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Global pharmaceutical industry is in a strategic crisis – Business models must be adjusted

Munich, January 6, 2013

  • Three out of four pharmaceutical companies are convinced their industry is in the midst of a strategic crisis
  • Price and cost pressure, regulatory changes and expiring patents are leading to shrinking margins
  • Emerging markets offer the biggest growth opportunities for the pharmaceutical industry – Their market share is set to rise to almost 40% by 2016, albeit with smaller margins
  • Pharmaceutical companies are prepared to relocate their administration (44%), R&D (43%) and sales departments (51%) to emerging markets
  • Four fundamental product/market constellations are driving strategic realignment of business models

Increasing price and cost pressure, regulatory changes and expiring patents are leading to shrinking margins in the pharmaceutical industry. Almost three in four companies believe their industry is in a strategic crisis, according to the results of the "Pharma's fight for profitability" study by Roland Berger Strategy Consultants. For this reason, 78% of the study participants are of the opinion that pharmaceutical companies must adjust their business models to fit the new market requirements. This includes focusing investments on the high-growth emerging markets, which will make up almost 40% of the global pharmaceutical market by 2016. This view is shared by many pharmaceutical companies: Almost half of those surveyed are willing to relocate their administration, R&D and sales departments to emerging markets. In this context, Roland Berger's new study shows four constellations driven by market type (mature or developing) and lifecycle of the products (established or innovative).

"The global pharmaceutical industry is facing a major structural change. Even though global sales have risen in recent years, profit margins have dropped considerably," says Michael Dohrmann, Partner at Roland Berger Strategy Consultants. "This means realigning business models to fit the various product/market constellations and their requirements is imperative for ensuring business success."

Strategic crisis is hitting the pharmaceutical industry hard

Although the top 10 pharmaceutical companies were able to increase sales by about 13% between 2009 and 2010, their EBIT margins dropped during the same period by almost 4%. This equals a profit loss of EUR 34 billion. This is being driven by developments in the mature markets: "Pharmaceutical markets such as Europe and the US are stagnating due to rising price pressure, regulatory changes in the healthcare system and more stringent admission requirements for new drugs," explains Roland Berger consultant Martin Erharter. "But in emerging markets we are seeing strong growth. Nevertheless, there margins here are lower and driven heavily by non-patent protected products."

R&D costs have risen by more than 80% worldwide over the past 10 years. On the other hand, the number of new product launches has dropped by 43%. Therefore, almost half of the companies surveyed believe that the Return on Investment (ROI) in the area of R&D is more or less negative. Greater efficiency in research and more collaboration with third-party providers will become increasingly important.

Emerging markets offer growth opportunities

Focusing on high-growth emerging markets could provide a way out of this tough situation. These markets will play a major role in driving the growth of the global pharmaceuticals market in the coming years. While the market for pharmaceutical products will grow on average by 4.5% annually through 2016, growth in emerging market will increase by almost 12%. Especially China, Brazil, India and Russia are experiencing above-average growth. Overall, Roland Berger expects that emerging markets will account for nearly 40% of the global market for pharma solutions by 2016.

"The rising purchasing power in these regions, the growing middle class and better healthcare systems are driving the demand for medication," says Roland Berger Partner and co-author of the study Moris Hosseini. "Therefore, it comes as no surprise that many pharmaceutical companies are increasingly focusing on emerging markets to better leverage the considerable growth potential in these regions." In this vein, the new Roland Berger survey reveals that more and more pharmaceutical companies are already planning to relocate their administration (44%), R&D (43%) and sales departments (51%) to these high-growth countries.

Four strategies for success

However, pharmaceutical companies must rethink their strategies in order to succeed in this tough market. "There is no such thing as a generally valid strategy," warns Dohrmann. "Instead, companies must think and plan strategically in various dimensions. For instance, whether the company is active in a mature or developing market and what products it sells there play a key role."

Thus, Roland Berger has identified four possible strategic approaches that can help the pharmaceutical industry to optimally position itself in various markets with a diverse range of solutions.

  • New products in mature markets
    In the past, marketing and sales activities were key for achieving lasting sales growth through innovative solutions. However, more restrictive healthcare policies in many countries and the rising demands of patients are now forcing pharmaceutical companies to focus on developing innovative products that add considerable value for patients. The opinion of experts from the clinical sector plus medical affairs activities are crucial to a product's success.
  • Established products in mature markets
    Fierce competition and considerable customer price sensitivity in this segment means pharmaceutical companies must manufacture their products in a cost-efficient way to remain profitable. To do so, companies can completely outsource certain functions or relocate them to low-cost countries. Companies that can offer high-quality products at reasonable prices will be successful, but this requires efficient administration, marketing and sales models.
  • New products in emerging markets
    A growing middle class, improving healthcare and rising income levels in emerging markets is driving up demand, even for more expensive medication. The development of new and innovative products provides considerable growth potential. However, successful market entry is possible only if products meet specific market conditions and patient requirements. To realize this, companies should conduct their medical affairs and R&D activities locally. Furthermore, these companies need a strong local sales organization and to collaborate with regional companies in order to gain effective access to patients willing to pay higher prices.
  • Established products in emerging markets
    Pharmaceutical companies can use established products to realize scale effects in new markets and enhance their reputation. However, companies need to precisely analyze the requirements and competitive situation of the individual markets in advance. This is because markets such as China are strongly affected by regional differences and require country-specific strategies. As a general rule, pharmaceutical companies need efficient production and sales initiatives to drive their sales and earnings. To do so, collaborating with local partners makes good business sense.
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