1 Pharmaceutical Industry Profile
Andrew A. Signore
CONTENTS
Industry Overview: Introduction
Outsourcing Contract Development and Manufacturing
Supply Chain Logistics and Security
Strategic Environmental Forces
Appendix 1.A: cGMP Design and Construction Facility Features
Appendix 1.B: The Future of Pharma Manufacturing Facilities Survey Summary
INDUSTRY OVERVIEW: INTRODUCTION
The pharmaceutical industry of today is experiencing unprecedented challenges and rapid transformation. For the purposes of this text, the pharmaceutical industry includes the producers of pharmaceutical products and their chain of service providers, including professional consultants, material and equipment suppliers, contract manufacturers, and any other entities that are involved in delivering regulated medicines (e.g., drug substance and products, whether chemically or biologically based, supplied as tablets, liquids, or injectables, or delivered by a medical device as defined by the U.S. Food and Drug Administration [FDA]).
The pharmaceutical industry is facing disruptive changes as headwinds continue from many sources, such as cost containment and accessibility initiatives by payers, governments, and health care insurance organizations. These forces are creating a challenging business environment by controlling pricing and promoting generic alternatives, as well as presenting obstacles to bringing innovative drugs to market. Cost pressures are mounting at the same time as remarkable scientific innovation and technology applications are offering significant opportunities to develop new therapies.
Change has been constant for the pharmaceutical industry, which has steadily evolved from a multinational base (1950s and 1960s) through global (1970 to 1990s) to international (2000 to present). The pharmaceutical industry has transformed from a strong product-based, local presence to an increasingly international presence, seeking cost advantages by leveraging parent company capabilities through worldwide adoption and a partner-friendly “health solution” focus. Rapidly evolving science and engineering innovations have also provided steady opportunities to modernize and transform manufacturing platforms to gain economic advantages and deliver greater levels of product differentiation and quality.
A new business model is emerging for the pharmaceutical industry, which includes growth opportunities gained through partnering in novel ways. Companies seeking competitive advantages are increasingly collaborating with other players, such as information technology companies, medical technology companies, food companies, and retailers, to deliver “patient-centric” products and services. Future collaborations and partnerships will be aimed at helping patients manage their health and expand their access to products and services that address yet unmet medical challenges. The pharmaceutical industry, however, faces many challenges, including (1) setting and enforcing globally accepted manufacturing standards; (2) rapid patent expiration of widely used brand drugs; (3) unregulated parallel trades, including reimportation; (4) intellectual property rights protection; (5) highly fluid and unregulated Internet sales; (6) shortage of pharmaceutical scientists; (7) biotechnology drugs and genetically engineered products; (8) ineffective postmarketing surveillance; (9) foreign manufacturing, regulatory, and pricing challenges; and (10) counterfeit products.
Research and development expenditures for new drugs often do not yield an acceptable return on investment. Over the last decade, the costs to develop novel compounds rose, while the useful market life shrunk as a result of innovative competitors. The number of future blockbuster drugs may be unable to support the industry as they have done in the past. Blockbuster drugs (i.e., primary care drugs that bring in more than $1 billion in revenue) have been the centerpiece of industry success. Compounding these challenges are regulatory requirements to ensure drug safety that have grown more stringent, bringing increased scrutiny and greater hurdles for reaching the market.
During the past decade, the industry has countered by diversifying around product lines. Some companies have elected to spend less on research and development (R&D), while seeking research partnerships and pursuing product acquisitions to fill the pipeline. Such strategic behaviors are changing the landscape for in-house R&D manufacturing capabilities and shifting these functions increasingly to outsourced contractors, known as contract development and manufacturing organizations (CDMOs).
The strategic implications for timely and cost-effective delivery of new facilities are growing. As margins continue to be squeezed, an organization’s capital deployment capacity becomes more prominent. In addition, these strategic implications put pressure on the manufacturing organization to anticipate and implement quality and capacity improvements to support business objectives. New facilities, whether owned by innovator companies or operated through contractors, are being forced to be highly efficient while balancing the need to meet quality requirements and the ability to deliver product sustainably.
