2011 Pharmaceuticals Industry Perspective

7/29/2019 2011 Pharmaceuticals Industry Perspective

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2011 Pharmaceuticals Industry Perspective

Last year was an interesting one for the pharmaceutical industry. Whilepharma emerged largely unscathed from healthcare reform in the UnitedStates, the industry was and remains under intense pressure because many ofits customers, particularly health plans, did not fare as well and are facingmeaningful declines in margin. Further, pharmas innovation rates are nothigh enough to drive growth, and prolonged reform and budget pressures inhealthcare systems globally are producing accessibility and affordabilitychallenges that also stifle revenue growth. In essence, what was once a

consistent, high-growth/high-return business has matured tremendously,forcing companies to make fundamental decisions about their futuredirection.

In our work and research this past year, a number of market truths havestood out in particular.

1. More than 70 percent of product launches in recent years missed theirinitial analyst sales forecasts.

The traditional pharmaceutical marketing model has become less and lesseffective as payors use aggressive tactics to limit prescription utilization. Thedegree of challenge is well illustrated by this quote from a U.S. pharmaceuticalbenefit manager: Our goal is not to allow any more blockbusters.

In a 2009 Booz & Company survey of European pharmaceutical sales andmarketing executives, 77 percent of respondents indicated that unfavorableformulary positioning and other market access barriers were having a negativeimpact on their new product sales. Although efforts to manage in-marketproducts continue, it is in the launch market, before there is real productmomentum, that payor restrictions have been particularly impactful.

At the same time, pharmaceutical companies direct contact with physicians isincreasingly restricted and physicians see less value in sales calls, in partbecause they have convenient access to a wealth of credible information fromother sources. And consumers, who are on the hook for a growing percentageof their healthcare costs, are demanding better information on the value oftreatment.


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Budgetary evidence indicates that pharmaceutical sales and marketing leadershave already begun to shift their efforts from detailing products to physiciansto focusing on a broader set of collaboration partners, including payors, andvalue creation in the disease state. That said, the one-off initiatives we have

seen to date do not yet represent the paradigm shift from product selling to thevalue focus that is needed.

Going forward, pharmaceutical marketing must aggressively promote productvalue creation to an ever-growing range of stakeholders. Five key imperativeswill form the foundation for successful marketing models:

Re-center marketing on value creation within disease states. Take a multi-stakeholder, multi-channel approach that uses an

integrated marketing plan to target key value creation opportunities allalong the patients journey with the disease.

Incorporate a focus on value creation early in the product developmentcycle (ideally during Phase II).

Accelerate the reallocation of marketing resources and align capabilitiesto support future market needs.

Rigorously measure and manage marketing ROI.The goal: Reorient the marketing model toward a holistic view of diseases,patient and other stakeholder needs, and outcomes, and positionpharmaceutical companies as fully engaged and effective leaders in asustainable, cost-effective, patient-centered healthcare system.

2. Tenders and contracts represent more than a quarter of the globalpharmaceutical market, and their share is growing.

The tender and contract market, which primarily consists of competitive,simultaneous procurement quote requests by institutional buyers, is large andgrowing quickly. It represents more than 25 percent of pharmaceutical salesworldwide, and in emerging markets, it represents over 40 percent of sales.

Due to the local, and thus diverse, nature of procurement by tenders andcontracts and their historically predominant focus on generics, most pharmasenior executives do not yet have a good understanding of this market. Forinstance, most home office executives believe that these contracts areessentially awarded on price. However, our research suggests that this is true inonly 40 percent of cases; in the majority of tenders, price is not the only


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consideration and real upside opportunities exist to maximize both volume andvalue. Another key finding is that tenders and contracts are quickly spreadingto branded products, where these procurements now account for nearly 15percent of global sales.

While tendering and contracting systems vary significantly across markets,these sales generally require specific skills that most pharma companies havenot yet developed into a dedicated capability. Tender processes are often highlyregulated and thus require different expertise than traditional sales/marketingmodels. Tendering can create all or nothing scenarios, which need dedicatedplanning capabilities. And bulk volume contracts require particularly closecoordination between the supply chain and commercial functions.

Our experience and research suggest that the prerequisite for profitableexpansion is a significantly upgraded tender and contract management process

that yields these results, among other things:

An explicit recognition of different market types, beyond country bycountry/customer by customer, in defining a manageable set of best-in-class approaches

Longitudinal and global visibility into major tender buyers andtendering opportunities beyond best efforts optimized at the locallevel

A fast, efficient process for evaluating major tender offers and settingprice parameters with a systematic learning capability beyond theexperience of the individual responsible for bidding

A more dynamic planning and ongoing management capability betweensupply chain (volume/cost curves) and tendering (potential/progressagainst goals)

3. Between 2010 and 2013, half of the growth in healthcare will come fromthe E7 countries (Brazil, China, India, Indonesia, Mexico, Russia, andTurkey).

