Pharmaceuticals Industry Challenges
Attracting and Retaining a Skilled Workforce
The pharma business is a knowledge and experience business and people have always been one of the most important resources for any pharma or life science company. We can talk about brand but the people in a company, in particular in their behaviour, represent a living brand. We can focus on intellectual property but that is the creation of the people, and people joining or leaving a company will add to or reduce the sustainable intellectual property. We can talk about markets, but to access any market you need people with a good understanding of that market and the culture and values of customers and suppliers.
Increasingly, we talk about regulation and compliance as thought they are some abstract function of a company. In practice we are describing the collective values and integrity of the individual members of staff, and the way they are motivated to behave in particular situations. So people are key but how any organisation ensure that it can attract, recruit, develop, and motivate those individuals with the competencies that will set that business apart from those of competitors.
The first challenge is that there are increasing signs that the labour market is moving in favour of the employee rather than the employer. There is growing demand for skilled people but traditional labour markets are providing fewer new people with the right qualifications and experience; and companies are still trying to recruit people with ever-more-specialised knowledge. It is possible to recruit from new markets, but this is a new competence for many companies.
People know that they have a choice and could lead them to elect to favour organisations with stronger ethical standing. They could be attracted by the possibility of working with individuals who are recognised as industry leaders, or they may simply aspire to serious financial wealth. Then again they may look for the excitement and ability of a biotech or smaller pharma company over the traditional big players. Organisations need to plan carefully to ensure that they can attract and retain the people who will add value to their business without falling into the trap of overpaying or rewarding poor or non-performance.
Controlling Operating Costs
It is accepted knowledge that the pressure to control and reduce costs is one of the next major challenges to be faced by the pharmaceutical industry. But, how this is done and what is the best approach? Understanding and controlling operating costs is a critical first step to developing or sustaining competitive advantage. Increasing generic competition, imminent patent expiries (revenue can decrease by up to 60% at patent expiry), shorter pipelines and the emergence of China as a low cost manufacturing base all contribute to constantly eroding margins. To maintain or increase margins in the future, leading pharmaceutical companies have to start taking a proactive approach immediately to understanding costs. As the pharmaceutical industry embraces these new challenges, the companies that emerge at the forefront will be those who address the issues now and are able to account for all the costs throughout their organisation. To achieve this advantage, companies have to start recognising and targeting costs today.
Research & Development (R&D) costs are spiralling as companies race to discover the next blockbuster, but where is the money to fund this research going to come from? Ask yourself the following:
How are costs distributed throughout your company?
Where should you focus your cost reduction efforts for greatest benefit?
How are you going to use to tackle these costs?
Have you identified all the hidden costs?
How do you compare to the best-in-class?
What is your baseline and what can you achieve?
Where are you going to start?
Cost is complicated, ranging from back office through manufacturing and quality to sales. To gain real benefits a structured programme of cost identification and improvement has to be in place.
All research-based pharmaceutical companies have to cope with the expiry of the patents protecting their biggest products. The 80% decline in sales of Eli Lilly’s Prozac within months of generic competitors entering the market in late 2001 was an indication of the damage that can be done when a drug’s market exclusivity is lost. Many companies are facing a similar meltdown in the sales of certain major products over the next few years. By 2009, all major cardiovascular drug classes will be genericised, thus potentially commoditising the largest and most lucrative therapy area.
Although the impact is greatest in the US, recent regulatory changes in previously ungenericised European markets such as France have ensured that companies have to deal with this threat in almost every major territory. It is no longer sufficient to begin efforts to extend a product’s lifecycle as patent expiry looms. Companies need to be developing a strategy to combat patent expiry even before a product is launched. There are many potential strategies to follow, and the choice depends on the particular circumstances of the product; second-generation versions with improved safety or efficacy, new formulations, combination products, licensed generics, and Over-the-counter (OTC) switching, are all potential choices.
