An Overview Of The Global Pharma Industry S New Trends (2019)

SSRN Social Science Research Network, Rochester, NY Jun. 1, 2019
Elsevier, B. V., Amsterdam, The Netherlands
Published, ID N° 3397618, Jun. 1, 2019.
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An overview of the global pharma industry´s new trends
Marcelo F. Ponce, M.D., Ph.D. Student
HES&PD consultancy
City of Córdoba
Argentina
Abstract
This study is a synthesis of the three main drivers that are exerting influence on the global
pharmaceutical industry: 1) mergers and acquisitions, 2) R&D changes, and 3) a new pricing
context. During the last decades, there has been a revolution in drug discovery and development
thanks to pharmacogenomics, proteomics, molecular biology, bioinformatics, biomarker-driven
studies, systems therapeutics, drug-target interaction prediction and artificial intelligence.
However, there are signs that a problem of excessive pricing of prescription pharmaceuticals is
creating awareness among stakeholders that this situation is unsustainable with clear consequences
for the global pharmaceutical industry´s predominant business model.
Keywords
Big Pharma, mergers and acquisitions, pharmaceutical R&D, pharmaceutical pricing,
pharmaceutical innovation, business models
Copyright © 2018 by Marcelo F. Ponce
1. Introduction
Over the past few years, the global pharmaceutical market has been experiencing
the emergence of new trends that are currently shaping the way participants drive
value, assess investments, formulate strategies, build relationships, realign their brand-
name drug portfolios, and compete with each other in a complex, government-
regulated ecosystem (Baker, 2018; Eddy, 2019; Emanuel, 2019; Gautam & Pan, 2016;
Jewell, 2019a; Ku, 2015; Lipton & Nordsted, 2016; Roy, 2019; Shepherd, 2017).
Big tech firms like Amazon, Apple and Google, among others, are making bold
inroads into the health care sector (Darie, 2019). Certainly, some observers see this as a
fearsome competitive threat while others are convinced that, on the contrary, this is
opening up new opportunities for drug-makers to team up with new creative alliances
to take advantage of the current and changing, tech-savvy environment. For instance,
on June 28, 2018, in exchange for about US$ 1 bn, Amazon acquired PillPack, a small,

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New Hampshire-based, internet pharmacy start-up, so much so that it could initiate the
direct-to-consumers (DTC) selling of both generic and branded medicines in the near
future in all the States where PillPack has an approved license (Cohen, 2018a; Farr,
2018a; 2018b; Sanborn, 2018). Doubtless, this entry doesn´t amount to a direct
competition for the pharmaceutical firms whereas, by contrast, it could specifically
represent a new distribution channel through which Big Pharma and other players
could commercialize prescription meds. Since we now all live in an era of data
abundance instead of data scarcity (Johnson, Gray & Sarker, 2019) thanks to the big
data innovations (Armstrong & Westerhout, 2017; Dhinsa et al., 2018; Fengler & Gill,
2019; Oschmann, 2019; van Altena et al., 2016), it is reasonable to think that Big tech
and Big Pharma can join up and establish a field inside which they can be in sync with
each other, profitably (Groves, Kayyali, Knott, & Van Kuiken, 2013; Hodgson, 2018;
May, 2019; Ng, 2019).
In what follows we offer a review on the new trends that are both putting the
pharma industry at the frontier of the innovation impulse and thrust all over the entire
globe and, at the same time, reinventing the form through which the industry is trying
to go ahead in the new century´s fierce competition landscape.
2. Materials and Methods
The literature search was undertaken between April 1, 2019 and May 27, 2019 to
identify peer-reviewed articles in English language, published between 2012 and 2019.
High-quality book chapters were also part of the accepted literature. Seventeen
databases were included as sources of bibliographic data, i.e., Elsevier´s Science
Direct, Oxford University Press (OUP) Journals Database, Cambridge University Press
(CUP) Journals Database, Wiley Online Library Database, ProQuest, Springer Journals
Database, Taylor & Francis Journals, Sage Journals, Google Scholar, Google News,
JSTOR, EBSCO, Elsevier´s Social Science Research Network (SSRN) Database,
ResearchGate, Academia.edu, Scopus Journals Database and National Library of
Medicine´s Medline PubMed.
Keywords included the following: “global pharmaceutical industry”, “global
pharmaceuticals and business models”, “pharma industry mergers and acquisitions”,
“pharmaceutical innovations”, “pharmaceutical R&D”, and “pharmaceutical pricing”.

