Pharmaceutical companies face a rapidly changing business environment with unprecedented challenges. At conferences, trade gatherings and in the news, the industry buzzes with topics of healthcare reform, aging populations, emerging markets, increasing regulatory oversight, and weak discovery pipelines. While large marketing budgets and blockbuster strategies drove the industry over the past few decades, cost containment and innovative business models are becoming paramount for survival in the new dawn of pharmaceutical manufacturing. Many blockbuster drugs have gone generic, but the generic producers are faced with their own challenges such as Generic Drug User Fee Amendments (GDUFA) fees, market consolidation, and formulary price control. According to the World Health Organization, the global pharmaceutical industry is $300 billion and expected to increase to $400 billion in the next three years [1]. With this anticipated stellar growth rate, pharmaceutical suppliers would expect to reap the rewards. Instead, the conversion to a highly competitive, generic market is resulting in a race to the bottom where low price dominates the landscape of victory. So what does this mean for pharmaceutical suppliers?
The pressure to control cost inevitably trickles down. For the past decade, purchasing groups have adopted centralized procurement strategies rather than maintain purchasing control at the site level. Combining this strategy with leveraged competition, reverse auctions, and bid systems, the focus was to commoditize and reduce pricing. And in general, it worked. With the exception of petroleum-based materials, pricing for many excipients and other supplies has either remained flat or even decreased over the past decade. In effect, suppliers gave up their margins in order to keep their business volumes. With margins minimized, market forces for raw materials are having a bigger impact on the price fluctuations. Pharmaceutical producers now monitor raw material costs as a way to hedge and understand pricing. And with margins eroded, pharmaceutical manufacturers will have to employ new strategies to continue cost improvement. The new challenge is to think differently.
Like many of the branded and generic pharmaceutical producers, excipient companies and other suppliers are moving towards industry consolidation as a way to stay competitive and take advantage of economies of scale. Today, the top ten excipients companies now garner two thirds of the industry revenue [2]. Companies with a single product line will not be as operationally efficient as those with broader portfolios or innovative technologies. This makes these “one trick pony” organizations ripe for acquisition. Additionally, niche producers, such as those whose businesses are primarily in the food or industrial sectors, are also at a huge disadvantage and potential risk, particularly when it comes to understanding the nuanced requirements of pharmaceutical quality systems. As such, these niche products will also be targeted by larger suppliers looking to expand their product offerings. And for new competitors, adhering to the demanding quality systems makes a high barrier to entry. However, when we see consolidation in the excipient space, no more than three competitors tend to be successful. We see the industry leader, a strong number two, the “alternative” number three, then everyone else. The pharmaceutical industry’s aversion to change tends to further the penetration of existing suppliers who acquire competition in their existing product range. Suppliers will also look at crossing the boundaries into highly similar markets aside from branded and generic pharmaceuticals. By adopting complementary products used in biotech, over-the-counter (OTC), nutritional, cosmetic, or other fine chemical consumers, their cost basis is further diluted to help maintain competitiveness. Consolidation and creating powerful pharma suppliers will be critical to future success.
While effectively managing business and understanding their market, the appropriate product offerings will also be crucial. Controlled release (CR), modified release (MR), orally disintegrating tablets (ODT), and other innovative dosage forms are still of interest to both pharmaceutical producers and suppliers. It has been repeatedly documented that moving patients from a TID dosing regimen to BID or OD vastly improves compliance, and thus the medicine’s effectiveness. Maybe more important to the bottom line, pharma producers know that altering the delivery can result in coveted patent extensions and product differentiation. With pipelines already weakened and generics moving from a “wait for expiration” strategy to a “patent challenge” strategy, any opportunity to extend intellectual property protection is warmly welcomed. Similarly, CR, MR, and ODT platforms offer differentiation to the prescribing physician and convenience to the patient which ultimately boost brand recognition and sales. Suppliers with product lines focused on altering release profiles or different delivery options will obviously benefit from this trend. The ODT market space is currently highly fractionated with many players offering competing platforms. Many pharma companies have also developed internal technologies rather than partnering. Given the broad number of emerging technologies, we might expect to see this market increase in size, but the number of providers significantly reduced in the next few years.
Lastly, we anticipate that pharma companies should be expected to start examining their own internal processes. While the industry is typically touted as highly innovative, it is in fact generally inhibited by the fear of change—and with good reason. Altering existing products has been highly discouraged as this allows regulators to take a deeper look into older filings. As such, the conventional wisdom has been not to change anything unless it was really, really broken. However, with the emphasis on Quality-by-Design (QbD) and lean six sigma programs, newer products are engineered to a higher standard with greater understanding of how change is both anticipated and affected throughout product lifecycle management. Now there is a greater focus on simplifying processes. Direct compression takes precedence over traditional wet granulation. The word “filler” is taboo in the excipient world. Every ingredient has a function and smarter, leaner formulations will prevail.
This means that highly functional ingredients, co-processing, and excipients that allow simpler and more robust formulations will take precedence over traditional, basic materials with limited performance. Also, with pipelines reduced to a trickle and potential new drug candidates having issues with solubility, permeability, and stability, suppliers focused on mitigating these challenges will reap the rewards in upcoming years.
Unprecedented challenges require innovative solutions. Like pharmaceutical companies, excipients and other suppliers will have to look internally and externally for solutions. Acquisition and consolidation, streamlining business operations, and economies of scale will be paramount to success. Companies that operate part time in the pharmaceutical space and those with a single pharma product line will be at an extreme strategic disadvantage. By focusing on the right product mix of drug delivery technologies and highly functional technologies, and solving the current formulation challenges like solubility, permeability, and stability, pharmaceutical suppliers will position themselves for strong growth in the future. Lastly, by looking at ways to positively impact the pharmaceutical manufacturers’ QbD and lean six sigma programs, suppliers will solidify themselves as partners and not just another supplier finishing first in the race to the bottom.
References
- World Health Organization. http://www.who.int/trade/glossary/story073/en/
- Specialty Excipients for OSDF Pharmaceuticals, Business Analysis and Opportunities. http://www.klinegroup.com/reports/brochures/y611j/brochure.pdf
Ken Seufert is Managing Director, North America, for MEGGLE USA Inc., a global leader in excipient products and technologies. Prior to his tenure at MEGGLE, Mr. Seufert was Vice President of Sales for another leading, global excipients company. Mr. Seufert has over 20 years of experience in the pharmaceutical and specialty chemical industries. He has three published papers on technology and economics, owned several companies, and has been elected to public office. In addition, Mr. Seufert holds degrees in Economics and Chemistry from the University of Delaware.