One of the most obvious trends in the industry over the last decade or so has been consolidation via mergers and acquisitions. Deals involving major players have been growing in size, and have created a new tier of mega-companies. Companies undertake these deals for reasons that include strengthening pipelines, gaining economies of scale, and improving research efficiency. However, the unprecedented size of these organizations is creating substantial management complexity, and some merged companies are finding the expected savings and improvements elusive. The stand-alone companies, on the other hand, are actively assessing what their most attractive options might be.

Even with industry consolidation, there has been a steady increase in the percentage of revenues that pharmaceutical companies and other industry players are spending on R&D. All of this spending has not guaranteed these companies sufficient pipelines to make up for expiring patents, and to meet growth expectations. Many pharmaceutical companies are experiencing a decline in research productivity. Some have tried innovative organizational models to drive productivity, but their success remains uncertain. Despite the emergence of new technologies, it is becoming more difficult to find a breakthrough molecule in many research areas.

In spite of talk of pharmacogenomics and other tools for streamlining clinical development, drug developers seem to be facing an era of larger, longer trials, and tougher regulatory hurdles, making it difficult to lower costs. Marketing plans that are increasingly sophisticated require executives to make tough decisions in trial design, balancing speed-to-market against developing the optimal product profile. High-profile withdrawals of approved drugs have, in some cases, raised the bar for regulatory approval. To the extent that regulatory hurdles are requiring larger or longer trials, it becomes increasingly difficult to get the desired return on R&D investment. In addition, as trial numbers increase and inclusion criteria get tighter, companies are finding it harder to keep patient recruitment from delaying clinical programs.

As companies have struggled with internal productivity, the past decade has seen a dramatic increase in licensing as a source of new products. At most major pharmaceutical companies, licensing has moved from a secondary activity to a crucial source of pipeline strength. At the same time, the search for the right licensing or co-promotion partner has grown increasingly competitive, while deal values have spiraled upward, particularly for late stage products with blockbuster potential. More and larger deals are being made, earlier in development, due to strong demand for licensing opportunities. As the deals have become larger, the risks have become greater and more visible to the investment community.

The maturing of the biotechnology industry has led to more robust pipelines and improved product offerings (e.g. humanized antibodies). The fruits of the genetic revolution are being seen in the increasing collection of biotechnology drugs in the market. For biotech companies, the long years of research are paying off. For pharmaceutical partners, biotech drugs offer hope for plugging some of their revenue gaps. However, the high novelty of the approaches, compounds and targets in development is increasing the risk profile of portfolios. This may lead to a period of increased attrition and higher costs per successful drug, as many novel compounds go through the pipeline. During this period, biotechnology companies may struggle to survive with limited cash in-flows during long periods between financing windows.  In addition, manufacturing complexity and capacity issues have continued to dog the biotechnology industry.

As pharmaceutical companies have grown larger, they have become increasingly focused on blockbusters – very large players are looking for very large drugs. This is leading to high competition in a few key disease areas. Failures in these blockbuster areas are very large and very public, while successes are requiring increasing investments in sales and marketing. Although mid-sized niche drugs can be very profitable, maintaining management focus on a broader portfolio can be a challenge for the largest players.

The focus on blockbuster drugs has led to an increasing emphasis on marketing, and to rapidly increasing direct-to-consumer (DTC) budgets and sales-force sizes. Other industry pressures, including revenue and earnings pressure, and increasing competition for access to specialists and high-prescribers, have also driven sales force growth, and a desire to improve sales effectiveness. Unfortunately for pharmaceutical companies, sales force growth has not yielded similar growth in physician access, so sales rep effectiveness is actually declining. At the same time, new regulation of traditional sales tools as well as counter-detailing to promote use of generics are making it harder for sales reps to gain access and influence physicians. Some players are using new tools such as e-detailing, and online DTC, but so far none of these has changed the belief that large sales forces are critical to drug marketing.

Pharmaceutical and device pricing has become a topic of heightened public debate in the United States. The difference in pricing levels between the U.S., and Canada and Europe has become common knowledge. Politicians and payors want changes, perceiving that U.S. patients and payors pay an unfair share of global revenues. Drug companies fear increasing price controls and utilization management. Payors fear that spending on drugs and devices will continue to grow rapidly. Patients worry about having sufficient insurance coverage. As cost containment pressures grow, the political environment facing the pharmaceutical and medical device industry is becoming increasingly hostile.

The forces already discussed have collided with other problems in global economies to send pharmaceutical companies into an era of increased cost pressures and lowered market valuations. Margin and earnings pressures are bringing an increased focus on traditional financial controls and operational efficiencies, in an industry that has historically given them little attention. Topics like purchasing and supply management, IT cost containment, and manufacturing cost reduction are becoming increasingly important to top management. Payors and providers are also continuing to seek ways to improve their cost structures, as employers strive to lower the cost of medical benefits.

Medical device companies continue to be driven by innovation. New devices, such as coated stents, deliver real improvements in clinical outcomes. New technologies, including tissue engineering, open new avenues to treatment. Pursuit of extended indications drives sales growth for existing devices – for example, heart failure and CNS indications expanded the market for cardiac rhythm management substantially. Many have come from niche players, and the industry remains highly fragmented by products and competitors. However, a few big, diversified players are increasingly using scale to their advantage.