2013 Life Sciences (Pharmaceuticals) Industry Perspective
by Peter Behner, Rick Edmunds, Marcus Ehrhardt, and Greg Rotz
Originally published by Booz & Company: December 13, 2012
After the roller-coaster year of 2012, it’s easy to overlook the exciting opportunities in life sciences: technological advances, new business models, and global markets.
The year 2012 will soon pass into history, and what a year it was for biopharmaceuticals. In the United States, the Supreme Court affirmed the new healthcare reform law and exempted pharma companies from sales force overtime rules, the Food & Drug Administration (FDA) approved the first obesity drug in 13 years with Belviq, and billions of dollars changed hands as a result of government settlements.
In emerging markets, there were new requirements for joint ventures and local manufacturing, and the Chinese government announced price cuts averaging 17 percent for many cancer drugs, with a list of more medications to follow. In India, the industry faced a different type of regulatory headwind; the patent office ruled against the intellectual property rights for several notable drugs, including Pfizer’s Sutent, Bayer’s Nexavar, Novartis’s Glivec, and Roche’s Tarceva.
A still more daunting challenge came from Europe, where mandated austerity measures have led to drug price reductions in countries such as Finland, Ireland, and Italy; in other countries, including Spain, the larger co-pays established by governments have led to significant decreases in prescription drug sales. The uncertainty of this moment is exacerbated by the patent cliff: Loss of exclusivity among popular prescription drugs will put US$250 billion of global sales at risk between 2012 and 2015.
With all of this going on—along with a continued roller coaster in Alzheimer’s medication, a few high-profile M&A deals, and changes in chief executives at Johnson & Johnson and AstraZeneca—it was easy to overlook the most positive trend for the industry this year: a host of significant changes that should ultimately benefit most pharmaceutical companies. These included the following:.
- Exciting advances in scientific technology, evidenced by more than 25 new molecular entity approvals by the FDA through September, and real enthusiasm for innovations such as Trastuzumab-DM1 (T-DM1) in oncology, Janus kinase (Jak) inhibitors for treating rheumatoid arthritis, and new stem cell research
- Additional steps toward reinventing the industry’s R&D model, including the launch of TransCelerate BioPharma, a 10-company collaboration aimed at making clinical trials more efficient
- Stronger cooperation in real-world evidence and patient engagement, including the expansion of Humana’s collaboration with Novo Nordisk on diabetes and the newly formed Merck–Geisinger partnership on adherence
- Significant investments in high-growth emerging markets, including AstraZeneca’s construction of a new plant in Russia, Pfizer’s joint venture with Hisun in China for marketing branded generics, and Novo Nordisk’s launch of its largest overseas insulin manufacturing site in Tianjin, China
Each of these advances represents a major bet on the future. To follow through, however, will involve significant human and financial resources—which leads us to the final significant trend from 2012: fiscal retrenchment.
Numerous rounds of corporate restructurings, merger integrations, and savings initiatives have been undertaken to protect earnings. If your company is typical of the life sciences industry, you were already fatigued from prior cost-cutting efforts, but in 2012 you once again took a sharp pencil to your budget. You scrutinized your assets and overhead; you closed sites, reduced your portfolio, killed molecules, trimmed your sales, shrank R&D, and cut general and administrative expenses. These efforts have helped to preserve the bottom line in the short term; your costs are indeed lower. But it doesn’t feel like you’ve added much breathing room; your budgets will be squeezed further, and you have not yet created a sustainable path to future growth or profitability.
Now you are asking this question: Where can we go from here?
You already know that you are going to have to reinvent your business model, or take on some disruptive new approach. Current revenues will not fund more than a few options, and every option involves daunting trade-offs in investment and management time. So you will have to choose carefully. Moreover, experience throughout the industry has proven that competitive new approaches—such as multichannel marketing and personalized medicine—are very difficult to bring to scale.
In this context, winning companies will do three basic things to get themselves in shape for growth in 2013 and beyond. These measures can be seen as starting points for a sustainable strategy in the short, medium, and long terms.
Headroom is the market share you don’t have minus the market share you likely will never get; it represents the missing sales, already available to you, for any particular product. Knowing your headroom can help you determine whether a brand is worth further investment. In pharma, the conventional “blanket the earth” product launch model has proven too expensive and is increasingly prone to underdelivering. Thus, every venture starting now needs a sharper view of where to drive its share and profitability.
Headroom is a valuable guide for thinking freshly and cogently about your products at any stage in their life cycle. As Ken Favaro, David Meer, and Samrat Sharma noted in “Creating an Organic Growth Machine” (Harvard Business Review, May 2012), labels like cash cow and growth engine are misleading, because they don’t precisely recognize the promise in a particular brand. Moreover, because they affect the operating units’ behavior they act like self-fulfilling prophecies, and ultimately become self-defeating.
For example, some older pharmaceutical products have been typecast as declining cash cows, fit only to be milked. But they are still viable brands, often with a great deal of headroom available. We know of one mature osteoporosis drug for which a final marketing review revealed several pockets of remaining headroom: physicians expanding their treatment of the disease who had only limited exposure to the drug; loyal patients who were stopping therapy due to misperceptions about it; and both physicians and patients who were unaware of recent positive changes in reimbursement. Had the company decided not to conduct the review, and to harvest this drug as a declining cash cow instead, these opportunities surely would have been overlooked. Even in cases where the headroom may not be significant, exploring the issue provides helpful guidance for scaling back investments in a smart, surgical fashion.
Other product groups have wasted resources or fallen short of their goals because the leaders did not generate a sharp view of which customers might switch and what it would take to change their behavior. At the other end of the life cycle, there is a premium on knowing how to minimize switching away from the brand while continuing to attract new customers. Sometimes, relatively low-cost marketing actions—changing how messages are conveyed or how commercial trade channels are used—can have a big impact on revenues. Knowing your headroom is a good first step in becoming more aware of your current portfolio and its potential.