Confronting the Future: Getting High Performance Back into the Biopharmaceutical Industry

The biopharmaceutical industry is facing a "perfect storm" of new challenges—patent expirations, generic competition, falling R&D productivity, pricing pressures and hostile regulatory environments. Given these difficulties, it's no surprise that in the last few years, financial investors have punished the industry and wiped US$500 billion off the balance sheets of big biopharmaceutical companies.

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As part of Accenture's extensive cross-industry research on what makes a high-performance business, we conducted a wide-ranging analysis of the global biopharmaceutical industry.

We analyzed trends within the industry, focused on the past performance of 14 of the largest companies and, based upon changes in their market capitalization, developed a view on their current versus future value in the health care industry.

Lured by the industry's fast growth and high profit margins, investors once flocked to buy biopharmaceutical stock. No longer. Over the past three years, the performance of the largest companies has remained flat in terms of shareholder returns, while the S&P 500 index has soared.

Over the past three years, only a handful of companies have consistently outperformed the industry median in returning shareholder value. Indeed, over the past five years, approximately US$500 billion in value has been wiped off the market capitalization of the big biopharmaceutical companies as investors have taken an increasingly dim view of the industry's growth prospects.

Overall industry enterprise value has declined 7 percent since 2000; future value has declined three times as fast at an average of 21 percent per year. The industry, however, has the power to change this view. Biopharmaceutical companies are still very profitable and cash-rich. They have ample resources to tackle the urgent portfolio and operating issues that threaten their current and future value. Renewed high performance is within reach.

Accenture believes that current industry pressures are pointing toward the emergence of a new health care paradigm, underpinned by the availability of digitized health care information. Companies that embrace the new paradigm—patient-centered connected health—will greatly increase their chances to recapture interest from investors and restore high performance.

We believe, however, that companies will greatly increase their ability to recapture the interest of investors, restore future growth expectations and build shareholder value if they focus their efforts on four imperatives:

1. Center the organization on the individual patient.
2. Reassess and restructure the business and products portfolio.
3. Radically redesign the R&D model.
4. Drive operational discipline across the entire enterprise.

The implications of a patient-centered connected health world are, of course, enormous. And there is no silver bullet to guarantee high performance within it.

Center the Organization on the Individual Patient
Companies that thrive will be those that best understand and respond to the ultimate customer—the patient—who as a voter also will wield political influence on issues affecting how health care is purchased and delivered.

Biopharmaceutical companies will need to develop a much better understanding of their target patients in order to communicate to them and deliver products and services that best meet their needs.

Reassess and Restructure the Business and Products Portfolio
To gain further market focus and positioning, industry participants need to decide which products, markets and even businesses to focus on.

Some may decide to move to a specialist-oriented focus or to target areas with high unmet medical needs where breakthrough drugs could command significant demand and price premiums and where the level of promotional effort required is limited. Other companies might choose to develop a world-class promotions model for a particular market so that they become the partner of choice for companies seeking to bring products to that market. Portfolio diversification and expansion beyond the US market into developing countries like India and China offer other options to improve corporate performance.

Radically Redesign the R&D Model
The loss of US$1 trillion in future value is a wake-up call for the industry. Participants need to be much bolder and more creative in their experiments in order to create a step change in R&D productivity. They need to develop another building block of high performance as defined by Accenture—distinctive capabilities or hard-to-replicate skills and knowledge that will maximize differentiation and help create future value.

Companies could, for instance, make more use of offshore resources and outsourcing to access lower costs. They also could encourage internal competition and reward to move successful products forward (and kill off unpromising ones). And they could strengthen their alliances and partnerships to access the benefits of innovation occurring outside the company.

Drive Operational Discipline Across the Entire Enterprise
There is an urgent need for greater operational discipline in three specific areas:

• Aggressive and continuous cost control to help maintain profit margins in the face of reduced pricing power and cost containment among payers.
• Fact-based investment decisions in all areas of the company to ensure financial resources are spent where they provide the greatest return.
• Regulatory compliance and crisis management, to reduce the possibility of highly damaging drug safety or regulatory noncompliance issues.

All four imperatives need to be addressed in parallel, but to do so could put significant strain on an organization's systems and people.

We recommend as a first step that senior management objectively assess the current situation of their company and then prioritize—placing greatest emphasis and effort on the imperative that describes their greatest vulnerability.

Without doubt, regular assessment of the changing and emerging health care environment and oversight of the company's transformation will be two of leadership's most important challenges in the coming years, and it is critically important to define clear leadership roles within the company. While the executive leadership team should set the new direction and lead from the front, individual business functions have key roles to play in developing the four imperatives.

R&D, for example, must challenge the R&D model with a view to radically redesigning it. Marketing and sales will need to both build and leverage the necessary deep understanding of target patient populations. Production and distribution can minimize the cost of goods sold (COGS) while ensuring a steady supply of quality product. And back-office functions can be enlisted to minimize cost while delivering a service that is clearly aligned with company strategy.

Leaders in each of these areas also need to create the culture of a high-performance business, influencing behaviors regarding compliance and the adoption of emerging standard business practices, as well as both risk-taking and risk management. All of these efforts—both functional and cultural—are integral aspects of the strategy that will chart the path to future success and the reestablishment of high performance.

Regular assessment of the changing and emerging health care environment and oversight of the company's transformation will be two of leadership's most important challenges.

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