With current global financial conditions and the threat of a broad recession, the world’s largest drugmakers must accelerate their timetables for implementing transformational changes in their organisations, Ernst & Young’s bi-annual global pharmaceutical report has warned.
In the face of unprecedented challenges related to patent expirations, pricing and regulatory pressures, thin late-stage pipelines, shifting demographics, efficacy issues and globalization, the majority of companies have announced major strategic shifts and choices that have the potential of transforming the business and the business model. However, most of them have yet to adopt the organizational and functionality changes needed to power these new models, it says.
“Many companies are facing initiative overload and need to find a way to increase the speed of change by prioritising, allocating resources effectively and exercising rigor in project management,” says Pamela Spence, UK pharmaceutical leader at Ernst & Young.
The report’s global survey of senior executives from 15 major drugmakers finds that improving new product flow is now their top priority, with 72% reporting that the “thinness” of their pipelines is a chief concern. Other top pressure points include producing and sustaining products of value in the current demanding marketplace (47%), pressures of global regulatory authorities (44%) and the redefinition of the customer and rise of payors (36%).
The study also found that pharmaceutical executives are aiming to rely less on cost-cutting campaigns that ignore or imperil long-term growth plans and are exploring more strategic, sustainable approaches in order to create lasting cost advantages. Only 40% of the executives polled said that optimizing costs was their most important initiative; in 2007, 92% of executives had ranked cost reduction as their priority initiative.
“Growth in emerging markets will play a key role in driving product flow, although this strategy does not come without risks,” comments Ms Spence. “Companies need to consider how they are interacting with third parties across their value chain including distributors, healthcare professionals and policymakers to ensure that the nature of these interactions meet the high standards of compliance required,” she adds.
The new research also reveals that industry leaders are searching for new ways to transform business models to drive innovation and better demonstrate the value of their products. 66% of the executives interviewed reported that reinvigorating R&D is the most important strategic initiative currently underway in their organizations, while 40% ranked expansion into new markets and becoming more customer-centric as their primary areas of focus.
Although the strategic changes should be transformative in making the business much more effective, most pharmaceutical executives are not fully advancing more radical business model shifts, the survey reveals. Transforming the finance function is a critical first step in preparing to implement the kinds of broad organizational and business model changes now needed, the report advises.
“To deliver real value to shareholders, the finance function of the future will be tasked with driving more sophisticated financial strategies. Real financial leadership will come from the application of different weighted costs of capital to different parts of the business that have fundamentally different profiles. This will drive decisions that are more specifically targeted on value creation,” says Ms Spence.