Pharmaceutical companies seeking growth must find ways to win in the diverseE7 markets, which will not be easy. China, for example, is now embarking onmajor health reform that is likely to both create major growth opportunities andlead to greater complexity within the national market as different provincesimplement it in different ways.

The E7 markets require a strategic approach and way of doing business thatdiffer from those of more developed markets. There are regulatory limitations


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on direct physician and patient access, along with widespread substitutions bypharmacists. There are compliance and adherence issues, particularly inmarkets with low levels of health awareness and high levels of out-of-pocketfunding. There are weak links in the supply chain, sometimes extremely highwholesaler and distributor markups, and inconsistent portfolio coverage,

particularly in markets with exclusive distributor relationships. Often, the mostsignificant challenge for new products in these kinds of markets has little to dowith the product and more to do with the infrastructure required to identifyand treat patients efficiently. Finally, unique political and fiscal contexts addcomplexity to winning E7 tenders.

While the fast-expanding middle classes in these countries and the increasingincidence of chronic diseases will fuel demand, there is also a need to meet thehealthcare needs of the entire population, including the hundreds of millions ofpeople at the bottom of the pyramid: Governments in these markets are

concerned with identifying effective and low-cost solutions to improve thehealth of all of their citizens. Chinas Healthy China 2020 plan is oneexample.

And not to be forgotten are the growth in local innovation and the emergenceof new competitors: As E7 markets develop, their companies and governmentswill increasingly focus on generating local innovation, rather than relying onimports of leading-edge products and the local production of me-too andgeneric drugs. China and India stand out for their focus in this area.

These issues occur in varying combinations within the E7 markets, whichmeans that they cannot be addressed in a one-size-fits-all way. Rather,companies must move quickly to understand the specific characteristics of eachmarket and tailor strong individual operational plans. To capture theopportunities in these markets and successfully navigate their diverse culturaland regulatory environments, companies should take the following steps:

Undertake a thorough assessment of the full range of opportunities thatthese markets offer.

Choose where to play based on market potential, appetite for risk, andstrategic and capabilities fit.

Bolster execution in these markets with a combination of deep localinsight and adaptation, alignment with the social context, anddeployment of global capabilities.

Remain vigilant about local competitive challenges, both in homemarkets and as these new players move overseas, while searching out


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opportunities to acquire new assets and capabilities as these marketsbecome sources of innovation themselves.

4. The rate of new drug discovery in the period from 2000 to 2010 was so lowthat the head of a major pharmaceutical company dubbed it the lost

decade.

Despite more than doubling its spending on research and development in thelast decade, the pharmaceutical industrys success rate in finding new drugshas been disappointing. Why? Pharmas consolidation wave over the past 20years saddled the discovery units of major players with bloated structuresand a proliferation of middle managers who are ill-equipped to driveinnovation. Middle managers (who often oversee 100 to 200 employees) canbe key enablers in the cultivation of promising new ideas, as well as in theengagement and empowerment of the scientists who discover them.

Strong middle managers in R&D depend on behaviors that are not oftentaught or developed in the academic world, but these behaviors areidentifiable and teachable. Our research shows four differentiating behaviorsthat separate the best from the rest in scientific leadership:

The most effective managers define a compelling destination for theirscientists. In laying out a visionary manifesto, they provide directionand inspiration.

They connect beyond boundaries. Recognizing that innovation comesfrom relating knowledge in new ways, these leaders encourage theirstaff to reach beyond departmental boundaries and functional silos toadvance their work.

They apply multiple lenses to problem solving. All organizations needto structure themselves and, in doing so, create a dominant way toview the world. For instance, organizations structured according totherapeutic area tend to view the world through a disease lens (asopposed to a technology lens, for example). Great scientific leadersminimize the risk of organizational blind spots by using alternativeviews to identify high-value solutions.

They use informal channels to engage their colleagues. These leadersrecognize that it is as important to know the scientists as it is toknow the science when it comes to investing in projects.

In addition to enabling these behaviors manager by manager, the leaders ofdiscovery organizations need to clarify (and then stick to) the definition ofmanagement roles within the structure. Too often, senior leaders end up


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playing middle management roles, thereby compressing and confusingresponsibilities throughout the structure. In addition to the inefficiencies itintroduces, this practice discourages the ownership necessary to foster thekey behaviors of scientific managers.

Strong scientific middle managers can be developed, and pharma companiesthat can build a sustainable capability for producing such leaders will have aleg up in meeting the R&D productivity challenge.

5. The cost of development from protocol design to patient enrollmentcontinues to skyrocket. In industry-sponsored clinical trials in the U.S.,for example, on average only 14 patients are enrolled for every 100patients screened.

