Pharmaceutical Companies Business Model

Overview

A Pharmaceutical or drug company is a part of the healthcare sector and involved in a commercial licensed business of research & development, manufacturing, marketing, and distributing drugs and medications. Different laws and regulations are imposed on the pharmaceutical companies related to patent, drug testing and marketing, drug safety, pricing and quality of drugs, etc. The pharmaceutical industry includes both private and public pharmaceutical companies that play an important role in vaccine and medication development for the purpose of preventing and reducing diseases. Enhancing quality of life by making a significant contribution in innovative research and active engagement in technological advancements so that the complex healthcare demands of people can be fulfilled; also comes under the portfolio of Pharmaceutical companies. The main aim of the industry is to make sure the availability of drugs for maintaining health by preventing and curing infectious diseases that affect a large population. The pharmaceutical companies are further classified into subcategories based upon their functioning i.e. biotechnology companies, drug manufacturing companies, and the wholesale & distribution companies that are responsible for handling the produced products. As per IBEF (India Brand Equity Foundation), India is considered as the largest providers in generic drugs category all over the world. The Pharmaceutical companies of India supply various vaccines i.e. more than 50% of global demand. Recently, on the demand of International countries that are most affected countries due to Covid-19 such as U.S., Russia, Sri Lanka, etc; India has supplied Hydroxychloroquine tablets to these countries for the treatment of the disease as India is one of the largest producers of these tablets all around the world.

A Brief Background

The history of Pharmaceutical companies and the use of drugs or medicines are quite old from the Medieval Ages where the records are found of people making use of herbs and other plants for healing. We can trace the concept of the modern pharmaceutical industry by the discovery of penicillin and insulin drugs in the 20^th century. Different developed countries, especially European countries, started manufacturing these drugs on a mass production basis. Arabian Pharmacists of Baghdad opened the first drugstore in 754. Lots of drugstores in North America and Europe were converted or developed into big pharmaceutical companies in the 19^th century. 19^th and 20^th centuries became a witness for the discovery of major pharmaceutical companies that exist today.

Business Model of Pharmaceutical Companies

A business model can be viewed as a framework that considers the technological characteristics and potentials of the company as inputs which are built on key resources, key partners and key activities of the company; and further converts these inputs into valuable economic output through the customer relationship, target customer segments, and key distribution channels by means of product or service offering i.e. value proposition. Before going into the detail of each element of the business Model of Pharmaceutical companies, let’s understand first different business segments of Pharmaceutical companies and how they work:

Pharmaceutical Companies- Business Segments

1) API (Active Pharmaceutical Ingredient): To understand the business model of pharmaceutical companies, it is worth taking an idea of the important ingredient in the Pharma industry i.e. API which is considered as the main active ingredient in the drug or medicine to cure diseases. The raw material that is being used to produce medicines, also termed as bulk drugs or API. Various pharmaceutical companies are there that are specialists in producing only APIs. These companies either purchase or produce intermediates themselves for making the final API. Further, these companies sell APIs to different formulation companies for producing final medical drug/medicine. One of such API pharmaceutical companies is Lupin Pharma.

2) Formulations: The term pharmaceutical formulation refers to the process of producing the final medical drug or medicine by combining various chemical substances, including the APIs. In the process of medicine manufacturing, formulations are the end result or product and are available in the form of capsules, tablets, syrups, or injectables.

The pharmaceutical companies indulge in manufacturing of formulations are considered as formulation pharma companies like Dr. Reddy’s Laboratories. Pharmaceutical formulations are of two types i.e.

• Oral formulation: This is related to the formulation of drugs like capsules, tablets, etc. that can be delivered by the mouth.

• Topical medication forms: i.e. creams, gel, powder, paste, ointment, etc.

3) CRAMS (Contract Research and Manufacturing): CRAMS stands for Contract Research and Manufacturing service which is considered as a process by which pharmaceutical companies outsource their research services or activities related to product manufacturing to the companies which offer        low- cost services. Basically, two main activities i.e. Contract Research and Contract Manufacturing come under CRAMS. Pharmaceutical and Biotechnology companies that need extensive Research & Development and manufacturing facilities at large-scale, use CRAMS. This segment of the Pharmaceutical and Biotech industry is also growing at a fast rate. Most of the pharma companies are increasing their outsourcing activities due to the extreme pressure of maintaining fixed costs.

4)  Export/Import Business segment: The Pharmaceutical sector of India is considered as the largest supplier of generic medicines to the developed countries and these medicines are cost-effective too. India exports drugs/ medicines over 200 countries around the globe and the U.S. is the key market for exports. India has witnessed US $19.14 billion pharmaceutical exports in FY19 and US $13.69 exports were there up to January 2020. The exports of pharmaceutical companies consist of drug formulations, bulk drugs, biological, surgical, intermediates, Ayush & herbal products, etc.

