Future Pharma PHARMACEUTICALS - kpmg.com - CHEManager
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
PHARMACEUTICALS
Future Pharma
Five Strategies to Accelerate
the Transformation of the
Pharmaceutical Industry by 2020
kpmg.com
Future
Pharma
Five Strategies to Accelerate the Transformation
of the Pharmaceutical Industry by 2020
Contents
Executive Summary
Key Challenges Facing the Pharmaceutical Industry 1
1. Delivering shareholder/stakeholder value 2-6
2. Low growth business environment 7 - 10
3. R&D productivity 11 - 15
4. Rising risks and loss of trust 16 - 18
A Vision of the Pharmaceutical Industry in 2020 and Beyond 19 - 24
Five Strategies to Accelerate Industry Transformation 25
1. Reassess product strategy 26
2. Invest in the marketing and sales infrastructure of 2015 and beyond 27 - 29
3. Acquire more talent and experience from other industries 30
4. Use internal rate of return to prioritise and rationalise the R&D portfolio 31 - 32
5. Review and revise governance standards 33 - 34
If you would like to discuss any of the ideas in this report or how they
can be implemented, please contact any of our pharmaceutical team.
“
Executive With well chosen
strategies combined
Summary with disciplined
This paper explores some of the major implementation, I believe
challenges facing the pharmaceutical the pharmaceutical
industry today.
industry has the platform
Four Major Challenges Facing from which to prosper
the Pharmaceutical Industry:
over the next 10 years.”
1. Delivering shareholder/stakeholder value
Chris Stirling, European Sector Leader
2. Low growth business environment
3. R&D productivity Scientific, political, legal and personnel But because the geographically diverse
4. Rising risks and loss of trust risks are all rising. We see a need for a nature of its business will increase with
review of governance standards from the growth of Emerging Market
We believe that there is a real
Board level downwards, together with a influence, the pharmaceutical industry
opportunity for the industry to redefine
fresh look at internal appraisal systems could take on the appearance of a high
itself in the minds of shareholders,
to ensure the best qualified employees value consumer products industry to its
stakeholders, consumers and
are in the key roles and get the best shareholders. Whether a diversified or
governments, following the
training for the changing marketplace. specialist business model is better to
disappointing business and share
meet the 2020 challenges is a much
price performance of recent years. Pharmaceutical companies must win
more company specific analysis that
back trust; they have created the
Stagnation in mature Western Markets we have not attempted to cover here.
perception that they put their
(WM) combined with rapid growth of
commercial goals above the interests We have identified five strategies to
Emerging Markets will change the
of governments, payors, prescribers accelerate the transformation of the
shape and needs of the industry.
and patients. industry to meet them.
Operating margins are peaking and the
impact of Emerging Market growth on This situation can be changed as part of a Five Strategies to Accelerate
the current cost base will bring margins series of transformational steps in both Industry Transformation:
down. Businesses need to ensure the operations and culture including better 1. Reassess product strategy
investment in growth markets reflects internal and external communication of
2. Invest in the marketing and sales
the new industry and not a template risks and more consistent compliance
infrastructure of 2015 and beyond
from the past. Social media and with regulatory standards.
information technology offer potentially 3. Acquire more talent and experience
There are many new relationships to from other industries
significant new ways to contact
develop with government agencies in
prescribers and consumers 4. Use internal rate of return to prioritise
the growth markets, in addition to
more efficiently. and rationalise the R&D portfolio
increasing complexity in relations with
R&D productivity has been sub-optimal governments and payors in established 5. Review and revise governance
and poorly measured. We assess that markets. Improving these relationships standards
returns on capitalised R&D spending can best be achieved by adopting better The industry is responding positively
have been steadily falling. A shift to standards of governance at all levels of to a number of other important issues,
an internal rate of return measure of the industry. such as working with governments and
development spending is needed, providers to address the rising cost
In our vision for 2020 we see an industry
together with some information about of healthcare.
that will be simpler for investors to
why the companies believe that
understand not because it will be The selective and focused approach
spending on development projects will
structurally simpler: developing new that we have chosen means that this
give shareholders a return greater than
medicines will be an ever more paper does not cover these other
the cost of capital for the company.
complex process. challenges in any detail.
1 | Future Pharma Key Challenges Facing the Pharmaceutical Industry 1. Delivering shareholder/stakeholder value 2. Low growth business environment 3. R&D productivity 4. Rising risks and loss of trust
Future Pharma | 2
Challenge 1
Delivering Shareholder/
Stakeholder Value
The pharaceutical industry has performed Factors influencing revenues include:
disappointingly over the last ten years, Positives: Negatives:
relative to other industries (Figure 1).