The current Good Manufacturing Practice (cGMP) manufacturing operations typically follow a hierarchical structure where corporate strategy drives business strategy, which, in turn, drives manufacturing strategy and therefore cGMP facilities’ expectations. Supply chain and plant networking strategies have grown more important in recent years in response to globalization and customer expectations for speed and access. While designing and delivering cGMP pharmaceutical facilities have always been a challenge, the challenges are growing. Dynamic global developments are raising the bar of strategic implications for manufacturers as they consider appropriate responses, which affect the mission, size, configuration, cost, and location of new cGMP production facilities.
The productive life expectancy of cGMP facilities is decreasing as a result of advancements in technology and market conditions, which include increasing use of CDMOs and rationalization of facilities due to mergers and acquisitions. Contract manufacturers face similar challenges as they seek to maintain a competitive advantage for their services, which may include adoption of the latest processes, equipment, and approaches that ensure high-quality production levels, while maintaining a reasonable cost structure and worker safety (Figure 1.1).
FIGURE 1.1 Average profitability profile: contract manufacturers by enterprise size. (From Contract Pharma, “Pharma Source Research”. www.contractpharma.com)
OUTSOURCING CONTRACT DEVELOPMENT AND MANUFACTURING
The pharmaceutical industry is increasingly turning to outside, third-party organizations, or CDMOs, to help develop and manufacture their products. By some estimates, 25%–30% of current pharmaceutical development and production is now through CDMOs. These contractors specialize as developers and producers for small-molecule active pharmaceutical ingredients (APIs), oral dosages, and emerging biologic products. Many industries use this approach, including aerospace, defense, computer, semiconductor, food, and others. The strategic objectives for producer organizations, regardless of the industry, are to speed up development time, lower costs, and enhance quality. Drugs developed and made by CDMOs must meet all of the quality expectations, including compliance with all applicable cGMP guidelines.
The trend toward outsourcing development and production has accelerated over the last 10 years, largely in response to market pressures on innovator firms to manage costs and gain access to new technologies. Benefits to innovator firms for using CDMOs include reduction in capital costs for equipment and facilities, speed to market, and access to advanced skills. Outsourcing high-volume, low-margin drugs and older drugs also allows innovator companies to focus on core competencies in development and production and newer, complex processes kept in-house. Potential risks inherent in contracting include reduced control and responsiveness, quality management complexity, and loss of intellectual capital.
Partnering with CDMOs is now a well-established strategic approach for the pharmaceutical industry. Establishing and managing relationships with CDMOs will continue to be a critical organizational imperative. Technical innovations in packaging, filling, and high-volume production will increasingly originate from CDMOs. Current challenges for CDMOs include adding value through process optimization; expanding use of green, sustainable chemistry to reduce the use of solvents; and decreasing the number of processing steps. High-volume, oral dose production has moved steadily toward and will likely expand further with CDMOs. Costly capital investment and expensive production, such as sterile filling, will likely move to CDMOs, especially for biosimilars (generic products), which are expected to gain more approvals as patents expire. Cost efficiency will likely drive many innovators toward outsourcing decisions and more partnering with CDMOs.
The CDMO industry is experiencing consolidation as pressure rises due to pricing competition, lower profit margins, and the lack of organic growth potential. Typical profit margins for CDMOs are lower (about half) than those for the pharmaceutical industry. Mergers and acquisition activity are up, and consolidation is occurring. There are many hundreds of globally based CDMOs, but it has been estimated that 70% of world CDMO production is handled by 30 companies [1]. Outsourcing of API processing and drug product development and manufacturing is a significant economic driver. In 2014, the pharmaceutical industry spent approximately $140 billion on formulation, development, and manufacturing, with $40 billion outsourced to CDMOs [2].
