2013 Life Sciences (Pharmaceuticals) Industry Perspective

The year 2012 will soon pass into history, and what a year it was for biopharmaceuticals. In the United States, the Supreme Court affirmed the new healthcare reform law and exempted pharma companies from sales force overtime rules, the Food & Drug Administration (FDA) approved the first obesity drug in 13 years with Belviq, and billions of dollars changed hands as a result of government settlements. In emerging markets, there were new requirements for joint ventures and local manufacturing, and the Chinese government announced price cuts averaging 17 percent for many cancer drugs, with a list of more medications to follow. In India, the industry faced a different type of regulatory headwind; the patent office ruled against the intellectual property rights for several notable drugs, including Pfizer’s Sutent, Bayer’s Nexavar, Novartis’s Glivec, and Roche’s Tarceva. A still more daunting challenge came from Europe, where mandated austerity measures have led to drug price reductions in countries such as Finland, Ireland, and Italy; in other countries, including Spain, the larger co-pays established by governments have led to significant decreases in prescription drug sales. The uncertainty of this moment is exacerbated by the patent cliff: Loss of exclusivity among popular prescription drugs will put US$250 billion of global sales at risk between 2012 and 2015.

With all of this going on—along with a continued roller coaster in Alzheimer’s medication, a few high-profile M&A deals, and changes in chief executives at Johnson & Johnson and AstraZeneca—it was easy to overlook the most positive trend for the industry this year: a host of significant changes that should ultimately benefit most pharmaceutical companies. These included the following:

• Exciting advances in scientific technology, evidenced by more than 25 new molecular entity approvals by the FDA through September, and real enthusiasm for innovations such as Trastuzumab-DM1 (T-DM1) in oncology, Janus kinase (Jak) inhibitors for treating rheumatoid arthritis, and new stem cell research
• Additional steps toward reinventing the industry’s R&D model, including the launch of TransCelerate BioPharma, a 10-company collaboration aimed at making clinical trials more efficient
• Stronger cooperation in real-world evidence and patient engagement, including the expansion of Humana’s collaboration with Novo Nordisk on diabetes and the newly formed Merck–Geisinger partnership on adherence
• Significant investments in high-growth emerging markets, including AstraZeneca’s construction of a new plant in Russia, Pfizer’s joint venture with Hisun in China for marketing branded generics, and Novo Nordisk’s launch of its largest overseas insulin manufacturing site in Tianjin, China

Each of these advances represents a major bet on the future. To follow through, however, will involve significant human and financial resources— which leads us to the final significant trend from 2012: fiscal retrenchment.

Numerous rounds of corporate restructurings, merger integrations, and savings initiatives have been undertaken to protect earnings. If your company is typical of the life sciences industry, you were already fatigued from prior cost-cutting efforts, but in 2012 you once again took a sharp pencil to your budget. You scrutinized your assets and overhead; you closed sites, reduced your portfolio, killed molecules, trimmed your sales, shrank R&D, and cut general and administrative expenses. These efforts have helped to preserve the bottom line in the short term; your costs are indeed lower. But it doesn’t feel like you’ve added much breathing room; your budgets will be squeezed further, and you have not yet created a sustainable path to future growth or profitability.

Now you are asking this question: Where can we go from here?

You already know that you are going to have to reinvent your business model, or take on some disruptive new approach. Current revenues will not fund more than a few options, and every option involves daunting trade-offs in investment and management time. So you will have to choose carefully. Moreover, experience throughout the industry has proven that competitive new approaches—such as multichannel marketing and personalized medicine—are very difficult to bring to scale.

In this context, winning companies will do three basic things to get themselves in shape for growth in 2013 and beyond. These measures can be seen as starting points for a sustainable strategy in the short, medium, and long terms.



Headroom is the market share you don’t have minus the market share you likely will never get; it represents the missing sales, already available to you, for any particular product. Knowing your headroom can help you determine whether a brand is worth further investment. In pharma, the conventional “blanket the earth” product launch model has proven too expensive and is increasingly prone to under-delivering. Thus, every venture starting now needs a sharper view of where to drive its share and profitability.

Headroom is a valuable guide for thinking freshly and cogently about your products at any stage in their life cycle. As Ken Favaro, David Meer, and Samrat Sharma noted in “Creating an Organic Growth Machine” (Harvard Business Review, May 2012), labels like cash cow and growth engine are misleading, because they don’t precisely recognize the promise in a particular brand. Moreover, because they affect the operating units’ behaviour they act like self-fulfilling prophecies, and ultimately become self-defeating.