 5)  Pipelines in Biotech Companies: Pipeline in pharmaceutical companies, especially in biotech companies refers to the different phases of clinical trials of drug medicine. In the pharmaceutical sector, this term is often used while defining and evaluating the activities, R&D (Research & Development) progress, measuring success, and growth potential for biotechnology pharmaceutical companies. When the status of a drug is considered in the pipeline; it means different clinical trial stages in which it is undergoing or have to undergo before getting approval for final use in the market. So, we can say that different drug medicines that are into clinical trial phases and seeking approval of USFDA (U.S. Food and Drug Administration Authority) are considered as pipeline drugs.

The various stages of a drug clinical trial are as under:

6) Biotech: Pharmaceutical companies are inter-linked with biotechnology companies in terms of obtaining licenses from them for the manufacturing of patented products. Different segments of the Biotechnology sector of India are Bio-Agriculture, Bio-Pharmaceutical, Bio-Services, Bio-Informatics, and Bio-Industrial. Biopharmaceutical products which are mostly pharmaceuticals, also referred to as biological medical product which is a pharmaceutical drug product, manufactured and extracted from biological sources.  This includes allergenic, vaccines, tissues, living medicines that are being used for cell therapy, etc.

7)  Drug marketing: One of the important business segments of Pharmaceutical companies is marketing. Pharmaceutical companies enhance their market reach with the support of marketing companies or in-house marketing team. Drug marketing companies facilitate these companies by selling their products where pharmaceutical manufacturing companies are not able to sell products in a particular area or region due to the absence of necessary license or marketing network. Now, after gaining insights into the business segments of Pharmaceutical companies, let’s review the different current and emerging business models of the companies:

Current Business Models of Pharmaceutical Companies

A) Block Business Model

In traditional terms, the pharmaceutical industry’s current business model is made around the blockbuster drugs and is referred to as the Blockbuster business model. The mass market is the main target of this business model with an expectation to bring revenue from high sales. Any drug that generates annual sales of over US$1 billion then it is said as a blockbuster. The main uses of these drugs are for the treatment of common medical issues such as diabetes, asthma, high blood pressure, cancer, and high cholesterol, etc. The blockbuster business model of pharmaceutical companies is related to investing a significant budget into in-house R&D (Research & Development) activities, to search different dead-end projects with the hope of turning a few of them into the successful blockbusters that generate high returns.

Blockbuster business Model Canvas of Pharmaceutical Companies

Different elements mentioned in the above Blockbuster business model canvas of Pharmaceutical Companies are as under: 

1. Value Proposition

• The new blockbuster drug offering is one of the main value propositions provided by pharmaceutical companies through which value is created for customers by invented drug usage. Also, delivery of the offering is through drug innovation. Despite starting from the comparatively higher price in the market, the price level of the blockbuster drug soon gets reduce.
• Pharmaceutical companies that are using blockbuster business model cater to a wide range of customers i.e. mass market.
• Drugs are developed by aiming at both innovation and quality. Pharmaceutical companies devote a reasonable part of their revenue to R&D activities in order to provide unique and new products based on technological innovation.
• The product portfolio of big pharmaceutical companies is also diverse as they deliver products and medications to a broad range of customers.
• Big pharmaceutical companies serve customers in various international countries too.

2. Customer Segments

The target customers of pharmaceutical companies under the blockbuster business model are mainly doctors and patients as the companies cover a mass market. Moreover, various health institutions like hospitals, clinics, pharmacies, etc. also come under customer segment portfolio.

3. Key Partners

Pharmaceutical companies generally have the following key partners:

• Channel partners include distributors or sales agents for the purpose of expanding market reach and in-house sales.

• CSR or Corporate Social Responsibility partners comprise of NGOs or non-profit organizations for collaboration on social projects.

• Strategic alliance partners consist of different technology-driven and other pharmaceutical companies and pharmaceutical companies have partnerships with these on shared resources or joint venture projects.

• Merger & acquisition partnership is the strategy adopted by Pharmaceutical companies to expand their reach in emerging markets, maintaining market share by participation in generics, strengthening growth in markets that are matured, etc.

4. Key Activities

Pharmaceutical companies that operate on Blockbuster business model have various key activities such as Research & Development with the companies rather than outsourcing, Development and production or manufacturing of various drugs/ medicines and healthcare products, Testing of drugs, marketing and distribution of drugs to appropriate customer segments using various marketing and distribution channels, and managing internal personnel, production, costing, etc.

 5. Key Resources

The main resources of pharmaceutical companies include research & development platform, technology (Artificial intelligence and Machine learning), technical and non-technical staff, intellectual property, generic capabilities (use of today’s drug innovation for future innovations i.e. both production and innovation), etc.

