Update #2: Big Pharma’s Business Model and its Future

How time flies! My second week of research is down in the books, and I’m officially moving onto the third and final. That being said, here are some of the things I investigated during Week 2.

Some interesting ideas I explored this past week include Amazon’s relatively new PillPack service which delivers your custom prescriptions right to your door in daily personalized packs. Although these drugs still require a doctor’s prescription, by delivering the product straight to the customer’s door, Big Pharma loses a giant marketing stage: the pharmacy. Where will these ads go in the future? Your computer, your phone, your smart television, maybe your Alexa.

The current pharmaceutical business model is concerning. The industry focuses on building brands and extending pre-existing patents rather than creating novel products. In my post last week, I mentioned how annual marketing expenditures typically exceed, sometimes doubling, research and development expenditures in top pharmaceutical companies. This is a little misleading, however, because although these firms may not do as much of their own research into new medical discoveries, they do acquire R&D pipelines and outsource. Looking at the industry as a whole, this outsourcing creates a low barrier to entry, which theoretically should allow competition with generics and other brands to flourish and prices to fall. However, the strength of a 20 year patent is unbelievable in this industry, especially as companies scramble to change formulas slightly to “evergreen” patents and hold onto a drug’s exclusive market for longer. Additionally, pipelines have been under scrutiny because this consolidation gives more power to the Pharma Giants with pre-established brand names and loyal customer bases. All of these factors contribute to high prescription drug prices in the United States.

Creating a novel drug product is costly, time consuming, and risky. The drug creation process can take up to 10 years of time and $2.6B, according to CNN. These financial barriers further limit innovation. So, why would a Big Pharma company spend money of R&D, which would not manifest results until 10 years later, when they could spend more (and make more) marketing the products that they know are effective and have a strong target audience? This makes the most sense for these companies right now. But the market is always changing, and couple this with tech companies like Amazon entering the pharmaceutical market and increasing competition, the current Big Pharma business model is doomed for the long run.

The current business model, based on high prices and high profits (which are put back into marketing), negatively affects certain populations. One vulnerable population is the elderly. Drug commercials promise a better, more active life with tantalizing smiles and joyous music. With little relief from the industry and its giants, many Americans look to the government to take some action in helping these populations. Part D of the Medicare bill offers a Medicare Prescription Drug Plan to help with retail prescription costs by lowering copayments. This is a more affordable option than standard branded medical insurances. The Affordable Care Act (ObamaCare) focused on closing a gap in Part D that exists in this segment between the government coverage limit and the catastrophic coverage threshold in hopes of further helping low-income Americans. Part D has been in the news lately again as the Senate Finance Committee has come to a bipartisan agreement that drug prices need to be lowered and the rate of price increases needs to be slowed. To do this, the committee has offered a series of penalties to drug companies if their prescription prices increase above the national rate of inflation, including the payment of rebates by manufacturers back to Medicare. Although this package is in an early stage of development, it would give the federal government more negotiating power with drug companies, much like we see in the rest of the world. A strong start with bipartisan support, this story will need future attention and monitoring. 

Current federal projections by the Centers for Medicare and Medicaid Services predict that from 2020-2027, annual spending on prescription drugs will increase 6.1% annually as Americans are prescribed more drugs, and pay more for each one. With so much pressure coming from consumers, doctors, and insurance companies to lower drug prices, the pharmaceutical business model needs to change. Markets like this are entirely dependent on innovation. Simply investing more money into marketing practices than on research and development is a sure-fire way to evade future profits. One way to lower prices is to increase competition with generics, but this could require substantial effort from the United States government, and pharmaceutical lobbyists would never let this happen. 

In the future, the industry needs to be more patient-focused and preventative, and we’ll see a rise in personalized medicine based on our unique set of genes. With individualized medicine, I don’t think individualized marketing is too far off. Many of us have every doctor’s appointment in a calendar on our phone, and some of us even have every prescription already listed in our fitness app. As technology becomes more powerful, and tech giants have more information about who we are as people, as consumers, as walking sets of genes, I predict the rise of relatively personalized ads recommending certain drugs to certain consumers, maybe even suggesting a prescription in a “talk to your doctor about” format near the day of your appointment. Additionally, we might see an expansion of the pharmaceutical industry into the wellness sphere and perhaps using the obsession with modern technology to its advantage by introducing paid wellness apps that combine your prescription information with regimented fitness routines and diets. This is all speculative on my part, but interesting to consider nonetheless. 

This was definitely a much longer post than I had anticipated, but thinking about the future of such an important industry is quite captivating. Next week, I’ll be fine tuning and rounding out some answers to my original questions, welcoming the complexities that arise in legislation descriptions and income statements alike, and working on my final project. On to Week 3!