Companies must be able to estimate the potential value of any investment in one or more of these brand protection strategies. The answer to this question will depend on the company’s corporate strategy, capabilities, resources and pipeline, and an understanding of brand and market specific factors will also be critical. The identification and implementation of lifecycle management and portfolio planning processes, tools and organisational structures will provide a strong foundation, enabling companies to confidently plan for generic competition.
Intellectual Property Protection
Intellectual Property (IP) is a pharmaceutical or biotech company’s most valuable resource, and its protection is a key to that company’s future success. Recent challenges over patents for HIV drugs has reminded the industry that progress is still needed in balancing the opposing forces of innovation through protection of IP rights, versus the provision of affordable drugs for the developing world.
Pharmaceuticals companies must face the daily challenge of creating value through the exploitation of IP rights, but avoiding considerable reputational harm. This situation was well illustrated in South Africa during the late 1990s when the balance between IP protection and the urgent needs of patients were not aligned. Since then, companies have become more aware of the potential damage that can be caused by too strict an interpretation of IP rights.
Working in collaboration with national governments, trans-national organisations such as the WHO, and non-governmental organisations such as the Bill and Melinda Gates Foundation, pharmaceuticals companies have begun to find ways through the minefield of IP protection in less developed countries, and most now have donation schemes for drugs to treat diseases such as leprosy and HIV.
In relatively strong emerging markets such as China and India though, additional issues prevail. Multinational pharmaceuticals companies require and expect IP rights to be strictly enforced in countries where there are countless local manufacturers with the ability to produce cheap counterfeit copies of patented drugs, which often find their way back to western markets. At the same time, the implementation and enforcement of IP laws in India and China is improving. Combined with the ability to leverage lower cost expertise, on the whole, these countries are still very much an opportunity rather than a threat. Nevertheless, companies need to be aware of and able to manage the considerable risks of doing business there.
Closer to home, drug patents are coming under increased attack from generics companies who believe they have identified a weakness in the IP protecting a product. For instance, in 2004 a major ulcer treatment drug was the subject of a patent challenge in the US by a generic manufacturer just three years after its launch. With the generics industry consolidating and becoming more aggressive, pharmaceutical companies are facing more rigorous and frequent challenges to their intellectual property monopolies and growing pressure internally to bring the realisation of value in Research & Development (R&D) forward, without compromising standards or regulatory compliance.
Managing Regulatory Compliance
As heightened regulatory scrutiny of the pharmaceutical industry grows increasingly global, sales and marketing practices, as well as privacy of patient and customer information, have emerged as targets for the most intense focus. Recent highly visible investigations and aggressive prosecutions regarding global compliance violations have resulted in significant financial judgments against leading pharmaceutical companies and subsequent criminal convictions, not only in the United States but also in Indonesia, China and Poland.
Other countries, including Germany, Italy and the United Kingdom, are investigating the activities of pharmaceutical companies or negotiating settlements for compliance violations. Such compliance missteps could lead consumers to question whether the pharmaceutical industry has lost track of its original vision to advance and improve the human condition.
These expanding regulatory forces are driving an urgent need for pharmaceutical companies to develop practical and effective solutions for meeting the challenges of integrating governance, risk and compliance on a global level. Such an integrated approach must properly synergise culture, process and technology to address current and emerging requirements and performance expectations, including:
Foreign Corrupt Practices Act (FCPA): Pharmaceutical companies must balance the anti-bribery and accounting requirements of this act with standard sales and marketing practices in foreign countries, which often are in direct conflict.
Legal and regulatory standards in each country: Foreign countries are increasingly enforcing their own laws and regulations, imposing fines and penalties for violations. Some countries don’t allow direct-to-consumer marketing, and some even regulate how much a company can spend on a pen or pad of paper.
Deficit Reduction Act of 2005 (DFA): This act added another layer of complexity to the already multifarious process of government price reporting. Until final regulations are published, the issues are unclear, but the passage of this act demonstrates Congress's ongoing intense interest in continued enforcement and scrutiny of government pricing practices and reporting.
