By Ed Giniat, David Blumberg, and Chris Stirling
The pharmaceutical industry has performed disappointingly over the last 10 years, relative to other industries, and is facing a future with lower growth prospects than in the past. In fact, IMS forecasts global spending on medicines will reach $1.1T by 2015, but the revenue growth rate will slow from 6% between 2005 and 2010 to 3% to 6% between 2010 and 2015.
Additionally, research and design productivity is declining — returns have nearly halved over the last 10 years, according to research — and scientific, political, legal, and personnel risks are all rising. In the United States, the number of pharmaceutical industry settlements with state and federal government has risen dramatically over the past decade.
However, the situation can and is changing as pharmaceutical companies alter the way they are organized and operate, set prices, incorporate more efficient development spending, and have a more dynamic approach to risk reporting with greater disclosure of potential and actual risks. In fact, during the next 10 years, the pharmaceutical industry could deliver growth in line with real GDP (3% to 5% ).
To accomplish this, the industry needs to redefine itself in the minds of shareholders, stakeholders, consumers, and governments. Companies need to demonstrate the value of their products (and services), and returns need to be more predictable. Companies can do this by reassessing their product strategy, investing in their marketing and sales infrastructure, acquiring more talent and experience from other industries, using internal rates of return to prioritize and rationalize the R&D portfolio, and reviewing and revising their governance standards.
Reassess Product Strategy
Products must take into account the needs of consumers in emerging markets. The recent volume increases reported by some companies for products for which prices have been substantially reduced indicate a path the industry must pursue. Emerging markets offer largely blank slates. Using an adapted “Old Western” model of the drug industry will miss a significant opportunity to redraw how the industry interacts with patients and governments. Today, pharmaceutical leaders should focus their business strategies on delivering high-value modern medicines to emerging markets at much lower prices than have been accepted in Western markets. Doing so would underpin a root-and-branch reassessment of the costs of bringing these medicines to market, the marketing and sales support required, and the risk of counterfeiting and parallel trade. Taking this approach also should drive strategies regarding clinical development, location of trials, marketing plans, sales infrastructure, and manufacturing investment. The opportunity for biologic therapies for cancer, for instance, is very large, providing the right pricing strategy can be developed.
Emerging market governments are moving rapidly to increase medical consumer spending. As generics become more commoditized, the use of “established generic” growth routes in emerging markets could run out of steam. That’s why every possible opportunity to drive consumer/OTC business in these markets should be explored, in addition to a focus on speed to market and lowering the costs of development and efficient delivery of appropriate, differentiated, quality prescription products.
Invest in Marketing And Sales Infrastructure
Pharmaceutical companies must accelerate the modernization of selling and marketing in mature markets. The key to doing this is mapping the new technology opportunity with the business in a sustainable and updatable way. For instance, investment in technologies such as using QR bar codes to transmit information to physicians might mean improved efficiency to a pharmaceutical company’s sales force.
Business leaders in key emerging markets need to develop investment plans that support new marketing and sales strategies and operating models that reflect what these emerging markets will become, not those that they are today. Merely adding more sales professionals on the ground in a traditional model does not seem an appropriate strategy for the future. A traditional model may be of help initially in building a presence, but plans should be regularly reviewed and realigned.
Finally, companies should accelerate development and integration of social media. Being prepared to use social media might be a key competitive advantage in many markets. For instance, social media use is higher in emerging markets as compared to Western markets, with more than 70% of the population of the Philippines and Malaysia, for example, as active users of social media.
Acquire More Talent And Experience From Other Industries
Within the last five years, in aggregate, less than 20% of executive team members within the pharmaceutical industry have come from outside the industry, according to our research. CFO is the most common role now filled by individuals with industrial experience from outside the pharmaceutical sector. Their fresh thinking has improved the scale and speed of efficiency programs at several companies.
To be sure, some companies have recruited new talent in the areas of manufacturing, administration, and R&D, but there is more to do. Indeed, fresh approaches to key account management in marketing and sales may be the areas of greatest need, given the shifting nature of both traditional Western and emerging markets. In particular, regional and country management would benefit from having experience from other sectors. With the old “sales rep calling on doctor” model now fading away, the industry should look to import key account management techniques from other sectors.
Use Internal Rate of Return To Prioritize And Rationalize The R&D Portfolio
All companies should have a standardized approach to show the internal rate of return (IRR) on past investments and an internal perspective on what the range of returns is forecast from the current investments, as well as the assumptions used in these projections. Such analyses should also include off-balance-sheet funding through partnerships and minority investment in third-party companies (typically development-stage biotechnology companies). This type of IRR-based information could transform the investment decisions recommended by senior management in the industry and signed off by boards of directors.
Additionally, companies should reevaluate the value proposition of all Phase 2, Phase 3, and registration assets on an IRR basis. This review should include a detailed review of the assumptions that supported development of these assets. Consideration could be given to whether the forecast returns could be improved by partnerships or comarketing arrangements.
R&D finance is also key to reducing operational obstacles that slow the progress of product candidates to market. Companies should conduct a timely analysis and financial review through the introduction of early warning indicators and go/no-go checkpoints based on financial analysis and evaluation.
Review And Revise Governance Standards
Companies need to conduct a root-and-branch review of governance and enterprise risk management across the entire value chain, from early research and development, through late-stage development, and from manufacturing to sales and marketing. Such a review will help leaders appreciate the impact from speed of change and the increasing pressures on each link of the chain.
To deal with the new risks, companies should implement internal independent checks and balances where people review each stage and have a reporting line outside of that area’s direct access to C-suite executives.
Additionally, power and credence should be given to internal audit groups and their outputs. Finally, companies should use independent and external experts who are allied with ethics, risk, and governance as a final check and balance for each element of the value chain.
Ed Giniat is a partner and global chair, David Blumberg is a principal and global advisory leader, and Chris Stirling is a partner and European sector leader, all with KPMG’s pharmaceutical practice.
This commentary represents the views of the authors only and does not necessarily represent the views or professional advice of KPMG LLP.