Biotech innovators are increasingly turning to CDMOs since bioderived products are particularly challenging and costly to formulate and produce in commercial quantities. Biotech products typically comprise large molecules, including proteins, which need protection as stable products. Large molecules are more difficult to make, ship, store, and deliver to patients. The CDMOs are increasingly partnering with innovators for new drug applications (NDAs). Formulation programs include challenging work with physiochemical characteristics of the biologics of interest. Most biological products are delivered as parenteral drugs, and many of these are lyophilized, reconstituted, and shipped as liquids. They are filled under aseptic conditions, which is challenging and expensive. Advances in barrier isolation approaches to aseptic processing have been embraced by CDMOs.
SUPPLY CHAIN LOGISTICS AND SECURITY
The pharmaceutical industry relies heavily on a complex system of suppliers and distributors. Security and brand integrity are primary operating concerns. The Drug Supply Chain Security Act (initiated in January 2015) has set requirements for serialization and traceability to be implemented in three phases over a 10-year period. Traceability techniques are aimed at improving product integrity and reducing the counterfeiting through brand security measures, including microprinting, holograms, invisible inks, and other printing and mechanical methods. To implement these techniques, additional capital investments, up to $250,000–$500,000 per packaging line, additional floor space, and line efficiencies are necessary. Computer-assisted processing will proliferate with these new systems and may be implemented through cloud-based platforms. Below is a list of interesting statistics that concern the projected direction of the pharmaceutical industry:
The National Association of Boards of Pharmacy reported that “the growth of global counterfeit piracy activities is estimated to range up to 10% of the global drug supply and could seriously threaten the economic well-being of international pharmaceutical companies” [3].
Pharmaceutical industry employment in the United States includes 810,000 direct employees and more than 3.4 million indirect employees.
From 2004 to 2013, more than 400 medicines were approved.
There are currently 900 biological medicines in development.
The generic market share (prescription volume) increased from 49% in 2000 to 86% in 2013.
The growth rate for R&D spending declined from 10% from 1985 to 2003 to 4.2% from 2004 to 2013.
The annual sales growth of pharmaceutical companies declined from 10.8% from 1985 to 2003 to 3.3% from 2004 to 2013.
The approval rate for research candidate drugs entering phase 3 is 16%.
Only 2 of 10 approved drugs recover their R&D costs [4].
Worldwide prescription drug sales in 2013 were flat as industry patents tapered off.
Oncology drugs are set to record the highest worldwide sales growth of all major therapy categories, with projections for an 11.2% compounded annual growth rate from 2013 to 2020.
Within the top 100 prescription products in 2020, biological products are expected to account for 50% of sales [5].
Generics were 84% of all prescriptions filled in 2012, up from 63% in 2007, and are projected to grow to 87% in 2017.
More than 7,000 rare diseases have been identified, affecting an estimated 25 to 30 million people. To date, only 470 therapies have been approved for these rare diseases [6].
RISK MANAGEMENT
The cost of cGMP failures to society and to the responsible producing enterprise is significant and increasing. Some organizations have reported remediation costs totaling $500 million or more. Managing the risks presented by the manufacture of globally sourced products is a major business activity and presents significant responsibilities to technical professionals charged with the sustainable production of compliant products. Patient injuries; shortages of key medicines, resulting from production restrictions; and economic losses to producers barred from the marketplace are clearly undesirable situations demanding attention and oversight. Manufacturing professionals are confronted daily with such challenges and play a vital role in offering solutions.
Risk-based approaches are being employed wherein production quality methods incorporate up-to-date science and encourage new scientific advancements. Quality by design (QbD) initiatives have emerged on product development programs and provide some useful structured approaches for the facility designer. QbD is described in International Conference of Harmonisation (ICH) guidelines Q8, Q9, Q10, and Q11, and is defined as a science-based approach to pharmaceutical development and manufacturing, intending to ensure product quality. The approach includes defining target performance metrics and control strategies. The FDA and the European Medicines Agency (EMA) jointly launched a pilot program in 2012 to allow joint evaluation of QbD elements. Applying this approach to facility and process support systems offers a solid foundation for facility design. Conducting risk assessments is also encouraged by QbD approaches.
