Roland Berger - Pharmaceutical Industry Study 2009 - What Is Next
Roland Berger - Pharmaceutical Industry Study 2009 - What Is Next
Roland Berger - Pharmaceutical Industry Study 2009 - What Is Next
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Table of contents
From the authors
Executive summary
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9. Where to start
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10. Sources
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Contacts
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Stephan Danner
Patrick Biecheler
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Executive summary
Even in today's challenging economic environment, the pharmaceutical
industry can still be considered an industry with good long-term prospects.
Expanding aging populations, increased wealth in emerging markets and
unmet medical needs, accompanied by rapid technological progress, are
fueling the demand for innovative drugs and will continue to do so in
the future.
Yet despite this fundamental trend, the environment for pharmaceutical
companies has deteriorated significantly in recent years. Growth rates and
margins have come under increased pressure. With R&D productivity down,
new products are failing to compensate for sales lost to the producers of
generics. With their cost containment efforts, public healthcare systems
have brought down prices and overall pharmaceutical expenditure. They
have also raised the stakes for what they consider to be real innovations,
and are forcing companies to offer more value for less money.
How times have changed. In the past, it was sufficient for pharmaceutical
corporations to contribute via their expensive clinical research. The authorities readily accepted the safe and efficacious drugs that the industry produced as innovative and worth funding. Today the challenges are greater. Socalled "me-too" products the cornerstone of many development programs
in recent years are no longer fully reimbursed. The fact that a company
conducts clinical research, previously thought of as the distinguishing factor
between the pharmaceutical and the generics industry, is no longer sufficient justification for a claim to innovativeness. To escape the pressure of
commoditization, the industry has only two options: It can aim for cost
leadership and offer generics or over-the-counter products, or it can develop
innovations that offer patients so much added value that society acknowledges their benefits and provides the necessary financing.
Focusing on R&D excellence is a prerequisite. But companies need to do
a lot more, too. The pharmaceutical industry must fundamentally reassess
what innovation really means and actively communicate these ideas to
society. The very concept of innovation needs to be innovated, and with it
the entire pharmaceutical business model. Innovation must replace marketing as the driving force behind the industry. If the industry fails to redefine
the concept of innovation, then the healthcare systems will do it for them
a trend that is already observable around the globe.
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One of the executives interviewed for the purposes of this study commented
as follows: "The rising R&D cost figures are misleading. While the increasing
complexity of studies has driven up the cost for development, the actual
expenditure for research has shrunk." According to this interviewee, the
ratio has risen to 70:30, the budgets for development now exceeding those
for research by far. To make things worse, identifying new targets has become more difficult, since all of the low-hanging fruits have already been
picked.
Product innovation and patents formerly the driving forces behind
the industry have lost momentum. The share of total industry pipeline
generated by the big pharmaceutical corporations has shrunk2), indicating
that the traditional "big pharma business model" has become less effective.
After years of high growth for shareholders in the 1980s and 90s, significant
value has been destroyed since the turn of the century.
Revitalizing innovation Pharma's driving force
The old blockbuster business model has lost its appeal. The pipeline
has dried up and the number of commercially viable candidates is down.
Companies show limited willingness to have a large share of their sales
depend on just a few products. Health systems are challenging the highmargin business model of the industry, primarily by questioning the value
contribution of "pseudo-innovations" and "me-too" products. The result?
Fierce competition from generics and a growing focus on price in tender
business.
What does this mean? Soon the pharmaceutical industry will no longer
be able to impose the pricing approaches it formerly used for "me-too" and
follow-on products. On the contrary, given the cost pressure which is
exacerbated by the global financial crisis corporations must reassess their
pricing and profit models. Real innovation is the key. It is essential that the
pharmaceutical industry reclaims the role of primary true innovator within
the healthcare system.
This is quite a challenge. As one executive in our survey commented,
"We have to redefine what innovation is for pharma." Corporations need
to ensure that they can still make breakthrough innovations. Pharma needs
to map out where the greatest value for patients lies and identify what the
various stakeholders are willing to pay for. Such changes will have a huge
impact on today's concept of what the pharmaceutical business is. Executives need to think about different services, new financing and marketing
models. And there are plenty more challenges beyond.