Clinical development is still unnecessarily costly, inefficient, and time-

consuming, even though pharmaceutical companies are actively seeking tooutsource and offshore the process. While these initiatives do offer cost andcapacity management advantages, they too often do not address the underlyinginefficiency of the process. In these cases, companies are missing a lions shareof improvement potential because they are outsourcing a process that is notoptimal in the first place.

We believe that clinical development must be fundamentally transformed byleveraging electronic clinical data to address the inefficiencies of clinicalprotocol modeling, patient selection, and patient enrollment that exist today inorder to accomplish the following:

Create standardized, data-driven approaches for gaining access topotential patients.

Enable more accurate site selection for trials. Raise awareness of clinical trials among patients and physicians. Ultimately improve the design of studies across additional therapeutic

areas, including disease outcomes research, epidemiology research, anddrug development.

Achieving such goals will require cross-industry efforts. One relevant initiativewe are supporting is the Partnership to Advance Clinical Electronic Research(PACeR), sponsored by the Healthcare Association of New York State. PACeRis an innovative collaboration of pharmaceutical companies, most of the majormedical centers in the state of New York, and health information technologycompanies. While there are many challenges to leveraging electronic data in


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support of clinical development, we believe the potential is well worth theeffort.

6. Potential economies of scale in manufacturing and the supply chainremain unexploited.

There is low industry concentration in pharmaceuticals today. The top threecompanies combined command less than a 25 percent global market share,creating unexploited potential for economies of scale in manufacturing and thesupply chain, especially compared to other industries, such as automotive andmining.

Such operational scale can be achieved through M&A (even though the primaryfocus of many acquisitions is not scale) or through less complex cooperativemodels that can create virtual scale in select areas. Other manufacturing

industries that have faced substantial margin pressure have successfully builtsuch cooperatives to leverage production scale. In pharmaceuticals, the firstcooperative models have already begun to emerge, but mostly around specifictechnologies or in certain countries or regions, rather than on a global scale.

In pharma, one of the most promising cooperative efforts could be theestablishment of so-called manufacturing utilities, in which a consortium ofcompanies own and operate shared manufacturing plants. Such utilities offer ahost of benefits to the member companies, including the following:

Lower operating costs through the consolidation of select productionprocesses

Increased utilization and enhanced flexibility due to the pooling ofproduction assets

The ability to maintain a close-to-the-customer production footprint dueto lower costs

Sourcing improvements due to the bundling of purchase volumes Lower capital expenditures and capital costs due to investment

smoothing and reduced reserve capacity requirements

The creation of synergies in the management of regulatory compliance andsupply chain resilience

Manufacturing utilities are also an effective response to the upcoming challengeof establishing local manufacturing capacity in fast-growing emerging markets.


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7. Although income growth has been buoyed by multiple cost reductioninitiatives, the sectors return on invested capital continues to decline.

The last five years financial results for the top 10 pharma companies show asteady erosion in returns on invested capital (ROIC), in spite of successful

efforts at improving EBIT margins by a compound annual growth rate ofroughly 1.5 percent. Our analysis indicates that this disconnect is a directconsequence of the strong competition for acquisitions, which has bid uppurchase prices and resulted in higher costs per every additional unit ofrevenue acquired.

Scale alone will not solve the ROIC conundrum. Pharma companies must actnow to fundamentally alter their cost structures in ways that will deliverlasting value and bring ROIC back to historic levels, independent of tweaksand tremors in the funding and organizing of the healthcare system. This

implies that these efficiencies cannot rely too heavily on acquisitions followedby cost cutting because, for ROIC to improve, top-line improvement mustoutpace capital requirements.

While many pharma companies have recently undertaken cost reductionprograms, sales force reductions, and plant consolidations, they still have notachieved the level of operational excellence that is seen in othermanufacturing sectors. Toward this end, pharmaceutical companies shouldtake the following actions:

Broaden cost reduction initiatives: Fundamentally attack cost structuresacross the value chain, reduce the overall cost base, and increase theability to flex costs.

Streamline portfolios and functions: Reduce product portfolio complexity,create leaner corporate functions, and restructure the supply base.

Pursue operating modellevel initiatives: Use contract research andmanufacturing operations, commercial trade channel managementapproaches, and innovative cross-company partnering in operations,such as collaborative manufacturing utilities.

Using these levers, pharma companies can significantly improve margins,counteracting the challenges they face with a means to drive profit growth andappease shareholders.

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These seven market truths ensure that the new year will be anotherinteresting and challenging one for pharmaceutical companies. But webelieve they also harbor valuable opportunities for those companies that canembrace and successfully address their challenges.

2011 Pharmaceuticals Industry Perspective

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