This is the result of a complex ebb and • Strong growth in Emerging Markets • Increasing speed and intensity of
flow of positive and negative factors on (Figure 2) product competition (Figure 4)
both revenues and profits that has • Aging populations • Increasing rebates to government
marginally favoured the negatives. and third party providers in the US
• Price increases in the US
(Figure 3) • Budget deficit driven price reductions
in Europe
• Influenza pandemics
• Exposure to loss of revenues
• Enduring willingness of payors to
following patent expiration (Figure 2)
support demonstrably
innovative therapies • Ferocity of early generic competition
• Higher regulatory hurdles, leading to
greater uncertainty and fewer
product approvals
• Greater restrictions
on reimbursement
• Declining R&D productivity
Figure 1
Relative Share Price Performance
from 2005 Source: Bloomberg
Key
250
STOXX Europe 600 Index
Health Care
200 Utilities
Tobacco
Food and Beverages
Food
&
Beverages
150 Tobacco
Personal
&
Household
Goods
Personal & Household Goods
U8li8es
Europe Pharma
STOXX
Europe
600
Index
100
Europe
PUS Pharma
harma
US
Pharma
50
0
07/01/2005
07/01/2007
07/01/2006
07/01/2009
07/01/2010
07/01/2008
07/01/2011
3 | Future Pharma
Challenge 1
Delivering Shareholder/
Stakeholder Value
The balance of factors Factors influencing profits and earnings
influencing profits has Positives: Negatives:
contributed to making the
consistent delivery of • An industry-wide drive to reduce costs • Royalty payments increasing due to
shareholder/ stakeholder and improve efficiency greater collaboration and risk sharing
value more difficult and • Improved operating margins • Increased legal settlements with
this continues to be (Figure 5) and plaintiffs and governments
the case. • Strong cash flow growth fuelling • Increased clinical trial demands
increased cash returns to
• Increased regulatory
shareholders through increased
filing requirements
dividend pay-out ratios and share
repurchase programmes (Figure 6) • M&A activity that has added
complexity, whilst rarely generating
obviously better returns
• Growing safety requirements
post-approval
Figure 2
Emerging Markets are the Key
Drivers of Total Spending Source: IMS Market
Prognosis; KPMG
1150
1100 $1081bn
29
1050
1100
150
Total Spending $bn
950
119 -120
900
47
$856bn
850
800
750
700
2010 Brand Patent Generic Emerging Other 2015E
growth expirations Markets
Future Pharma | 4
Figure 3
Average Annual Percent Change in US Retail Prices
for Widely Used Brand Name Prescription Drugs Source: AARP RxWatchdog Report, August 2010
9%
8% 8.3%
7.9%
7%
7%
6%
6% 6.1%
5%
4%
3%
2%
1%
0%
2005 2006 2007 2008 2009
Figure 4
Speed and Intensity of Competition Source: DiMasi and Faden; Tufts Center for the Study of Drug
Development, Working paper 2009; PhRMA
Percent of First-in-class medicines with 100%
a competitor in phase II testing at the
90%
time of approval. 90%
80%
77%
70% 71%
60%
50%
50%
40%
30%
20% 23%
10%
0%
1970s 1980-1984 1985-1989 1990-1994 1995-1999
5 | Future Pharma
Future Pharma | 6
Figure 5
Industry Pharmaceutical Division Operating Margins Source: KPMG estimates
Aggregate pharmaceutical industry operating margins in USD
33%
32%
32%
32%
31%
Operating Margin
31%
30%
30%
29%
29% 29%
28%
28%
2005 2010
Figure 6
Pharmaceutical Industry post Tax cash flows Source: KPMG estimates
160,000
140,000
Industry post tax cash flow $bn
120,000
100,000
144,797
80,000 134,955
122,893
123,104
118,327
60,000
98,233
87,612
68,465
40,000
20,000
0
2003 2004 2005 2006 2007 2008 2009 2010
We believe that over the next ten years This will require a shift in how the This is likely to be uncomfortable but will
the pharmaceutical industry could industry operates, particularly regarding be, we suspect, a continuation of a
deliver growth in line with real GDP how it spends its shareholders funds process which has already started.
(3-5%), which is respectable and merits and how it communicates the value Novartis management has made a step
a higher market value than that of today. its products and delivers its services. in the right direction by discussing cash
We see a real opportunity for The industry has to demonstrate flow return on invested capital, and how
the industry to redefine itself in the that it can deliver better returns on it planned to improve it for each division,
minds of shareholders, stakeholders, investment than in the past by changing at its November 2010 Strategy &
consumers and governments. many aspects of how it operates. Innovation Forum1.
1
http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17-
generating-financial-returns-from-the-portfolio.pdf
7 | Future Pharma
Challenge 2
Low Growth Business
Environment
Revenue growth modestly
slowing in 2010-2015
The pharmaceutical industry is facing a Policy changes seen in 2010 in the US, Biologic therapies as a class are a major
future with lower growth prospects than Japan, Europe and China are unlikely to growth contributor, forecast to grow
in the past. IMS forecasts global spending be the last made as governments from $138bn in 2010 to $190-200bn by
on medicines will reach $1.1 trillion by struggle with growing budget deficits 2015, or an increase from 16% of global
2015 but the revenue growth rate will and look for ways to spend more drug spending to 18%.
slow from 6% between 2005 and 2010 effectively on healthcare, further
to 3-6% between 2010 and 2015. pressurising growth.
The impact of $120bn of
Major therapeutic classes driving product revenues losing
The impact of $120bn of product
brand growth between 2010 and
revenues losing patent protection in patent protection in major
2015 are expected to be Oncology
major Western Markets from 2010-2015
(+5-8% annually to $75-80bn), diabetes Western Markets from 2011-
will be largely matched by on-patent 2015 will be largely matched
(+4-7% annually to $43-48bn) and
brand growth, leaving Emerging Market
autoimmune diseases (+6% to circa by on-patent brand growth,
growth and generic spending as the
main drivers of global spending. Per IMS
$30bn), with continuing if slower growth leaving Emerging Market
for asthma/COPD (+2-5% to $41-46bn), growth and generic
the combined US and EUR share of
angiotensin inhibitors (+1-4% to
spending will shrink from 61% in 2005 to spending as the main
$28-33bn) and platelet aggregation
44% by 2015 and Emerging Markets will
inhibitors (+4-7% to $18-22bn), both drivers of global spending.
grow from 12% in 2005 to 28% by 2015.
for cardiovascular disease (Figure 7).
Figure 7
Forecast Therapeutic Class
Growth 2010-2015 Source: IMS Health
90
80
70
60 Oncology
$bn
50
40 Lipid lowering
Asthma/COPD
Diabetes
30 Angiotensin inhibitors
for CV disease
20
2010 2015
2
The Global Use of Medicines: Outlook Through 2015. IMS Institute for Healthcare Informatics May 2011Future Pharma | 8
Aggregate Emerging Market If Western Market stagnation/decline If the pressure on US and EU market
revenues are forecast to grow continues and Emerging Market growth lessens post the patent expiration cliff
slows to around 10% per annum then and low levels of growth return (say
at a compound 14% between
global revenues would grow on average 3%) then global growth would be 4%
2010 and 2015. 4% per annum between 2015-2020 between 2015 and 2020.
(Figure 8).
