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The Pharmaceutical Price War: How We Got Here and Where We’re Going

By Mitchell Lee
November 15, 2016

The 2016 news cycle, while dominated by politics, has shown significantly more about pricing in the pharmaceutical industry than in years past. And because the term “price war” is now used openly, there are big reactions in the market—drops in stock prices of 12%, 14%, and even 26% are in the news.

There are numerous moving parts here. The industry is no longer exclusive to direct competition between the drug manufacturers as they try to recoup the long-term investments from an extended product development cycle. Now, the intermediates between the manufacturers and pharmacies—all B2B transactions—are destroying the value inherent in those distribution channels.

Since selling brand drugs leads to razor thin margins, pharmaceutical distributors have developed their sourcing and product positioning channels with a primary focus on the higher economics provided by generic drugs.

READ MORE: Mylan’s EpiPen Pricing Crossed Ethical Boundaries

For the last few decades, this was a booming and profitable business where you could architect your supply chain, deliver products and expect the market to bear whatever price manufacturers and distributors decided upon. Customers would allow the fixed price knowing they would save money when compared to brand drug equivalents. This caused an increased push for generic drugs in most developed societies with complex, expensive healthcare systems. From there, we saw an unprecedented spike in patent expirations that led to a higher conversion from brand to generic drugs.

It’s no wonder distributors have placed an emphasis on generic sales when you consider generic drugs account for roughly 10% of their total revenue, but 70% of total profits. Can you blame them for squeezing the cash cow without having to significantly invest in technology in their sourcing and go-to-market channels?

But things have changed. Now, there is increased scrutiny with regards to pharmaceutical pricing. When things get complicated and the market is racing to the bottom, there is often a simplistic view: maintain (or even grow) market share. This has resulted in various mergers and acquisitions (Pfizer and Allergan, Mylan and Abbott, Alliance and Rite Aid, etc.), which lead to a host of new issues once the new company is formed.

Companies must look elsewhere to have a chance at sustained growth. Consider this: How do you ensure the tactics you deploy are fitting your evolving strategy and market? Can you point to a set of rules about what you will and won’t do today and in the future? Are those rules tuned to make sure the right people are spending the right amount of time on the right deals?

In this regard, the pharmaceutical industry has traditionally lagged compared to the rest. There has been less emphasis on leveraging Big Data and the urgent need to shift to value-based pricing. But in the way the market dynamics are rapidly evolving with increased transparency and scrutiny, outcome-based pricing will undoubtedly reshape the way current stakeholders do business (whether they like it or not).

If you’re in the pharmaceutical space you most likely do not have an integrated enterprise solution. You are probably in a tough spot: deciding what to do every day with ad hoc, disparate tools.  It’s not out of the question to get started on a real solution, but probably hard to get attention from the right people: bandwidth is being burned at a tremendous rate.

If you’re not in the pharmaceutical industry (or another industry with similar “warring” going on) then take a moment to consider that situation, and project the issues to your own capabilities in similar conditions: do you have integrated decision/guidance deployment capabilities for times when your strategy is tuned, and hugely different tactics are required?  Can you turn on a dime, to defend the value you have in your offering? There are companies that are already waking up to this new reality.

At such a pivotal moment when the public domain is keeping a close watch on the next moves in pharmaceutical pricing, it is crucial to recognize the importance of that integrated enterprise system that monitors market shifts and protects from volatility.

  • Mylan , pharmaceuticals , price war , pricing , profit , stock

    Mitchell Lee

    Mitch is a Business Consultant at Vendavo with 25+ years of experience in the technical, operational, marketing, and commercial arenas of the chemical industry. Prior to Vendavo, Mitch was with BASF and Orica in product marketing and business management, driving operational optimization, pricing excellence, and margin improvement, as well as personal engagement in high value sales negotiations. Mitch also has deep experience with raw materials supplier portfolio management having negotiated large scale and long-term agreements with leading suppliers.