to plant its seeds elsewhere – possibly because of the negative publicity related to recent scandals. The FDA has three offices in China and the Chinese government is under a lot of pressure [to comply] because they are opening themselves up. The FDA is managing the quality assurance in China. In terms of the management, in terms of the control, in terms of the regulatory environment, I feel we already have very good infrastructure built in China. Also the government is injecting funds into companies to help them grow this industry and the government is helping the U.S. counterpart to groom their prospective strategic alliances. "

• Expert 3: Partner at a private equity firm focusing on biopharma

  Opportunity and Risk: Biologicals, not generics
  
  

  "Companies are talking about getting into biologicals because there is currently no pathway for them to become generics. I think the plan in the health care bill right now is to give biologicals ten years of exclusivity and then go generic. But there are lots of intellectual property issues that will have to get resolved for process patents. A lot of those intellectual property issues will have to get resolved before there are legitimate generic biotech drugs. And the costs for generic biologicals are a lot higher than generic small molecules. "

• Expert 4: Leading expert on strategic management in emerging markets

  Risk: Domestic competition in emerging markets
  
  

  "The emerging multinationals from emerging countries, like Ranbaxy or Dr Reddy’s or Cipla, are trying to climb up the value chain and as they’re doing that they’re competing directly with big pharma. These companies have become extremely competitive and have become very, very smart. They have figured out the game. Do they have the capabilities to come up with big blockbuster drugs? Not yet, but they’re trying. I think they’re coming up with very disruptive business models to challenge the pharmaceutical companies in the West."

Looking Ahead

It is premature to put the major pharma companies on life support, but there are significant risks even with their evolved strategies. Pharmaceutical companies hoping to stanch losses by entering markets in new geographies, particularly India and China, may find that opportunities are slow to materialize and that they face competition with maturing local firms. Additionally, inroads into the generics market could provide limited returns due to high levels of competition, razor-thin margins, and limited drug candidates in the long-run.

Big pharma is unlikely to fade away – but it will have to adjust its goals and business models to compete in a changed landscape. In addition to solutions discussed above, big pharma might look at investing in biologicals or merging with other companies to generate new revenue. The next 5-10 years could represent a sea change in the global pharmaceutical industry. The manufacturers and investors who go beyond the headlines to identify opportunity and risk will be the decade’s winners. .

Ergo’s healthcare and pharma work has covered everything from analysis of the approval and registration process for new drugs in Brazil to diligence on vaccine manufacturers in Israel.