March 1, 2009 (Vol. 29, No. 5)

Carolyn Buck-Luce
Mark B. Hassenplug

Vision and Boldness Are Needed to Execute a Winning Strategy in the Near Future

The U.S.-based pharmaceutical industry received a sliver of good news last year when first-of-a-kind drug approvals in the U.S. reached a three-year high. Twenty-four drugs were approved during 2008, compared to only 18 in 2007.

Most in the industry, however, would likely find little solace in this achievement. Drug approvals have been on a steady decline for the past decade, and there is a wide consensus that current R&D funding models have become unsustainable given recent economic realities. The need to reenergize pipelines has become even more pronounced with more than three dozen drugs totaling approximately $67 billion  in annual sales facing patent expiration within the next few years.

Ernst & Young’s recent report on the pharmaceutical industry, Progressions—Executing for Success: Powering New Business Models, revealed the results of a global survey of senior executives at 15 major pharmaceutical companies.

These findings further demonstrated the extreme pressure that executives are facing to increase their levels of R&D productivity. Almost three-quarters of executives interviewed cited the thinness of their product pipelines as their top concern. When asked about the most important initiative under way in their organizations, 66% of executives listed reinvigorating R&D.

Pharmaceutical companies have long recognized the need for new approaches to increase the quality and effectiveness of their portfolios given the confluence of challenges contributing to the dearth of robust pipelines, but there is little evidence that significant progress has been made.

Furthermore, few companies have adopted the types of organizational and functional changes needed to drive innovation and to better demonstrate the value of their products. The findings from Progressions, however, indicate that the industry is beginning to experiment with ways to optimize R&D engines more aggressively.

A recently conducted survey of senior executives at 15 major pharmaceutical firms revealed six key pressure points.

Restructuring R&D

For many years, the monolithic structure of most large pharmaceutical companies has been seen as the cause of the industry’s pipeline drought. To mirror the business models and underlying culture of their biotech counterparts, more and more pharmaceutical companies are restructuring R&D units as a means of fostering increased autonomy among research teams and to drive internal competition.

These experiments have resulted in new R&D units as small as 60–80 people in some organizations. Additionally, early returns have shown a positive impact on collaboration between and energy among team members.

In 2008, there was a growing recognition within the industry that the long-standing, fully integrated pharmaceutical company model (FIPCO), which covers the entire life-cycle of value creation from drug discovery to development and distribution, may no longer fit with the complex disease states being studied.

With an increased emphasis on speed and efficiency, companies have embarked on partner-driven models, built on an intricate web of advisors, service firms, academic centers, and other third parties. These new models can shorten the development time for promising candidates and enable the importation of new creativity while allowing for shared risk and reduced costs.

Targeting Therapies

Current economic realities have also led companies to abandon researching across multiple disease fronts. Instead companies are betting on select therapies considered to have high growth potential and pricing flexibility. To further align R&D efforts to patient needs and payor demands, some organizations are bringing their market-facing teams into the development process at the earliest stage to assess market need before investing additional time and resources in candidates.

Talent Pipeline

Despite the industry-wide quest for boosting pipeline productivity demonstrated in the findings from Progressions, there was a glaring lack of executive focus on what many would consider to be the most important driver of innovation—the people within the organization.

The industry as a whole has yet to consistently transform its method for fostering talent pipelines within individual organizations. This transformation has become more imperative as a result of the mass layoffs that have dislocated a generation of upper-middle management and senior-level executives whose expertise will be difficult to replace as the global financial environment recovers.

The challenge to attract and retain top talent will be further complicated by dramatic changes in global demographics, such as the impending U.S. baby bust, that according to research will reduce the number of 35- to 44-year-olds in the workforce by 15% by 2015. Companies able to tap into an increasingly diverse and multicultural global workforce will have a tremendous advantage in the race for innovation.

2009 will represent a crossroads year for many members of the pharmaceutical industry as they grapple to get organized to face a plethora of industry issues and the new reality of the global economy. Industry leaders are searching for new ways to transform business models to drive innovation, and the global financial crisis is accelerating the timing for executives to move forward with this change mandate.

Despite the challenges ahead, the fundamentals of the industry, particularly on a global scale, have never been better. Companies with the vision and boldness needed to execute a clear strategy will be able to capitalize on tremendous opportunities, regardless of the path they choose.

Carolyn Buck-Luce ([email protected]) is global pharmaceutical sector leader, and Mark B. Hassenplug ([email protected]) is global pharmaceutical markets leader at Ernst & Young. Web:

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