Figure 8
Pharmaceutical Industry 2010 to
2020 by Major Geographic Market Source: 2010, 2015 IMS Health; 2020 KPMG estimates
1400
$1,318bn
1200
$1,081bn GR
4%
CA 300
1000 3 %
GR 238
CA
$856bn
800
188
487
$bn
303
600 154
205 205
400 195
200
308 335 335
0
2010E 2015E 2020E
US EU EM Other
Figure 9
Estimated Industry Cost and
Margin breakdown Source: KPMG estimates
Operating Margins Peaking
2010E
and Set to Decline
We believe that the pharmaceutical Revenues 100%
industry currently achieves close to Cost of sales -25%
50% pre-R&D operating margins,
General and administrative costs -7%
on average.
Marketing & sales -20%
R&D -16%
Operating profit 32%
Pre R&D operating profit 48%9 | Future Pharma
Challenge 2
Low Growth Business
Environment
Figure 10
Estimated 2010 Geographic Contribution to
Global Pharmaceutical Sales and Profits
Source: IMS Health;
KPMG estimates
Based on data from various industry Region % 2010 global Revenues Est Pre-R&D Pre-R&D
sources we have estimated the revenues $bn margin op. profit $bn
contribution by major geographic US 36% 308 65% 200
region to industry pre-R&D
EU 24% 205 43% 88
operating profit (Figure 10).
EM 18% 154 33% 51
This table highlights the
Other 22% 188 40% 75
lower margins available
in Emerging Markets. Total 856 48% 415
Figure 11
Changing Geographic Contribution
Source: 2010, 2015 IMS Health;
to Global Pre-R&D Operating Profit 2020 KPMG estimates
Growth of Emerging Markets could 100%
result in these countries together 18% 20% 21%
90%
contributing as much to global profits
as the US by 2020 (Figure 11). 80%
12%
70% 21%
60% 21% 30%
16%
50%
40% 13%
30%
48% 42%
20%
36%
10%
0%
2010 2015E 2020E
US EU EM OtherFuture Pharma | 10
Using the assumptions shown in The importance of Emerging Markets We find that the pre-R&D
(Figure 12) we conclude that global and the pressure on margins we believe industry operating margin
margins will inevitably come under merits a wholesale review of the
could decline from an
pressure as the contribution from lower marketing and sales investment in both
margin Emerging Markets continues to growth markets and those in decline, estimated 48% in 2010 to
grow rapidly relative to the mature the personnel talent required to manage 43% by 2020.
Western Markets. We find that the these businesses and above all the R&D
pre-R&D industry operating margin portfolio being developed to supply
could decline from an estimated 48% appropriate products that payors will
in 2010 to 43% by 2020 (Figure 13). fund in these different markets over
the next 10 years.
Figure 12
Assumptions of Compound Annual Revenue
Growth and Geographic Margin 2010-2020 Source: IMS Health; KPMG estimates
2010-15 2015 Pre-R&D 2015-20 Revenue 2020 Pre-R&D
Revenue CAGR op. margin CAGR op. margin
Assumptions
US 2% 60% 0% 60%
EU 0% 38% -1% 38%
EM 14% 33% 10% 35%
Other 5% 40% 5% 40%
Global 5% 45% 4% 43%
Figure 13
Pre-R&D Profit Margins Pressured
due to Emerging Markets Source: 2010, 2015 IMS Health; 2020 KPMG estimates
This figure illustrates the profit
margin impact of the growth of 1318
the industry in Emerging Markets. Pre-R&D
margin 48%
1081
Pre-R&D
margin 44%
856
Pre-R&D
margin 43%
566
474
415
2010E 2015E 2020E
Revenues $bn Pre R&D op profit $bn11 | Future Pharma
Challenge 3
R&D Productivity
Over the past decade the Poor R&D productivity So far this year (through 7th July) 20
number of applications for The number of new medical entities new medicines have been approved
(excluding line extensions) being compared with 21 in the whole of 20104.
approval of new medical This looks like the pattern of 2005 and
approved in the US has not shown
entities being made to any trend change (Figure 15) over 2009 being repeated. There is no basis
FDA has averaged 30 per the past decade. It is hard to correlate to assume the overall number of
year. However, in 2010 only application numbers with approvals approvals is on a long term up trend.
23 applications were filed, because of the difference in approval
times. FDA data indicates that between
the second lowest number
January 2006 and October 2009 61%
in a decade (Figure 14). of new medical entity applications
were approved. Comparative data for
the equivalent European authority,
the EMEA, indicates 68% were
approved in the same period3.
2011 is looking a lot better than 2010
and could be an above average year.
Figure 14
Number of Applications for
New Medical Entities to FDA Source: FDA
Number of applications for new medical entities to FDA by year
40
35
30
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
3
http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDER/UCM192786.pdf
4
http://www.firstwordpharma.com/node/886309Future Pharma | 12
R&D productivity based on R&D spending has, however, been R&D productivity based on numbers
numbers of approvals relative climbing inexorably, running at a of approvals relative to R&D spending
compound annual growth rate of 10% is worsening.
to R&D spending is worsening. 1999-2007, although there has been a
Looking at R&D productivity another way,
significant slowdown since 2007 (CAGR
industry success rates in bringing a drug
1%). These calculations are based on
from research to market was just 4%
data for member companies of the
between 2005 and 20095. This is clearly
Pharmaceutical Manufacturers
an unsustainably low rate.
Association of America and therefore
understate global R&D spending.