Harmonization of global production regulations has increased over the last decade to include quality risk management (QRM) and other approaches promulgated by the ICH organization. The development of the regulatory initiative led by the FDA, design space verification, is another design-focused approach that seeks to demonstrate that a combination of input process parameters and material attributes ensures the manufacturing of a quality product on a commercial scale.
High-risk manufacturing challenges are being raised by recent product developments, including customized controlled release, dividable tablets, advanced soft gels, nanodose formulations, self-administered delivery forms, combination therapies, and uniform ratios for antibody drug conjugates (ADCs). Also known as immunotherapies, ADCs are a new class of therapeutic agent that is gaining worldwide attention. The marriage of an antibody with a cytotoxic drug is known as a conjugate. ADCs are thought to be more efficient and effective in the treatment of disease. Safe processing of cytotoxic materials presents considerable challenges to the manufacturer to ensure reliable protection for workers and the community.
Delivering facilities that serve the global marketplace presents many risks and challenges to technical professionals. Diverse consumer preferences and regional business practices complicate the objectives to plan, design, construct, and operate cGMP facilities successfully. These plants must deliver a globalized product subject to evolving technologies and compliance requirements, emanating from several influential regulatory authorities, such as the U.S. FDA, Medicine and Healthcare Products Regulatory (United Kingdom), Ministry of Health, Labor, and Welfare (Japan), China Food and Drug Administration, Central Drugs Standard Control Organization (India), and World Health Organization (United Nations), among others around the globe. Despite recent progress with regulatory harmonization, global regulatory requirements remain discontinuous, especially in remote locations where there are questionable capabilities of local suppliers and support industries.
Pharmaceutical innovator companies (those who invest extensively in R&D programs) typically devote 5%–10% of their annual sales each year toward capital spending for plant and equipment. This is a relatively low rate of capital investment when compared to other industries that typically commit 15%–40% of annual revenues to capital investment in such groups as infotech, semiconductors, chemicals, and mining. Innovator companies do invest heavily in R&D where typically up to 20% or more of annual sales is spent toward innovation.
Operating costs are increasing as a result of rising energy costs, environmental management, and demands to minimize waste. Technical professionals are deeply involved in the project management and delivery of facilities that must adhere to dynamic business requirements and conform to evolving regulatory demands. The application of good design practices offers assistance for an organization to achieve needed efficiencies and strong performance.
STRATEGIC ENVIRONMENTAL FORCES
The pharmaceutical manufacturing landscape comprises a wide range of entities, including global innovators, generics, CDMOs, providers of professional services and equipment and system solutions, and suppliers of specialty materials. Pharmaceutical manufacturing includes the production of small-molecule (traditional chemical processes) and large-molecule (newer biological processes) drugs. For manufacturing and related cGMP facilities, the industries’ production lies largely with global innovator companies; however, over the last decade, a growing level of production, approximately 10%–15%, is outsourced to CDMOs.
Pharmaceutical manufacturers are typically large, complex enterprises. There are more than 700 companies operating in the pharmaceutical industry in the United States. The leading 10 firms account for more than 40% of industry sales. Interestingly, pharmaceutical industries remain quite decentralized. Many large industries consolidate over time, so that the top three or four firms own 60%–75% of the respective markets. While some highly public pharmaceutical industry consolidations are occurring, the market share of the top 10 enterprises has remained steady at less than 50% of the total market for the last 20 years. There appears to be much more room for consolidation in the future.
The implications of profound and accelerating market changes offer many future manufacturing challenges for all players, including operating companies, service, and solution providers. Technical professionals engaged in the planning, designing, constructing, commissioning, validating, and operating of pharmaceutical cGMP facilities occupy an increasingly strategic role within their organizations. Engineers, architects, scientists, and management professionals are assuming pivotal roles in supporting the successful implementation of manufacturing and supply chain strategies. Whether employed by an innovator company’s in-house staff, a professional design and construction firm, a CDMO, or a specialty vendor or supplier, the built-environment professional, is deeply engaged in developing and delivering complex facilities. Being fully skilled in the application of good design practices is a vital capability for technical professionals who contribute daily to their organization’s success.
