The healthcare industry is currently facing the following main challenges:

 

1. Declining R&D Productivity

R&D productivity, the key to succeed in the industry, has declined dramatically in the last few years. The cost of developing and bringing a molecule to market is estimated at $1.3 billion. However, company revenues are not growing fast enough to sustain such expense levels.

The 23 new molecular entity applications filed in 2010 with the Center for Drug Evaluation and Research is the lowest number recorded since 2002. This doesn’t match well for an industry that spent an average of 16.7% of its revenues on R&D in 2011. Many companies tried to work themselves out of the R&D crisis through mergers and acquisitions. However, this approach of building scale and broadening the product portfolios hasn’t really improved their ability to innovate.

This situation is even more alarming for the industry when companies launch ever fewer new products, while at the same time losing patents on many of their existing products. This “loss” is barely offset by protected brands and new launches during the same period.

At the same time the big diseases have already been contemplated and future investigation focuses on more niche diseases that require the same R&D expense but have fewer target profiles of patients. Therefore, many of the future innovations, in oncology for instance, will have to come at a higher cost than the old ones.

For many the era of blockbuster drugs has ended; current drug pipelines lack the poten­tial to generate the sizeable revenue and margins that the industry once enjoyed. Despite being among the top industries in R&D investments, the number of new drugs brought to market contin­ues to fall, so changes need to take place.

 

1. Preference for Generics

A growing trend that is hurting traditional pharmaceutical companies is the introduction of new generics to substitute for blockbuster drugs that are los­ing patent protection. Moreover, an increased pressure from payers to switch to lower-cost generics, when available, has created an increase in demand for these products.  In 2010 generics already constituted 78% of all dispensed prescriptions in the U.S., and it now takes only six months to replace over 80% of the prescription volume of a drug that loses its patent.

Beginning in 2010, the pharmaceutical industry faced one of the biggest waves of drug patent expirations is history, a phenomenon referred to as the “patent cliff.” Since then, a significant number of top-selling drugs, such as Lipitor, have experienced patent expirations, paving the way for lower-priced genetics. In 2012 alone, nine blockbuster drugs exceeding $1 billion in sales lost patent protection, and nearly $35.1 billion in total sales was at risk as a result of patent expiries. In 2015, the blow is predicted to be nearly equal to that ($33.5 billion) in what has been called “Patent Cliff II.”

While the market’s shift to generics puts further pressure on margins and revenue in developed markets, it is also an opportunity for future growth in developing nations. To capitalize on this growth, many big pharmaceutical companies have developed alliances or acquired big generic players in developed and emerging markets.

 

Source: Sanofi-Aventis Managed Care Digest Series, HMO-PPO Digest, 2010–2011

 

1. Continuous Regulation Changes

As for regulatory reforms, they are occurring both in developed and developing economies. Developed economies are facing an aging population and thus a rapid increase in the number of chronic patients, as well as cost and quality problems, and issues derived from sustainability and value. Developing economies are addressing the rising expectations of the middle class, diseases of prosperity (such as diabetes and cardiovascular diseases) and, in general, the search for innovative solutions, without falling into the mistakes of others. Recently, several countries have undertaken major regulatory changes.

As main examples: the United States (with the impending approval of Obama’s health care bill), Japan (with strict control of prices of procedures and medications to maintain universal coverage), Turkey (where recent reforms include the transition towards universal health coverage), Brazil (which passed a bill to increase spending on health to at least 10% of GDP and is seeking foreign private investors), China (where the health sector is growing 25% annually and the state is considering opening 2,000 new hospitals).  

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Sources:

http://www.uspharmacist.com/content/s/216/c/35249/

http://www.epvantage.com/Universal/View.aspx?type=Story&id=384778&isEPVantage=yes