By Cindy Dubin, contributing editor
While Moody’s Corp. has stated that a credit downgrade for the U.S. is looming, Moody’s Investor Services has actually revised its outlook for the global pharma industry. According to Forbes, the ratings agency believes earnings should rebound next year as the deluge of patent expirations on big sellers finally slows down. Since 2007, Moody’s has, in fact, maintained a negative credit rating on the industry but now believes the worst is over.
“The stable outlook reflects our view that the worst of the industry’s blockbuster patent expirations has passed,” says Moody’s Senior VP Michael Levesque. “Although industry earnings will still be affected by very recent patent expirations, earnings for large, branded (drug makers) will … rebound in 2013.
But while the worst may be over, Forbes reports that Levesque believes the industry “remains challenged by a difficult regulatory approval environment for new products and by areas of research that are still seeing limited success.” A new report from global consulting firm Booz & Co. points out that successful life science leaders (LSLs) will need to take action in several areas in 2013 and beyond. They will need to identify untapped growth opportunities, focus on core capabilities, analyze operating models, collaborate with the payor/ provider community, and trim more fat from the bottom line.
Find The Missing “Headroom”
The study authors define headroom as the market share you don’t have less the market share your company will never get; it represents the missing sales already available to you for any particular product. Knowing your headroom helps determine whether a brand is worth further investment.
“Finding headroom should be done as part of the strategic planning process for any product,” says Greg Rotz, partner with Booz & Co. “To do this, every life science leader should ask the following of its brand teams and commercial teams: Where is the headroom for growth with this product? That is a different question than where is the biggest untapped part of the market because it might be that the biggest untapped part of the market may not actually be accessible to you.”
The equivalent here is in politics: Some states will always vote Republican, some always Democrat, and there are those swing states that can actually be persuaded to change their behavior. Headroom is all about getting a sharper view of the equivalent of the swing states. Find the patients and physicians that have a propensity to value what you are offering and therefore a propensity to change their behavior in your favor. “Headroom brings a level of sophistication and surgical precision to finding those pockets of growth and opportunity where you have a reasonable chance to change behaviors,” says Rotz.
Focus On Distinctive Capabilities
A capability is the capacity to reliably and consistently deliver a specified outcome through a combination of processes, knowledge, and skills within the organization. Only a few of the capabilities have core strategic value that help differentiate one company from its competitors. As defined in the Booz & Co. report, differentiating capabilities could include personalized medicine, digital patient engagement, or expertise in a particular type of treatment. “Just looking at a few critical capabilities across your product portfolio will make a big difference,” says Rick Edmunds, senior partner, Booz & Co.
Some of the biggest names in Big Pharma did just that in 2012, with many pharma executives taking pencil to paper to slash costs unrelated to core capabilities. For some, the price cutting was public, like Pfizer, which publically announced it would slash 30% of its research budget as part of a plan to focus on only the most promising areas, like cancer and Alzheimer’s disease. For others, it was more a quiet battening down of the hatches that involved less visible reductions in budgets and headcount. “Many execs feel like they’ve been at this cost cutting for a long period of time in an industry that’s historically been a growth industry. And now many are asking, ‘What’s next?’ and ‘How can I regenerate growth?’ while still maintaining cost fitness,” says Edmunds.
The answer is that it requires identifying the capabilities that are most critical to the company’s growth. “Reduce investment in the less critical capabilities so that you can fully fund building the muscles that will drive your differentiation,” says Rotz.
Hold up A Mirror To The Operating Model
To stay focused on the key capabilities discussed above, Rotz and Edmunds say it is critical to have the right organizational design (e.g. how the company organizes and runs itself, how it structures itself, how many layers of decision making there are, how quickly decisions get made, how the company compensates and incentivizes to get things done on a daily basis). And once decisions are made, is there follow through, and are people held accountable?
“Holding up a mirror to your model means taking a critical look at how you make decisions and run a life sciences organization,” says Rotz. “There’s a lot that can undermine the operating model, but there is a lot of value in getting an operating model lean, efficient, and effective, especially during these challenging times in life sciences.”