Pricing Pressures and Shrinking Margins
Contrary to public perception, drugs form only a small proportion of overall healthcare costs (around 9% in the US – a lower percentage than in most developed countries). However, the high profitability of pharmaceuticals companies makes them a relatively easy target for healthcare providers trying to reduce costs. In Europe and Japan particularly, government funding restrictions mean severe constraints on drug reimbursement prices. While these constraints are by no means new, the situation has worsened considerably for pharmaceuticals manufacturers in recent years. For instance in 2004 the 16% claw back from manufacturers in Germany resulted in an unprecedented 6% decline in German pharmaceuticals sales. Even in the US, where manufacturers are free to set drug prices, the rapidly rising cost of healthcare is likely to result in counter-measures that will hurt the pharmaceuticals industry. Although the Medicare drug benefit is generally seen as being positive for the industry, it does introduce into the market a very powerful single purchaser of drugs, and with that the inevitable negative pressure on prices. In 2006, Medicare will account for an estimated 28% of prescription drug spending, compared to just 2% in 2005.
What impact is the pressure on prices having on pharmaceuticals companies, and what are they doing to combat it? On the one hand, the company that develops a truly innovative drug with proven improvements in safety and efficacy can still, after careful evaluation of the market, demand premium prices and secure an excellent return on investment. On the other hand the reality is that with such breakthrough products being few and far between, even the most innovative pharmaceuticals companies are learning to live in a more cost-conscious environment, with margins under continuous pressure. There is a consequent focus on cost-cutting opportunities in all aspects of the business, from discovery research right up to sales & marketing and general administration.
Realizing Tangible Value from Strategic Alliances, Joint Ventures and Partnering Arrangements
As drug pipelines among major pharmaceutical manufacturers have become less productive, many companies have increasingly sought to establish a variety of partnering arrangements such as strategic alliances and joint ventures with small, innovative biotech companies as a source for new products. Further, the high cost of Research & Development (R&D), risk management considerations as well as market demand, makes it increasingly attractive for industry players to form alliances, often in the form of licensing or co-marketing/co-promotion agreements. The resulting benefits of these alliances include:
For licensors, out-licensing maximizes the value of a compound while freeing the organization from many of the risks associated with manufacturing, providing services and establishing distribution channels;
For licensees, in-licensing can be very profitable by allowing companies to fill new product pipelines; and
For co-marketers and co-promoters, the collaboration with marketing partners allows for broader distribution of products.
Companies spend significant amounts of time and resources researching and negotiating various alliances. However, many companies fail to effectively monitor the royalty and other revenue streams that are negotiated with their partners and as a result, often leave significant amounts of revenues on the table. This lack of monitoring is often the result of poor coordination among legal, accounting/finance and sales departments as well as the turnover of personnel responsible for oversight. As the number of alliances has grown and the complexity of the compensation arrangements has increased, the monitoring of these arrangements has struggled to keep pace. Further, as companies assess controls under the Sarbanes Oxley Act of 2003, including the provisions of the Section 404 certifications, they are finding an inability to gain assurance that such arrangements are working effectively due to the confidentiality constraints or lack of critical information from an alliance partner.
For many years, the pharmaceutical industry was highly regarded for its role as a leader in the advancement and improvement of human health. For many years, the continuous introduction of new and improved drugs has also driven substantial revenue growth in the industry. But there have been a number of recent product recalls despite well established quality assurance processes and regulatory requirements. These, incidents have led many consumers to believe that pharmaceutical manufacturers have lost sight of their original vision, and instead of focusing on bettering the human condition, are more interested in bettering their profits.
The damage to the industry has been pervasive, resulting in costly settlements on pricing and promotional practices, difficulty in obtaining clinical trial subjects, high-profile drug withdrawals, and an inability to produce and sell product due to manufacturing halts. Moreover, compliance problems have led to additional industry regulations, raising the total cost of compliance as well as the financial and reputational risks should non-compliance occur. Since 2000, pharmaceutical companies have paid a total of almost $4 billion in settlements and fines.
