The

Pharmaceutical
Profitability
Outlook

Is pharmaceutical
profitability
sustainable into the
21st century?
“As the pharmaceutical industry finds
itself at a crossroads, the strategic
directions companies take will be pivotal
in determining whether they can
continue to operate at such consistently
high margins”
Increasing competition, combined
with healthcare reforms and the
rising cost of R&D, is threatening
the pharmaceutical industry’s
traditionally high profit margins.
How can drug manufacturers adapt
their historically simple, yet
consistently successful research-
based strategies to sustain their
profitability into the next decade?
When benchmarked according to
the most up-to-date data available,
how do the recent profitability
performances of the top 10 PoM
companies compare? What are the
essential components of the optimal
strategy to eliminate over capacity
and cost excesses? What are the
key resistors to profitability now
and into the 21st century? How far
can the role of outsourcing in the
pharmaceutical industry expand?
Based upon our in-depth primary
research with key opinion leaders,
‘The Pharmaceutical Profitability
Outlook’ provides all the vital
strategic insight you need to answer
these fundamental questions and
many more.
Business Insights is a series of management reports
providing you with:
• Primary research
• Independent, expert opinion
• Long-term predictions and analysis
How we collect our information 170 pages of insight and
- primary research analysis enabling you to:
Business Insights’ reports consist of original research
• Evaluate current and potential
backed up by expert analysis and forecasts. The
regulatory changes and their
Pharmaceutical Profitability Outlook is based
implications for your company’s pricing
upon our exclusive interviews with over 70 key
and revenue generating strategies
decision-makers analysing their opinions on
profitability and future strategies within the • Understand how outsourcing is
global pharmaceutical market. becoming a vital component of all

pharmaceutical companies’ make-up,

How we conduct our analysis - and in which areas it offers most
industry experts benefits

Our authors are recognised experts on the topics we • Effectively leverage the impact of more
cover. They derive their experience from either powerful, better informed patients
consulting firms such as Mercer Management
• Evaluate the impact of new
Consulting and Bain & Co, or industry itself. They
technologies, from drug delivery to
apply their knowledge and expertise to particular
situations to explain past events and make accurate healthcare informatics on R&D

predictions of future developments. productivity

• Streamline your company’s cost

Our research for this report structure and eliminate excess capacity

• 10 Business Development Managers

detailed how they perceive the changing
marketplace will influence and impact upon
their companies’ strategies
• Benchmark the top 10 PoM companies’
profitability performance
• Understand the interplay of critical

• 32 Finance Directors identified optimal mass, R&D pipeline strength, control

current and future strategies for controlling over the value chain and global reach

costs whilst maximising productivity within pharmaceutical profitability

• 20 US and European Pharmaceutical
• Comprehend how premium pricing can
Marketing Executives analysed the changing
be best obtained and exploited
customer dynamics within their markets
• 15 Healthcare Payers outlined what they • Explore new avenues for increasing

require from pharmaceutical companies in the your profit margins into the millenium

future, and what companies expect in return

This report addresses key questions, such as:

How does the profitability performance of leading drug companies

compare?
• What components of a
Operating profitability versus PoM concentration for the
top PoM companies, 1997 company’s strategy will have

greatest influence on its

40%

35% GW profitability into the 21st

Operating profit margin

30% BMS
Merck
century?
25% AHP
Pfizer
SB
20% Novartis
• How have companies
R oche
15%
positioned themselves in the
10%
HMR Lilly
changing marketplace?
5%

0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% • Which companies have the
PoM/Total sales
greatest potential for future
Source: Business Insights
growth?

What is the optimal cost structure for each tier of pharmaceutical

company?

Cost breakdown of lower, middle and upper tier • How are the upper tier
pharmaceutical companies as a percentage of sales companies able to more
100 %

90 %
effectively manage the cost
80 % of goods sold?
70 %

60 %
• What are the dynamics of the
% of sales

50 %
trade-off between production
40 %

30 % costs and SG&A costs?

20 %

10 % • How can cost savings in non-

0%
Lower Middle Upper All value added areas best be
COGS R &D S G&A Other Operating profit
realised?

Source: Business Insights

How far will virtual integration progress in the next century?

• Is it viable to outsource all of

Value of key pharmaceutical outsourcing markets, 1997
a company’s operations to
create a virtual
50
Outsourced
pharmaceutical company? 45 In-house
40

• Do companies need to retain 35

Spend ($bn)
30
certain skills in-house? 25

20

• What is the optimal 15

10
relationship between drug
5

companies, CROs and 0

Custom Clinical drug Sales &
manufacturing development promotion
CSOs?

Source: Business Insights

Which non-traditional revenue generating tools will come to the

fore in the next decade?

• Can DTC advertising fulfil its

Actual and forecast DTC spending in the US, 1990-2005
potential?

