By Steve Arlington, Ph.D., global pharmaceutical and life sciences advisory leader, PwC
The pharmaceutical and life sciences industry is on the cusp of a golden era of renewed productivity and prosperity. Major scientific and technological advances, coupled with socio-demographic changes, increasing demand for medicines, and improved conditions in global trade, will renew pharma’s fortunes and deliver dramatic improvements in patient care. Yet, pharma’s future has never looked more challenging. Emerging issues, including residual effects of the financial crisis, healthcare reform, new cost constraints, and rising customer expectations, have added new pressures that make pharma’s future success uncertain.
Pharmaceutical companies can prosper in the next decade if they are willing to make tough decisions in three areas:
Rising customer expectations: The commercial environment is becoming more difficult, as healthcare payers impose new cost constraints on providers and analyze the value medicines offer much more carefully. Like patients, payers want new therapies that are clinically and economically better than the existing alternatives, together with hard, real-world outcomes data to back any claims about a medicine’s superiority.
Pruning the pipeline: Most of the products that will be launched in coming years are already in the pipeline but are not aligned with medical needs and demand or rising expectations from payers, providers, and patients. There is a crucial need for the industry to rebalance expenditures and invest more in the early part of the R&D process to improve productivity that will deliver returns on investment.
Breaking down cultural barriers: The management culture on which the industry depends is the same one it traditionally has relied on. New entrants to the market and new technology are beginning to disrupt the status quo, and pharmaceutical companies can expect an even more demanding commercial environment going forward. Pharma companies in the future will be more collaborative, and the industry’s top figures are likely to be mavericks who have the vision and courage to break the mold.
Many of the conditions that will have an impact on what happens to companies in the next decade are already in place. Most, if not all, of the products that will be launched by then already exist or are in development. Similarly, many of the senior executives who will be at the helm have been earmarked for high office or are already in place. Yet, there are a number of tactics companies can pursue now to increase their chances of prosperity over the next decade and thereafter.
Maximize The Molecule
Mature markets are becoming more difficult places in which to prosper because payers there are demanding better outcomes as a precondition for paying for new medicines. The message they are sending is clear: They want more value for their money, they are measuring the value they get more rigorously, and they are not prepared to pay for medicines that produce only incremental improvements in outcomes.
Pharmaceutical companies have a choice: Either offer more value without charging more or prove that they can remove costs from another part of the healthcare system to justify premium pricing. Outcomes are the new currency. In essence, if there is no outcome, then there is no income.
In mature markets, there is enormous opportunity for the pharmaceutical industry to help payers save money and for providers to deliver better quality care for less money. Roughly 85% of global health spending currently goes to healthcare services delivered by physicians, hospitals, and other providers, and less than 15% goes to medicines. But, by demonstrating that medicine can reduce spending on costly medical services and procedures, PwC estimates that pharma’s share of healthcare expenditures could rise to 20% by 2020.
Serve The Growth Markets Profitably
Expenditures on medicines are rising faster in the growth economies than elsewhere, but serving these markets can be very difficult since they are fragmented. As such, the industry cannot rely on the same strategies for making a profit as in mature countries. Global growth strategies should shift from a one-size-fits-all, mass-market approach to a targeted specialty approach in which pharma companies pick the right spots for targeted populations — those where they can add value. Some organizations have responded by creating new business models, not just new products and services, that use innovation-driven or market-driven approaches, depending on the distinct needs of the market.
Collaborate And Capitalize On New Sciences
R&D productivity has remained static for 15 years and is at an all-time low. In the decade prior to 2011, the FDA approved 308 new molecular entities and biologics. Given the amount invested in R&D each year during the same period, that means the annual average cost per approved molecule ranged from $2.3 billion to $4.9 billion. And, there is no sign of these costs coming down. This trend is not sustainable.
Yet there are changes the industry can make to tackle the productivity problem. The industry should rebalance its expenditure and invest more in the early part of the R&D process for productivity improvements that will deliver returns on R&D investment. For example, whole-genome sequencing is critical; it allows scientists to identify new regions for research and to validate or eliminate mechanisms in human populations before subjecting drug candidates to costly, lengthy clinical trials.
Companies also should become more selective about the therapeutic areas they cover and bolster their expertise by hiring or collaborating with the leaders in their chosen fields of research. Executives generally recognize the merits of “open innovation,” but cultural obstacles, such as fear of sharing intellectual property and unnecessarily individualistic business processes, still serve to discourage collaboration.
In addition, it is important for companies to devise a clear path to clinical proof of concept for all compounds entering development and to test them in humans as early in the process as possible, using the best tools for selecting subjects. Biomarkers have a significant contribution to make here by narrowing the subset of patients on whom a molecule should be tested, thus exposing defects more rapidly.
Manage The Portfolio More Rigorously
Managerial factors also play a role in pharma’s low R&D productivity, and one of the biggest factors is poor decision making. Attrition rates in late-stage clinical trials have climbed steeply over the past two decades, possibly the result of overlapping activity between companies with similar compounds in the pipeline.
This could be because many companies cannot yet manage the relationship between risk and value very effectively. To improve their risk/ value management, they can prune their portfolios to focus on the compounds with the greatest probability of success. In doing so, they should draw on all the information at their disposal. Most companies still focus on technical rather than commercial risks, for example, and few companies consult payers to determine the potential value of new medicines.
Pharma companies also should aim to build balanced portfolios. Many companies concentrate on the molecules with the highest potential revenues and underestimate the risks because they rely too heavily on the opinions of the researchers involved. A better approach is to combine a few speculative compounds with some “bread-andbutter” products that will generate a steady income. It also is essential to appoint an independent committee of senior executives to monitor the portfolio and compare it with those of the company’s rivals.
Change The Culture
Despite the seismic shifts of the past few decades, the organizational culture at many pharma companies has changed very little. Many are still operating within a management approach that prevailed 20 years ago, when the blockbuster model reigned. But pharma’s business model has altered almost beyond recognition, and the focus is on creating specialist medicines that require a culture that fosters open innovation and collaboration to address the needs of the 21st century.
Cultural transformation will require change in the mindset at the top. That is gradually changing, as younger executives, eager to embrace new ways of doing business, come to the fore. Some of the changes include hiring executives from other industries to give the company access to new ideas and methods and eliminate roadblocks; create autonomous R&D teams that are given a specific challenge, budget, and time frame on which to deliver; and implement a measurement and reward system that combines financial and non-financial metrics, such as motivation and commitment. That system also should be flexible enough to measure different kinds of innovation. But, it is equally important to promote a “fail early, fail cheaply” mindset by providing incentives for quickly terminating weak candidates.