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References of retrieved articles were assessed for relevant articles that our searches
may have missed.
3. Results
As we mentioned above, there is a complex set of drivers exerting influence on the
global pharmaceutical industry today. In what follows, we cluster the factors into three
main groups, namely: a) M&A activity; b) R&D changes and c) a new pricing context.
3.1. M&A activity
Observers of the global pharmaceutical industry, from different perspectives, have
been giving account of the changes the industry exhibits as a result of a set of drivers
that are exerting a powerful influence on the strategic intent, size, structure, internal
functioning, and conduct of companies (Deloitte, 2019; Garthwaite, 2019; Griffin,
2019; Tulum & Lazonick, 2018). Besides their organic growth, the last two decades
show a process of consolidation of firms through a series of mergers and acquisitions
(M&A), whose targets have been other big firms, mid-sized companies and,
noteworthy, promising start-ups with arresting R&D capabilities and uniqueness in
their value propositions (Barbieri, Huang, & Tassinari, 2017; Bartfai & Lees, 2013;
Dierks, Bruyère & Reginster, 2018; Ignatova, Datsenko & Rudyk, 2017; Jewell,
2019b; LaMattina, 2011).
For example, in 2018, Takeda Pharmaceutical Co., a 237-year-old Japanese drug-
maker, spent US$62 bn on a merger with Shire plc, an Ireland-based firm, reaching the
top Nº10 spot, for the first time, among the list of the world´s biggest pharmaceutical
firms by revenues (Du, 2019; Toplensky, 2018; Ward, 2019) and UK-based
GlaxoSmithKline (GSK) acquired Tesaro Inc., a Waltham, Massachusetts-based
cancer-focused biotech firm, through a US$5 bn deal.
This year, up until now, the buying frenzy is growing. Founded in 1858, Bristol-
Myers-Squibb Co. (BMS) bought US-based Celgene Corp. by investing US$74 bn,
which valued the latter at US$90 bn, including debt (Helfand, 2019a), and US-based
Eli Lilly & Co., founded in 1876, snapped up Stamford, CT-based Loxo Oncology
Inc., founded as early as 2013, in exchange for US$8 bn (The Economist, 2019a).

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On certain occasions, the strategic decision to take over a smaller firm in the
pharmaceutical landscape is a huge success; however, the experience shows that,
sometimes, costly acquisitions do not offer a return on investment (ROI) as imagined
by the acquirer or its shareholders (Speights, 2019). For example, in April 2016, North
Chicago-based AbbVie Inc. announced a US$5.8 bn deal by which it acquired a small,
Silicon Valley-based company named Stemcentrx owing to the fact that Stemcentrx´s
portfolio included rovalpituzumab tesirine (Rova-T), an apparently very promising
anti-cancer compound. Unfortunately, two years later, the phase III clinical trial of
Rova-T in patients with advanced small cell lung cancer (SCLC) was put on hold as a
consequence of a shorter overall survival rate observed in patients in the Rova-T arm
in relation to those in the comparator arm (Columbus, 2018; Court, 2018; Leuty, 2019;
Speights, 2018).
Because the global prescription drugs market is made up of a myriad of segments,
niches, micro-, and ultramicro-niches (or therapeutic areas), a profound market
knowledge is paramount to identify new opportunities and to draw out profitable lines
of business. Relatedly, Severi Bruni and Verona (2009), in evaluating the importance
of market knowledge for the survival and growth of science-based firms, asserted that
“(…) given the cost and duration of R&D projects in the pharmaceutical industry, the
general goal that characterizes market knowledge seems twofold: providing support for
the fast development of the right molecule” (p. 16). While any molecule has to
conform to specific market needs, R&D people must give the drug the attributes that
most appeal to the market, i.e., patients and prescribers alike. Hence, as market
knowledge is crucial to market access, those firms with ample market knowledge on
the specific segment they compete bear a crucial strategic advantage in relation to other
firms. However, the knowledge about the current market is not enough. As
Christensen et al. (2018) pointed out, successful firms are those that are capable of
developing market-creating innovations.
M&A activity in the pharmaceutical industry reached an all-time record in 2015,
when surpassed the US$250 bn level in annual value. Since then, the aggregate value
of the deals was not as high but, only during the first two month of 2019, this figure
added up to US$146 bn, outstripping each of the entire years of 2016, 2017 and 2018
(Grocer, 2019). Clearly, what is behind this significant M&A activity is the need to
obtain new sources of revenues in the future by means of a diversification strategy (Di

