Big Pharma needs to speed up transformation to meet changing market dynamics

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Current global financial conditions and the threat of a broad recession have accelerated the timetable for implementing change for the largest global pharmaceutical companies, as the industry confronts lower corporate stock prices and an increasingly cost-averse customer, according to Ernst & Young’s bi-annual global pharmaceutical report.

The report reveals findings from a global survey of senior executives from 15 major pharmaceutical companies, identifying the concerns of the leaders and the progress they have made in transforming their businesses.

The industry faces unprecedented challenges related to patent expirations, pricing and regulatory pressures, thin late-stage pipelines, shifting demographics, efficacy issues and globalization, Ernst & Young said. While the majority of companies have announced major strategic shifts and choices that have the potential of transforming the business and the business model, most have yet to adopt the organizational and functionality changes needed to power these new models, according to the report.

Improving new product flow is a top priority among pharma execs. The report found that 72 percent of executives indicate that the “thinness” of their pipelines is a chief concern. Other top pressure points include producing and sustaining products of value in the demanding marketplace (47 percent), pressures of global regulatory authorities (44 percent) and the redefinition of the customer and rise of payors (36 percent).

Pharmaceutical executives are exploring more strategic and sustainable approaches to create lasting cost advantages. They aim to rely less on cost-cutting campaigns that ignore or imperil long-term growth plans. Only 40 percent of executives ranked optimizing costs as their most important initiative, compared to a similar study in 2007 in which 92 percent of execs ranked cost reduction as their number one initiative.

“Growth in emerging markets will play a key role in driving product flow, although this strategy does not come without risks. Companies need to consider how they are interacting with third parties across their value chain including distributors, healthcare professionals and policy makers to ensure that the nature of these interactions meet the high-standards of compliance,” said Pamela Spence, U.K. pharmaceutical leader.

Industry leaders are searching for new ways to transform business models to drive innovation and better demonstrate the value of their products. The report found that 66 percent of interviewees ranked reinvigorating R &D as the most important strategic initiative underway in their organizations, and 40 percent ranked expanding into new markets and becoming more customer-centric as primary areas of focus.

“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,” Spence concluded.