We depend on other people in our lives. During childhood, we depend entirely on our parents, who provide us with food, shelter, education, medicines, etc. Then, during our teenage years, we start to gain a little bit of independence, until we reach adulthood when we depend entirely on ourselves.
But, the reality is that, even in adulthood, we depend on other people and organizations to survive in this world. One of them, very important, is the pharmaceutical industry.
Pharma industry (in short), is one of the most dynamic, changing, and profitable sectors in the world, due to the potential for revenues if new drugs are created, approved, and effectively manufactured for consumers. Just the United States alone accounts for almost 50% of all revenues in the global pharmaceutical industry.
Yet, not everything is as easy as it sounds. There are a lot of involved risks as well.
The pharmaceutical industry depends a lot on patents, licenses, and special permissions to receive the necessary returns to thrive in the long run.
You see, within the pharmaceutical industry, most of the expenses go for Research and Development (R&D), which translates in the development of new drugs that can cure certain diseases, conditions or health issues, with a patent (intellectual property), to ensure profits in the short-run. The objective of the industry, most of the time, consists on creating a new drug that can impact a common issue, such as cancer, hearth issues, a cold, etc., in this way, they ensure that a great number of people will use this drugs when necessary.
Conversely, not a lot of companies in the sector dedicate their efforts towards the development of what is called an orphan drug—i.e., a drug that can only be beneficial in an uncommon health issue, benefiting, for example, a population of just 50,000 people who are the only ones with that issue or chronic disease.
France, as an example to follow because of its health care system, has also a leading role in Europe when it comes to supplying the market with drugs. According to records from the Organization for Economic Co-operation and Development (OECD), France has a market share of approximately 22% in the drugs market.
The main French pharmaceutical companies that stand out the most are, of course, the well-known Sanofi, and Aventis. These two giants are included in the top 20 of global groups in the world, having a 4% and 1.5% in the world market, respectively (figure from 1999 according to the OECD data).
The funny thing is that Sanofi, with its current CEO Olivier Brandicourt, acquired Aventis through a merger (which, as we mentioned, are very popular in the pharmaceutical industry alongside acquisitions) in the year 2004. This French pharmaceutical is a little bit unconventional in the sense that they not only engage in R&D to develop new pharmaceutical drugs, but they also develop over-the-counter medications, which do not require a prescription at all. Another unconventional aspect of Sanofi is that they develop vaccines, something very unpopular within the industry due to the fact that they are not as lucrative as treatments or other drugs that can be continually sold to the public for a long period of time.
Despite this, Sanofi specializes in a lot of different areas, including cardiovascular, diabetes, oncology (which deals with cancer), thrombosis, etc.
It is funny and intriguing to look at the M&A history of the current Sanofi. It is as huge as the number of drugs rejected annually by the Food & Drug Administration and its counterparts all around the world. Indeed, they merged with Aventis, but before that, Sanofi had already merged with Synthélabo. And after their episode with Aventis, Sanofi-Aventis (as it was called before changing the name to just Sanofi in 2011), they acquired Zentiva in 2008, then Medley Farma in 2009, then Shantha Biotechnics in the same year, then Chattm in 2010… Should we continue?
The list of Mergers and Acquisitions goes on and on. The last two important acquisitions by the French company Sanofi were Bioverativ in 2018, and another acquisition in the same year of Ablynx.
Another aspect to highlight is that the pharmaceutical industry is closely related to the biotechnology industry as well. The latter is related to the development of new products and technical solutions for a bunch of different areas and sectors. Some of them include the agricultural sector, the healthcare sector, the oil or natural gas industry, the textiles industry, etc.
The biotechnological industry is very famous among the pharmaceutical one. The reason? It is said by the scientific community, politicians, and researchers, that fostering the biotech sector has the potential of multiplying the production of new drugs during the development process (which usually lasts years), by a factor of 10 to 20, as well as the rate of acceptance of drugs when delivered to the competent agency charged with the task of approving or rejecting new drugs for user consumption.
In fact, in the United States alone, the Food and Drug Administration (FDA) approves 5% to 10% of all the new drugs submitted for the revision process (which lasts a lot too: more than 5 years through a process with multiple phases). And this is not an isolated case: this happens all around the world, including France, where the National Agency for the Safety of Medicine and Health Products (Agence Nationale de Sécurité du Médicament et des Produits de Santé) is the corresponding counterpart and has at its disposal the option of requiring safety and efficacy post-authorization studies as well.
But, because of all this potential in the biotechnology sector, for more than two decades, the French biotech industry has been receiving special assistance from their government and from the European Union to fund their R&D activities regarding the development of new drugs.