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Guardo, Harrigan & Marku, 2018), and the internalization of external R&D
capabilities (Lindström & Kekkonen, 2018).
Even though the acquisition of a R&D-focused company is not the only way to
obtain promising new molecular entities (NMEs), undoubtedly, one of the key trends
in the global pharmaceutical industry is the fact that, for the better and for the worse,
external sourcing of R&D is more attractive than internal development (Birnbaum,
2016; Shepherd, 2017). Though the pharmaceutical industry is a well-known capital-
intensive as well as a research-intensive industry, most of the research is not made in-
house because, on the contrary, it can be obtained through the acquisition of another
firm or, alternatively, through the formation of a strategic alliance (Marhold, Kim, &
Kang, 2017). Baldwin, Becker and Dessain (2012) analyzed thoroughly the case of the
Switzerland-based Roche Holding A.G.´s complex acquisition of US-based Genentech
Inc. in 2009 and found that the main reason why Roche acquired Genentech was the
intention to expand its innovation prowess with the aim to regenerate and enrich its
future drug portfolio and, certainly, to leverage the subsequent cash inflow this is
expected to represent (see also Franco, 2015).
Big Pharma´s appetite for acquiring small- or mid-sized R&D-focused companies
proceeds from the fact that after the date of patent expiration, sales of an on-patent
drug usually plunge in favor of lower-priced generic versions of that drug. This is what
is known as ‘patent cliff’ (Guertin, 2016). A patent cliff is the point in time at which a
firm´s revenues could fall off a cliff when one or more established products go off-
patent (Armenean, 2012; Budwell, 2019; Fourie, 2019; Helfand, 2019b; Jack, 2012;
Kakkar, 2015; Song & Han, 2016). For example, currently, Roche´s top three selling
drugs (i.e., Rituxan, Herceptin, and Avastin), all oncology drugs, account for 43% of
its sales, though this year is patent cliff for all of them. Still, Roche innovation pipeline
profile is so attractive that, according to industry analysts, it is in a prime position to
make up for the expected decline in sales with the entry of new promising medicines,
provided that they are approved (Chrisomalis, 2019; Friedman, 2019).
Although all on-patent drugs have a patent cliff future, a well-implemented long-
term business plan, to a certain extent, can manage risks and foresee that point in
anticipation. However, as it´s well known, drug development is a risky and costly
activity. For example, the failure of Biogen´s aducanumab, an Alzheimer´s disease
drug, during phase III trials, spurred a collapse in Biogen´s market value of US$18 bn

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in a week in March, 2019, in part, because Biogen´s main sources of revenues (i.e.,
Tecfidera and Spinraza) were near a patent cliff (Liu, 2019).
To offset the patent cliff problem, each company is obliged to augment the number
of drugs in clinical stage testing, which are referred to be ‘the pipeline prospects’. But
this is not so simple. During the last years, the cost of drug development has been
growing just as the risk of failures (Au, 2014; Avorn, 2015; Banzi et al., 2015;
Cummings et al., 2017; DiMasi et al., 1991; DiMasi & Grabowski, 2007; DiMasi,
Grabowski & Hansen, 2016; 2015; DiMasi, Hansen & Grabowski, 2003; Kimko, 2016;
Mullin, 2014; Venkatakrishnan et al., 2016; Yoon, Rosales & Talluri, 2018). In this
regard, Begley and Ellis (2012), for example, acknowledged that, unfortunately, the
ability to translate cancer research to clinical success has been remarkably low, in spite
of the growing amount of money invested in discovery research both in preclinical
(animal) and clinical (human) stages of drug development. Further, as these authors
have borne out, “clinical trials in oncology have the highest failure rate compared with
other therapeutic areas” (p. 531). As a consequence, in oncology, owing in part to the
growing worldwide high incidence and prevalence of cancer, “the costs of drug
development have increased along with the number of late-stage clinical-trial failures
and the demand for more effective therapies” (p. 532). Therefore, this situation
constitutes one of the biggest challenges for the pharmaceutical industry as a whole. As
Begley and Ellis (2012) have said, “(…) although hundreds of thousands of research
papers are published annually, too few clinical successes have been produced given the
investment of significant financial resources (p. 533).
Recently, Milne and Kaitin (2019) have analyzed the new and complex drug
development landscape. Obviously, they coincided with Begley and Ellis´s remarks
(2012) about the assertion that the likelihood of success for oncology product
development is relatively low but they added that, in their view, there are an
overemphasis in the development of cancer treatments as a result of regulatory
practices that speed up the approval process in case of oncologic molecules (i.e., anti-
neoplastic agents). Since time-to-market is key to draw upon the benefits of the period
of market exclusivity, probably there is a problem of overinvestment in oncology drug
development, which shows a comparative high rate of failures in detriment of other
therapeutic areas. Further, in accordance to Fogel (2018) and others in the field,
clinical trials for pharmaceuticals offer many opportunities for failure, along all the
stages. For instance, the cost of a failed phase III trial is not just the cost associated