Industry manufacturing costs are increasing as solutions are becoming more complex in response to increasing demands for quality and sustainable practices, including imperatives to address global standards for responsible energy and environmental management. Technical professionals are deeply involved in the project management and delivery of facilities, which are required to “perform” in response to dynamic business requirements, while also expected to “conform” to evolving regulatory demands (Figure 1.2 and Tables 1.1, 1.2 and 1.3).
FIGURE 1.2 Global pharma manufacturing facilities. FDF, finished drug facilities; API, active pharma ingredients facilities.
TABLE 1.1
Global Pharmaceutical Market: 2013
TABLE 1.2
Total Global Manufacturing cGMP Facilities
| 2015 | 2014 |
APIs | 927 | 942 |
FDFs | 709 | 685 |
API/FDF testing only | 1,027 | 975 |
Source: Kunst M, et al., A New Pharma Launch Paradigm, Bain & Co., www.bain.com/publications/articles/a-new-pharma-launch-paradigm.aspx.
Note: APIs, active pharmaceutical ingredients; cGMP, current good manufacturing practice; FDF, finished dosage form [8].
TABLE 1.3
Manufacturing Countries: Number of Approved Facilities
The pharmaceutical industry is a global business and subject to a complex landscape. The following discussions offer a summary of the major strategic forces at play that demand strong enterprise responses to navigate change successfully and deliver highly regulated products effectively to an increasingly diverse and expanding global market (Figure 1.3).
POLITICAL FORCES
Due to the rising costs of health care and especially the high prices of many new medications, governments are focusing on the pharmaceutical industry for solutions. Senior citizens consume considerably more medications than any other age group and have a progressively more powerful voice. As the population ages worldwide, so too does the influence of this demographic. The “gray vote” is driving discussions on the high cost of medications and the desired advocacy role of government in reimbursement, as well as control of the health care insurance industry.
The Affordable Care Act (ACA) of 2013 promises to have a prodigious effect on the pharmaceutical industry. With such critical issues as consumers’ pay share of medical insurance, universal coverage, and promised cost reductions for health care coverage achieved through competition and efficiency, the ACA will likely affect the ability of companies to recover innovation investments and sustain profit margins.
Emerging and highly visible concerns for global climate change will also affect the industry through pressure to produce drugs, using environmentally sustainable processes. Government regulations will likely demand that future manufacturing activities incorporate state-of-the-art energy conservation and waste and emission reduction methods. Investors and local communities will also be watching as all manufacturers, not only in the pharmaceutical sector, respond with strategies that include greener, more sustainable approaches to their net impact on the environment. In the short run, these additional environmentally friendly processes will likely raise the cost of manufacturing. There are promises of net efficiencies and new technologies that would reduce the negative impacts on the cost of goods. Below is a summary of some business activities within the pharmaceutical industry.
FIGURE 1.3 Pharmaceuticals industry: strategic environmental factors.
The prices of drugs are increasing faster than any other patient expense.
Pharmaceutical companies spend almost twice as much on marketing and administration than on research.
Americans pay more for prescription medications than anyone else in the world.
The average per capita number of prescriptions written in the United States is 12.2 per year, which is an annual increase of 1.7% in 2013. The average number of prescriptions for patients over 65 years old is 28 per year.
Two-thirds of all new prescription drugs are identical to existing drugs and essentially are modified versions.
Over the last few years, the FDA has sent warning letters about manufacturing and packaging violations to companies operating in Australia, Austria, Canada, Germany, Ireland, Japan, Spain, India, China, and others. Commonly cited problems are contamination and inadequate testing of medications.
The FDA has pledged to increase foreign facility inspections and to do so as frequently as it does domestic plants, which is every 2 years, according to the FDA Safety and Innovation Act of 2012. The agency also announced beefing up the number of inspectors it has in India from 12 to 19 and in China from 8 to 27.