2) Source: IN VIVO
This study provides a roadmap that can help you analyze the strengths
and weaknesses of your company and identify areas that offer room for
improvement. In the following chapters, we answer some of the most
pressing questions facing industry executives: What is innovation? How
can I deliver it? How should innovation be positioned? How can I redefine
my business model? And how can I ensure access to the best talent
globally?
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The five levers in the Roland Berger Innovation Framework represent the
most important aspects of innovation. We will investigate each of them in
turn. The survey provided us with primary quantitative findings for each
lever which were subsequently discussed with the executives in our interviews. We then looked at selected additional cases and carried out secondary research. At the end of this study, we assess the different levers and
indicate where we see the biggest room for improvement and where there
are "quick wins" for companies.
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practitioners and their activities. Now they are likely to turn their attention
to specialty areas. "Reimbursement will only be ensured if pharma succeeds
in increasing targeted therapies with clear end points."
Comparing the past performance of different TAs shows that the strongest
revenue growth is expected mainly in TAs that experienced either a high
total sales volume or a strong growth rate in the past. Another factor in the
calculation is the penetration of generics: revenue expectations decline in
TAs already affected by generics. This underlines the challenge of ongoing
commoditization (see chart 3.2). Since expectations of revenue growth and
profitability are correlated, plotting the historical data against future profitability would produce a similar result.
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This shift in product types is expected to have a major impact on the pharmaceutical value chain. Thus, pharmaceutical companies seeking approval
for expensive biologicals will need to clearly demonstrate the additional
benefit of their drugs in order to ensure reimbursement. Indeed, in the
survey, 74% of respondents considered reimbursement and market access
the biggest challenges faced in the pharma value chain (see chart 4.1).
Combinations of pharmaceuticals and diagnostics were ranked second
after biologicals. Clearly, pharmaceutical companies see them as a potential
solution to the challenge of reimbursement and market access. If companies
master this challenge, they will most likely be able to justify the increasing
costs of treatment with biologicals. Many experts believe that it will take
more than five years before the effects of combinations of pharmaceuticals
and diagnostics will fully materialize. However, most agree that they do
have great potential.
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A strong foothold in this field would represent a significant strategic advantage for companies, allowing them to push targeted therapy approaches.
Although not all interviewees planned to invest in diagnostics directly,
the number of partnerships is expected to rise.
For some companies, this could represent a first step toward building
a new business model. By moving toward stratified medicine and owning
the resulting data, these companies could evolve from product providers
into true partners for stakeholders such as payors. As one executive asked:
"Why should we stop at providing the product and leave the huge market
for clinical data to other players?" If pharmaceutical companies do not
exploit the great potential, other players such as pharmaceutical benefit
managers (PBMs) certainly will.
Differentiation is key
As we have seen, the type of physical product dominating the industry is set
to change. Yet many players will move in the same direction. Consequently,
companies need to decide how they will differentiate their products from
those of competitors.
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In terms of potential methods of differentiation, nearly two-thirds of participants in the survey mentioned treatment solutions (33%) and price- or costbenefit advantages (30%). First-in-class characteristics came third (23%) and
best-in-class fourth (14%; see chart 4.2). A number of interviewees claimed
that this was simply a continuation of today's marketing-driven approach.
The fact that best-in-class came last also surprised many of those we spoke
to. One executive commented as follows: "This shows that the industry
does not trust its own innovation capabilities which is shocking!" The
combination of two findings treatment solutions are ranked highly and
first-in-class is perceived as important led many interviewees to the conclusion that the industry is sticking with its old model of "coming up with
a mediocre innovation and then marketing it like hell."
Another bone of contention was the idea of offering more treatment solutions. Cardiovascular and diabetes patients, for instance, can now choose
to be monitored via special medical devices. These devices automatically
submit data to specialists who, if required, can adapt the treatment. However, companies that aim to move into solutions need to make drastic
changes to their operating models. Even today, patients with osteoporosis
can sign up for deals which oblige the pharmaceutical company to pay for
unsuccessful medication and any additional treatments that may become
necessary (see box 5.1). Such packages involve extensive risk management,
and pharmaceutical companies choosing this model will have to develop
skills similar to those of insurance companies.
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To summarize, the executives we interviewed expect two kinds of companies to develop: companies focusing on cost-benefit advantages and bestin-class and companies focusing on treatment solutions and first-in-class.