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with the trial itself but the cost of all prior trials as well as the cost of lost time
pursuing a potentially viable alternative.
M&A as a vehicle of growth is in discussion. For example, one of the largest
pharmaceutical companies in the world is New York-based Pfizer Inc., which
outpointed US$13 bn in revenues in 2018. During the past two decades, Pfizer chose to
follow a M&A strategy to become bigger and bigger. In 2000, it acquired Warner-
Lambert for US$111 bn, then in 2002, it invested additional US$60 bn to take
possession of Pharmacia, a combination of Upjohn, Searle, and Sugen, and, in 2009, it
bought Wyeth for another US$68 bn. Although, certain firms such as Merck & Co.
preferred to keep an organic growth path, M&A activity in the industry was so intense
that “the share of revenues from innovation sourced outside the companies—meaning
acquisitions, partnerships, and licensing deals—has grown from 25% in 2001 to 50%
in 2016” (Teitelman, 2019, p. 2).
This trend brings to light that, inside the industry ecosystem, Big Pharma is
behaving more like a venture capitalist than an entrepreneur, leaving the role of
entrepreneur to new start-ups and small-sized, more specialized biotech and biopharma
firms with an almost exclusive focus on R&D (van der Gronde, Uyl-de Groot, &
Pieters, 2017).
By analyzing 160 pharmaceutical acquisitions, Higgins and Rodriguez (2006) have
demonstrated that the propensity to engage in acquisition activity was greater among
firms with a deteriorating product pipeline. According to this view, one can believe
that a firm chooses to buy another firm because its in-house R&D capability is not
good enough to replenish its pipeline, and, hence, replace its on-patent and on-market
drug portfolio. But, we can present another hypothesis: Some firms choose to grow by
means of M&A because they perceive that buying a firm with good R&D capability is
more attractive, cheaper and less risky than developing 100% of the R&D in house.
Still, some firms are making use of M&A to complement instead of substituting
internal research programs.
3.2. R&D changes
Whereas some observers of the sector have maintained during the last decade that
the global pharmaceutical industry is suffering a so-called ‘productivity crisis’
(Abbany, 2018; Bryans & Kettleborough, 2019; FitzGerald, 2010; Naci, Carter &

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Mossialos, 2015; Pammolli, Magazzini & Riccaboni, 2011; Paul et al., 2010; Tulum &
Lazonick, 2018; van Vierssen Trip, Nguyen & Bosch, 2015), the US Food and Drug
Administration (FDA) approved an all-time annual record of new medicines in 2018
when it granted marketing authorization to 59 new molecular entities (NMEs) (Jarvis,
2019; Mullard, 2019). Thus, even though the number of NMEs is not a perfect metric
of R&D outcomes, as it does not reflect changes in the quality or profile of the output,
nor the size of the target population, the quantity of new and innovative compounds
reaching the commercialization stage is, in principle, good news for the unmet needs of
specific groups of patients, for treating clinicians in search of alternatives and, also, for
the potential improvement of health care systems´ performance and public health.
Finding new drugs is a complex, time-consuming, risky and costly task. The
biotechnology, genetics, pharmacogenomics, molecular biology and bioinformatics
revolutions underway spurred some structural changes in the way pharmaceutical R&D
is being framed in favor of entrepreneurial start-up firms founded by university
scientists and backed by venture capital (Gittelman, 2016). Regardless, according to a
recent Brookings report, the global pharmaceutical industry invested a total of
US$156.7 bn in R&D, in 2016. In this respect, Big Pharma companies, in decreasing
order, were the following: Roche (US$8.7 bn), Novartis (US$7.9 bn), Johnson &
Johnson (US$7.8 bn), Pfizer (US$7.0 bn), Merck & Co. (US$6.8 bn), Sanofi (US$5.7
bn), AstraZeneca (US$5.6 bn), Amgen (US$4.9 bn), Eli Lilly & Co. (US$4.7 bn),
Bristol- Myers Squibb (US$4.4 bn), AbbVie (US$4.2 bn), Gilead Sciences (US$3.9
bn), Takeda (US$3.8 bn), Boehringer Ingelheim (US$3.2 bn), Bayer (US$ 3.1 bn) and
the remaining, under the US$2.0 bn level. It is worth noting that other firms around the
world, including China, India, and elsewhere accounted for US$63.1 bn in total,
showing the current wave of globalization in pharmaceutical R&D investment
(Sablich, 2018).
If one compares the amount of capital allocated to R&D in 2016 (US$156.7 bn)
with the number of NMEs approved by the FDA in 2018, that is, 59, one can obtain a
cost of US$2.6 bn per NME, which is the same value that DiMasi, Grabowski and
Hansen (2016) calculated as the per-medicine cost of drug development, taking into
account the attrition rate of investigational molecules (see also Mullard, 2014). In the
2017 annual survey of the US-based pharmaceutical drug companies, PhRMA, the
primary trade group, pointed out in a report that the 37 companies´ R&D investment it
represents was, on average, as high as 21.4% of revenues, a high parameter when

