Every day, novel technologies to treat various diseases, medical conditions and improve human health are being developed. The expected rate of growth for the pharmaceutical industry globally is poised to have a rate of growth of about 4.9% from $ 1 trillion in 2015 to about $ 1.3 trillion in 2020. However, the pharmaceutical industry of today faces a considerable amount of risk. While the global revenues are expected to rise steadily, the innovativeness in terms of successful new product launches by the pharmaceutical industry is way below par. It has been observed that the Pharmaceutical Industry roughly follows Eroom’s law. Eroom’s law in this context is that the number of New Molecular Entities per billion dollars spent on research and development has halved every 9 years since 1950.
The Blockbuster Business Model was conceptualized to develop select innovative therapeutics that provided an incrementally improvised functionality than its predecessors. However, a fully integrated pharmaceutical company (which handles R&D, manufacturing and sales all by itself) is exposed to risk at multiple points across its value chain. This can be proven by the observation that on an average in the pharmaceutical industry, out of every 10,000 compounds that are investigated, 250 compounds enter the pre-clinical testing stage. 5 compounds subsequently are chosen to enter the Phase I, II and III trials, out of which only one is approved by the authorities(FDA). Hence the rationale behind creating the blockbuster was always to find that one product offering that would cover for other failed prospective drugs and in addition to it still yield a high rate of return (10-20 times the net investment). Blockbuster drugs are often the results of a wide scale collaboration between companies excelling at different levels of the value chain. According to a survey carried out by Hannigan, Mudambi, & Sfekas in 2013, about 87.6% of all blockbusters were finally marketed by the major pharmaceutical industries major companies in their research are the top 12 pharmaceutical companies of the Fortune 500 list.
In the recent years, there has been an increasing pressure on the pharmaceutical companies to lower drug prices due to government initiatives for affordable healthcare. At the same time, the cost and difficulty to commercialize new drugs has also been rising. According to a study conducted by the Tufts Center for the Study of Drug Development, the life cycle costs incurred from developing a new prescription drug to gaining post-market approval is $2.87 billion in 2013 which is 145% higher than in 2003.
The major reason attributed to this rise in the cost of drug development is the increase of ‘’out of pocket clinical costs”. This means that due to stricter regulatory protocols, expensive medical consultations to study drug effects, a higher number of test subjects (in thousands) for clinical trials etc. need to be paid for. Further, on an average only one out of five thousand compounds clear medical trials and reach the drug shelf with the process taking about 15 years.
- Osakwe, O. (2.016). Trends in Innovation and the Business of Drug Discovery. In Social Aspects of Drug Discovery, Development and Commercialization https://doi.org/10.1016/b978-0-12-802220-7.00002-8
- Hannigan, T., Mudambi, R., & Sfekas, A. (2013). A longitudinal analysis of blockbuster pharmaceutical drugs. DRUID Academy 2013, (1942).
- U.S. Department of Commerce, & International Trade Administration. (2018). Overview and key findings. https://doi.org/10.1787/weo-2018-4-en
- DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2016). Innovation in the pharmaceutical industry: New estimates of R&D costs. Journal of Health Economics, 47, 20–33.
- Spatz, I. (2010). Health Reform Accelerates Changes in The Pharmaceutical Industry. Health Affairs, 29(7). https://doi.org/https://doi.org/10.1377/hlthaff.2010.0432
- Gilbert, J., Henske, P., & Singh, A. (2003). Rebuilding Big Pharma’s Business Model. In Vivo, 21(10), 1–10. Retrieved from
- Schilling, M. A. (2013). Strategic Management of Technological Innovation (Vol. 53).