Figure 15
New Medical Entity Approvals and
Annual R&D Spending 1999-2010 Source: PhRMA and FDA
40 55,000
35 50,000
Number of new US drug approval
Annual US Industry spent
30
45,000
25
40,000
20
35,000
15
30,000
10
5 25,000
0 20,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
New drug approvals R&D spent
5
Linda Martin KMR, Bernstein R&D Conference 2011, cited in Roche 1H2011 results presentation13 | Future Pharma
Challenge 3
R&D Productivity
R&D returns have Return on R&D falling The steady decline over the past 20 years
nearly halved over We have made an illustrative calculation is no surprise, but it illustrates the need to
of the post-tax return on R&D spending address the expectations of future returns
the last 10 years. over 15 years (Figure 16). from current spending both from a peak
sales perspective and from a cost of
marketing and sales support point of view.Future Pharma | 14
Figure 16
Illustrative Post Tax Return
on R&D Expenditure Source: PhRMA data; KPMG estimates
20%
18%
Post Tax return on R&D expenditure
16%
14%
12%
10%
8%
6%
4%
1991
2001
1997
2007
1992
1994
2002
2004
1995
2005
1993
2003
1990
1996
1998
1999
2000
2006
2008
2009
201015 | Future Pharma
Challenge 3
R&D Productivity
A predictable delivery of R&D Productivity We believe that there is little or no value
new drugs over a multi-year Ineffectively Assessed being ascribed to pipelines, based on
Industry focuses on numbers of projects current market capitalisations and the
period is the most likely cash flow value of on market drugs. Some
in R&D, not returns, nor forecasts
means for companies to Corporate presentation of the value of value should be allocated, although not
capture an element of their R&D tends to focus on numbers of too much given the inherent
pipeline value in their product candidates in development. unpredictability of medical research. A
market capitalisation. Mention of how much was spent rarely predictable delivery of new drugs over a
features prominently in the annual report multi-year period is the most likely means
to shareholders and we could find only for companies to capture an element of
one company, GlaxoSmithKline, among their pipeline value in their market
the industry majors that highlights its capitalisation. However, in the shorter
target return on R&D spending. term, exposition of an understandable
assessment of the returns that have been
Phrases that industry participants use to achieved and indications of why the future
describe their R&D pipelines include: returns will be better would also help.
• ‘strongest’ A systematic explanation of why product
• ‘one of the best’ candidates failed or why products had to
be withdrawn from the market and what
• ‘one of the most innovative’ was learnt from these failures would help
• ‘strongest and most productive’ show that the R&D process is more
considered than in the past and that past
• ‘uniquely broad’ mistakes are not being repeated.
• ‘peer-leading’ Some measure of scientific quality is also
needed. The best science is not always
The subjective nature of these conducted in large-capitalisation
descriptions is not unreasonable. There is pharmaceutical companies as illustrated
little numerical basis for comparison with by the industry seeking new ways to
other companies whose needs for future partner with academia6.
growth may be smaller or greater. The
recent history of the industry would
suggest that hubris is to be avoided at all
costs. The point is that these comments
and the detailed explanations of the
individual development projects give no
information about why the companies
believe that spending on these projects
will give shareholders a return greater
than the cost of capital for the company.
Or put another way, why these projects
will result in a reversal of the long-term
trend illustrated in Figure 16.
6
2 March 2011 | Nature 471, 17-18 (2011Future Pharma | 16
Challenge 4
Rising Risks and
Loss of Trust
Staying close to government Rising scientific risk We think that a systematic approach to
In the information age it is reasonable to the changing nature of government
thinking will be critical to
assume that everyone knows everything, policy in Emerging Markets is key to
securing a continuing strong reducing long-term political risk. In a
and therefore that competitors may be
position in the industry. working on similar biological targets with majority of Emerging Markets, the
similar chemical or biological entities. In consumer pays for prescription
the recent past the speed with which medicines, but governments influence
several companies have simultaneously the price paid to varying degrees.
developed new chemical entities is Staying close to government thinking
testament to this. We see it as key to will be critical to securing a continuing
understand the end game at the start: strong position in these markets.
integrate information on what value a
Rising legal risk
new drug or new drug class could bring
In spite of extensive risk management
and the attitude of those that will pay for
input to Board audit committees, there
the medicine as early as possible into the
has been a rise in the number of
development process.
settlements for violations of a variety of
We were very surprised to find that only laws as exemplified by data from the US
5/13 (38%) of major companies include a over the past twenty years with a very
Board committee with an explicit mandate rapid rise since 2003 (Figure 17, Figure 18).
to provide assurance to the Board about
the quality, competitiveness and integrity The industry needs to
of the Company’s R&D/scientific reverse these trends to begin
activities. This would seem an essential
check and balance on the path to greater
to win back confidence and
rigour in agreeing R&D expenditure given trust from consumers and
the importance of innovation. governments alike.
Rising political risk This is no small task.
Political risk in the US and the European
We suppose that the rate of increase in
Community is well understood and will
these settlements could be viewed by
be part of all companies’ planning
some as a positive, because the decks
process. There are probably no
are being cleared and historic long
expectations that pressure from
running litigation risk is being reduced.
governments to reduce the cost of
We see this as stretching the point.
medicines and of treating chronic
disease is going to reduce. The industry
is cash generative and relatively cash
rich. Working with governments to
promote innovation, while achieving
adequate commercial returns, will
be important.17 | Future Pharma
Challenge 4
Rising Risks and
Loss of Trust
Figure 17
Number of Pharmaceutical Industry Settlements
with US State and Federal Government 1991-2010 Source: Public Citizen
40
35
30
25
20
15
10
5
0
1
01
7
07
2
4
04
02
5
05
3
03
6
06
10
8
9
00
08
09
9
9
9
9
9
9
9
9
9
20
20
19
19
19
19
20
19
19
19
19
19
20
20
20
20
20
20
20
20
The value of these settlements has also risen dramatically over the past decade.