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compared with other high-tech industries (Dunn, 2018). Still, the average cost of
bringing a new medicine to market was barely US$1.19 bn in 2010, a measure that
highlights the upward curve the cost of drug development experienced since then. In
part, this is the reason why the return on R&D investment fell to 1.9% in 2018, when
the same parameter was 10.1% in 2010 (Hirschler, 2018).
On the basis of the number of patents obtained as a metric of R&D output, Madsen
and Wu (2016) proved that there is a phenomenon of diseconomy of scale in the
pharmaceutical industry whereby small, younger, more specialized firms exhibit a
better return on R&D investment compared to Big Pharma companies, who, on the
contrary, specialize in marketing, communication, regulatory affairs management and
sales. Therefore, these companies prefer to follow a M&A strategy (“value capture”) in
a bid to take in new promising molecules instead of developing the compounds entirely
in-house, framing the options into the “make or buy” decision dilemma (Preker,
Harding & Travis, 2000).
With the intention of clarifying the link between market size and innovation,
Dubois, de Mouzon, Scott-Morton and Seabright (2015) constructed a model whereby
they concluded that the drug innovation elasticity is below one, which implies that
innovation increases with market size, but less than proportionally so. In other words,
the bigger the market size of a medicine, the more the R&D investment to conquer a
fraction of that market, and potentially the more the number of competitors interested
in being part of the supply side. Thus, this analysis emphasizes that, when the R&D
investment is geared to serve a micro-niche of the therapeutic market, the expected
profitability will be limited as a result of the small market size, which makes the R&D
investment costlier (and riskier) over time. Also, the estimation of a product´s future
demand curve is full of uncertainties because of variability in substitution patterns,
rapid technological change, and the behavior of new entrants, which are not completely
predictable. And as Anne Pollock (2011) has stated, there is not an automatic
correlation between increased R&D and increased drug discovery.
Because only one among 250 compounds entering the preclinical testing phase will
eventually be approved by the FDA to enter market stage (Banerjee & Siebert, 2017),
the global pharmaceutical industry is increasingly trying to diversify the source of
innovation by outsourcing R&D to ultra-specialized firms located in China, which
offer a cost and quality advantage. For example, sofosbuvir, an anti-hepatitis C virus
(HCV) compound, was originally synthesized at WuXi AppTec in China in the service

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of Pharmasset Inc., a Princeton-based pharmaceutical company that was acquired for
US$11.2 bn by Gilead Sciences Inc. in 2012. Thanks to this acquisition, Gilead
Sciences launched sofosbuvir in 2013 under the brand name of Sovaldi (see also
Fernholz, 2016; Xia & Gautam, 2015).
3.3. A new pricing context
The price of a pharmaceutical product is one of the main factors that determine its
affordability. So, a high price (or an exorbitant price) of a drug sometimes function as
an insurmountable barrier to access, at least for a segment of patients, with or without
health insurance. Specially in the US―but not limited to the US―there is still a
profound problem of access and affordability because of the high-price of prescription
drugs that negatively affect both welfare and population health (Beaubien, 2019;
Brody, 2019; Calcagno, Chapsal & White, 2019; Danzon, Mulcahy & Towse, 2015;
Kesselheim, Avorn & Sarpatwari, 2016; Ponce, 2018a, 2018b, 2018c, 2018d, 2018e,
2018f).
Over the last five years, in the US, the price growth curve of prescription
pharmaceuticals became a disputed political issue (Facher, 2019; Lovelace & Turner,
2019; Rice, 2019; Rowland, 2019; Tallapragada, 2016) and, as a consequence, a
preferred topic of intense media coverage (Entis, 2019; Feldman, 2019; 2018; Harpaz,
2019; Ludwig, 2018; Ren, 2019). For example, a well-designed study provided
evidence that the annual change in wholesale acquisition cost (WAC) pricing of
specialty drugs sold from 2010 to 2013 was 7.03% or greater, near four times higher
than the inflation rate, with a steep increase in the number of drugs with price hikes
greater than 10% per year during an 11-year period, from 2002 to 2013 (Pennington &
Stubbings, 2016).
During the first three months of 2019, there has been documented rises in 2,862
pharmaceuticals, some of them with triple-digit percentage increments. And not only
on-patent drugs experienced rises. For example, the antidepressant fluoxetine
hydrochloride, the generic version of Prozac, increased its list price by 568% (Kuchler,
2019). A life-saving drug such as insulin is an illustrative case. Although insulin is an
almost one-hundred-year-old off-patent drug, its per-month price is so high that many
patients are self-rationing its consumption with dangerous health risks. In this regard, a
Yale study bore out that about a quarter of people with diabetes skipped doses or use

