Going for Growth: How the Pharmaceutical Industry Must Balance Cost and Price to Drive High Performance in a Recovering Global Economy

As pharmaceutical companies begin planning for growth, they will need to strike a delicate balance between continued cost-cutting and optimal pricing.

Without this alignment, they will struggle to achieve profitable growth and, ultimately, attain high performance.

To explore this vital topic, Accenture undertook research that included pharmaceutical executives. The result is a thought-provoking picture of the industry at present, and its plans for the near future.

As the effects of the recent economic downturn recede, companies are again turning their attention to growth. It is clear, however, that profitable growth will require companies to keep costs in sync with revenue and value.

Without this alignment, cost decisions not only can impede profitable growth, but also can wreak havoc with service quality and the overall customer experience. Navigating this dual price and cost imperative is especially critical for the pharmaceutical industry, in which many companies face both a major patent cliff and a transforming health care landscape that is redefining customers’ needs and values.

To provide some guidance on this important topic, Accenture embarked on a comprehensive global research effort in which we surveyed 1,000 executives in companies representing 12 countries and eight industries, including pharmaceuticals. Our data was collected from November 2010 through January 2011, a period during which economic prospects were beginning to brighten for most markets and industries, although many companies still were hesitant to believe a full-scale recovery was under way.

• Half of respondents anticipate revenue growth of only 5 percent or less in the next 18 months, with 30 percent anticipating growth to reach between 6 and 10 percent.

• Two of the most popular levers for driving competitive advantage are innovation and marketing/brand promotion.

• Challenges to price optimization include in sales execution (75 percent), inadequate pricing analytics (69 percent), the wrong strategy (67 percent), unclear pricing strategy (65 percent), inadequate decision support/analytics (63 percent) and governance and accountability incentives (60 percent).

• Eighty percent of respondents say that price optimization is one of the three most important strategic priorities for their companies.

• Nearly 30 percent said their pricing processes tend to lack rigor.

• Forty percent of pharmaceutical executives said analytics are core to their price optimization programs or initiatives, while 52 percent said analytics are one of several inputs.

• Seventy-nine percent of global pharmaceutical companies have undertaken a significant effort to reduce costs.

• Sixty-four percent of pharmaceutical executives said their cost-reduction efforts have been somewhat successful at creating sustained cost reduction, while 35 percent said they had been very successful.

• Only half (52 percent) of participating pharmaceutical executives said their companies understand cost to serve—fewer than in the retail, consumer goods and communications industries.

• Strategic sourcing and inventory reduction are the most popular cost management actions in pharmaceuticals over the coming six months.

After analyzing the results of the survey, Accenture drew the following high-level conclusions:

• Innovation and marketing/brand are the most common levers for driving competitive advantage.

• A market-based approach is by far the most popular means for setting prices.

• Several different areas of the business are heavily involved in making pricing decisions.

• Several challenges impede pricing optimization.

• Price optimization is a priority.

• Pricing capabilities lack sophistication.

• Analytics are important, but not core.

• Companies have undertaken significant cost reductions.

• Cost-reduction efforts have generated positive results.

• Companies fall short in understanding their true cost to serve.

• Cost reductions are expected to continue.

Global pharmaceutical companies once again are concerned about growth—although cost reduction has not left the executive suite’s agenda given the uneven progress of the recovery and many companies’ patent exposure and innovation challenges. Thus, the question becomes: How can pharmaceutical companies reignite growth in a time of strengthening demand while continuing to make intelligent reductions in cost?

In our experience, the answer is using insights from the demand side to drive appropriate cost-reduction efforts on the supply side. During the recession, many companies cut costs with an axe, and growth suffered as a result. Now, they need to fine-tune costs with a scalpel by gathering and acting on insight from the demand side to pursue profitable growth.

For example, they should:

• Use segmentation to understand which pricing strategy is most beneficial for which parts of the business.

• Identify the true cost to serve each customer segment and make appropriate changes to service to reduce costs and enhance value.

• Create a more variable cost structure based on company performance to help avoid the typical cycle of hiring and laying off in concert with economic swings.

Pharmaceutical companies that can strike this delicate balance will be the ones setting the agenda for competitive differentiation, profitable growth and, ultimately, high performance in a volatile world.