Challenges in the Pharmaceutical Industry in 2016

Challenges in the Pharmaceutical Industry in 2016

Provided by GBI Research

The pharmaceutical industry faces a variety of threats and challenges in 2016. However, it is important to note that most of these are not new challenges, as they are mostly the result of a wide variety of economic, operational and commercial issues that in many cases have been overlooked, accumulating over decades and increasingly gaining momentum.


R&D Productivity

One of the most important challenges for the pharmaceutical market, at a global level, is the continued decline in R&D productivity – albeit there have been some recent signs of improvement. Productivity in the pharmaceutical industry is difficult to measure, and despite the wide range of methodologies that have recently emerged – and that sometimes provide conflicting views – the general consensus is that it has been in decline for several years. It has been estimated that as of 2000, less than one drug has been approved per $1 billion spent on R&D.

Moreover, several recent studies have observed a stark imbalance between declining forecast peak sales and growing drug development costs. Blockbuster drugs have become increasingly rare, and continue to face reimbursement challenges in key markets, resulting in declining revenues for companies who are constantly under threat from generic manufacturers.

Pharmaceutical companies will not only face significant threats from generic drugs in the coming years, but also from biosimilars. It is currently estimated that over $67 billion worth of biologic patents are due to expire by 2020, and the first biosimilar was launched in the US last year.

The issue of productivity is not a new one, and pharmaceutical companies have been trying to close the gap in innovation for several decades, as it represents significant strategic implications for the entire industry. A recent surge in the approval of innovative drugs, coupled with reports of companies being more successful in the final stages of clinical testing (the number of new molecular entities launched globally in 2014 reached a 17-year high of 46) seems to point towards a brighter future.


Rising Development Costs

The cost of bringing drugs to market continues to increase. Again, this is not a new challenge, as R&D spending has increased dramatically since the 1970s due to increasing clinical trial complexity, greater emphasis on rigorous large-scale testing, and rising clinical trial failure rates.

In 2015 the cost of bringing a single novel drug to market was estimated at $2.3 billion. An important factor that is driving up costs is the fact that regulators and payers are demanding more evidence than ever before for the cost-effectiveness of medical interventions. This has increased costs for manufacturers significantly, as they have to carry out expensive additional trials in order to demonstrate higher levels of effectiveness and justify prices.

Regulatory agencies in key markets like the US continue to implement stricter regulations on safety and manufacturing processes. This has been largely due to high-profile safety issues related to foreign manufacturing plants not following required standards – particularly those involved in generic drug manufacturing. The additional scrutiny has prompted companies to spend more on manufacturing expertise, and to increase collaboration with regulators in order to maintain access to important high-revenue generating markets.


Pricing Pressures, Reimbursement and the Ever-Changing Regulatory Environment

Companies in the pharmaceutical industry also face continuing pricing pressures, in the face of constrained healthcare budgets in key markets; intensifying competition between companies, healthcare providers and payer consolidations; and the increasing demand for more cost-effective drugs from both payers and regulatory agencies.

Despite drugs only forming a relatively small proportion of healthcare costs (approximately 10% in the US) the high profitability of pharmaceutical companies has made them prime targets for healthcare providers and regulators looking to reduce costs. Governments and insurers in key markets like the US and Europe have sought to reduce healthcare expenditure significantly in recent years due to a range of factors, including economic uncertainty, surging drug prices, the financial burden of aging populations on budgets, and the increasing incidence of chronic conditions.

These issues have led governments and insurers to demand more value for money from pharmaceutical companies, and prompted the introduction of new policies that incentivize the use and manufacture of cheap generic drugs. In essence, national healthcare agencies – including health technology assessment agencies and payers – have become increasingly sophisticated in their demands for evidence of the cost-effectiveness of medical interventions, prompting new regulations and guidelines on pricing and reimbursement. Moreover, controversial and high-profile price hikes for certain drugs, particularly in the US (where manufacturers are free to set drug prices) have pressurized regulators to develop measures and restrictions on pricing that are likely to hurt pharmaceutical margins in those markets in the coming years.

The decline in productivity and constant threat of generic and/or biosimilar activity are key factors in the increased competition in the pharmaceutical market, which in turn has resulted in downwards pressures on pricing. It is estimated that in the next four years over 100 novel therapies will reach the market, carrying a heavy price tag for governments and payers – currently estimated at $1.4 trillion. It is therefore very likely that national agencies and payers will turn to biosimilars and generic drugs to curb expenditure, imposing more pricing pressures on innovator companies.

Consolidation among payers, purchasing organizations and distributors has led to increasing pressure from buyers on pharmaceutical companies to lower prices and rethink their market access strategies. Specifically, there has been an increase in hospitals acquiring other hospitals and physician practices becoming entire health systems, as well as payers becoming more involved by creating partnerships with hospitals in the US.

Downwards pressure on pricing is therefore being exerted from a range of stakeholders in the pharmaceutical industry, from payers to generic drug manufacturers and consumers. However, companies that are able to develop truly innovative therapies with proven improvements in safety and efficacy can still demand premium prices.



Despite the wide range of challenges that pharmaceutical companies are currently facing, there are still a wide range of opportunities in the sector. Aging populations, the increasing incidence of chronic and lifestyle diseases, emerging market expansion and advances in therapeutic and diagnostic technologies are all expected to spur growth in the pharmaceutical sector for the foreseeable future. Additionally, pharmaceutical companies have demonstrated that they are able to survive and even thrive during recent periods of economic uncertainty, constrained healthcare budgets and changing population profiles.

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Published by Research and Markets