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less than prescribed to save money (Kodjak, 2019). The average US list price (WAC)
of the four insulin categories increased by 15% to 17% per year from 2012 to 2016
(Cefalu et al., 2018), and, according to the American Diabetes Association, the average
price tripled between 2002 and 2013 (Ames, 2018; Hua et al., 2016).
Of course, the growing cost of innovation, at least in part, is linked with the high
price of patented drugs. For example, new medicines to treat hepatitis C virus (HCV)
infection are very effective but, at the same time, are very expensive. This condition
has public health relevance insofar as approximately 80 million people are living with
HCV viremia worldwide. Nonetheless, the prices of the medicines for hepatitis C vary
significantly across countries. The median nominal price of sofosbuvir for a 12-week
course across all OECD countries was US$42,017, with the price ranging from
US$37,729 in Japan to US$64,680 in the US (Iyengar et al., 2016).
Another illustrative example of pricing distortions is the oncologic drug imatinib
mesylate (Novartis´ Gleevec in the US or Glivec in other countries) designed for
treating patients with chronic myeloid leukemia (CML), once a fatal diagnosis. As a
tyrosine kinase inhibitor, Gleevec ushered in a new era of targeted oncology drugs and
proved to be an effective drug capable of transforming a deadly disease in a
manageable chronic condition so long as one takes the pill daily. At its introduction in
2001, the list price of Gleevec was $26,000 per year. But, surprisingly, near the time of
its patent expiration in 2015, the price had risen to over $120,000 annually (Cohen,
2018b). Currently, the price of the generic version of imatinib is around US$8,800 per
year, a high price taking into account that this is now an off-patent drug; albeit the
price of Gleevec, the originator´s compound, is still more than US$76,000 per year in
the US (Cowley, 2013).
However, there are signs that this excessive pricing problem is creating awareness
among some stakeholders that this situation is unsustainable with clear consequences
for the global pharmaceutical industry´s predominant business model (Abboud et al.,
2013; Angelis, 2016; Davey, 2019; Florko, 2019; Gren, 2019; Prasad et al., 2017;
Simoens et al., 2017). In 2012, a group of oncologist at the Memorial Sloan-Kettering
Cancer Center announced in The New York Times that they decided to refuse to
prescribe a recently launched anticancer agent for colorectal cancer named ziv-
aflibercept (Sanofi´s Zaltrap) due to the fact the its price averaged US$11,063 per
month of treatment―that is, US$132,756 per year―and because there was an
available alternative with similar effectiveness for half the price (Bach, Saltz, &

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Wittes, 2012). Since then, the pricing context has been changing. The public outcry
about exceptionally high prescription drug prices is being heard and is paving the way
to envisage new approaches to work out a better balance between the industry´s
freedom to fix the price of its products and the population´s healthcare access rights
(Griffin & Edney, 2019; Hurst, 2017).
Another example of a pricing dispute is illustrated by the tension between the UK
government and Boston-based Vertex Pharmaceuticals, the manufacturer of
lumacaftor-ivacaftor (whose brand name is Orkambi), an effective drug for the
treatment of cystic fibrosis, a life limiting disease (Herper, 2017). In 2016, the National
Institute of Health and Care Excellence (NICE) rejected the approval of Orkambi for
reimbursement for the National Health Service (NHS), because of its extremely high
price (Kelso, 2019; The Economist, 2019b). The price of Orkambi was set by Vertex
for the UK at₤105,000 per patient per year of treatment, which is unaffordable by the
patients´ families at full price (Boseley, 2019). Just Treatment, a civil society group,
affirmed that a generic version of Orkambi could be acquired instead at
₤5,000 per
patient per year of treatment, hence, this decision could potentially save the NHS
nearly £4 bn over the next 10 years (Withers, 2019). With that aim, they proposed that
the government turn to a provision called ‘crown use licensing’ under the 1977 Patents
Act, setting aside Vertex´s patent over Orkambi.
Given that there is more than 10,000 patients with cystic fibrosis in the UK alone,
the complex Orkambi case shows that sometimes the payer´s value-for-money
judgment is in contrast with the value in monetary terms a pharmaceutical firm
(regards that) it deserves in exchange for its product, complicating the relationship
between the pharmaceutical industry, the public policy decision making process and
the society at large (see also Bauchner & Fontanarosa, 2013; Durrant, 2001; Keown,
2019; Maynard & Bloor, 2015; Paradise, 2015; Schneider, 2017; Silverman, 2019;
Williams, 2019).
4. Discussion
Mergers and acquisitions, R&D changes and a new pricing context are the three
main groups of drivers that are shaping the industry, now and in the near future. In the
current environment, it is not clear whether a bigger company can be more competitive
than a smaller firm, taking into account that innovation prowess is perhaps the most

