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In a position statement on the current state of the pharmaceutical industry, the Royal Society of Chemistry (RSC) points out that there is a growing feeling around the world that the "big" pharma model is broken. The sheer scale of the costs involved in the search for new products has reached the point where even a few failures could bring a big pharma to its knees.

Moreover, as the evidence piles up, it is becoming abundantly clear that trying to do everything itself, in-house, is neither competitive nor effective. As discovery costs are ramping up, governments around the world are trying to rein back drugs pricing to stop national healthcare costs spiraling evermore out of control. Clearly, this makes it still more difficult for big pharma to justify placing enormous R&D bets that have a very good chance of failing, since it can no longer expect to jack up the price of a successful drug to support its total R&D spend.

Instead, "outsourcing" has become the way to go, with the outsourcers being small and in some cases tiny life sciences companies. Many of these are fledgling spin-outs from academia with a professor or two ready to gamble a safe academic career against the possibility of a billionaire life-style if their big idea pays off.

Another significant pressure is big pharma's desire to be well positioned, with a great portfolio of drugs, to serve the rising Asian healthcare markets. One of the corollaries of high growth in Asia and Africa is the development of a burgeoning middle class, with ever higher expectations concerning healthcare. The pharmaceutical sector, the RSC points out, is making substantial investments in partner organizations closer to these new markets.

Despite these problems there is no doubt that the pharmaceutical sector is important in every major economy. In the U.K., the pharmaceutical industry is consistently in the top three industrial sectors. However, as accountants Ernst & Young make clear in their commentary on global big pharma, that percentage is shrinking fast.

The other two players E&Y lumps together with big pharma for this analysis are big biotech and specialty pharma. In 2006, big pharma used to command around 85% of the cash resources for global deals; however, in 2012, their share of the firepower had shrunk by 10% to 75% and in 2013 it fell another 5%, to 70%. The valuations of big biotech and specialty pharma are the cause. Their valuations are shooting up faster than big pharma, since many of them are themselves in the sweet spot for acquisitions and are being priced accordingly.

Of course, with ever rising stock markets, the valuations of big pharma companies are moving up as well, but not as fast as their acquisition targets. This means that their actual firepower, in terms of acquisitions has shrunk by some 20%, E&Y claim. In 2014, big pharma is facing even stiffer competition in deals from big biotech and specialty pharma. The two accounted for more than 80% of M&A activity last year (2013) in terms of announced deal values.

A 2013 report by the Frankel Group adds weight to the idea that the big pharma model is bust. It commented:

"An innovation drought has significantly affected the viability of the current pharma business model. An industry dependent on innovation is losing the ability to innovate."

Put into plain English, the Frankel Group argues that big pharma has lost its way when it comes to knowing how to evaluate risk and return equations in hard-to-predict development projects, and has therefore got itself mired in "sub-optimal organizational structures and incentives". Ouch! Misallocation of resources is a classic ingredient of boom to bust cycles, and big pharma has to navigate itself out of these rapids if its ranks are not to be decimated in the years ahead...

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Source: Big Pharma Looks For New Models