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Thought leadership and innovation for the Pharmaceutical Industry

From the perspective of investors, the jury is still out on that question.

By Editor on Jul 24, 2006

From the perspective of investors, the jury is still out on that question. The Amex Pharmaceutical Index is an indicator of how investors view the financial prospects for major pharmaceutical companies. Since suffering a nearly 20% decline in the first half of 2002, the Index has basically treaded water for the past four years, gaining a net 5% from June 2002 through June 2006. Meanwhile, the broader market, as measured by the S&P 500 Index, has gained roughly 25% during the same four-year period.

Industry Challenges

The main drivers for investor malaise are well known. The tremendous clinical and marketing successes of products launched in the 1980s and 1990s have become a drag on big pharma as the industry faces increasing competition from generic versions of its drugs. Given its reliance on patent protection for value capture, this is an industry in a constant search for unmet medical need where it can bring new and differentiated solutions.

In the face of this requirement for innovation, disappointing late-stage pipelines attest to the fundamental challenges and inherent risks that remain in drug discovery and development. At the same time, there has been a shift in the balance of power from big pharma towards the biotech industry, where so much of the discovery and preclinical development work now takes place, as big pharma competes aggressively for licensing rights to promising compounds.

On the commercial side of the equation, payers are increasing in their commitment and ability to control pharmaceutical expenses by influencing prescribing and purchasing behavior. Compounding all of these changes, the highly profitable US market has become more difficult to operate in, with safety concerns leading to product withdrawals, patient lawsuits, and tighter regulatory constraints. More broadly, the negative perceptions of the industry that are currently popular have led to an intensified level of scrutiny.

New Directions for Pharma

What are pharmaceutical companies doing to survive and prosper in this new regulatory and market environment? Some common themes are beginning to emerge across the industry:

1. Therapeutic Focus


Many companies have decided that they need to focus their research, development, and commercial activities around a more limited number of therapeutic areas where they can achieve and sustain market leadership based on extensive clinical knowledge and strong external relationships. The drive for strategic focus around selected therapeutic areas is leading to tough decisions to stop investing in compounds and marketing activities that aren'st aligned.

2. Operational Effectiveness


The industry is engaged in an active search for new R&D and commercial models that can deliver a step change improvement in efficiency and effectiveness. Companies need to extract greater value from their innovation activities. In combination with therapeutic focus, they need to apply more flexible risk management and value-capture strategies including more active use of out-licensing and external development partnerships -- to ensure that their pipelines deliver the greatest value. On the commercial side, companies are looking for more effective ways to add value to all of their stakeholders, particularly physicians and patients, while taking out unnecessary cost. In contrast with the historical focus on promoting consistent, simple messages with high frequency and reach, the new model will emphasize value-added conversations with physicians supplemented by new delivery modes (especially the internet) to deliver information in ways that are convenient, cost-effective, and tailored to meet individual needs.

3. Clinical and Economic Value


In recognition of the growing influence of payers, pharma companies are beginning to place greater attention on relative economic as well as clinical value in their clinical development and marketing strategies. In particular, they are starting to recognize that healthcare economics can no longer be treated as a pricing exercise at the end of the development cycle. It needs to be embedded in the entire development and commercialization process, informing pipeline portfolio investment decisions and clinical research design in particular.

4. Technology Integration


Several leading companies anticipate a convergence of medical technologies particularly among drugs, devices, and diagnostics and they are looking to develop, acquire, or partner for capabilities in a broader set of these technologies to achieve new medical breakthroughs. Examples include more active use of advanced diagnostic tools in preclinical and clinical research as well as therapeutic management for a variety of diseases. The strategy is a compelling one, since the scale and complexity required to become a leader in the converging markets plays well to the strengths of big pharma.

The Implementation Challenge


Together, these changes imply nothing less than a transformation of the pharma business model. Not surprisingly, they will not be easy to implement. It is always difficult to change direction in large, globally distributed organizations.

Furthermore, each of the new strategies carries its own specific implementation challenges.

-- Therapeutic Focus is a dramatic change from the traditional blockbuster model where the primary criterion for development and marketing investments was peak sales potential. The change requires real discipline for an industry where products (not markets) have historically been king. Biologically-active compounds often produce unexpected effects on the human body; when these effects are shown to have therapeutic benefits, the historical approach of the industry has been to follow them wherever they lead. In this new era of therapeutic focus, companies will need to become just as comfortable out-licensing compounds that don'st fit as they are in-licensing ones that do.

-- Achieving a step-change improvement in Operational Effectiveness requires the development of new approaches while keeping the current business success going. Along with this difficult balancing act, the new models will take time to define, develop, and perfect, and they will process will involve significant experimentation and learning. The inherent uncertainty and flux contrasts with the historical stability of an industry in which the operating structures have been so consistent from one company to another that individuals can readily change companies without significantly changing their jobs.

-- Addressing Clinical and Economic Value requires a broader, more strategic perspective on therapeutic alternatives and their economic implications than pharma companies have traditionally had to manage. They will need to generate and evaluate appropriate clinical data not only for therapeutic outcomes but the significance of those outcomes on healthcare costs considering the overall continuum of care. They also need to effectively position their findings in ways that payers in particular find compelling.

-- Technology integration, to be effective, requires participation in multiple businesses that have historically been independent of each other and operate according to different rules. Even companies that have participated in device or diagnostics industries in addition to pharma have managed the businesses separately. For now, big pharma is taking a cautious approach to integration, making smaller technology acquisitions and pursuing individual therapeutic opportunities rather than the mega-mergers that leading entertainment and financial services companies engaged in when convergence became the watchword in their industries.

How to get there from here

The journey to successful implementation will be easier for companies that follow a few key principles:

-- Set a clear strategic direction with aggressive goals for the 3 to 5 year horizon, and put the mechanisms in place including structure and accountability, performance expectations, metrics, and incentives to ensure tight alignment throughout the organization. Goal setting should look beyond the pharmaceutical industry for appropriate benchmarks of what can be achieved operationally.

-- Invest in strategic marketing capabilities to generate real insight into market trends and the nature of unmet need, as well as the specific value propositions that different customer groups payers, physicians, patients, and providers and the key segments within them will find most compelling. Then build the therapeutic focus around meeting those needs, and redesign the R&D and commercial models to deliver the identified value.

-- Take a systematic approach to experimentation, learning from the experiences of other industries that have gone through similar challenges, but translating the lessons into the specific needs of pharma.

Leading pharmaceutical companies have publicly committed themselves to transformation. As with other industries that have experienced discontinuous change, leadership in the new era will go to the companies that not only identify the form that the new business model will take but that can also translate their understanding into effective execution. Over the next half decade, strategic implementation will be the watchword of the industry.

Rita E. Numerof, Ph.D. is President and Jack Nightingale is a consultant of Numerof & Associates, Inc. (NAI). NAI is a strategic management consulting firm working with Fortune 1000 companies in dynamically shifting industries. The authors can be reached at (314)997-1587 or through email: info@nai-consulting.com.