How Big Pharma has to change

By guest blogger Daniel Hoffman:

Even casual observers of the pharmaceutical industry know that it is in a trough of new product development especially over the next three years.  What remains unappreciated, even within the industry, is that pharma's entire customer base is undergoing enormous change.  If the industry wants to adapt, its entire business model must change just as radically.

     Pharma's historic customers -- the individual physicians -- have been consolidating into larger corporate entities. They are doing this to get a stronger hand in negotiating with insurers/payers, and to earn revenue from other sources such as clinical trials.  And in an era when electronic medical records (EMRs) are becoming coins of the doctoring realm, larger practices possess the capital to make the change more quickly. This recent report  in The New York Times shows that physicians now own less than 50% of private practices.

  This trend holds several huge consequences for the pharmaceutical industry.

   The sun will set on the gatekeeper system. Practices rather than individual physicians will make or constrain most of these decisions, and profits will represent the principal factor driving their choices.

     Sales reps become obsolete. Pharma and others will have to conduct business-to-businss selling, not aim at individual docs.  Reps will become as obsolete as buggy whip operators.

     Niche products will be king.  In the near future, the decision on which drugs to use will result from a dynamic of dueling electronic databases.    Instead of a company being able to argue persuasively that its  product is the most effective, larger practices will check the historical outcomes of each product among tens of thousands, and even  millions of patients.

Until new blockbusters are found, most new, branded products will show better cost-effectiveness in only a small proportion of patients.  That means pharma must learn to prosper by making profits on small, niche products.  Until they can do that, the giant companies such as Pfizer, Merck and GlaxoSmithKline will operate with diseconomies of scale, the exact opposite condition of what favored the mergers and acquisitions that created those behemoth companies.