The pharmaceutical business

The pharmaceutical industry is a captive of the past success. The business model of the pharmaceutical company is very complex and has become increasingly so with the advancement of technological inventions of biotechnology. Though there is advancement, the pharmaceutical business model that served the industry well over the past decades has not kept pace with the advancement. This has led to various problems.

In order to challenge the problems of the pharmaceutical business model Andrew Witty, the CEO of GSK set out four new strategic priorities, they are:

  • Grow a diversified global business
  • Delivering more products of value
  • Simplifying GSK's operating model
  • Commitment to Shareholder Value

"These new strategic priorities will evolve GSK into a company that has a balanced group of healthcare businesses and a lower overall risk profile," said Witty. "They also point to a more disciplined allocation of capital across all our different business areas."

The major problem of the pharmaceutical industry is the viability of the product which they produce. This means that the company has to invest millions in the R&D to create one particular drug. However, it involves greater risk. The drug has to pass through various stages before it can be made available for the customers. The problem of uncertainty crops up because a drug may pass through the phase 1 & 2 successfully but it may fail at the 3rd phase. In such cases it is a loss for the company because they have invested millions and time in developing the product.

Blockbuster Mentality:

Over the last decade, the pharmaceutical industries have adapted themselves to the blockbuster business model. In this approach, majority of a company's investment is on creating a blockbuster product that achieves global sales of more than $1 billion. Majority of the pharmaceutical companies have relieved heavily on the blockbuster sales. But with the expiry of the patents of blockbuster, many large pharmaceutical companies are facing the problem. The question of "what to do next?" Has arrived in the minds of the managers.

Patent is an intellectual property right. Patents are very important in the pharmaceutical industry because they help in the exclusion of competition and help to defend their prices and margins from wearing. The patents are time limited. They mostly last for 20 years. However, these 20 years include the pre-clinical stage which typically lasts for 6 yrs. Thus, the life of the drug lasts up to 11-12 yrs. So, when the patent of an ethical drug comes to an end it usually looses two-thirds of its revenue in less than a year from the expiry of the patent.

Zantac is an important blockbuster of the GSK. The above table shows the zantac sales. The patent of the zantac medicine expired in the year 1997. After the patent expiry it can be clearly seen that zantac sales has reduced from 17.2% in 1997 to 9.5% in 1998. In monetary terms the company incurred a loss of $618 million as compared to that of the previous year 1997.

From the above explanation, it is evident that the patents play an important role. To sustain their revenues, the companies will need to replace those blockbusters. But it is not easy to do so because of the massive investment in science, marketing, technology, R&D, organization that used to yield fortunes.

Declining R&D

It is important for an ethical pharmaceutical company to introduce new innovative products. This can be achieved through proper R&D. In the past few years the companies have been ignorant about the R&D, which had lead to the decline. It may due to any of the following reasons

  • There is heavy government regulation of drug innovation process
  • Cost and complexity of clinical trials
  • The feedbacks from the clinical tests are generally very expensive and time consuming because of the need to get approval by the FDA
  • Higher product failure rate.

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