Pursuing both models at the same time would become increasingly
challenging.
Forward integration?
Many of our interviewees thought that a possible consequence of companies
offering solutions would be forward integration with companies becoming
service providers. Nearly 50% saw this as a trend for the future. But the
people who would actually be responsible for making this happen (by means
of acquisitions) are skeptical: Not one of the respondents working in the
field of business development or mergers and acquisitions saw this as a
future trend (see chart 4.3). One manager commented as follows: "Be it solutions, hospitals or even fitness companies we have tried it all and failed."
Another said: "Every attempt of pharma to leave the product business and
enter into services has failed. You cannot combine a product-centered
company with a service company."
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What is more, in the markets that will drive future growth China, Latin
America and India, for example patients must usually make substantial
co-payments. On a global scale, the share of state funding will thus decrease
and the importance of the "private payor" as a customer will increase.
Companies need to strengthen their existing sales and marketing skills to
address this target group within the regulatory boundaries.
But it's not only the source of financing that is expected to change in the
coming years. In light of the increasingly difficult market environment and
the active role that payors are carving out for themselves, the industry is
developing a range of innovative financing models. These models are designed to drive sales by creating win-win situations between pharmaceutical
companies and new stakeholders, particularly payors (see box 5.1).
Survey respondents thought that value-added models (43%) and risk-sharing
(38%) would be the most important financing models in future to prevent a
decline in sales and profits. Some 10% mentioned discount agreements and
9% cost sharing. Many managers see risk-sharing as an option for innovative
products, while discount agreements would appear to be more suitable for
off-patent products. Most interviewees thought that discount agreements
were ranked too low compared to other models as they were perceived as
the established model. One interviewee commented as follows: "Just look
at the US. For years, we talked about their high prices when in reality their
net prices after discount were much lower."
One respondent asked: "Why stop at the classical models of discounts, costor risk-sharing?" A major source of growth in crowded TAs can be combinations of existing patent-protected products. From the payor perspective,
such combinations cannot simply work by adding the prices. To leverage
this potential, novel partnering models between pharma companies would
be required.
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These findings indicate that the most important parameters along the R&D
value chain are selecting the right goals early on and choosing the correct
inclusion and exclusion criteria for recruiting patients. Having a professional
study design is seen as a means to demonstrate the value added to drug
authorities. However, pharmaceutical experts consider the relationship with
regulatory officials to have "fundamentally broken down," as one manager
put it. Interviewees criticized officials for being unduly risk-averse and very
slow in accepting new methodologies such as adaptive clinical trial design.
At the same time, the pharmaceutical companies are making some headway
in battling for reimbursement and have begun to collaborate with payors
early on in the R&D process (see box 6.1).
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According to participants in the survey, the first four of these drivers have
the biggest impact on the results achieved by R&D. However, they are also
the areas with the greatest potential for improvement (see chart 6.3).
R&D is not an area that can be industrialized easily. Technological innovations such as high-throughput screening (HTS) and genomics brought with
them high hopes, but results to date have been disappointing. One interviewee commented as follows: "The key is to have a sound understanding of
disease mechanisms. R&D truly remains an art."
Other earlier trends such as centralizing R&D are now seen as more critical.
To ensure access to research expertise, innovation and the best talent,
executives are focusing on partnerships and collaborations. Indeed, 51%
of survey respondents saw this as the key trend in R&D organizations
(see chart 6.4). One insider commented: "Innovation management with
the external world will become a key lever in the future."
Past experience shows that big mergers rarely if ever help reduce pipeline risk or improve R&D productivity. Hence the majority of senior executives now believe that pooling, and not acquiring, resources may represent
the business model of the future. They hope that this will lead to improved
ROI and reduce not only the amount of low value-adding "me-too" products
but also the crowding in the most attractive therapeutic areas such as oncology. This trend has already become reality in recent deals (see box 6.2).
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Box 6.3: Gaining access to the best innovators and inventors An example
from outside the world of pharma
IdeaConnection.com is an example of how innovation can be made to work
across corporate boundaries. Companies can use the on-line platform to
launch a contest to solve their particular problem, search for an attractive
technology or ask for expert advice. These inquiries are then worked on by
a collaborative team of inventors and innovators.
