| Thought Leadership

The Industry Perfect Storm

March 1, 2013

2012 was a tremendous year for pharmaceutical M&A, with notable deals including Gilead Sciences’ $11 billion purchase of Pharmasset, GlaxoSmithKline’s $3 billion purchase of Human Genome Sciences, and Bristol-Myer Squibb’s $5.3 billion purchase of Amylin Pharmaceuticals. Despite this positive activity, I believe that the forecast for 2013 will include a “perfect storm” that has the potential to cause a great deal of damage to the pharmaceutical industry. This perfect storm of pipelines, patents, pricing and profits, are all converging in a manner that continues to concern me for the following reasons:

  • Approximately 40% to 60% of pharma’s pipelines are comprised of new drugs that are externally sourced (in-licensing or acquisition) and 26 of the 50 top-selling products in the US in 2011 were externally sourced..
  • Approximately $290 billion of current worldwide branded drug sales are expected to come off patent between 2012 and 2018, including $29 billion in the coming year.
  • From 1990 to 2010, the percent of pharmaceutical sales derived from products discovered in-house has dropped from more than 80% to less than 60%. Less than half of the 50 top-selling products in the US in 2011 were developed organically.ii
  • The continued need to reduce health care spending will likely lead to continued public and government pressure on pricing of pharmaceutical products.
  • Pharmaceutical profits are also in decline, with the industry losing its position as the most profitable US industry, which it held from 1995 to 2002, and dropping to 3rd place or lower in subsequent years.
  • For 2011, only one of the top ten pharmaceutical companies by revenues had double-digit revenue growth


This perfect storm is fundamentally the result of unprecedented gaps in innovation. Over the past 15 years, pharma has significantly increased R&D spending while generating a decreasing number of new therapeutic products. Simultaneously, the biotech industry has exceeded pharma in terms of new NDA and BLA approvals, and sales of biologics have grown at twice the rate of small molecules. No wonder then that adding biologics or the entire R&D infrastructure of a biotech company seems to be the method of choice for filling the pharmaceutical industry’s innovation gap.

Yet, there is one other component of this perfect storm, one which may also provide a path to calmer shores – and that is patients. Today we have a limited ability to meet their medical needs. For example, approximately 20% of patients taking statins don’t respond to them, and about 50% of patients with rheumatoid arthritis or cancer similarly see no meaningful benefit from currently approved therapies. Adverse drug reactions remain a leading cause of death in the U.S. despite efforts aimed at making drugs safe.

Rather than looking for that next “blockbuster” product the pharmaceutical industry needs to provide greater and more integrated value to patients. To do this, pharmaceutical companies need to focus on more highly characterized products that target well-defined (and possibly smaller) patient populations and deliver greater efficacy and tolerability. At the same time, new drugs must be developed and integrated with companion diagnostics, and care management. This approach will result in a more comprehensive health solution while also providing opportunities to hold down costs.

In addition to this more integrated approach to healthcare, other bold moves may include: research outsourcing, expanding the search for new technology and IP into Asia, collaborative technology development, and exploring was to advance open-source research in which individual companies give up sole ownership of particular technologies in order to join forces with other companies and take research innovation to a new level. While such changes to the pharmaceutical business model will not be easy, they are essential if our sector is to regain its place at the forefront of value creation for patients and investors.


[1] Biotech M&A at 4-year high as pharma faces expiring patents. Soyoung Kim and Paritosh Bansal. Reuters. August 2, 2012. Available at http://www.reuters.com/article/2012/08/02/us-healthcare-deals-idUSBRE8711H420120802.

[1]World Preview 2018: Embracing the patent cliff. EvaluatePharma. June 2012. https://www.evaluatepharma.com/secure/FileResourceDownload.aspx?id=98a75eab-95f6-41d8-903f-4732848fdf78