According to the FDA, approximately 40% of finished drugs come from abroad, and 80% of APIs are also manufactured outside the United States.
Spending on branded (patent-protected) drugs accounts for 71% of total consumer drug spending in the United States. Generic drugs account for 29% of domestic spending.
Branded prescription drugs account for 14%.
SOCIAL FORCES
Pharmaceutical manufacturing strategies are increasingly challenged to respond to evolving social forces that affect the scale of production and the nature of the products consumed by a growing, aging, and diverse global population. The industry also must respond effectively to actual and potential supply interruptions of critical medications, which threaten to harm dependent patients, as well as raise a public outcry for additional government intervention (Figure 1.4).
People are living longer and are seeking healthier outcomes for better lifestyles. The average life expectancy in the United States in 1900 was 47 years; in 2000, it was 80 years. Global literacy in 1970 was 47%, and today it is 84%. Global infant mortality in 1990 was 61 per 1,000; today it is 40 per 1,000. The global population is increasing, which raises the consumption of medical products, as well as the total cost of providing these products. The world population was 2.5 billion in 1950, 3.5 billion in 1970, and today it is more than 7 billion.
Consumption of medicine increases dramatically with age. Consumers over 65 years of age buy more than twice the number of prescriptions as the general population average and more than five times the number of prescriptions as those under 25 years of age. The impact on manufacturers is an increased demand from the marketplace and governments for greater access to cost-effective drugs. Providing specialty products for home care is a growing opportunity driven by an aging population. Pharmaceutical manufacturers see this trend as an opportunity to expand distribution channels with an accompanying drive to reduce the cost of goods. Custom medications, offered in safer and more stable ways, such as single-dose packaging, are clearly on the rise.
The once highly regarded pharmaceutical industry has recently suffered a reduction in public trust. Claims of price gouging, fraudulent research activities, and high-profile product failures are increasingly common headlines and provide significant challenges for industry leaders. The media label of “big pharma,” similar to “big oil” and “big tobacco,” is a popular pejorative reference to “big” industries that are increasingly characterized as powerful and greedy.
The continuing threat of a global disease pandemic also affects industry policy and practice. The potential spread of life-threatening disease across the world is in the headlines. Government leaders look to the health care system for solutions, including medications that can reduce or eliminate the spread of infectious diseases. The high level of public awareness drives government officials toward high-profile remedies, which will likely include the accelerated introduction of medications offering potential solutions. The pharmaceutical industry’s role in this arena is prominent and offers significant potential for bolstering goodwill and driving manufacturing processes to deliver an adequate supply of medications in a timely manner.
Some industry observers claim that the high cost of health care is, in part, due to the lack of progress and low efficiencies in health care delivery. “Productivity improvements in health care industries have generally underperformed most other sectors. Incorporation of new process technologies has lagged other industries. Statistics from the Bureau of Economic Analysis and Centers for Medicine and Medicaid Services indicate that productivity improvements for health care have actually declined slightly over the last 20 years when compared to significant increases in sectors such as computers, Internet, telecom, retail trade, and wholesale trade” [10].
FIGURE 1.4 Medicine Spending and Growth. (From IMS Health, National Sales Perspectives, December 2014; U.S. Census Bureau; U.S. Bureau of Economic Analysis. www.imshealth.com)
FINANCIAL FORCES
As one of the largest global industries, the pharmaceutical industry is a major economic force. Several hundred companies discover, develop, manufacture, and distribute thousands of unique pharmaceutical products globally. Over the last 50 years, investors have been choosing the pharmaceutical sector as a source of above-average growth potential. The pharmaceutical industry has earned the reputation as a well-managed group of companies that consistently offer favorable returns. In the last several years, however, there has been a mixed performance for many companies, resulting from competition from generic drugs and a loss of patent protection on blockbuster products. The ACA promises to accelerate the level of uncertainty and the rate of change confronting the industry, a rate that will require strategic responses; these responses, in turn, will affect manufacturing operations and the future mission of cGMP facilities.