For example, some older pharmaceutical products have been typecast as declining cash cows, fit only to be milked. But they are still viable brands, often with a great deal of headroom available. We know of one mature osteoporosis drug for which a final marketing review revealed several pockets of remaining headroom: physicians expanding their treatment of the disease who had only limited exposure to the drug; loyal patients who were stopping therapy due to misperceptions about it; and both physicians and patients who were unaware of recent positive changes in reimbursement. Had the company decided not to conduct the review, and to harvest this drug as a declining cash cow instead, these opportunities surely would have been overlooked. Even in cases where the headroom may not be significant, exploring the issue provides helpful guidance for scaling back investments in a smart, surgical fashion.

Other product groups have wasted resources or fallen short of their goals because the leaders did not generate a sharp view of which customers might switch and what it would take to change their behaviour. At the other end of the life cycle, there is a premium on knowing how to minimize switching away from the brand while continuing to attract new customers. Sometimes, relatively low-cost marketing actions—changing how messages are conveyed or how commercial trade channels are used—can have a big impact on revenues. Knowing your headroom is a good first step in becoming more aware of your current portfolio and it's potential.



A capability is your capacity to reliably and consistently deliver a specified outcome, through a combination of processes, tools, knowledge, skills, and organization. Among your hundreds of capabilities, a very few will have core strategic value, differentiating your company from competitors and enabling a value proposition that works for you and your customers. Depending on your strategy and portfolio, your differentiating capabilities might include distinctive forms of customer-centricity, personalized medicine, digital patient engagement, or expertise with a particular type of treatment or pathology.

Your view of the capabilities you already have—and those you need to build for the strategy you choose—can enable you to look more strategically at the trade-offs you have to make: how many molecules to put in the pipeline, how to fund them, how much to collaborate with outside researchers and other companies, how rapidly to move into emerging markets, and, most important of all, how to bring transformative new models to scale. Distinctive capabilities tend to be cross-functional, and they ideally apply to all your products; thus, rather than deciding how to spread your investment across all the individual parts of your organization, you can focus on only those big cross-cutting capabilities that will generate your “right to win.”

Though it helps you maintain the short-term bottom line (in part through divestment of nonstrategic products and activities), a capabilities focus also orients you to larger priorities; you don’t have to make trade-offs between long-term investments and immediate returns. Having chosen one or two new capabilities to develop, you can take on the difficult task of scaling them up, making them a substantial core element of your business instead of an add-on, and applying the investment and attention necessary to do so.

You can also now separate your differentiating capabilities—those that merit heavy investment—from the basic business capabilities that can be cut back or outsourced. This is one of the core elements of Booz & Company’s Fit for Growth^SM methodology. Many companies are now using this or similar means to shift the dialogue about funding from “Where can we cut 5 percent?” to “What investments will help support our differentiating capabilities?” and “How can we bring these strengths to bear around the world?”



To stay focused on a few key capabilities and bring them to scale, it is critical to have the right organizational design. Often, the existing operating model gets in the way of making effective trade-offs; there are too many legacy conflicts and inefficiencies that duplicate efforts, dilute resources, or diffuse your focus.

For example, the boundary between adjacent areas like clinical operations and medical affairs may be blurry, muddling processes like in-country site selection and thought leadership management; it may not be clear who has decision rights over which jurisdictions. Even companies that are good at setting priorities can struggle when their operating models or organizational structures don’t reinforce those choices.

Take a fresh look at your organizational structure, especially the complexity of layers (including overlapping local, regional, and global authority), the relationship between business units and shared functions, and the mix of organizational boundaries. Your established processes may also be ripe for review; they may unintentionally drive up your costs, simply because no one has examined them in some time. This is as true of management decision-making processes as of production processes. As one brand leader at a major pharmaceutical company puts it, “Our annual planning process brings marketers to shine in front of senior management. Thus, there is an interest in creating a new campaign and rolling out new materials, even if last year’s campaign might have been good enough.”

You can also greatly improve your company’s performance with some deliberate attention to the informal aspects of your organization: cultivating the people who tell the right stories in the hallways, training mentors to give better advice to mentees, or establishing better role models among leaders. Just identifying two or three key behaviours to change in an organization—add a strong payor lens to each commercial decision, increase time spent out in the market, or simply start and end meetings on time—can be a very powerful way to begin changing a company. It can infuse your culture with the feeling of an ongoing fitness regime, instead of a series of crash diets.

In short, pharmaceutical industry leaders are looking for a fresh approach to their challenges. In that context, innovation and funding the pipeline will continue to be big themes in 2013. We know a number of companies that are beginning to use the methods and ideas described here to prioritize and consolidate their capabilities. One life sciences company reduced manufacturing costs by 30 percent and reinvested the funds in more targeted forms of innovation. As you and your colleagues enter 2013, we ask you to consider two questions: Are you prepared to take those kinds of measures? Is your company in shape for growth?

Our year-end missives have often prompted executives to call or write us with their thoughts and comments. We hope this one sparks a dialogue with you about the challenges pharmaceutical companies face in the coming year, and how we can help you make your firm more prosperous in 2013.