Blockbuster drugs totaling up to US$120b in annual sales are set to lose patent protection over the next one to three years2, and current drug discovery pipelines won’t come close to replacing their value.
The life sciences industry as a whole has shown resilience to the economic downturn. As in prior recessions, the conventional wisdom has been that the demand for drugs and other medical services is fairly inelastic — people still fall ill and they require immediate attention.
Even so, the industry has not been completely unscathed by the downturn. In some cases, consumers who have lost their jobs or have been otherwise affected by the recession are:
- losing insurance coverage
- postponing elective surgery
- turning to cheaper generic varieties of popular drugs
- not refilling prescriptions on a regular basis
Companies selling aesthetic products are also facing pressure as discretionary spending declines. Government budgets around the world are growing more constrained by a combination of plummeting tax revenues and economic stimulus spending, leaving less money for government program drug expenditures.
Hospitals, healthcare providers and major retailers are tightening their budgets and inventory levels. And emerging biotech companies have faced severe cash shortages — due to the decline in venture capital and IPO financing associated with the financial and capital markets crisis — which have put more than a few out of business.
In the pharmaceutical industry, these immediate pressures have added to an already lengthy list of longer-term challenges to the traditional blockbuster drug business model, which large life sciences companies have increasingly relied on in recent years.
Blockbuster drugs totaling up to US$120b in annual sales are set to lose patent protection over the next one to three years1, and current drug discovery pipelines won’t come close to replacing their value. Some companies will be lucky to generate US$50m in annual revenues from blockbuster drugs that once contributed US$5b or US$6b.
Many companies are addressing this situation by aggressively cutting costs and reducing their fixed-costs structures. Patent expirations, of course, provide significant new opportunities for generic pharmaceutical companies, many of whom are aggressively expanding their operations through acquisitions.
New challenges
Now new ingredients can be added to the stress mix as the drumbeat for healthcare reform and controlling the costs of healthcare can be heard in capitals around the globe — the US, Brazil, China, Mexico and Russia, for example.
While such programs will expand the consumer market for drugs and devices in general, many questions remain about how reforms will impact pricing and comparative effectiveness. Medtech companies, in particular, need to be sensitive to the discussion about comparative effectiveness since many of their products have been approved using regulatory pathways that do not require extensive clinical trials.
From opportunities to fulfillment
In 2009, in conjunction with the Economist Intelligence Unit, Ernst & Young interviewed 28 senior executives from major life sciences companies (most with more than US$1b in annual revenue) around the world to identify which areas are garnering the most management attention.
Our Opportunities in adversity survey helped delineate where life sciences executives viewed their companies on a stress pendulum in terms of access to cash, with large pharma and medtech companies comfortably on the cash-rich end (although big pharma’s access to cash will become considerably strained over the next few years as blockbuster drugs lose patent protection) and emerging companies at the other end, struggling to raise capital.
Figure 1
Respondents from life sciences firms reported focusing on improving cash flow and working capital management, increasing their speed to market, catering more to top customers and driving efficiencies throughout their supply chains. Industry executives were more inclined than their counterparts elsewhere to say they were planning to engage in significant organizational shifts.
1. Herman Saftlas, Healthcare: Pharmaceuticals, Standard & Poor’s Industry Surveys, 4 June 2009, via S&P Market Insight, © Copyright 2009 The McGraw-Hill Companies, Inc.
