Big Pharma’s Business Model is Changing

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Understanding the new normal of a business model is key to the success of any company.  The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place.  Big Pharma’s business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.

Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants.  This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales.  However, in the coming years, this research to commercialization model will no longer work for many organizations. If Big Pharma is to prosper, it will need to reduce costs while improving its R&D selectivity AND productivity.

The mid to late 1990s was the hayday of Big Pharma drug approvals.  Research was humming, treatments for diseases with large populations were rolling out, and pricing was favorable for reaping billions.  Big Pharma saw pharmacy benefit mangers as the wave of the future, as Pharma could sell their ‘perferred’ drugs through their networks, much like health insurance.  The bigger the PBM, the better off one would be, and Mevco (owned by Merck at the time), was growing rapidly!  Even if a drug was going generic, the PBM’s would continue to sell the branded drugs for a premium, their own branded drugs!  All was good in the drug world.  Then the winds of change hit, where 2007/8 caused a backlash not only in the financial world, but also in pharma.  PBMs were sold off, as companies were accused of script manipulation and unfair pricing.  In addition, the margins were shrinking as the likes of TEVA, Dr. Reddy, and others were gaining market share.

Then, the ‘Patent Cliff’ started rearing its ugly head, and those big revenue streams were drying up.  In 2010, I wrote ‘The Calm Before the Storm” article on PSW, noting that the for Big Pharma to continue, it needs…