The pharmaceutical industry faces unprecedented barriers to evolution

Historically, pharmaceutical companies have faced a number of major challenges, both internally and externally, which have shaped the pharmaceutical industry we see today. Ongoing issues such as the declining efficiency of companies' internal R&D processes and increasingly crowded markets have resulted in fierce price competition between both branded and generic players. Heightening regulatory pressures also mean that companies are more restricted in their promotion of products to patients and physicians, with payer decisions ever more critical to whether a drug is prescribed.

However, these issues are not new. The pharmaceutical industry has long been aware of these potential problems and has already implemented strategies to evolve from its traditional industry model towards a new model: so-called 'Pharma 2.0'. This new model is defined as a leaner, more globalized entity whose increased scale is achieved 'virtually' rather than through accretion. Pharma 2.0 is focused on targeting high-growth markets through collaborative alliances, the use of smart sales and marketing strategies, and cost-effective pricing.

More recently, however, the industry has begun to face additional, unprecedented political and economic challenges. Many leading economies are now entering potentially deep and long recessions and this new economic reality, combined with President Obama's overhaul of the US healthcare system, have increased the sector's vulnerability just as it embarks on its first steps towards Pharma 2.0, with the extinction of the blockbuster model and the 2011 patent cliff fast approaching.

On balance, Datamonitor believes that President Obama's healthcare reform proposals will have a negative impact on the pharmaceutical industry's future growth. While the likely expansion in public healthcare to capture the estimated 15% of the US population which is uninsured will grow future drug revenues, generics companies and eventually biosimilars manufacturers will be the ultimate winners. The need to cut US healthcare spend, with the potential implementation of comparative effectiveness research and drug re-importation, will offset any additional revenue that the industry may gain through expanded healthcare provisions.

On top of this, the industry now also faces added economic pressures, both directly and indirectly as a result of the global economic downturn. Having already implemented a swathe of cost-cutting strategies, many smaller companies face potential bankruptcy as traditional sources of funding (debt markets, public offerings, private placements and convertible bonds) are still largely closed for cash-burning firms. Furthermore, due to the worsening economic conditions in the US, uninsured patients are now even less able to cover the costs of their healthcare. This, coupled with the growing size of the uninsured population, means that patients are increasingly switching from branded to generic drugs where available, ultimately impacting pharmaceutical sales.

The industry may also struggle to justify the costs of expensive prescription drugs over the next few years, with greater pressure from payers to produce more robust pharmacoeconomic data.

In response to these ongoing trends, and as the first steps in the transition to Pharma 2.0, companies have adopted varied strategies in order to adapt to market changes and shareholder expectations. For example, Pfizer-Wyeth and Merck & Co.-Schering Plough are products of mega-mergers, while GlaxoSmithKline CEO Andrew Witty outlined that large-scale M&A is "unlikely to be a great solution to anything in the next few years." Similarly, both Johnson & Johnson and Abbott have focused on portfolio expansion, expanding their non-pharmaceutical footprint and medical device businesses, respectively, while Roche is aiming for portfolio specialization by focusing on its oncology franchise. Roche is also bolstering its internal pipeline through the final acquisition of Genentech, as opposed to the start-up R&D model of GSK and, latterly, Pfizer and Eli Lilly.

That said, despite these variations in strategy, pharmaceutical companies have implemented a number of unified solutions in response to the mounting pressures which they are facing. For instance, cost cutting - most obviously within primary-care sales teams and R&D budgets - remains a constant strategy across the board. Companies are also looking to move into specialized high-growth areas, with increased focus on developing biologic therapies that command higher prices and are currently relatively immune to generic competition in the US.

Rest of world expansion remains high on the agenda: branded pharmaceutical firms are expanding their emerging market footprint to capitalize on the higher rate of growth in these countries compared to traditional markets. Indeed, sales of prescription drugs for the top 50 pharmaceutical companies in the 'rest of world' markets are forecast to grow twice as fast as those in the mature markets.

While companies have already adapted to some of the new industry challenges, they will ultimately need to adapt even further. Turbulence in global financial markets and a rise in interventional politics, particularly in the US, will make the pharmaceutical industry's journey across a radically altered healthcare terrain far more difficult, although the ultimate goals remain the same. market positioning, especially in the light of the inconsistent Phase III trial result published at this meeting. Datamonitor maintains its cautious stance regarding the commercial potential of lurasidone. Following an anticipated 2010 filing, Datamonitor forecasts lurasidone to accrue disappointing seven major market annual schizophrenia-specific sales of around $150m by 2014 in this competitive and soon-to-be highly genericized atypical antipsychotic market.

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