::New Methods of Discovery
::Marketing and New Consumerism
::Outsourcing
The industry has become increasingly focused on understanding the effects of disease and infection on a molecular and physiological level in order to find better, more specific targets to concentrate their energies on. When before there were more hit-and-miss, serendipitous discoveries, new technologies and understandings can now be used to find targets for innovative drugs.
In 1990s, the marketing that could be performed by the pharmaceutical industry expanded. Due to the rise of the Internet, consumers could purchase non-perscription drugs directly from the producers. Also, in 1997 the FDA loosened its requirements for the presentation of risks, so companies have been able to market direct-to-consumer through TV, radio, and print media advertisements.
The industry has also seen a shift in the drugs that are going through the pipeline. New blockbusters, as of the 1990s, are antidepressants such as Prozac. Also increasingly popular are nutritional supplements and alternative medicines, which have presented new competition into the industry.
For more information on the changing patterns of the industry and its effect on the patterns of International Trade, see the Trade Patterns section.
Pharmaceutical companies need to be constantly innovating and developing new products in order to remain competitive. However, the industry is very high-risk, high-reward, and the risk is derived from the time-intensive and costly process of research and development for producing a new drug.
Therefore, even big, vertically integrated pharmaceutical companies have become more horizontal in an effort to reduce costs, especially since they have been rising consistently over the past few years.
Source: IBM Business Consulting Services
Figure 1 depicts the different functions that were historically all performed within big pharmaceutical companies. Now, some of these functions have been outsourced in the move towards greater cost savings.
From 1999-2004, the pharmaceutical industry dramatically increased the amount of outsourced R&D. This is due to the high costs of required, expensive clinical trails. Also, again, the risk involved with R&D can be costly if the high-reward results are not produced. This is very likely with a drug pipeline that has an extremely high attrition rate, like in the pharmaceutical industry. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), a pharmaceutical research and biotechnology trade group, out of 250 drugs that are tested, only five will enter clinical trails, and only one will receive the right to be produced and marketed to the public.
The cost of discovering, developing, marketing, and launching a new drug (factoring in the cost of all those that fail to make it to market) has risen to a high of $1.7 billion according to a study by Bain & Company in 2003.
Source: Baden-Württemberg
Partnerships with smaller firms and organizations allow for the creation of new concepts and technologies, normally with the small companies providing one part of the value-add in the chain. These contracts are in an effort to minimize the extreme (and growing) costs of the industry.
Typically, contracts are sent out to smaller biotech companies or universities for research and discovery. The contracts can occur at home or abroad.
More and more, the discovery segment of the value chain is being sent abroad to countries like India and China, where such high-cost procedures can be carried out for relatively low costs. By contracting companies in these countries, they are increasingly building their development capabilities in this field. Therefore, while these developing countries are becoming progressively more useful for contracts from the big pharmaceutical firms, they are also rising as potential rival competitors.
In the big pharmaceutical companies, financial and market concerns are the chief instruments that guide the direction of discovery and product development; therefore, there is an emphasis on speed of development rather than original innovation or scientific breakthrough. Over the past few years, this has increasingly become the case, especially as the costs to R&D have risen sharply, along with risks. Smaller biotechs and educational institutions are able to focus more on the innovative side of drug development, so over the years there has been a shift towards contracting or mergers and acquisitions of these smaller firms. The pharmaceutical industry can use these resources for innovative ideas, technologies, and substances that will help them develop a more creative product to be manufactured and marketed.
Less often do pharmaceuticals contract out the manufacturing segment of production; they often have the most efficient manufacturing capabilities, and are able to complete it rather cost-effectively due to their economies of scale.
Also, the same small biotech firms simply do not have the financial or technical resources to either get marketing approval from the regulatory agents or market their product. The big pharmaceutical companies continue to keep these processes in-house, since they have the most financial and high-skill labor resources at their disposal for this specific development.
Source: Baden-Württemberg
Marketing perscription drugs in particular is something that requires a highly complex, pre-established network. The big pharmaceutical companies have already spent large amounts of time and resources to set up these networks domestically and abroad. It would be very difficult, if not impossible, for a small biotech firm to effecively market its product, especially to markets outside of its home country. The pharmaceutical companies have the connections and sales teams most capable of handling this capacity. There may be a shift in the future towards an increasing focus on the higher value-add functions of marketing and sales in the big pharmaceutical companies.
This means that the smaller biotech firms and the big pharmaceutical companies can both profit from the relationship: the biotech firms can have their innovations marketed through the most efficient and profitable channels, and the pharmaceutical firms can contract out for research that can be done for much lower costs.
Though there has been an increase in the outsourcing of discovery and product development, and marketing and sales have been increasingly emphasized, the big pharmaceutical companies cannot stop conducting the first processes in the chain themselves and remain competitive. Without their own highly-trained scientists and researchers, pharmaceutical companies would not be able to accurately gauge the positives and negatives of new drug technologies coming from the small biotechs, or be able to assess the risks involved.