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Pfizer has addressed the flexibility of its R&D operations by including development in its commercial business units. Similarly, GSK has created centers
for excellence in drug discovery (CEDDs) as part of a shift toward smaller,
pathway-focused drug performance units.
The effectiveness of R&D in pharmaceutical companies relies strongly on
support from other key functions. These functions include:
> Business development and in-licensing to supplement the company's
product pipeline and build a world-class portfolio
> Clinical/regulatory strategy to ensure appropriate study design
> Pharmacoeconomics to demonstrate a favorable cost-benefit ratio
and secure reimbursement after market authorization
> Medical affairs to ensure that R&D generates products that meet
patient needs
Looking ahead, participants in the survey believe that business development,
in-licensing and clinical/regulatory strategy will gain in importance for the
results achieved by R&D (see chart 6.5). Respondents who themselves do
not work in R&D believe that pharmacoeconomics and reimbursement will
become more important in the future. These findings again underline the
trend in the pharmaceutical industry toward external growth and partnering.
They also emphasize the fact that pharmacoeconomics will become more
important in the future. In times of restricted health budgets, there is a clear
need to demonstrate increased value to both patients and payors.
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Improvements in this area are not expected to significantly affect the other,
"harder" levers. Nevertheless, 38% of respondents working in the area of
R&D think that improving competencies and behaviors would also potentially drive technology. One executive commented as follows: "We have
become too commercial and we need to increase the acceptance and appreciation of R&D within the firms again." Another added: "We need to foster
a culture which encourages real debate if we want to avoid having too
many streamlined scientists in R&D."
What can I do to improve the culture within my company?
The majority of respondents in the survey (78%) said that the first step
would be to improve the personal or "soft" skills of their employees (see
chart 7.2). Specialist expertise is also seen as major challenge by respondents working in the area of R&D. One such respondent commented as
follows: "It is not only about those soft skills. You need the top people
with the top specialist know-how for those TAs you want to play in."
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They must feel free to communicate new ideas upwards and be praised
for it. One interviewee commented: "For sure, some of these new ideas
will fail. But with the right understanding, we will learn from them and
do better the next time round. What we need is entrepreneurship and
creativity."
Lever 3: Focus on the scientific culture in R&D and incentivize employees
accordingly
As shown in chart 7.2, less than one-third of respondents felt that performance management needed to be changed. This was not confirmed
by the interviews, however. Interviewees saw a need for a new approach
to incentives, especially in the area of R&D. As one manager commented:
"One of the key issues in pharma is that we tend to incentivize our R&D
experts like the rest of the firm. We really need to move away from the
classic monetary-driven approaches that work for commercial guys and
think about appropriate rewards for researchers." R&D incentives should
refocus on aspects such as peer challenging, peer motivation, respect for
the profession and medical breakthrough. R&D staff can be provided with
platforms or given academic rewards. They can be allowed to develop a
different, more scientific culture within the organization. Schemes that
not only offer monetary incentives but also honor creative behavior will
go a long way to increasing the motivation of R&D staff, and so foster
innovation.
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9. Where to start
At Roland Berger Strategy Consultants, we have a wide range of experience
in laying the foundations for innovative organizations and business models.
We have supported numerous clients within the pharmaceutical industry
and helped them analyze the different aspects of the Innovation Framework.
We tailor our support to the specific needs of our clients by leveraging a
wide range of proven methodologies, tools and approaches developed
and applied in the pharmaceutical industry and beyond.
Typically, we perform a performance health check that looks at each of the
key levers in the Roland Berger Innovation Framework in turn. We identify
the areas that offer the greatest room for improvement and apply specially
adjusted analytical and diagnostic tools to determine how the client is
performing compared to industry standards. Once the burning issues have
been singled out, we derive strategic initiatives. These are then prioritized.
Implementation begins in the areas where the biggest impact can be
achieved for the least effort.
We have helped our clients evaluate their current product portfolios and
TAs in light of the expected pipeline outcomes. By reviewing clients' strategic context and internal capabilities, we can define new models that challenge the traditional approach of pushing physical products only. With our
provider and payor practices, we have assisted pharmaceutical companies
in analyzing cooperation models so as to ensure innovative ways of financing.
