Critical Issues Affecting the Pharmaceutical Industry in 2012

Recently, the consulting firm Booz Allen reflected on the critical issues that the pharmaceutical industry will face in 2012 and how life sciences companies can position themselves to benefit.

Lipitor’s recent loss of patent exclusivity was a sharp reminder of the patent expiration wave making its way through the industry, increasing pressure to cut costs and improve productivity and innovation. As The Wall Street Journal said on June 15, 2011, “white-knuckled investors have been hoping that drug makers would have found replacement products by now or adequately diversified themselves to withstand the impact.”

Pharmaceutical companies confront these patent challenges at a time when growth in the overall industry is slowing and demand is shifting to generic segments and emerging markets. The firm expects these trends to continue in 2012, along with 

• Persistent regulatory hurdles;
• Increasingly demanding stakeholders: payors, providers, pharmacies, etc.; and
• Challenges: value chain-from slumping R&D productivity to supply shortages. 

While the industry faces serious problems, the report noted that companies can survive and thrive if they adopt highly differentiated strategies.  Differentiation goes beyond a shift from “me too” products to novel breakthroughs. True differentiation stems from the presence of carefully nurtured distinctive capabilities throughout an organization that endure and are tough to copy.

As pharmaceutical management teams turn the calendar to 2012, the report told companies to consider four critical and rapidly changing aspects of the industry—1) research, 2) commercial operations, 3) supply chains, and 4) networking—that require specific, highly developed capabilities. 

The Capable R&D Engine

Many R&D transformation programs do not meet their potential because they comprise a broad set of uncoordinated and overlapping initiatives that are not underpinned by an overarching strategy. A clear focus on a few specific differentiating capabilities can act as a “guiding star” for innovation. The firm’s research and experience with clients suggest five key capabilities to power a capable R&D engine:

1) Value-driven clinical program design with a focus on explicitly and transparently assessing trade-offs among development cost, risk, and revenue, based on an understanding of value in the eyes of all major stakeholders, and the design characteristics that drive cost, risk, and revenue.

2) Scientific and clinical leadership development that builds a highly effective cohort of discovery and development “managers in the middle” who have extensive external networks, broad disease and pathway understanding, and decision-making authority given established scientific and clinical targets, coupled with performance measures that encourage collaboration and overall portfolio optimization.

3) Disciplined portfolio management based on assessments against rigorous, forward-looking target product profiles that have been externally tested against market and competitive trends.

4) Targeted therapy development involving systematic and early identification of targeted therapy options, analysis of trade-offs, and selective design of tailored drug development programs to focus on patient subpopulations, including codevelopment of diagnostics as appropriate.

5) Scale-up of next-generation clinical development that focuses on rapid and broad rollout of new approaches such as building access to high-quality electronic medical record data for protocol modeling and patient recruitment, remote data collection, and novel approaches to data quality risk monitoring, as well as aligning the design of outsourcing partnerships with strategic development goals.

The report noted the need for companies to develop key capabilities at scale including, performance management systems for functional and therapeutic area teams, and partnership agreements with outsourcing firms.

The Commercially Capable Company

Over the past two decades, large pharmaceutical companies relied on a sales and marketing approach aimed at prescribers in the world’s largest markets-the United States, Europe, and Japan. While the model spawned blockbusters such as Lipitor and created unprecedented value, now, however, it is no longer generating growth.  Going forward, four trends will require not just more significant cuts in traditional resources, but a focus on building distinctive new capabilities. 

• First, cost containment continues to create a more restrictive market access environment with greater pricing pressures, additional reimbursement restrictions, and new or altered drug procurement systems.
• Second, new product launches are increasingly focused on high-value specialty indications.
• Third, trade liberalization is opening new opportunities in distribution and trade channels.
• Finally, emerging markets-which have very different healthcare models for marketing authorization, pricing, reimbursement, and distribution-are forecast to make up 30 percent of the global pharmaceutical market by 2015, compared to 19 percent in 2010.  

The firm’s work with clients in the past year suggests that certain go-to-market capabilities will be critical in confronting these trends: 

• Payor engagement capabilities to address market access, pricing, and reimbursement (including innovative pricing agreements);
• Joint disease management programs; and
• The provision of additional patient services that enhance the value of the product.  

These services may include compliance management programs supported by nurses, or telephone hotline services, among others.  Companies of course need to know where value can really be attained rather than over-investing in marginal benefit.

Multi-stakeholder marketing capabilities that target all relevant players in the healthcare system including prescribers, nurses, pharmacists, formulary committees, and payors requires close coordination among medical, sales and marketing, market access, and pricing teams to secure pricing and utilization that reflect the value of each product. It calls for joint planning and decision-making processes, as well as coordinated execution.