An interesting analysis that can be done to understand the pharmaceutical industry at a more deep level, is the 5 Forces Analysis from Porter. This analysis can help to understand the dynamics and the different factors’ interaction that compose this sector. The 5 forces taken into account are the power of suppliers, the power of buyers, the threat of new entrants, the competitive rivalry, and the availability of substitutes.
In order to better understand how the pharmaceutical industry works, it is necessary to do some sort of analysis, and Porter’s 5 Forces Analysis seems like a solid option.
The most important factors to take into account are the threat of new entrants, the competitive rivalry, and the availability of substitutes.
There’s always one small company or startup that gathered different researchers and is currently trying to develop a breakthrough new drug. If successful, this can generate financial returns like no other company, and definitely be a threat if this turns out to be a very important drug, that can then be protected by intellectual property for some years.
The thing is that most pharmaceutical companies in the world tend to rely a lot on Merger & Acquisition (M&E), and this is explained because of the existence of economies of scale (the bigger the production, the lower the total costs a company has to pay). Big companies are always trying to acquire small successful startups or analyzing the possibility of merging with another medium or big company from the same sector. Because of this, natural selections has bred just a humble amount of very big companies in the industry.
People always say that money moves the world (rapper Lloyd Banks says it too in one of his songs), and it is totally true. These startups are very dangerous because of the great amounts of money they can attract for their projects; to the point where they can easily get funding of millions of dollars just to carry their idea.
In France, since most of these R&D projects are publicly funded, it is sometimes hard to find that private investors are generating and dictating the changes in the pharmaceutical industry, giving more value to some companies instead of the big ones. It should be noted, though, that according to the current trends, this sector is rapidly expanding in France, increasing its capital value year by year since decades.
Then, there is the competitive rivalry, where the information problem comes in. Larger companies in the business take almost extreme measures to ensure that information is not leaked toward their competition in the sector. And, of course, the availability of substitutes is practically the most important force to analyze.
When a patent or license expires, then the company that originally came up with the idea of this new drug—that was then submitted, tested and approved by the competent agency some years ago—, loses the exclusive right of production for this drug, thus enabling the competition within the country and all around the world to produce it, with their own tools and methods, and the possibility of offering it a lower price. In this situation, the cash flow can be reduced a lot.
In fact, generic medicines can drive costs down as much as 30% from the original price (they would be 30% cheaper). Countries like India, for example, are very controversial because they completely ignore patents and licenses—that have not expired yet—, and secretly start producing their own versions of this drugs (of course, always with a lower and poorer quality). The worrying part is that this industry is almost the biggest in the country, and it is openly endorsed by the government of the current Prime Minister Narendra Modi.
Of course, the sole existence of patents is something artificial that does not allow markets to reach equilibrium and make everyone happy. But this is the contribution, prize, or retribution researchers and companies get at the end of the day after a long effort and lots of capital. In the biotech industry, the existence of this intellectual property tools is more significant, to the point where some people say that it defined the sector as a whole.
One important thing to consider about the complex pharmaceutical industry, whether in France or in other parts of the world, is the existence of the Pharmacy Benefit Management (PBM) companies, although they are more prevalent in the United States.
The reason of its existence is the high costs in prescription drugs and the necessity of insurance companies of getting a high-profit margin, and lowering costs when buying these medicines for their clients, holders of policy in health insurance. That’s why PBMs are required. They are basically intermediaries between these insurance companies and manufacturers or pharmacies, who sell the drugs directly.
Their job consists in negotiating with these pharmacies or manufacturers to get a better price regarding these drugs; then, they are sold for a slightly higher amount to insurers (but lower than the amount they would be charged if they were to buy these drugs without PBMs), and that’s it. Their power comes from the capacity to negotiate; thus, it is necessary that PBMs are big companies that can be a force during negotiations.
And how do pharmacies or manufacturers win in this scenario?
Well, simple. They say to the PBMs: “hey, I can sell you these drugs for a lower price; however, I want YOU to sell these specific drugs from these specific companies”, in that way, the drug products from these businesses are exposed to the public instead of what the competition offers, and thus they increase their profits.
But, in summary, France’s pharmaceutical industry is another example of how these companies operate in the rest of the world. Lots of M&A are present as we saw with Sanofi, and the competition between these companies can be fiercer compared with other countries. The main cause is that private insurance companies are very popular among the French (they’re called Mutuelles), and compete for clients a lot between them; thus, the pressure to get better prices from drug manufacturers and pharmacies than the other Mutuelle can be very demanding, since this would ensure that the insurer will stay afloat and prosper in the future, instead of being forgotten and left in the Boulevard of Broken Dreams.