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important attribute in order to create new patentable and marketable drugs and thereby
conquer market share and profitability (Gassmann, Schuhmacher, von Zedtwitz, &
Reepmeyer, 2018; Gupta, Polonsky, & Ray, 2018; Ni et al., 2017). Therefore, a M&A
strategy for growth can be controversial and risky unless the target company is not
overvalued and has the R&D capability to offer a new stream of breakthrough products
(Higgins & Rodriguez, 2006).
In this sense, Guo, Hu, Yheng and Wang (2013), by analyzing a sample of 127
drugs with their 621 American patents, demonstrated that patents, not only are the best
shield for innovative medicines against generic entrants, but, as a consequence, are a
powerful weapon for pharmaceutical firms to win the substantial returns generated by
market exclusivity (see also Sinha, Curfman, & Carrier, 2018).
Some scholars support the hypothesis that mergers and acquisitions in the
pharmaceutical industry reduce the innovation capability of the merged entity and its
non-merging competitors (Comanor & Scherer, 2013; Munos, 2009). By using data on
horizontal mergers among pharmaceutical firms in Europe and applying propensity
score matching estimators, Haucap, Rasch and Stiebale (2019) found that average
patenting and R&D of the merged entity and its rivals declines substantially in post-
merger periods. They linked this observation with the predictions from an oligopoly
model with heterogeneous firms, as well as a patent race model, when pre-merger
R&D intensity is sufficiently high. The negative effects of mergers on innovation were
concentrated in markets with high R&D intensity and in technology categories with
overlap in pre-merger innovation activities of merging and rival firms (see also Haucap
& Stiebale, 2016). Even though the Schumpeterian hypothesis about firm size argue
that large firms will be more effective than small firms in generating technological
progress (Link & Scott, 2018), the shift of R&D intensity towards new start-ups, spin-
offs, small- and medium-sized firms in the pharmaceutical industry supports the idea
that the entrepreneurial and innovation capability is stronger among small firms and,
therefore, this is the reason why big firms try to acquire smaller companies with an
specific R&D advantage (Banerjee & Nayak, 2015; Fernald et al., 2017; Gagnon &
Volesky, 2017; Heracleous & Murray, 2001; Lee, 2017). However, according to some
authors such as Entezarkheir and Moshiri (2017) merger effect on innovation is
heterogeneous across industries, increases with market share, and is greater in the long
run. Moreover, given that post-merger demand estimation is complex and full of
uncertainties, the result of a specific M&A on value creation is difficult to foretell

14
(Bokhari & Mariuzzo, 2008; Dierks, Bruyère, & Reginster, 2017; Ringel & Choy,
2017).
Relatedly, some observers find clear advantages in combining R&D capabilities in
the case of well-managed mergers (Shimura, Masuda, & Kimura, 2014). For example,
Eisenman and Paruchuri (2019), by analyzing the experience of the merger between
Bristol Myers and Squibb in 1989, they found an interesting space of knowledge
recombination that favored the merged entity, at least in the case of this two equally
sized pharmaceutical companies.
Further, whereas there are a group of authors that underscore that the global
pharmaceutical industry´s R&D priorities are not in coincidence with the global burden
of disease (Maynard & Bloor, 2015; Ràfols, Hopkins, Hoekman, Spietel, O´ Hare,
Perianes Rodríguez, & Nightingale, 2014; Ràfols & Stilgoe, 2018; Ràfols & Yegros,
2018; Rechel, 2019; Yegros, Tijssen, Abad-García, & Ràfols, 2018), others instead are
optimistic with regard to the potential that new advances in biomedical research can
provide to help resolve common population health problems in low and middle income
countries (Horton, Gelband, Jamison, Levin, Nugent, & Watkins, 2017; Katz, 2013;
Terry, Yamey, Miyazaki-Krause, Gunn, & Reeder, 2018).
For example, during the last decades, there has been a revolution in drug discovery
and development thanks to the application of new tools and approaches from
pharmacogenomics, proteomics, molecular biology, biomarker-driven studies, systems
therapeutics, drug-target interaction prediction techniques, artificial intelligence, and
clinical trial site network building (Bertuzzi, & Jamaleddine, 2016; Blind, 2012;
Danhof, Klein, Stolk, Aitken, & Leufkens, 2018; Ding, Tang, & Guo, 2019; Dong &
McCarthy, 2019; Duval, 2018; Edmunds et al., 2019; Fernald, Weenen, Sibley, &
Claassen, 2013; Hogan & Tangney, 2018; Illingworth & Prokop, 2017; Kimko, 2014;
Kinch, Kinch, & Griesenauer, 2019; Kinch & Moore, 2016; Scannell & Bosley, 2016;
Schuhmacher, Gassmann, & Hinder, 2016; Schuhmacher, Germann, Trill, &
Gassmann, 2013; Takebe, Imai, & Ono, 2018; Wu, Zhang, & Yang, 2015).
This unprecedented progress in drug discovery and development is occurring along
with an upward pressure on per-unit prescription drug prices so that pharmaceutical
spending tends to grow faster than total health care spending. Therefore, governments,
policymakers, and payers are trying to devise new schemes to cost containment. The
European countries have ample experience with the use of a set of ‘innovative
agreements’ or ‘managed entry agreements’ to reach an accord with the pharmaceutical