Commercial trade channel (CTC) capabilities, to engage more closely with key stakeholders in the distribution chain, including wholesalers, pharmacists, and patients: 

• New distribution models, such as direct-to-pharmacy (DTP), in which manufacturers sell straight to pharmacies, enabling a direct trade relationship and paving the way for targeted loyalty programs.
• Patient loyalty card schemes, which are common in Mexico, Brazil, and many other large emerging markets.  

The success of these new CTC models depends on close collaboration among product supply, marketing, and commercial trade functions, as well as the management of new partnerships with specialist third-party service providers (for example, to provide logistics services for DTP or to operate loyalty card programs).

Tender and contract management capabilities to respond to this increasingly important method of pharmaceutical procurement, which now makes up 27 percent of the global market, which include: 

• New customer-facing roles to interact with buyers,
• Analytic capabilities to review tender opportunities, and
• New planning and tracking processes to manage the tender business. In particular, it requires close collaboration among commercial functions, pricing, and product supply.  

Top-tier pharmaceutical companies are leading the way: Four of the top five pharmaceutical firms have invested in developing tender and contract management capabilities in the past year.

The Capable Supply Chain

There are several industry dynamics that add to the urgency for more sophisticated supply chains than the pharmaceutical industry has relied on in the past: 

• Supply chains must be tailored, agile, and cost-efficient.  
• Rising complexity-the result of new SKUs being added to a portfolio of traditional ethical drugs and more and more generic “mature” products -is placing new stress on the supply chain. 
• New and more complex distribution channels, including online ordering and direct-to-consumer delivery, continue to evolve; and
• Pricing pressure-from generics companies gaining share in cost-conscious developed markets and financially strapped developing economies-continues to intensify.  

The report suggested four key capabilities for pharmaceutical companies to consider for added investment and development:

A set of tailored supply chains that addresses segment-specific needs.  Instead of, “one size fits all” supply chains, firms need to construct a series of individual supply chains tailored to products, markets, and customer segments. For example, high-volume products with steady demand-the old “blockbusters” that are coming under cost pressure from generics-could be manufactured in low-wage countries and with lean inventory management.  Meanwhile, pricing on patent-protected drugs for less common medical conditions could justify manufacturing in factories close to markets in sufficient volume to allow for short lead times and avoid expensive stockouts. The two types of supply chains may be utilized simultaneously at the same company.

Agility in the supply chain enables a pharmaceutical manufacturer to respond to variability in demand for a drug-for example, from one country or region to the next-and also to maintain less inventory (thus minimizing costly write-offs) while still meeting demand. Postponement, wherein drugs are packed to order, is one increasingly popular strategy that is supported by an agile supply chain.

Flexibility in product supply and manufacturing allows a company to better respond to volatile manufacturing capacity requirements, such as those associated with tenders, and to minimize underutilization of capacity. Building flexibility into supply chains requires the right product supply setup, the right production footprint, and management of strategic supply relationships with contractors.

Integrated planning capabilities increase alignment of key supply chain parameters, such as capacity, inventory levels, and lead times, with market demand.  For example, as generics enter the marketplace, company planners must correctly gauge their impact on individual branded drugs to guide the business side in managing inventory size, returns liabilities, and write-offs if sales drop. Pharmaceutical companies must deploy a disciplined business planning process that supports the company’s portfolio management strategy and product transition plans.

One company’s capable supply chain is likely to bear little resemblance to that of even its closest competitor. Big global pharmaceutical companies with their own production networks might rediscover manufacturing as a competitive advantage, while small firms or pure innovation players rely fully on outsourcing.   Several leading pharmaceutical companies starting to fundamentally rethink their supply chain strategies.

 
Enabling the “Networked Enterprise”

In the coming year pharmaceutical leaders will be focused on developing and stitching together this complex array of capabilities.  Certain capabilities, including major outsourcing arrangements, matrixed organizational models, and collaborative partnerships with stakeholders, point to the need to effectively manage a networked enterprise. Success in this area depends on putting in place the right combination of formal and informal mechanisms that define and influence networked organizations.  Formal mechanisms for enabling accountability include: 

• Clear decision making,
• organization design,
• compensation systems,
• compliance, and
• business planning 

In addition, informal enablers-such as norms, social networks, mentoring relationships, and mind-sets-have even more power to drive, or undermine, the enterprise’s capabilities and results. Too often, these informal dynamics are thought to be uncontrollable. Capable management of a networked enterprise deliberately cultivates the right informal organization.

In the future, winning pharmaceutical companies will be those that pursue strategies based on developing and investing in targeted capabilities will successfully differentiate themselves in the marketplace.