Figure 18
Value of Pharmaceutical Settlements with
US State and Federal Government 1991-2010 Source: Public Citizen
5000
4405
4500
3976
4000
3517
3500
3000
$bn
2500
2000
1441 1445
1500
967 999 1067
889
1000
404 549
500
10 22 1 0 10 7 4 3 100
0
91
01
97
07
2
94
4
02
95
05
93
03
96
98
99
00
06
08
09
10
9
0
20
20
19
19
19
19
20
19
19
19
19
19
20
20
20
20
20
20
20
20Future Pharma | 18
Rising personnel risk Loss of Trust
The changing nature of the growth drivers Pharmaceutical companies have created corporate priorities, corporate
within the pharmaceutical industry and the perception that they put their responsibilities and of the risks that the
the cultural shift in how the industry commercial goals above the interests company is prepared to take and why.
spends money, suggests to us that there of governments, payors, prescribers
is rising personnel risk. Risk because the and patients and lost the trust of these Stakeholders need a
best qualified staff may be tempted by stakeholders. Investors too remain clear understanding of
competitors, or by opportunities for sceptical of the longer term outlook the risk profile to which
career development. Risk because the in the wake of serial R&D pipeline
they are exposed either as
wrong staff may be retaining key disappointments. Justified or not, the
management positions for too long. pharmaceutical industry faces a sceptical employees, shareholders
Risk because senior management has audience regarding the integrity of its or both.
not asked the hard questions of its commercial operations. Golden
There are many new relationships to
employees frequently enough. It could parachutes that reward executives in
develop with government agencies in the
be argued that Boards of Directors and spite of poor performance exacerbate the
growth markets, in addition to increasing
executive management should put in situation. Fines, court cases and product
complexity in relations with governments
place plans to increase the diversity of withdrawals are all prevalent and serve
and payors in established markets.
senior talent to match the evolving needs to draw attention to the industry’s
Improving these relationships and
of the global healthcare market. In weaknesses. This situation can be
avoiding the creation of new risks can
addition a review of management changed as part of a series of
best be achieved by adopting better
structures would also seem essential to transformational steps in both the
standards of governance at all levels
the growing importance of Emerging operations and culture including better
of the industry.
Markets not only as growth drivers, but internal and external communication of
also as important sources of scientific
and medical research talent.19 | Future Pharma A Vision of the Pharmaceutical Industry in 2020 and Beyond
Future Pharma | 20
A Vision of the Pharmaceutical
Industry in 2020 and Beyond
Companies that can Having laid out some of the key In addition, the pharmaceutical industry
demonstrate the value their challenges that we believe the industry is has a significant opportunity to play an
facing, we outline a vision of the how the important role in the broader healthcare
products (and services) industry might look in 2020 and beyond. “ecosystem” as the pressures to
bring to patients will be We believe that to be successful in ten reduce cost, improve quality, and
able to access broad patient years’ time companies will need to be increase access to care impact nearly all
populations in both Western different from today in the way that they countries’ healthcare systems. Payment
and Emerging Markets. are organised and operate. (Fig. 19) for healthcare products and services,
which has historically been based on
Companies that can demonstrate the
unit or episode, is expected to move to
value their products (and services) bring
a new economic system that rewards
to patients will be able to access broad
demonstrably better health outcomes
patient populations in both Western and
and lower costs. In this scenario, the
Emerging Markets. Scale will still be
interests of the pharmaceutical industry
important but marketing muscle alone
would converge with those of healthcare
will not be sufficient.
providers and payers in increasingly
Companies with the courage to price integrated delivery and financing
according to ability to pay and not solely models. Given pharmaceutical
wedded to a global high Western based companies’ deep knowledge of testing
price will reap the volume benefits, as for and measuring quality outcomes and
example GlaxoSmithKline has reported related costs, the industry can play a
following an Emerging Market price cut significant role in the evolving, broader
for anti-allergy medication Avamys.7 healthcare enterprise.
Figure 19
Future Industrial Success Factors Source: KPMG estimate
Bases of competitive advantage today Bases of competitive advantage in 2020
Development resources, sales and marketing scale Value of products and services, distribution strength
Global high prices, restricting access Pricing based on ability to pay driving volume uplift
Multiple competitors in major therapeutic areas,
Fewer competitors in a broader range of diseases
scale permitting success
Multi-billion dollar drug revenues covering high fixed costs More products with lower revenues and lower costs
Significant outsourcing of operations such as manufacturing
End to end operational capabilities for “self-sufficiency” strategy
and support functions
Acquisitions of technologies and products to augment
Greater collaboration with academia, biotech and peers
product pipeline
Focus on mature Western Markets Focus on Emerging Markets
7
http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf21 | Future Pharma
A Vision of the Pharmaceutical
Industry in 2020 and Beyond
Historically, companies have faced We see this trend slowly reversing per disease. New biological targets are
competition at an ever increasing pace because of the need to focus R&D being identified for less common but
because markets have sustained spending on the most differentiated debilitating or life threatening disease for
multiple products with little or products. The growth of which no treatments exist, including rare
no differentiation (Figure 20). biopharmaceuticals is also likely to have diseases. In these areas we expect
an impact on the number of competitors fewer competitors.
Figure 20
Competing Medicines
Race for Approval Source: Tufts Center for the Study of Drug Development; PhRMA
12 The average time a medicine is the only drug available in its
therapeutic class has declined dramatically – from more than
10 10 years in the 1970s to less than 2 years by 1998
Median number of years
8
6
4
2
0
1970s 1980s 1990s
We think that by 2020 there will be more According to a recent report from the tests will be much more common and
products selling less on average than Centre for Medicines Research there will be integral to development, market
today as a result of more targeted were 55 phase III drug terminations access and penetration. More risk
therapies and the genericisation of many during 2008-2010, more than double the sharing with other industry participants
of the major primary care therapeutic number of terminations during 2005 – should help improve research
areas. But new products should have 2007; and in addition the number of drugs productivity. The creation of ViiV
better returns on capital thanks to more entering phase III clinical trials fell by 55 Healthcare by GlaxoSmithKline and
efficient development spending, fewer per cent in 20108. We see a growing trend Pfizer, should provide both companies
failures and much lower levels of for large pharmaceutical companies to with a better outcome for their HIV
marketing and sales investment. bypass the small biotechs and forge therapies than either going it alone and is
collaborations directly with academia. We a good example of how to retain
The scarcity of new product opportunities
see leaner organisations with networks intellectual capital on the one hand and
has driven up the price to in-license
of academic collaborations and small access a commercial platform for a
development stage compounds. But the
company partnerships fuelling the development assets on the other.