One of those challenges, as Edmunds points out, is that large pharma companies with large product portfolios across the globe can face difficult decisions regarding how they spread out the dollars they invest and the capital in which they invest. “As a senior management team, these multitude of trade-offs can be very hard to make, whereas operating where the senior team stays primarily focused on the critical capabilities to drive success across the portfolio/markets enables a more streamlined concentration of management focus and true investment (versus just operating expense) prioritization,” says Edmunds.
Partner With Payors
In the past, pharmaceutical manufacturers would negotiate with a payor to determine how much discount or rebate would be given for a particular drug based on that plan’s membership. “We want and need to move from that transactional and contractual type of interaction with the large payors and hospital systems to a more collaborative dialogue about where the unmet need is in a certain population of patients,” Rotz says. “That would be quite a fundamental shift on both the payor and pharma sides of the equation because that’s not historically how they’ve done business.”
These partnership migrations are evidenced with the one-year research partnership between Humana and Novo Nordisk, whereby they will work together to explore diabetes treatment and care. A similar move was made by Geisinger Health System and Merck, which recently embarked on a multi-year collaboration designed to improve patient health outcomes by focusing on solutions that facilitate shared decision making between patients and physicians and improve adherence to treatment plans and clinical care processes. Teams from Geisinger and Merck will work together to improve patient adherence, increase the role of patients in making decisions to help manage their conditions, share information among extended care teams, and improve clinical care processes. The first tool being developed is an interactive web application designed to help primary care clinicians assess and engage patients at risk for cardiometabolic syndrome — the risk factors that put an individual at risk of developing Type 2 diabetes and cardiovascular disease.
“It has been slow, but that equation is changing considerably with payors and providers opening to collaboration, but the process is being initiated by the pharmaceutical companies, and smart industry executives understand which payors and providers are willing to engage in this different model,” says Edmunds. “When we see the partnership work, it’s because both sides are jointly developing solutions rather than a pharma company developing a solution and trying to push it or the payor/provider asking for something and shopping around to see what pharma company can satisfy its request. This collaborative model takes investment and the mindset from both sides to build successfully.”
Successfully fulfilling the resolution to get in shape this year will leave many LSLs struggling with the realization that they have to change how they operate and not be afraid to risk moving too far away from current business models.
What You Can Glean From Last Year’s Drug Approvals
U.S. drug approvals in 2012 reached a 15-year high with regulators giving the thumbs up to 39 new drugs. Of the 39, 11 were for cancer treatments and almost 20 were designated orphan drug status.
“The sheer number validates the shift of pharmaceutical companies over the last number of years focusing on more oncology drugs and developing drugs that meet unmet medical needs,” says Rick Edmunds, a senior partner at Booz & Co. “The increase is suggestive of the future growth potential of the industry.”
Edmunds adds that these are the efforts of an industry that has spent the last 5 to 10 years pruning its portfolios to focus on unmet medical needs, areas that are attractive to payers, providers, and the FDA. This shows, he says, that receiving FDA approval is less than half the battle of bringing a drug to market. It is also about how the market — opinion leaders, physicians, payers, and institutional providers — perceive the value of the drug. “While we think the increase of approvals is great, LSLs should not be naïve to think that it’s a panacea,” says Edmunds. Greg Rotz, a partner with Booz & Co., adds that, “While the number of approvals has been going up over the last few years, the thing that keeps life science leaders awake at night is the number of drug launches that have missed their expectations; their uptake and adoption in the market is much less than any of us would like to see.”
So, while we may have more success moving through the regulatory hurdle, the point is that the commercial hurdle is vexing because studies suggest that between 2/3 and 3/4 of launches going back to 2009 to 2010 are underperforming expectations. “LSLs should be encouraged by the uptick in approvals from the FDA and learn lessons of past launch disappointments to make sure that these 39 molecules that we’ll take to market this year are actually outperforming expectations as opposed to contributing to the disappointing skeletons along the road,” says Rotz.