The pharmaceutical industry has lost some of its shine from a once golden image for investors over the last decade. A review of the current top 500 corporations, as listed by Fortune Magazine in June 2015, notes that only one pharmaceutical company, Allergan, made the list of the top 20 leaders in returns to shareholders over the last year, and only one company, Biogen, made the list for the last 5 years. Two companies, Celgene and Gilead Sciences, are listed for a 10-year horizon. A ranking by market value yields two pharmaceutical companies on the list of the top 20 corporations: Pfizer and Johnson & Johnson. There are no pharmaceutical companies on the list of the top 20 corporations as measured by employees or equity. There are no pharmaceutical companies on the top 20 list as measured by return on shareholders’ equity (Tables 1.4 and 1.5).
Increased drug approvals by the FDA in 2014 and the somewhat lessened effect of patent expirations are positively affecting pharmaceutical stock valuations, which are up approximately 50% in 2015 compared to 2014. Pharmaceutical stock values have doubled in the last 3 years, rebounding from a downturn starting in 2006, when values took a long slow slide to reach lows of 50% of the previous value.
The financial performance of pharmaceutical companies has also been challenged in the last decade by the number of layoffs due to mergers and acquisitions. In 2009 and 2010, for example, Pfizer merged with Wyeth, and Merck merged with Schering-Plough, which resulted in approximately 40,000 layoffs.
TABLE 1.4
Industry Comparisons: 2014
TABLE 1.5
Pharma Industry Large Mergers and Acquisitionsa: Highest Premium Price Paid
Compared with other industries, health care has demonstrated poor productivity improvements. The Bureau of Economic Analysis’s Center for Medicare and Medicaid Services estimates that during the period 1990–2007, the health care industry has actually registered a reduced annual productivity rate of 0.8%, while the average employment growth rate was 3%. This is the poorest productivity improvement rate and the highest average growth rate in employment among 15 major industry sectors [10] (Table 1.6).
Better manufacturing operations have increasingly been the industry’s response to reduce the cost of goods in the current low-profit landscape. Sales volumes have been adversely affected in several ways in the last decade. An expanding consumer marketplace is demanding better access to low-cost medicine. Government and insurance actions have reduced prices for many popular brands that have lost patent protection. Manufacturers are seeking efficiencies, where possible, to protect profit margins. Strategies have included consolidation of manufacturing facilities; abandonment of small-volume, low-profit products; and mergers and acquisitions to improve scale and distribution potential. The CDMOs have grown considerably in the past 10 years and offer options to innovator companies that seek to rationalize their global production capacity.
The intensity of mergers and acquisitions, including consolidation of innovator companies, has continued over the last decade and promises to remain a potent strategy going forward. In 2013, there were 615 announced and closed transactions, involving targets in the pharmaceutical sector, compared to 456 in 2012 [11]. These activities continue to generate many plant closures, consolidations, renovations, and relocations of productive capacity for the posttransaction entity.
Globalization has also resulted in companies increasing the effectiveness of their investments in R&D, leveraging the productive life cycle of their medicines, and producing product with acceptable financial returns. Strategic tax management goals are also driving the deals, including so-called inversions where the newly merged entities enjoy lower business taxes by being headquartered outside the United States.
According to PricewaterhouseCoopers in their publication “Pharma 2020: The Vision,” “the current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets. In order to make the most of future growth opportunities Pharma must fundamentally change the way it operates” [12]. Global pharmaceutical companies are known to strategically position their operations to maximize the positive effect on taxation rates. The global nature of the business offers significant potential to realize lower tax rates by incorporating and operating where local governments offer incentives for their presence. These practices have been observed for the last 40 years and will likely continue to be an option for companies to maximize their profit margins and their attractiveness to investors.
TABLE 1.6
Top Merger and Acquisition Deals in 2014: Ranked on Deal Value
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