• Is there a clear relationship

8,000
betwen DTC spend and
7,000
Total US DTC spend

product sales? 6,000

5,000
($m)

4,000
• How can the product
3,000

licensing dynamic be 2,000

1,000
optimally managed? 0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Source: Business Insights

 Marketing

Contents abridged
Manufacturing
IT
A fourth regulatory hurdle: Pharmaceuticals
The role of the generics sector
EXECUTIVE SUMMARY Rx-to-OTC switching
Key Findings
Innovation
New technologies
CHAPTER 1: BACKGROUND OF THE The shift away from research-based strategies
PHARMACEUTICAL INDUSTRY The customer-focus
Summary of key findings Disease management
Introduction The evolution of the sales and marketing function:
Historical Development Pre-marketing
Growth strategies DTC
The current competitive environment Sales force strategies
Market drivers Product licensing
Cost containment
Regulatory reform CHAPTER 4: ANALYSIS OF
Epidemiology
CURRENT
Industry structure:
Leading companies PHARMACEUTICAL PROFITABILITY
Corporate strategies LEVELS
Developing companies Summary of key findings
The changing customer base Introduction
Cross-industry comparison
CHAPTER 2: INTRODUCTION TO Ratios
Key drivers
PROFITABILITY Profitability across the pharmaceutical industry
Summary of key findings
Profitability of leading pharmaceutical companies
Introduction
Key strategies and portfolio analyses for the following
Definition
companies:
Measures of profitability
Merck
The three channels of profitability: price, volume and cost
Glaxo Wellcome
Traditional strategies to boost profitability
Pfizer
Price-based strategies
Novartis
Case study
Bristol-Myers Squibb
Volume-based strategies
Hoechst-Marion Roussel
Case study
SmithKline Beecham
Cost control strategies
Roche
Case study
Eli Lilly
External pressures on profitability
American Home Products/Monsanto

CHAPTER 3: PHARMACEUTICAL
CHAPTER 5: THE FUTURE OF
PROFITABILITY IN THE 1990s
Summary of key findings PHARMACEUTICAL PROFITABILITY
Introduction Summary of key findings
The search for critical mass Introduction
Integration: Future industry structure
Horizontal integration Consolidation
Vertical integration Integration
Diversification Drivers of growth
Virtual integration Demographic shifts
Globalisation Epidemiological trends
Global products The role of biotechnology
Emerging markets Pharmaceutical regulation in the 21st century
Outsourcing Pricing
CROs Drug approvals
CSOs Innovation: The future of R&D
Novel technologies
The changing role of R&D
Will profitability be sustainable into the 21st century?
Sources of growth
New markets:
Therapeutic markets
Geographic markets
Technological markets
Resistors of growth
GLOSSARY
LIST OF FIGURES (abbreviated)
The drug development process
R&D as a percentage of sales, 1980-1997
US R&D expenditure since 1980
The cost of developing a new drug
Number of patients in clinical trials per NDA
Influence of customer groups on price and prescription
volume, US
US prescription sales, 1993-97
Influence of customer groups on price and prescription volume
in key markets
Level of return on a pharmaceutical product
The constant sales curve
Generics' share of the US prescription drug market by volume,
1984-1997
Market penetration and expected growth of generics
Brand versus generic price changes in the US, 1996-97
The profitability triangle
The effect of price, cost and volume on profitability
Opportunities to increase profitability
Pressures on pharmaceutical profitability
Cost breakdown of lower, middle and upper tier
pharmaceutical companies, 1997
Number of employees by cost centre
US R&D personnel trends 1990-1997
R&D as a percentage of total costs for lower, middle and upper
tier companies
Number of patients in clinical trials per NDA
R&D as a percentage of sales 1980-97
Profitability of the top 10 PoM pharmaceutical companies,
1997
Trends in sales, operating profit and profit as a percentage
of sales for the top 10 PoM companies, 1993-97
Top 10 companies' PoM R&D costs compared to the industry
spread, 1997
Correlation between average market penetration and market
share
The virtual pharmaceutical company
Changes in research technology
The role of genomics in drug discovery
The impact of premarketing upon future sales
Actual and forecast DTC spending in the US 1990-2005
Pharmaceutical companies with biotechnology interests,
1991-97
Breakdown of top 10 PoM companies' sales by key therapeutic
areas, 1997
Growth of total sales, 1996-97, compared to PoM sales as a
% of total sales, 1997
Correlation between PoM sales and PoM R&D spend, 1997
Correlation between therapeutic area focus and profitability
Operating profitability versus PoM concentration for the
top 10 PoM players, 1997
Relative importance of best-selling drugs to the top 10 PoM
players, 1997
Value of key pharmaceutical outsourcing markets, 1997
LIST OF TABLES (abbreviated)
Drug innovation through the 20th century
Top 10 ranked companies according to R&D expenditure,1997
US R&D costs, 1997
Profitability of the top 10 pharmaceutical companies by total
sales, 1997
Changes in FDA requirements
US healthcare is funding, 1997
Medicaid drug expenditures, 1980-1997
Relative influence of different customer groups in the US
Western European healthcare expenditure, 1970-2000
Government restrictions on the price of ethical pharmaceuticals
Review times of selected drugs under the EMEA centralised
approval procedure
Relative influence of different customer groups in key markets
Generic share of the pharmaceutical market by value
Integration strategies adopted by the pharmaceutical industry
Billion dollar deals in the 1990s
Market shares of merged companies, pre- and post-merger
PBM acquisition details
The competitive mass needed to provide adequate market
coverage
Revenues of leading CROs
CRO specialisation
Populations of selected emerging markets
GDPs of selected emerging markets
Inflation in selected emerging markets
Generic divisions of ethical manufacturers
Innovative drug launches during the 1990s
US salesforce movements
Return on R&D investment for biotechnology companies
The pharmaceutical industry's three tier system
Outcome of pharmaceutical R&D in top tier companies
Breakdown of top 10 PoM companies' sales by key
therapeutic areas, 1997
Profitability ratios of top 10 PoM companies', 1997
Comparative analysis of top 10 PoM companies', 1997
Vital statistics of the top 10 PoM companies, 1997
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