Your assignment is to prepare and submit a paper on the pharmaceutical industry. The Pharmaceutical Industry: 2. After 2002, the profitability of the industry, measured by ROIC, started to decline. Why do you think this occurred?
There are several reasons for the decline in profits for pharmaceutical companies after 2002. The foremost among them is the aggressive competition for market-share seen in the generic drug sector. It is well-known that once pharmaceuticals lose patent protection over their proprietary drugs the prices tend to fall drastically – as much as 80%. With companies losing patents over blockbuster drugs without adding new drugs to their repertoire, the profits are bound to fall. Then there is the negative publicity attracted by the adverse side-effects of drugs such as Vioxx and Bextra. These blockbuster drugs, which could have yielded substantial profits for their manufacturers have to be pulled out of the market due to mounting number of lawsuits from patients. These episodes have also proven to be public relations disasters for the pharmaceutical industry, which could explain the decline in profits. There are some political reasons as well. For example, growing health-care costs are heatedly debated in the Congress and Presidential races. Healthcare costs in the United States are the highest within the industrial world and its outcomes are some of the poorest. The pressure from the general public to reverse this trend has meant that politicians are skeptical to make further concessions to Pharmaceuticals industry. Also, there was a dip in the annual spending on prescription drugs since 2003. Between 1990 and 2003, there was a 12.5% annual increase in spending, which was expected to lower to 10% annual growth till 2013. Hence, there are a multitude of factors that have contributed to the decline in profits of pharmaceutical companies.
3. What are the prospects for the industry in the future? What are the opportunities? What are the threats? What must pharmaceutical firms do exploit the opportunities and counter the threats?
Going forward, the prospects for the pharmaceutical industry will depend on the usefulness of genomics technology in helping find cures for various chronic ailments. Again, there is a political angle to this scenario, as conservative sections of the demography are against stem-cell research and genomics-based medical interventions, which they argue is unethical from a theological viewpoint. Having said so, scientific advancement in this area could open up plenty of revenue generating opportunities for companies in the pharmaceutical industry. There are some valid threats as well, including the pressure exerted on the judiciary to reduce the span of proprietary patents from 20 years to lesser. The smaller competitors to mega-corporations like Pfizer argue that the monopoly offered by such patents virtually wipes out competition and hands over unlimited pricing power to the capital-rich bigger corporations. If these appeals to amend patent laws come through, then the 16% return on invested capital, as seen in the period between 2002 and 2006 could be a thing of the past. To protect their interests in the future, the pharmaceutical industry can aggressively lobby in the Congress and the Senate, stating supporting arguments for maintaining the status quo. Further, they can carry out positive publicity campaigns in order to on improve the industry’s image among the general population, as the Vioxx and Bextra disasters are still fresh in public memory. Leaders in the industry can also educate the public as well as policy makers about the many beneficial consequences of genomics and stem-cell research.