6. Channels

Various medium or channels of pharmaceutical companies include:

• Website of these companies using which information is provided to different customers related to their products, business activities.

• Sales and marketing personnel plays a key role in making sales and conducting marketing activities of pharmaceutical companies. These sales and marketing team can be segment-wise or geographic region-wise depending upon the market approach of companies.

• Pharmacies and Distribution networks are also key channels of pharmaceutical companies to sell consumer products.

7. Customer Relationship

 Pharmaceutical companies enhance and maintain their customer relationship by providing various customer assistance and customer support facilities such as:

• Customer service support of 24/7 to handle any query or issue of customers

• CRM (Customer relationship management) for better customer service

• Sales team through which customers can interact directly and also, contact numbers, email IDs to facilitate customers to stay in touch with concerned departments of pharmaceutical companies so that they can get real-time assistance from their sales representatives.

• Online presence through social media and website is there for providing any online information, and FAQs (frequently asked questions). Using social media accounts of pharmaceutical companies i.e. on Facebook, Youtube, Linkedin, Twitter, etc. customers can interact with them directly.

• Pharmaceutical companies also enhance customer relations by creating the awareness of their brand through various print and digital medium, and also, build trust by making an effort to provide better products and services.

8. Revenue Streams

 The revenue model of pharmaceutical companies is clubbed in the below chart:

•  Sale of products & services: The main source of revenue of Pharmaceutical companies is through the development and sale of drugs or medicines to different customers in the mass market. Generic drugs, different bulk drugs like antibiotics, steroids, vitamins, along with herbal and biological products, drug formulations, etc. play a significant role in revenue generation of pharma companies. Net profit (in billion Indian rupees) of renowned pharmaceutical companies as of April 2020 in India is shown in the below chart. This profit also includes the revenue earned from the sale of products of these companies.

 Net Profit of Leading Indian Pharmaceutical Companies

As of April 2020

 *(Information Source: Statista.com)

•  Patents: Another important money or profit earning source of pharmaceutical companies is the patent that provides incentives for companies to research and development of innovative and new pharmaceutical drugs. The patent refers to a product’s property right, and in terms of pharmaceutical companies, it is considered as a chemical formula that any rival pharmaceutical company may not copy. A patent gives a guarantee to investors that their product will remain as the only product of its exact type in the market for long years i.e. 20 years. Patents are highly important to pharmaceutical companies due to the great possibility of guaranteed profit. The patent system facilitates companies to gain profit from patents by the mean of restricting any other competitor to market and sell a similar kind of prescription drug or medicine. Also, pharmaceutical companies can fix the high price/cost of their products because of having somewhat monopoly on their drug and absence of any competitive forces in the market that usually are responsible for bringing prices down.
• Research and Development (R&D): One revenue resource of pharmaceutical companies is the R&D factor that has a great significance in the pharma industry because revenue’s major share depends upon research and development. A huge budget is generally allocated to invest in R&D activities by pharmaceutical companies to ensure future profit once a new formulation research process is completed. R&D returns on the private pharma sector are quite attractive as well and very based upon drug type. The companies having the capability of advanced R&D tend to be considered as the most profitable as through their R&D, drugs that have the potential to be highly profitable, can be patented.

•  Strategic alliances: Pharmaceutical companies also earn a small portion of their revenue from different strategic alliance agreements through which products of third-parties are co-promoted by them

9) Cost Structure

Pharmaceutical companies bear different expenses in the development and sale of products & services such as:

• Research & Development cost: R&D is considered as one of the crucial ROI (Return on investment) function of Pharmaceutical companies and so they spend heavily on R&D activities. The study reveals that pharmaceutical companies spend roughly 17% share of their revenues on R&D activities. As per statistics, most big pharma firms have spent around 20% on R&D last year i.e. 2019. The reason behind such a big investment in R&D is that in the process of new drug discovery, it undergoes various testing stages before selling them in the market which is both costly and time-consuming. Also, it costs millions to discover and develop an effective and innovative new drug.

• Manufacturing cost: Another major segment of costing of pharmaceutical companies are expenses involved in the manufacturing process of drugs in different stages i.e. production including the cost of raw material, quality control, quality assurance, regulatory approval, packaging, warehousing, etc.
• Apart from the above two, other cost includes sales & marketing expenses, partnership management, general and administrative expenses comprises of the salaries and benefits to staff, etc.

1. B) DEFRAGMENTED BUSINESS MODEL:

• Defragmented business model has a much wider verity of value propositions as it focuses on a particular segment of the drug pipeline. The value proposition attributes in this model depend on the offerings of pharmaceutical companies and a niche market is the center focus of value proposition. This niche market can be a particular category of patients who are suffering from a common disease or pharmaceutical companies that are into the outsourcing business of drug manufacturing, etc. So, the value proposition of the Defragmented business model consists of offerings based upon the niche market and products of high-quality and comparatively low-cost.