15
industry with respect to price-setting decisions. Some of them are classic price-and-
volume agreements, list-price discounts (Morgan, Vogler, & Wagner, 2017), caps or
annualized rebates on a per-manufacturer basis, but other innovative agreements put a
greater emphasis on real-world clinical effectiveness and are known under the name of
‘performance-based agreements’, that includes, in some circumstances, the delisting of
products (Dunlop, Staufer, Levy, & Edwards, 2018; see also Panteli, Eckhardt, Nolting,
Busse, & Kulig, 2015).
In Germany, since the approval of the German Pharmaceutical Restructuring Act
(AMNOG) in 2011 the government tries to ensure a proper balance between
affordability and innovation. Each new medicine must demonstrate added clinical
benefit in relation to a comparator and then each manufacturer have to negotiate the
price with the statutory social health insurance funds association (in German,
krankenkassen) (Lauenroth & Stargardt, 2017).
In Eastern Europe, the governments use some form of external price referencing
(EPR) system, but this pricing policy was criticized because the comparators they use
are countries with high prices (Csanádi, Kaló, Prins, Grélinger, Kiss, Fricke, &
Garrison, 2018).
In the Asia Pacific region, Australia, New Zealand, China, India, South Korea and
Malaysia use some form of ‘price regulation’ of pharmaceutical products, being New
Zealand the country with the lowest prices among them (Hasan, Kow, Dawoud,
Mohamed, Baines, & Babar, 2019; see also Roughead, Kim, Ong, & Kemp-Casey,
2018).
While the pharmaceutical industry is against ‘price controls’ with the argument that
they discourage innovation, it is imperative to strike a balance between the global
pharmaceutical industry´s right to set the price of its on-patent products and the
patients´ right to access to new and life-saving or life-extending medicines. For this
reason some scholars are proposing outcome-based or value-based pricing through
which the industry can set a price taking into account the value in terms of population
health of the new product (Blumenthal, Goldman, & Jena, 2017; Daems, Maes, &
Glaetzer, 2013; Fuller & Goldfield, 2016; Mattke, Klautzer, & Mengistu, 2012;
Parkinson et al., 2015; van der Gronde, Uyl-de Groot, & Pieters, 2017; Villa et al.,
2019). This is a better alternative to the aggressive promotion of generic substitution,
which could potentially harm the disposition of the industry to invest in R&D
(Blatchford, 2019). On the contrary, the absence of an agreement on price between the

16
industry and payers or insurers tends to generate coverage restrictions or exclusions
(Chambers, Poe, Bungay, Cohen, Ciarametaro, Dubois, & Neumann, 2018), resulting
in a scenario in which patients have to pay out-of-pocket the full price of the drug.
Finally, Viswanathan et al. (2012) found “robust evidence that reduced out-of-
pocket expenses improved medication adherence across clinical conditions” (p. 793).
This is a clear demonstration that a high price can be a barrier to access to needy
medications.
5. Conclusions
On the basis of the evidence, three main drivers of change are exerting influence on
the global pharmaceutical industry, i.e., mergers and acquisitions, R&D changes, and a
new pricing context. As the three drivers are interrelated, it is possible that they will
jointly shape the industry in the next decades. And specially, the new advances in drug
discovery and development will intensify the tension between an upward trend in
prices of new, patent-protected drugs and the ethical need to ensure the affordability of
their clinical benefits to society.
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