problem is that the failure rates have been
research process and more focused Companies will need to maximise
rising for all late stage compounds and
development organisations using the return on differentiated
are higher for in-licensed compounds
genomic profiling allowing smaller clinical research skills and avoid losing
than for in-house projects.
trials to be conducted with more power intellectual capital.
and at lower cost. Companion diagnostic
8
CMR 2011 Pharmaceutical R&D FactbookFuture Pharma | 22
A predictable delivery of Companies in the industry have already Returns need to be more predictable
new drugs over a multi-year started unpicking, to various degrees, and with the optional upside from
their long-established network of internal serendipitous discoveries not based
period is the most likely capabilities that were built up during the on the need to be creative to order.
means for companies to heady days of free pricing and less
Shareholders need to see an explanation
capture an element of their competition. We see this trend
of the returns on historic R&D spending
pipeline value in their accelerating, with the potential for
and the criteria for future returns to
market capitalisation. significant portions of not just primary
believe that R&D spending is worthwhile.
manufacturing being outsourced. It is of
Boards of directors need to believe this
note that the markets to which many
even more and sooner.
capabilities are being outsourced are the
very same Emerging Markets that are Successful companies in 2020 could
driving industry growth. pursue either a diversified or a specialist
business model; the key will be to
Emerging Markets will be the drivers of
maximise the individual company’s
industry growth and successful
strengths, to improve internal processes
companies beyond 2020 will have deep
and to understand if the company’s
local relationships including significant
product offering and future product
investments in R&D facilities, as well as
offering deliver sustainable value to
the already growing manufacturing
its customers.
investments in these key markets.
Clear articulation of the strategy both to
We believe that there is a significant
access Emerging Market growth while
opportunity for creating shareholder value
not missing opportunities in mature
by rebalancing the risk that shareholders
markets will be needed to persuade
perceive they are taking with more
shareholders that companies have
predictable rewards from better
moved on from the old pharma model.
organised and governed companies.
Trust needs to be restored. Visibility
and honesty will be key to achieve
this. Simpler, less complex businesses
will make this easier.
Figure 21
Potential Success Factors in
Creating Shareholder Value Source: KPMG estimates
Bases of competitive advantage in the past / Today Bases of competitive advantage in 2020
Serendipity and scale drive returns from R&D More predictability and efficiency drive returns
Portfolio with range of IRR forecasts based on
Number of R&D projects the basis for a ”strong pipeline”
historic track record
Emphasis on earnings per share growth Emphasis on volume/revenue growth
Inadequate articulation of systemic risk Risk better governed and managed
Unintended complexity Transparent and simpler business model – easier to understand23 | Future Pharma
A Vision of the Pharmaceutical
Industry in 2020 and Beyond
Scientific and medical research is through share repurchase or enhanced
unpredictable and serendipitous dividends is a positive use of excess
discovery will continue to occur. free cash flow, it is not likely to be
However, the competitive nature of the rewarded by a high valuation.
business now (likely to be even more
so by 2020) means that in our view a
We think successful
greater element of predictability needs
to be introduced to regain investors’ companies in 2020 will have
confidence in the value the sector can a more dynamic approach to
deliver. Show regular and steady risk reporting, with greater
growth. Minimise business surprises. disclosure of potential and
R&D in 2020 will be a much more actual risk.The industry will
numerically driven process than today. be perceived to be better
We cannot see any way to justify the governed as a consequence.
spending needed without better
measures of the historic return on
Lastly, we see an industry in 2020
capital based on IRR. The seeds of a
that will be simpler for investors to
new approach are being sown, for
understand not because it will be
example at Pfizer9, Novartis10.
structurally simpler; developing new
The dominance of Emerging Market medicines will be an ever more complex
economies by 2020 could result in a process. But because the geographically
shift back to volume growth as a key diverse nature of its business will
measure of performance, with earnings increase with the growth of Emerging
growth following. Improving efficiency Market influence, the pharmaceutical
is the right strategy, but until it is industry could take on the appearance
accompanied by sustainable revenue of a high value consumer products
growth it is not likely to see the industry to its shareholders.
industry‘s valuation expand, all other
factors in the stock market being equal.
While returning cash to shareholders
9
http://www.pfizer.com/files/investors/presentations/barclays_capital_031711.pdf
10
http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17-changing-
the-practice-of-medicine.pdfFuture Pharma | 24
25 | Future Pharma
5
Strategies to
Accelerate the
Transformation of
the Pharmaceutical
Industry by 2020Future Pharma | 26
Strategy 1
Reassess Product Strategy
The driver of industry growth is The recent volume increases reported by There is an argument for focusing
Emerging Markets. While these some companies for products for which business strategy on delivering high
markets are currently being driven by prices have been substantially reduced value modern medicines to Emerging
the growth of classic primary care indicate in our view the path the industry Markets at much lower prices than have
products for major diseases – the very must pursue in the long term although been accepted in Western Markets.
therapeutic categories that are being balancing the need for affordable prices This would underpin a root and branch
genericised in western markets, this with the risk of commoditisation. Value reassessment of the costs of bringing
situation is unlikely to persist. There is delivery must be demonstrable. these medicines to market, the marketing
therefore a strategic dilemma because and sales support required and the risk
most companies do not possess an Products must take of counterfeiting and parallel trade.
ideal Emerging Markets portfolio. into account the needs This should drive strategy in clinical
To what extent should investment in of consumers in development, location of trials,
today’s needs be made versus the longer Emerging Markets. marketing plans, sales infrastructure
term? Because in the longer term, the and manufacturing investment. The
key Emerging Market consumers and Emerging Markets offer largely blank opportunity for biologic therapies
governments will want access to slates; the continuing application of an for cancer for instance is very large,
the very best medicines, but it is adapted “old Western” model of the drug providing the right pricing strategy
inconceivable that they will be prepared industry, which is currently ongoing, will can be developed12.
or able to pay the prices currently paid in miss a significant opportunity to redraw
Emerging Market governments are
the US or even in Europe. The volumes how the industry interacts with patients
moving rapidly to increase medical
and therefore the costs would simply be and governments.
consumer spending. The “established”
too high. There could be twice as many
branded generic Emerging Markets
people with income above $10,000 in
growth route could run out of steam as
the top 13 Emerging Markets compared
generics become commoditised. This
with the US and EU combined11.
suggests that every possible opportunity
to drive consumer/OTC business in
Emerging Markets should be explored in
addition to a focus on speed to market,
lowering the costs of development
and efficient delivery of appropriate,
differentiated quality prescription products.
