adapt or die Study: Big pharma must move from ‘blockbuster drugs’ to big data

The value of the pharmaceutical industry in Germany is doubling. But drug companies need to move into the digital era in a hurry, if they want to keep profit margins high, a new study warns.
How to deal drugs.

The world’s pharmaceutical companies are gradually becoming less profitable and face radical change in the coming years as the health market shifts away from lucrative “blockbuster drugs” – that is, drugs that make them more than $1 billion a year - towards more individual treatments.

That’s the conclusion of a new industry study by consultancy EY which has scrutinized the world’s 21 biggest pharma companies.

Analysts expect the pharma market in Germany to double to some €63 billion ($74 billion) by 2030, but they see its focus shifting towards new IT-driven health solutions. That means a large portion of the market’s expansion could come from new players that develop and offer solutions based on digital analysis of individual patients’ conditions.

The EY study also found that aggregated operating profits for all the companies in the study fell by 2.4 percent, while revenues inched up just 0.4 percent in 2017.

To be sure, margins are still high in the sector compared to many other industries. But this drop reflects mounting pressure on companies to innovate and enter new niche markets, said Gerd Stürz, head of life-science at EY for Germany, Austria and Switzerland.

09 p15 Pharmaceutical market worldwide-01

EY said the top 21 firms last year increased their research spending by almost 6 percent to a combined €85 billion last year. That’s likely to have contributed to a decline in the average EBIT (earnings before interest and taxes) margin by 1.8 points to 26.5 percent.

“New individualized treatments will become increasingly important in future,” Mr. Stürz said. It will be risky for companies to be overly reliant on high-revenue blockbuster drugs.

EY’s analysts doubt whether traditional drug development will be enough for companies to defend their positions in a growing health market.

“In that sense the pharma industry faces a turning point,” said Jürgen Peukert, who heads the EY consultancy in life-science business for Germany, Austria and Switzerland. New ecosystems will emerge in which participants share large amounts of data to be analyzed so that more individualized treatments can be created, Mr. Peukert said.

So-called blockbuster drugs won’t matter as much anymore. Established players will only be able to master this challenge by undergoing a cultural transformation and approaching their business with entirely new concepts. The key in future will be to control the information exchange through digital technologies. “Those without a relevant platform will lose,” he said.

This means being in a position to somehow collect personal data from potential patients and drug users, then use software to analyze their needs and the effectiveness of drugs, and then finally, to put together individualized medical solutions. The latter may, or may not, include blockbuster drugs. But certainly the one-size-fits-all pharmaceutical solution no longer counts.

A lot of analysts are advocating major change for big pharma. “The reality is that digital technologies won't transform a business if its operating model isn't designed to accommodate digital innovation. To thrive in the era of value-based health care and personalization, companies can't just make incremental changes within their existing operating model. They need an end-to-end redesign,” a recent report by senior analysts at the Boston Consulting Group warned.

Sure, it sounds tricky. But, as the BCG writers also concluded: “We haven’t seen an opportunity of this magnitude in the pharmaceutical industry for a very long time.”

Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. This story was adapted in English for Handelsblatt Global. To contact the author: [email protected]