German Drug Companies to Diversify

The value of the pharmaceutical industry in Germany is doubling. However, a new study warns that drug companies need to move into the digital era, if they wish to keep their relative profit margins northwards. 

Background 

The pharmaceutical industry as we understand it today has its origins in the second half of the 19th century. The outcomes of the Scientific and Industrial Revolution were fused to benefit human health.Merck in Germany was possibly the earliest company to move in this direction. Founded in 1668 as a pharmacy Heinrich Emanuel Merck began the transition towards an industrial and scientific concern  in 1827  by manufacturing and selling alkaloids.

Similarly, GlaxoSmithKline’s origins can be traced back to as far as 1715. However, in 1842 Beecham became involved in the industrial production of medicine and opened the world’s first factory for producing only medicines in 1859.

Pharmaceutical firms, first in Germany in the 1880s and more recently in the U.S. and England, established cooperative relationships with academic labs. The resulting exchange of research methods and findings drove a focus on dyes, immune antibodies, and other physiologically active agents that would react with disease-causing organisms.

In 2014, Germany’s healthcare spending accounted for 11.2% of the GDP. Out of this, 14% was spent on pharmaceutical products. The increased spending was due to rise in demand and introduction of new drugs in the market.  With revenue of EUR 38 billion in 2015, Germany is the world’s fourth largest pharmaceutical market. 

Analysis 

A new industry study by EY consultancy concluded that the world’s pharmaceutical companies are gradually becoming less profitable and face radical challenges as the health market shifts from lucrative drugs to individual treatments. The study scrutinized the world’s 21 biggest pharma companies.

Analysts at EY expect the pharma market in Germany to double in value by 2030, but they see its focus shifting towards new IT-driven health solutions. That means a large portion of the market’s expansion could come from new players that develop and offer solutions based on digital analysis of individual patients’ conditions.

EY’s analysts doubt whether traditional drug development will be enough for companies to defend their positions in a growing health market.The study also found that aggregated operating profits for all the companies in the study fell by 2.4%, while revenues inched up just 0.4 % in 2017. This drop reflects mounting pressure on companies to innovate and enter new niche markets

EY said the top 21 firms last year increased their research spending by almost 6 % to a combined €85 billion last year.

“New ecosystems will emerge in which participants share large amounts of data to be analyzed so that more individualized treatments can be created”,said Mr. Peukert who heads the EY consultancy in life-science business for Germany, Austria and Switzerland. “Established players will only be able to master this challenge by undergoing a cultural transformation and approaching their business with entirely new concepts. The key in future will be to control the information exchange through digital technologies.Those without a relevant platform will lose,” he added.

A lot of analysts are advocating major change for big pharma. “The reality is that digital technologies won’t transform a business if its operating model isn’t designed to accommodate digital innovation. To thrive in the era of value-based health care and personalization, companies can’t just make incremental changes within their existing operating model. They need an end-to-end redesign,” a recent report by senior analysts at the Boston Consulting Group warned.

Counterpoint

The tough market conditions contrast with the pharmaceutical industry’s impressive R&D performance. Last year, US authorities approved gene and cell therapies against cancer, in which patients’ immune cells are modified and then reinjected into their bodies to fight tumors. New immunotherapy drugs of this kind include Bavencio, jointly developed by Germany’s Merck Group with Pfizer.Other innovations include the “digital pill” developed by the Japanese firm Otsuka for use against schizophrenia: the tablet includes a tiny electronic sensor which tracks absorption of the drug.

Last year the US biotech firm Gilead shelled out almost $12 billion for Kite Pharma. An innovative hepatitis medicine launched in 2015 had swelled Gilead’s coffers, boosting it into the top 10. But it too is under threat from generic manufacturers, as is British firm Astrazeneca, whose cash-cow heart medicine Crestor lost its patent protection two years ago.

However, growth in the global pharma business continues to be sluggish, with the industry facing intense price pressure and the expiration of lucrative patents.

Assessment

Our assessment is that this transition calls for pharmaceutical companies to make a paradigm shift from its  one-size-fits-all approach to a more bespoke model in healthcare.  We believe that the  pharmaceutical industry is increasing its bandwidth for more innovative models of drug research. We feel that there will be a transformational change in an individual's healthcare experience when the industry is able to evolve its business on to a digital platform.