We regularly help clients in the areas of R&D and manufacturing excellence.
Our work involves using levers such as organizational and structural set-up,
smart outsourcing, streamlined decision-making, effective project teams
and common performance goals. Within the pharmaceutical industry and
beyond, we have set standards in the areas of diversity and inclusion initiatives, helping stimulate an entrepreneurial and creative high-performance
culture in large companies.
Subsequently, we have helped clients develop implementation plans and
assisted them in executing them. In a nutshell, Roland Berger Strategy
Consultants can help pharmaceutical companies in all aspects on innovation
excellence, from defining winning strategies to putting them into practice.
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10. Sources
For the purposes of this study, Roland Berger Strategy Consultants conducted a major quantitative survey and carried out a large number of
interviews with top industry executives. In both cases, our focus was
on patent-protected prescription drugs.
A total of 35 global pharmaceutical companies participated in the quantitative survey. These were responsible for more than 50% of global annual
pharmaceutical revenues. Participants included 21 of the global Top 30
pharmaceutical companies.
We conducted in-depth interviews with executives from international
pharmaceutical companies. During more than 50 face-to-face discussions,
we were able to generate a wealth of qualitative insights. Interviewees
included Chief Executive Officers, Chief Financial Officers, Directors
of R&D divisions and Commercial Executives.
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Contacts
Stephan Danner is a Partner in the global Pharmaceutical & Healthcare Competence
Center at Roland Berger Strategy Consultants in Berlin. As leader of Roland Berger's
global pharma and medtech practice, he works with pharmaceutical clients to design and
implement corporate strategies, effective operating models and performance improvement
programs along the entire value chain. Innovation management, marketing and sales,
organizational development & restructuring and post-merger integration are among his
key areas of expertise. Stephan is the author of several publications and has made
presentations at many international conferences and events.
Alt-Moabit 101b, 10559 Berlin, Germany
Stephan_Danner@de.rolandberger.com
+49 (30) 39927-3556
Dr. Morris Hosseini is a Principal at the global Pharmaceutical & Healthcare Competence
Center at Roland Berger Strategy Consultants in Berlin. He holds a Ph.D. in Biomedical
Engineering from the University of Toronto and co-founded a biotech company in the area
of mesenchymal stem cells. Due to his comprehensive scientific background, he is in charge
of Roland Berger's ongoing study of innovation and R&D in the pharmaceutical industry. He
has also advised global clients on topics besides R&D, such as commercial strategies, medical
affairs, launch management, market access, sales force excellence and organizational
effectiveness.
Alt-Moabit 101b, 10559 Berlin, Germany
Morris_Hosseini@de.rolandberger.com
+49 (30) 39927-3350
Patrick Biecheler is a Principal in the Paris office of Roland Berger Strategy Consultants.
A wealth of experience both at Roland Berger Strategy Consultants and as a marketing
director in the pharmaceutical industry has made him an authority on a wide range of
marketing and sales topics. His expertise covers areas such as strategic positioning, parallel trade, generification management, post-merger integration and operational effectiveness. Patrick has successfully implemented performance optimization strategies in various
projects and shared his knowledge in a series of reports and articles on the key lessons
learned. He is involved in Roland Berger Strategy Consultants' ongoing research into
innovation and commercial effectiveness.
11, rue de Prony, 75017 Paris, France
Patrick_Biecherl@fr.rolandberger.com
+33 (1) 53670-902
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Krzysztof Badowski
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Patrick Biecheler
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Patrick_Biecherl@fr.rolandberger.com
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Vladimir Boroutski
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Vladimir_Boroutski@ru.rolandberger.com
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Stephan Danner
Alt-Moabit 101b, 10559 Berlin
Stephan_Danner@de.rolandberger.com
+49 (30) 39927-3556
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Christoph_Beseler@es.rolandberger.com
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Frigyes_Schannen@hu.rolandberger.com
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Aleksandar_Ruzicic@ch.rolandberger.com
+41 (44) 38481-67
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Monica Bravi
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Monica_Bravi@it.rolandberger.com
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David Stern
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David_Stern@uk.rolandberger.com
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Masugi_Kaminaga@jp.rolandberger.com
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Antonio_Benecchi@us.rolandberger.com
+1 (248) 729-5125