• Customer segments include B2B or B2C customers and pharmaceutical companies focus on niche market segments.

• Customer relationship in the Defragmented business model is more personalized that provides pharmaceutical companies to obtain active feedback from customers. Also, through participation in the collaboration process with customers for the purpose of quality improvement in value proposition; companies are able to strengthen customer relations.

• Key resources include both tangible resources such as technology, plants, and Intangible resources like Intellectual capital. Moreover, the staff of pharmaceutical companies is also main resources.

• Key partners can be other pharmaceutical companies and partnership purpose can be customer acquisition, acquisition of knowledge, outsource certain activities, and risk-sharing.

• Key channels are direct and indirect distribution channels.

• The key activities of the model focus on core capabilities such as capabilities related to gain a competitive advantage. Non-core capabilities are outsourced and internal sourcing is there for capabilities that are required for delivering value proposition. Also, pharmaceutical companies who use this model, participate in the business networks for reducing uncertainty and risks.

• The cost structure of pharmaceutical companies in the defragment model is related to the utilization of core capabilities. Both fixed and variable costs are part of it. The revenue is earned through the manufacturing of drugs.

Emerging Business Model of Pharmaceutical Companies

The pharmaceutical companies working on the Blockbuster business model are facing the biggest challenge i.e. expiry of the patent of the blockbuster drugs and a great expansion of generic drugs. Apart from the expiry of patent, other challenges in front of these companies are of deficiency of new product innovations and high cost-margins. This resulted in the diversification of innovative drug manufacturing companies into generic drug manufacturing. The current blockbuster business model of pharmaceutical companies is moving slowly into a focused and lean type business model which is made of small and local R&D clusters. Wherein, the earlier blockbuster business model is focused on more diversified global R&D clusters. So future pharmaceutical companies demand more specialized and defragmented business model with a focus on core capabilities to sustain long-term growth.

The future of the pharmaceutical industry seeks improvement in R&D productivity, cost reduction, to grasp the opportunities of emerging economies, etc. The futuristic approach will even look forward of the collaboration of large pharmaceutical companies with others for the development of more economical and effective new medicines, support patients for health management, and for ensuring the true impact of products and services offered by them. Mainly, 2 emerging business model i.e. Federated and Fully Diversified will support in future prospects of Pharmaceutical companies.

Let’s have a look at these emerging Business models of Pharmaceutical companies:

A) Federated Business Model:

The federated approach includes network creation of separate identities by the companies that consist of a common platform of supporting infrastructure. The different participant companies have a common goal like managing outcomes in the available population of patients. Companies are interdependent with each other as they share data, funds, back-office services, and patient access. This model facilitates a framework for developing a product’s integrated packages and so, it diversifies beyond the core offering of a pharmaceutical company. Each participant in this model is enabled to make a particular segment of expertise, to have a competitive advantage as an outcome of expertise, and to sell its offerings i.e. products or skills, by transferring those activities that are better disbursed by other partner firms of the federation. The federated business model is further categorized into two categories i.e.:

1.a) Federated model’s virtual variant

 In this type of federated business model, the pharmaceutical companies outsource almost all of its operations and the company reflects as a management hub that coordinates the various activities of partners. Several large pharmaceutical companies are already working on this model up to some extent. These pharmaceutical companies acquire external contractors to fulfill their own resources. By outsourcing various activities i.e. manufacturing, marketing & promotional activities, R&D, etc. to 3^rd parties, they can take advantage of specialist skills, wider scope of opportunities, and market access. Doing so, these companies can further focus on other value-addition activities like business development, project management, management of intellectual property, regulatory affairs, etc.

1.b) Federated model’s venture variant

This vertical of federated business model demands an investment in a portfolio of pharmaceutical companies and in return to have a share of capital growth or the intellectual assets, instead of outsourcing specific activities.  Pharmaceutical companies can focus on investing in a specific therapeutic segment or divide them into a number of activities or areas for risk minimization. Once the investment period ends, either the generated intellectual property might be claimed or to give to a 3^rd party via out-licensing. As an alternate, the intellectual property might be retained and commercialized by the original companies and its ROI (Return on Investment) is paid to sponsoring companies.  Different big pharmaceutical companies like Pfizer, Novartis, etc. have venture capital funds at the corporate level.

1.B) The fully diversified model

 In this business model, Pharmaceutical companies expand their horizon from their core capabilities or core business into different related products or services like generics, health management, diagnostics, etc.  This facilitates companies in reducing their dependability on Blockbuster medicines.