Global Pharmaceutical Industry at a Crossroads

MUNICH, German, July 7, 2008 - Times are getting ever tougher for pharmaceutical companies. New registration procedures and the restructuring of healthcare systems are changing the industry and causing fiercer price competition. Many companies are being forced to radically rethink their business models. The Roland Berger study "Pharma at the crossroads – Choosing directions in a transforming healthcare world" analyzes the trends and key issues for international pharmaceutical companies that focus on patented prescription drugs. The participating companies represent more than 50% of global drugs sales, and 20 out of the 30 largest pharmaceutical groups.

The study "Pharma at the crossroads" is based on questionnaires, fifty face-to-face interviews with top decision makers from leading global drugs companies and data research. Most participating companies recognize that the traditional pharmaceutical business model is coming under massive pressure. Those surveyed see strategic opportunities primarily in two areas: first, pharmaceutical companies should develop into integrated healthcare service providers, and not just sell products. Second, they should further increase innovation and efficiency through more intensive cooperation with external providers. The changing healthcare systems in different regions of the world are a key driver of change in the industry.

Regional differences
With USD 315 billion, the US will continue to be the main market for pharmaceutical companies. Yet in light of expected cost-cutting in the US healthcare system, this market also has the highest risks in the world. Roughly half the respondents said their US profits will decline in the medium to long term. About one-third of them say that getting drugs registered is a major problem at the moment. In the EU, lengthy reimbursement procedures and pricing both cause 28% of the companies surveyed a headache. In Japan and the BRIC countries, about one-fourth of the participants say pricing is a problem. The UK is considered to be at the forefront in the areas of market access and reimbursement, not least because it is home to the National Institute for Health and Clinical Excellence (NICE). More often than not, it shows drugs companies the future of market access and reimbursement.

Opportunities for further growth and profitability
The industry sees the key levers for further growth and profitability in tapping the BRIC countries' growth potential, driving the development of outdated marketing and sales models, and further intensifying Innovative capacity through research and development.

BRIC countries are the growth markets of the future
22% of the respondents say the BRIC countries are key growth engines for drugs companies. Almost all companies have launched projects and structures designed to help shape their emerging healthcare markets and secure a promising market position. "These markets also offer the opportunity to get to know a healthcare environment that is more narrowly tailored to consumer needs. This kind of experience is becoming more and more important in traditional markets," says Stephan Danner, the Partner responsible for the pharmaceutical practice at Roland Berger Strategy Consultants.

Marketing and sales business models under pressure
Many pharmaceutical companies have started to rethink their marketing and sales business models to face the new challenges. Changing customer and decision-making structures, as well as intensifying cost pressure are forcing the industry to give up their traditional business model focused narrowly on physicians. They say it is more promising to focus more on payors as well as on innovation and clinical product differentiation. In addition, more flexible structures and outsourcing are considered the most effective actions for increasing profitability. In conclusion, 45% of the respondents expect to fundamentally revise their marketing and sales models again in the next year or two.

Innovation from outside
Expiring patents and the lack of new developments are a threat to many drugs companies' product portfolios. This is especially true for the industry's giants. To them, depending heavily on individual blockbusters is a real danger because many patents are expiring. When it comes to ensuring innovation and, with it, timely product portfolio regeneration, there is a clear trend: 41% of respondents prefer outsourcing innovation (buying individual licenses or entering into partnerships). 39% think buying whole companies is the best approach, especially in the biotech area. Only 20% think in-house R&D is the most efficient source of future innovations.

Cost cutting is a top issue
Pharmaceutical companies have been cutting costs over the past two years, especially in sales (69%), production (59%), distribution and logistics (59%), marketing (57%) and chemical production (41%). They say the largest potential for further cuts is in marketing and sales. About 25% of the respondents say that this is even more than 10%. "Many managers still think that they can cut costs fast and effectively by isolated actions. This may give them a short breather, but in the long term, they must examine their entire value chain," says Aleksandar Ruzicic, co-author and Principal at Roland Berger.

More and more companies have realized that they need to fundamentally rethink their value creation structures. This effort should always be based on their own core competencies: Top executives think these will continue to be in marketing and sales as well as research and development. Companies are also starting to develop more outsourcing strategies along the entire value chain. This indicates how the industry could develop, given that its vertical integration is still exceptionally high compared with other industries.

Outlook
The pharmaceutical industry will be facing massive change over the next few years. The US will continue to be the main sales market, but the up-and-coming BRIC countries will become much more important. At the same time, price and innovation pressure will continue to intensify. To hold their own in a fiercely competitive market, pharmaceutical executives must answer the following questions: What are our core competencies that help ensure innovation and growth? Where does outsourcing make sense? How profitable is the service business for third-party customers??? In the past, top executives usually said the answers to these questions are to found in a fully integrated business model. Drugs companies have now started to think again. "The pharmaceutical industry does not have a vision for the future. The answers to these fundamental questions will make or break the players in the industry," says pharma expert Danner.

Contact:
Roland Berger Strategy Consultants GmbH
HighLight Towers
Mies-van-der-Rohe-Str.6
80807 Munich
Germany

Phone +49 89 9230-0
Fax +49 89 9230-8202

Posted: July 2008


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