11
http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf
12
http://www.roche.com/investors/ir_agenda.htm?tab=2 Sanford Bernstein Conference 1st June 2011, p1027 | Future Pharma
Strategy 2
Invest in the Marketing and
Sales Infrastructure of 2015
and Beyond
Accelerate the modernisation of selling Many companies have started to address Focus on the longer term
and marketing in mature markets the need to reduce marketing and sales in Emerging Markets
New technology has come relatively infrastructure in mature markets of the US Emerging Markets are not going to
slowly to the pharmaceutical industry. and Western Europe. However, we think replicate the development of the
Now the challenge for the pharmaceutical the pace of change could be accelerated Western pharmaceutical markets of the
industry is to balance innovation and and may be a key component of last 25 years but will take new paths
creativity in its use of new technology preserving margins in the face of defined by the pressures from large
against perceived value and the cost of increasing pressure on price. New populations, rapid growth of both
creation. The key is mapping the new technology, such as the iPad, is enabling personal and national wealth but also
technology opportunity with the business greater efficiency according to several the clear need for individuals and
in a sustainable and updatable way. companies including Novartis13, Otsuka14. governments to balance spending on
Pfizer launched an iPhone app to healthcare with multiple other demands.
Integrating flexible technologies such as encourage doctors to send questions
QR barcodes as a means for doctors to directly to the company15 and AstraZeneca Business leadership in key growth
communicate with the industry using has an iPhone, iTouch and iPad app to help Emerging Markets needs to develop a plan
smartphones is one example of how educate healthcare professionals with for investment in the markets that these
technology investment could make a genetic testing for lung cancer16 . key countries will become, not those that
sales force more efficient. It provides AstraZeneca also recently launched a live they are today. Merely adding more and
a more rapid and flexible response click-to-chat function on its US Crestor more sales reps on the ground in a
mechanism for a physician to contact and Nexium consumer websites17. traditional model does not seem an
the pharmaceutical company than appropriate strategy for the future. It could
simply ticking a box or even filling The basis for assessing marketing be valid to build a presence but the pace
in an online form. and sales effectiveness needs to of change is such that plans should be
be addressed. regularly reviewed and realigned.
Partnership with technology companies
could be a route to more rapid We see communication of evolving
integration of modern technology corporate strategy in the face of the
platforms. Potentially partnership with rapidly changing industry as essential.
consumer companies might also reveal This is no straightforward or simple task
opportunities for greater efficiency. and merits a major commitment from
executive management.
13
http://www.pharmalot.com/2011/03/novartis-the-ipad-35000-more-visits-to-docs/
14
http://www.bloomberg.com/news/2010-06-08/ipads-to-help-otsuka-pharmaceutical-sales-force-market-drugs-
to-doctors.html
15
http://www.pharmalot.com/2010/06/one-more-way-to-minimize-the-sales-rep/
16
http://www.astrazeneca.co.uk/Media/latest-press-releases/2010/FIRST_IAPP_TO_HELP_EDUCATE_HPa_ON_
EGFR_GENETIC_TESTING?itemId=12167029
17
http://astrazeneca-us.com/about-astrazeneca-us/newsroom/all/12379170?itemId=12379170Future Pharma | 28
The diverse nature of Emerging Markets At the same time there is likely to be a From a survey of the websites of the 13
merits a careful refinement of investment government push to increase use of OTC companies that we define as the large
strategy; while Brazil, Russia, India, drugs sold at retail pharmacies. These capitalisation pharmaceutical industry,
China, Mexico and Turkey may contribute moves by government will very likely 15% have a blog, 54% are on Facebook
half of Emerging Market sales, dozens result in material changes in the Chinese and 77% are now on Twitter.
of other smaller markets make up the market and will need different
However it is clear that there is an
other half. infrastructure from 2011 to maximise
opportunity not only to lead the
long term returns.
One recent example of the need to plan regulators and help develop regulatory
for change can be found in China. An Accelerate development and policy but, for internal planning purposes,
important element of the historic growth integration of social media being prepared to use social media
experienced by most international and mobile-health policy might be a key competitive advantage
companies has come from branded The pharmaceutical industry has lagged in many markets.
generics, where the manufacturer’s other major industries in its use of social For instance Emerging Market
name is a proxy for high quality. Branded media. At face value this is understandable penetration of social media use is higher
generics have enjoyed higher prices given the high levels of regulatory than in Western markets, with over
(referred to as separate pricing) than local scrutiny imposed on all aspects of the 70% of the population of the Philippines
equivalents that are limited to a lower industry’s interaction with patients, and Malaysia for example as active
maximum price (known as general prescribers and payors. online users.
pricing). A new price list issued in
November 2010 reduced separate pricing Since 2009 there has been a significant
on nearly 50 drugs out of 200 on the investment in social media.
Essential Drug List. It is believed that
separate pricing could be reduced or
eliminated across the board over the
next 4 years.