These developments have exacted a toll on the pharmaceutical industry’s reputation while fuelling political rhetoric. An even higher levy may be in store if the industry does not respond effectively to the issues and forces that have already lowered the public’s sense of trust. Aggressive investigations and expanding regulation alone have arguably already stifled innovation. And in the absence of trust, the public may demand an alternative business model for the pharmaceutical industry, one which may impose unacceptable controls and operating restrictions.
The industry’s past attempts to address concerns around trust through compliance and governance policies has occurred as a reaction to developments rather than a proactive assessment of risk and an integrated approach to compliance management. Moreover, new layers of added compliance load have led to bottlenecks and inefficiencies in operations.
Successfully Developing Innovative Drugs and Enhancing Research & Development Productivity
Pharmaceutical, biotech and medical device companies need to move new products into the market quickly to obtain sufficient benefit from a limited patent life and to compensate for development costs which can exceed US$800 per drug. Most major pharmaceutical manufacturers spend an average of 15% of sales on Research & Development (R&D). Given this substantial outlay and the long development cycle, companies have struggled to find ways to speed the introduction of new products into the marketplace. Strategies typically employed to compress research & development (R&D) time include developing improved operational and management processes and the use of advanced technology. Technologies such as high throughput screening, combinatorial chemistry and genomics are at the forefront of transformational approaches intended to surmount a fundamental challenge facing the industry.
The issues involved in effectively carrying out research and development are complex and transcend science. The regulatory environment is a key component that essentially affects every stage of the process. For example, clinical development activities not performed in compliance with good clinical practices (GCP) expose a company to risks that include delays in approval, wasted investments, litigation and settlement costs due to product liability, and reputational harm. Industry observers consider the area of clinical development to be the next major area of government investigations and urge companies to focus on the design and implementation of processes and controls that will mitigate development risks. This belief is supported by a noticeable increase in the number of intense and unannounced FDA inspections of clinical sites across the industry.
Sustaining Growth in Global Markets
Global prescription drug sales grew at just 7% in 2004, the lowest rate since 1998. Sales growth was slowed by government pressure to reduce prices, concerns over drug safety and the impact of patent expiries. Over the next five years, sales are forecast by IMS Health to grow at a meagre 6-9% compared with growth of well over 10% in the last five years. The slowdown in growth reflects continuing generic competition, a dearth of new products, regulatory tightening and pricing pressure. This comes at a time when the product development paradigm is undergoing significant change. Most current blockbuster drugs were developed through traditional biochemistry, but it is generally accepted that opportunities to develop truly innovative breakthrough drugs in this way are now exhausted. The completion of the Human Genome Project has opened up the possibility of developing drugs based on genomics, but these are 5 to 10 years away. In the meantime, Big Pharma is reacting by increasing in-licensing activity, particularly from the biotech sector, targeting Mergers & Acquisitions (M&A) opportunities, expanding into new geographic markets such as China, and searching for cost-reduction opportunities in-house. Pharmaceuticals companies are also taking a fresh look at specialist markets. Historically, a blockbuster $1bn drug had to be a primary care product, but since the spectacular success of Genentech’s breast cancer drug Herceptin, the blockbuster specialist product is now a reality. Specialist niche markets such as cancer, Alzheimer’s and HIV are expected to be major opportunities over the coming years.
In the longer term, for growth to be sustainable drug companies must re-establish their relationship of trust with the patient and physician, which has been severely tested in recent years as fraud investigations, safety issues and perceived high prices have entered public consciousness. Notwithstanding these issues, the healthcare market, and pharmaceuticals as an integral part of it, will continue to grow as the world’s population ages and becomes more affluent. The pharmaceutical company that makes intelligent investment decisions, effectively creates and exploits its intellectual property, and manages its relationship with key stakeholders, will continue to benefit from that growth