I am pleased to forward the following 'Brief Report' from the Samsung Economic Research Institute. This is a short, high-level review of the dilemma facing the pharmaceutical industry. Much of this will not be new, but SERI's challenge to the Korean IT industry is of strategic importance to the global pharmaceutical industry.
All the best,Daniel I. Shostak
Strategic Affairs Forecasting
safiredshos@aol.com
301 758 2106Forecasts for Decision Makers
www.strategicaffairs.net
Industry Report -->
Disruptive Innovation in the Pharmaceutical Industry KOH You-Sang
Apr. 7, 2010
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Have you ever heard of "disruptive innovation?" The term was coined by Clayton Christensen, a professor at Harvard Business School, and was introduced in his book 'Innovator's Dilemma,' released in 2000. The term comes from his research on the changing landscape of competition in the electronics industry.
His subsequent book, 'Innovator's Prescription,' also attracted attention with a disruptive solution for the health care industry. The professor argued that with the emergence of generic drugs and customized health care, the competition landscape in the pharmaceutical industry is going through a fundamental change. Today, we are going to talk about the fundamental changes taking place in the pharmaceutical industry.
Traditionally, major pharmaceutical companies have competed against each other by inventing synthetic drugs for chronic diseases like high blood pressure and hyperlipidemia. However, this has started to change. With the patents of products that account for 42% of sales of the top ten pharmaceutical companies expiring by 2012, pharmaceutical companies are about to face fierce competition with generic drug producers.
Moreover, big discount stores such as Wal-Mart and Walgreens are increasing their market share by selling generic drugs at discount prices. For example, Walgreens is selling a 90-day supply of generic drugs at US$ 12.99, a phenomenon now common in the US.
The wind of change is blowing in the pharmaceutical industry. Only about 30% of new drugs are invented by major pharmaceutical companies while the remaining 70% are developed by biopharmaceutical companies.
If so, what could pharmaceutical companies do to prepare for this new situation?
First, pharmaceutical companies need to develop biopharmaceuticals customized for each patient. Research is under way in areas of cancer and dementia treatment where conventional medicine have not been effective. The anti-cancer drug market produced with biotechnology increased by 20% to reach US$39 billion in 2008. Sales of biopharmaceuticals such as Rituxan and Herceptin have also been growing by over 10% every year since 1998.
Gleevec, a medicine for chronic leukemia patients, recorded US$ 3.7 billion in sales in 2008, with an 86% 7-year survival rate. As the development of biopharmaceuticals requires sophisticated technology and is hard to copy compared to conventional synthetic medicine, companies can dominate the market once they succeed in developing customized biopharmaceuticals.
Second, pharmaceutical companies need to develop diagnostics combined with treatment. Biopharmaceuticals do not work for some patients. For example, Herceptin, for breast cancer, is effective in patients who have an excess of HER2 proteins, but these patients only account for 20% of all breast cancer patients. Furthermore, biopharmaceuticals are costly compared to synthetic drugs, and are not usually covered by insurance. This has created an obstacle to the expansion of the biopharmaceutical market.
If doctors can tell whether a medicine will work for a patient in advance, it would not only relieve the cost burden of patients, but also reduce national medical costs. In the US, the Food and Drug Administration Amendments Act of 2007 makes it mandatory to classify participants in clinical trials by genetic trait to improve the efficiency of the clinical trials from the initial stages. For these reasons, the development of diagnostics combined with treatment has become essential in the pharmaceutical industry. Currently, 145 drugs are under development with diagnosis kits. Pharmaceutical companies aim to shorten the approval period of new drugs, and increase sales through this process.
So far, we have talked about the changes in the pharmaceutical industry, and what direction pharmaceutical companies should take in the future. To sum up, there will be fierce competition over the development of biopharmaceuticals in areas where conventional medicines have not been effective. Furthermore, the development of diagnostics has become an essential part of new drug development. For Korea's part, it needs to work hard on developing diagnosis kits based on its capabilities in the IT industry. Why don't you set your sights on the changes in the pharmaceutical industry, and grab onto new opportunities?
Thank you for watching. I'm You-Sang KOH.
Copyright ⓒ 2010 Samsung Economic Research Institute. All rights reserved.
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