The November 2018 Strategic Case Study is based on a fictional company called Novak, which works in the pharmaceutical industry. This is an absolutely fascinating industry for so many reasons. Unfortunately, it is also an enormous and complex industry, and for that reason it can be quite intimidating to get to grips with. That’s why VIVA’s tutors have put together a full, comprehensive Industry Analysis for you. In that analysis we simplifyi the industry, taking you through the key facts, figures and trends, illuminating the structure, and drawing attention to some of the key issues that arise for modern pharmaceutical companies.

You can access the full industry analysis by clicking here. Below, we introduce you to a few key insights from the industry, and give you a flavour of how interesting this industry really is…


Revenues vs. Profits

The pharmaceutical industry is one of the largest industries in the world in terms of revenues generated. And those revenues have grown considerably in the last 15 to 20 years. In 2001, annual world revenues for the pharmaceutical industry stood at US$ 390 billion. Today, they have already surpassed US$ 1 trillion per year. To put it in perspective, that accounts for around 1% of the entire world GDP! The sheer size of the industry in absolute terms often leads to a popular perception that this is also one of the most profitable industries in the world today. However, although profits can be large in any given year, if we look at the rate of return on investment in the pharmaceutical industry, it is not as profitable as popular opinion suggests.  According to Pharmaceutical Research and Manufacturers of America, the average return on equity for key industries from 2014 – 2016 shows that the pharmaceutical industry’s profits stand at 16.2%, significantly lower than Computer Sciences (31.6%), Beverages (27.4%), Aerospace/Defense (23.0%), and Trucking (19.1%). So despite health revenue growth figures in recent years, and large profits in absolute terms, relative to investment, it is not the most profitable industry in the world by any means. The reasons for this will become clear as we proceed through the full industry anlaysis…



Clinical Trial Phases

The research and development phase in this industry is long, painstaking, and has an extremely high failure rate. In the full analysis we investigate the reasons why this is the case. Here, we offer a quick overview of the structure of the testing period for new drugs, and look at the fail rates that correspond to each. There are 4 main stages or phases of testing that new drugs go through. First, there are pre-clinical trials. These are usually a battery of sophisticated laboratory tests, in which pharmacists and technicians perform provisional tests on the efficacy of a chemical compound by using biological cultures, disease samples, and in some cases (though less and less frequently), animal testing. Once promising indications of efficacy have been established at this pre-clinical stage, the drug passes on to testing on human subjects. This is usually called “Phase 1” testing. In Phase 1, voluntary human subjects are administered the drug. These subjects are typically healthy and are not suffering from the relevant disease or ailment. The primary aim of this phase is to determine whether or not there are any strong adverse side-effects, and appopriate dose thresholds. If there are no clear problems at this stage, the drug proceeds to Phase 2 trials. Phase 2 usually involves a larger sample of people, and in this case, the drug is tested on people who actually suffer from the relevant disease. The main objective of Phase 2 testing is to ascertain and confirm the efficacy on real human patients, while again ensuring no adverse side effects in those actually suffering from the disease. If there appear no obvious problems here, the drug is submitted for the final Phase 3 trial. This is a much larger trial, typically taking in hundreds or even thousands of patients where possible, over longer periods, in order to establish long-term usability and efficacy. One of the main aims of Phase 3 testing is to compare the long-run efficacy and safety of the new drug with already-available medications that are on the market. Once Phase 3 testing is successfully completed, the drug is submitted for approval with the relevant regulatory authority (e.g. the FDA in the United States, or the PTA in the pre-seen case of Novak).


Success Rates

It’s interesting to note the success rates in percentage terms from one phase to the next. As you can see in the chart below, the main hurdle is at Phase 2. This is perhaps not surprising, as this is typically the first time that the drug is tested on real patients who actually suffer from the disease. Even if in Phase 1 no advese side effects are discovered, there is no guarantee that patients with the disease won’t react differently due to their ailment. Moreover, there’s no guarantee that the provisional efficacy established in pre-clinical trials on isolated biological samples (or animals) will carry over into real, full human subjects. Therefore, Phase 2 is critical from the point of view of determining whether or not the drug is really viable in the real world. Once all the clinical trials have been completed in accordance with criteria established by the regulatory authority, then there is an 85% chance that the drug will be approved. However, when sum the probabilties and we look at the overall chances that any given drug will make it from pre-clinical trials to approval, the percentage plumments to just over 9%! Put another way, there is a 91% chance that any given drug will not be saleable at the end of an approximately 10-year cycle of testing! Not surprisingly, research and development in this industry is very expensive indeed...


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