Michael Porter’s well-known ‘five forces’ model is often applied to various industries to analyze their level of competitiveness and scope for profitability. When applied to the pharma industry, the five forces (threat of new entrants, threat of substitutes, power of buyers, power of suppliers and industry rivalry) present an industry with a high level of rivalry and high barriers to entry, along with a high level of buyer power. Over the last few years, the negotiating power of buyers has only gotten stronger, exerting pressure on pharma companies’ margins.
The buyers’ ecosystem in the pharma industry – payors, providers, physicians and patients – has been driving some key changes since the last decade. Consolidation of healthcare providers has picked up speed after the enactment of the Affordable Care Act in the U.S. In some countries, cost-conscious governments are also encouraging the sale of generics. Out of pocket expenditure on healthcare has been declining, shifting the burden (and the power) to payors. As a result, payors are seeking to move from payments made on services-rendered basis to outcome-based models.
Pharma sales representatives are dealing with drastically reduced access to physicians as individual clinics are taken over by larger providers. All of these are challenging the traditional pricing, sales and marketing models of pharma companies.
WNS undertook an analysis of the various forces at play in the U.S. pharmaceutical sector. The WNS DecisionPoint™ Buyer’s Power Index (BPI) tracks variables that are indicators of the influence of the buyers, and maps their impact on the gross margin of pharmaceutical companies. The key variables tracked in BPI are:
Generic sales contribution (for the entire pharma industry)
Out of pocket expenditure (as a percent of GDP)
Pace of hospital consolidation
Not surprisingly, a rising BPI indicates falling gross margins. Our study shows that the influence of the buyers has increased significantly during 2009-2014, causing the BPI to rise by 20 percentage points. As a result, the top 10 pharma players have lost around 3.6 percentage points from their gross margins in this period. Alarmingly, BPI is expected to rise further in the coming years, driven by further consolidation of providers and rising power in the hands of payors.
As pharma companies struggle against these headwinds to contain their sales and marketing costs, there is growing acceptance that a transformed commercial strategy needs to be adopted for sustainable and long-term business impact.
The pharma industry is no stranger to the use of data and analytics, but its application has traditionally been restricted to clinical research. The use of advanced and predictive analytics – be it in product launches or while executing digital marketing strategies – is a fast-emerging idea. Leading adopters of analytics in the pharma industry are already reaping rich benefits in the form of reduction in operating expenditure (58.2 percent respondents) and higher increase in sales volume (43.6 percent respondents). It’s time then for all pharma companies to ponder, ’How do we leverage analytics to transform our commercial strategies?’