Figure 22
Social media use by Fortune
100 Companies in 2009 Source: Burson-Marseller: Social Media Use by
Fortune 100 Companies 29th July 2009
Percentage with Percentage on Percentage on
Industry
a blog Facebook Twitter
Telecommunications 75% 100% 100%
Computer, office
67% 100% 67%
equipment
Specialty retailer 50% 50% 100%
Food and drug stores 17% 33% 50%
Pharmaceuticals 33% 0% 33%29 | Future Pharma
Strategy 2
Invest in the Marketing and
Sales Infrastructure for 2015
and Beyond
Figure 23
Global Social Network Penetration Source Global Web Index
80%
70%
60%
% Active online users
50%
40%
30%
20%
10%
0%
a
s
il
ia
ng ia
e
nd
K
Av S
on ico
ng
da
Au a
lia
ly
s
n
y
ce
a
n
e
a
az
si
ne
an
in
nd
re
or
ai
ag
pa
U
U
si
ss
d
Ita
ra
na
an
la
Ko
ay
In
ex
Ch
Sp
Br
Ko
ap
ne
m
pi
la
Ja
Ru
er
st
Po
Ca
al
Fr
M
lip
er
er
g
do
h
M
h
G
i
ut
Ph
Si
et
In
l
H
So
ba
N
lo
G
Source Global Web Index greater voice and empowering Patient groups are becoming more
The rising power of patient groups in the individuals, with a potential impact at organised, better informed, and
data age will continue at pace. If the all levels of healthcare provision and connecting across borders using social
past five years has seen the industry delivery. The use of social media offers media. Greater interaction with such
focus on regulatory and reimbursement the industry a route to restoring trust groups in a structured way should
outcomes then the next five years with patients from its current low ebb18. benefit all aspects of the pharmaceutical
should see a greater emphasis on how development process and the safe and
The industry needs only to look back
to improve the outcome for patients. appropriate use of medicines
in history at the power exerted by
The spread of social media use seems once marketed.
organised patient groups (e.g. in the
certain to be giving patient groups a
fast-tracking of the first AIDS drugs).
18
Financial Times 12th March 2010, Patients’ groups distrust ‘big pharma’Future Pharma | 30
Strategy 3
Acquire more Talent and
Experience from other Industries
The growth markets of the future look This could cover all major business areas.
more like consumer brand driven markets Manufacturing and administration are
than the traditional pharmaceutical areas in which new talent has been
markets of the 20th century. This begs recruited by some companies but the
the question of what leadership talent will need for greater urgency is pressing.
be required to capture the opportunities Even in R&D there have been some very
presented by these new markets while successful hires of highly skilled academic
maximising the most efficient returns researchers to lead drug discovery.
from mature Western Markets.
Our research indicates that in aggregate We believe that senior
less than 20% of executive team management in the industry
members within the industry have come should actively seek talent
from outside the pharmaceutical industry
within the last 5 years, within a range of
and experience from outside
0%-50%. The most common role now the traditional group of
filled by individuals with industrial pharmaceutical competitors.
experience from outside the
pharmaceutical sector is that of chief However, it could be argued that looking
financial officer. The impact of the for fresh approaches to key account
attendant fresh thinking has been visible management in the changing world of
on how individual companies spend marketing and sales is the business
shareholder funds and the scale and activity with the greatest need, given the
speed of efficiency programmes. shifting nature of both traditional Western
and Emerging Markets. In particular
More diversity of talent regional and country management would
throughout any given benefit from having experience from
other sectors, as opposed to just from
organisation should enhance the pharmaceutical industry. With the old
and strengthen the business. “sales rep calling on doctor” model now
being gradually consigned to history, we
believe that the industry should look to
import key account management
techniques from other sectors,
notably in the consumer space.31 | Future Pharma
Strategy 4
Use Internal Rate of Return to
Prioritise and Rationalise the
R&D Portfolio
Research spending is the minor part of Development spending and the post If more efficient development can be
industry R&D investment (circa 30%). launch investment needed to deliver achieved, and marketing and sales
It should be reviewed for how and why acceptable returns is the big issue. practices are modernised, lower peak
spending is taking place but also scrutinised revenue numbers will still permit internal
We believe all companies should have a
as to who is doing the spending i.e. the rates of return well above the industry’s
standardised approach to be able to show
quality of the individuals leading cost of capital.
on an ongoing basis what internal rate of
the projects.
return (IRR) has been achieved on past
This scrutiny, which could be along the lines investment and an internal perspective on There is also a need to be clear
of “is this best biology/best molecule/best what range of returns is forecast from the about the true cost of capital
target and are these the best people”, begs current investments, and what
the question of how do you know that you assumptions are used in these projections.
for any individual company.
have the best of anything?
Such analyses should also include off
It is hard to believe that every late stage
Patent applications filed, scientific papers balance sheet funding through partnerships
portfolio in the industry is optimal and that
published (and the proportion in the and minority investment in third party
none of the projects carries a potentially
prestigious journals, such as Nature and companies (typically development
marginal or negative return. We
Science), and the number of times stage biotechnology companies).
recommend re-evaluation of the value
scientists working in research have been
We believe this type of IRR based proposition of all phase II, phase III and
cited by their peers all spring to mind as
information could transform the registration assets on an IRR basis.
potential measures of quality. Assessment
investment decisions recommended by
by an independent panel of experts is a This review should include a detailed
senior management in the industry and
further possibility. review of the assumptions that
signed off by boards of directors.
supported development of these
assets. Consideration could be given
to whether the forecast returns could
be improved by partnerships or
co-marketing arrangements.Future Pharma | 32
We think that the most successful
We also recommend the following actions as part of the R&D review:
companies have complemented their
scientific agenda with business • Set up an R&D team with the express role of working out how to beat
performance management goals and an the company’s key innovative compounds - an internal fast follower team
integrated approach to R&D Finance.
• Assess whether the compounds with the highest potential return are
R&D Finance is key to reducing
optimally funded to bring them to market as rapidly as possible with the
operational obstacles that slow the
best possible label
progress of product candidates to
market by timely analysis and financial • Consider introducing an external perspective to this process
review through the introduction of early
• Host an internal R&D day for all R&D employees worldwide to showcase
warning indicators and go/no go
their research to each other and drive higher levels of collaboration
checkpoints based on financial
analysis and evaluation. • Clearly articulate policy on collaborations, both with academia, with
biotechnology companies and smaller pharmaceutical companies as
well as with peers
• Look for ways to maintain a return on the intellectual capital built up during
a periods of success in any given therapeutic area. Too often companies
discard this intellectual capital once patents have expiredYou can also read
