Does The Pharmaceuticals Industry Have An Issue With Innovation?

The pharma industry's recent struggle with ROI


The pharmaceutical industry can't get it right with their financial models lately. According to Deloitte's insight 'Measuring the return from pharmaceutical innovation 2016', prices for the life-saving drugs are still skyrocketing and the industry has reached its lowest return on R&D investments in 6 years. As a result, projected sales have fallen by 11.4% year-on-year since 2010, whilst the number of FDA newly registered drugs was 22 in 2016, compared to 45 in 2015. What's going on?

Colin Terry, consulting partner for the European life sciences R&D at Deloitte says that among all the issues, 'drug price is the most publicized challenge, with political and public scrutiny on the topic intensifying.' Usually, when there is an unreasonable increase in drug prices, a company would face a multi-million-dollar penalty which is aimed at stopping the practice, but today, it doesn't seem to be working. Among just a few examples, the UK's Competition and Markets Authority (CMA) fined Pfizer £84.2 million for the price hike of their prescribed anti-epilepsy drug, which skyrocketed from £2.83 per 100mg to £67.50 between 2012 and 2013. More recently, multinational Actavis was is under in for increasing the price tag of their hydrocortisone tablets, which in the course of 8 years, went from 70 p a pack to £88. If pharma companies manage to gouge prices, why is their ROI only at 3.7%?

Despite being a life-saving industry, pharmaceuticals is ultimately about business and competition. Every time a pharma behemoth launches a new drug, firstly, they face the intense competition from other incumbents who might have been developing a drug to cure the same condition. Today, there are 12 research-based companies that dominate the market: Pfizer, Sanofi, Takeda, Roche, Johnson & Johnson, Bristol-Myers Squibb, Eli Lilly, AstraZeneca, Amgen, GlaxoSmithKline, Merck & Co, and Novartis. Other challenges include an average of 12-year FDA approval period for a new product and additionally, a launcher company holds exclusive rights for a drug distribution only for a certain number of years.

Once an innovative drug is launched, the company has on average 10-15 years to control manufacturing, prices, and marketing. Considering the industry's importance globally, usually, a pharma company would balance within a legal-moral framework, meaning that new drugs would be sold on more or less agreeable conditions with the government and consumers. After the patent expires, other companies are allowed to start the manufacturing of generic drugs, which are usually available for a significantly lower price. As with any product, there must be a high consumer demand to get a good R&D ROI and profit margin. Given that the time for a new drug's approval in 2016 was exceptionally slow and that the majority of new drugs were aimed at a niche segment with rare conditions, it took a lot of R&D money to produce new medicine, but the ROI and sales were much lower.

Since the pressure on the pharma industry and pharmacy benefit managers (PBM) is increasing, somehow, companies urgently need to find a consumer-friendly approach to cut the price, but also decrease a unit production cost. If the new US administration keeps their promise to lower corporate tax, the loss from international tax can be less painful, which may contribute to a review of price strategies. As for now, there are many questions to be raised on the topic of innovation in pharmaceuticals, because today it's all going in the wrong direction. 

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