Pharmaceutical Companies Need To Speed Up Transformation To Meet Changing Market Dynamics, Says Ernst & Young Report

Main Category: Pharma Industry / Biotech Industry
Article Date: 16 Nov 2008 - 0:00 PST

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Leaders of the largest global pharmaceutical companies recognize the need for transformational change in their organizations, but will need to move swiftly to ensure sustained growth for the sector. Current global financial conditions and the threat of a broad recession have accelerated the timetable for implementing change, as the industry confronts lower corporate stock prices and an increasingly cost-averse customer. These and other findings were released today in Progressions, Executing for success: powering new business models, Ernst & Young's bi-annual global pharmaceutical report.

The Progressions report reveals findings from a global survey of senior executives from 15 major pharmaceutical companies. It identifies the top concerns of these 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. 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, the report says.

"All of the top 15 pharmaceutical companies have undergone senior executive-level changes within the last two years, bringing in an influx of new C-suite talent that includes many individuals from industries that have successfully tackled the challenges now confronting Pharma," said Carolyn Buck Luce, Global Pharmaceutical Leader, Ernst & Young. "These leadership changes should help innovative companies to transform their finance function, organizational design, and business models in ways that enable them to continue to prosper in a challenging time."

Executive insights from the report include:

- Improving new product flow is the top priority among pharmaceutical executives. Seventy two 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 today's demanding marketplace (47%), pressures of global regulatory authorities (44%), and the redefinition of the customer and rise of payors (36%).

- 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% of executives ranked optimizing costs as their most important initiative, compared to a similar study in 2007 in which 92% of executives ranked cost reduction as their number one initiative.

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

Although the strategic changes should be transformative in making the business much more effective, most pharmaceutical executives are not fully advancing more radical business model shifts, according to the survey results in Progressions. For example, there is little focus on developing complementary alternative businesses in the "health-care" arena to compete with other sectors (e.g. food, financial services, consumer products) that are targeting the pharmaceutical industry's customer base. The majority of companies continue to exclusively pursue a product only business model at the expense of advancing service based offerings that could expand customer relationships. Furthermore, the survey reports that some initiatives may not be transformational enough - pharmaceutical companies are not pursuing aggressive overhaul of the discovery, development and life-cycle management of their human capital pipeline in response to the dramatic demographic changes in the global talent pool.

Transforming the finance function is a critical first step in preparing to implement the kinds of broad organizational and business model changes now needed, according to the report. Finance's mandate has broadened in the current environment beyond its traditional role as scorekeeper, custodian and analyst. The finance function has become a central player in identifying the specific strategies needed to meet the changing demands of industry stakeholders and creating a sound decision-making framework for value creation to address them.

"In this period, it is more critical than ever that companies tackle a host of issues that, to date, have not been fully embraced - from the fragmented ways in which risk is managed, to the need to adopt a 'grow lean' culture or best allocate scarce capital," said Mark Hassenplug, Global Pharmaceutical Markets Leader, Ernst & Young. "As the industry's focus shifts from driving top-line revenue growth to managing for return, the need to transform finance has grown especially urgent."

About the survey

Ernst & Young commissioned Broderick & Company, an independent market strategy firm to conduct a global market survey of 40 senior executives from 15 major companies from around the world. The interviewees included a diverse mix of senior executives in each organization, including CFOs and other financial titles - divisional CFOs, vice presidents of finance, controllers, regional finance directors and treasurers; chief information officers (CIOs) and information technology (IT) directors; leaders of major business areas; and members of boards of directors.

About the Global Pharmaceutical Center

The Global Pharmaceutical Center is the focal point of Ernst & Young's pharmaceutical practice. It serves as the central hub of a network of senior professionals providing quality assurance, tax, transaction, risk management and business advisory services to pharmaceutical companies and others in the pharmaceutical value chain worldwide. The Ernst & Young Global Pharmaceutical Center fosters a collaborative environment where our seasoned professionals work together to provide clients with tailored services, thought leadership, forums and education to address the complex issues facing the pharmaceutical industry.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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