In the concluding ii weeks, I bring started writing most epic autumn of Valeant as well as the unraveling of the Theranos story, but I bring held dorsum because all iii stories bring to live on laid upward against the backdrop of the changing wellness tending business. While at that topographic point are numerous stories beingness told most how this is changing, I decided that it made feel to get past times looking at the evolution of the wellness tending draw of piece of job concern over the concluding 25 years and how changes inwards its inwardness characteristics may explicate all iii stories.
The Story
To empathise the drug business, I went dorsum to 1991, towards the starting fourth dimension of a surge inwards spending inwards the U.S. on wellness care. The pharmaceutical companies at the fourth dimension were cash machines, built on a platform of substantial upward front end investments inwards enquiry as well as development. The drugs generated past times R&D that made it through FDA approving as well as into commercial production were used to comprehend the aggregated cost of R&D as well as to generate important excess profits. The commutation to this procedure was the pricing mightiness enjoyed past times the drug companies, the outcome of a well-defended patent system, important increment inwards wellness tending spending, splintered wellness insurance companies as well as lack of accountability for costs at every degree (from patients to hospitals to the government). In this model, non surprisingly, investors rewarded pharmaceutical companies based on the amounts they spent on R&D (secure inwards their belief that the costs could live on passed on to customers) as well as the fullness as well as residual of their production pipelines.
So, how has the story changed over the concluding decade? The rising inwards wellness tending costs seems to bring slowed downwards as well as the pricing mightiness of drug companies has waned for many reasons, amongst Obamacare beingness solely i of many drivers. First, nosotros bring seen more consolidation inside the wellness insurance business, potentially increasing their bargaining mightiness amongst the pharmaceutical companies on drug prices. Second, the regime has used the buying clout of Medicaid to deal for amend prices on drugs, as well as patch Medicare nevertheless industrial plant through insurance companies, it tin lay pressure level on them to negotiate for lower costs. Third, the pharmacies that stand upward for the distribution networks for many drugs bring too been corporatized as well as consolidated, as well as are gaining a vox inwards the pricing process. The internet effect of all of these changes is that R&D has much to a greater extent than uncertain payoffs as well as has to evaluated similar whatever other large uppercase investment, that it is goodness solely when it creates value for a business. Consequently, investors bring had to transcend to a greater extent than measured inwards their judgment of R&D spending at drug companies, rewarding companies for spending to a greater extent than on R&D solely if it is productive as well as punishing them when it is not.
The diminished pricing mightiness story is non a novel i as well as others bring made the points that I bring but it is nevertheless but a story. The existent enquiry is whether the numbers dorsum the story as well as to respond that question, I looked at commutation operating metrics for publicly traded drug companies from 1991 to 2014, amongst the intent of eking out trends inwards the numbers.
The Revenue Growth Story: The Rise of Biotech
The increment inwards wellness tending costs continued into the concluding decade, albeit at levels much to a greater extent than moderate than inwards the 1990s, but the large story was the rising of biotechnology companies inwards the space. At inception, the distinction betwixt pharmaceutical as well as biotech companies wass the method past times which they produced drugs, amongst pharmaceutical firms working amongst chemicals as well as biotechnology companies using alive organisms (bacteria, cells or yeast) to generate their drugs. Given that both R&D processes are designed to generate drugs that transcend through similar FDA approving processes as well as teach sold through the same distribution channels, this departure is i that solely scientists tin relate to, as well as i that is becoming meaningless every bit R&D departments at both groups poach on the other's territory. The repose of the differences that people request to betwixt the two, i.e, that biotech companies pass to a greater extent than fourth dimension on research, tend to lose coin as well as are riskier than pharmaceutical firms bring less to arrive at amongst draw of piece of job concern differences than life cycle differences.
In the painting demo below, I human face at the aggregate revenues reported past times pharmaceutical as well as biotechnology companies from 1991 to 2014.
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| Source: Classification past times S&P Capital IQ |
Note that past times the concluding decade, as well as peculiarly since 2010, almost all of the increment inwards the drug draw of piece of job concern has come upward from the biotech companies, amongst pharmaceutical companies reporting apartment revenues betwixt 2010 as well as 2014. In 2014, biotech companies accounted for 30.63% of total revenues at drug companies, upward from 19.23% inwards 2010.