Executive Prophesies Vision for the Future

For the pharma industry, the year 2002 brought unprecedented competition, pricing pressures, public scrutiny, and ever-increasing regulation, all exacerbated by a weak economy. (See "Defining Events," pages 50-56.) Although a few companies forged new partnerships and produced life-saving treatments, many more struggled to meet the industry's challenges. And no road map exists to guide them through today's continuing market pressures or to help them anticipate tomorrow's challenges.

But a new Ernst and Young report, "Partners with Vision," called on some of the world's experts in the pharmaceutical, health, and related industries to explore how pharma might yet reach the golden age of medicine. This article summarizes the result of those discussions. Although their collective voices propose no single path, their leadership offers some guideposts to increased innovation, productivity, and accountability and may serve as a catalyst to foster better relationships both inside and outside the industry.

Time of Crisis

In the next ten years, say the experts, success will come to those companies that build on past achievements and create a strong vision of the future healthcare marketplace, while dealing with two key dilemmas:

Market/investor paradox. Pharma costs are increasing while stockholders' investments are decreasing. Industry analysts and investors meticulously monitor how companies respond to those conflicting forces. Pfizer CEO Henry McKinnell predicts that "unsuccessful companies will be absorbed by those that have mastered the 'productivity paradox' by yielding return on R&D investment." At least two companies have successfully managed that paradox:

• Novartis. To forge stronger relationships with top scientific and academic communities, the company moved its headquarters from Cambridge, England to Cambridge, Massachusetts.

• GlaxoSmithKline. To create a more entrepreneurial environment, GSK is breaking up its R&D units and creating six independent Centers of Excellence for Drug Discovery. That new R&D structure provides the flexibility needed to better coordinate research, allocate funding, and improve pre-clinical research and clinical development productivity. GSK also announced that it has doubled its new chemical entities (NCEs) in clinical trials.

The "Partners with Vision" report explains why those two leadership components are critical to the industry's survival and argues that pharma companies can take the industry to the next stage, if they address four key areas:

• global regulatory and legislative risk management

• corporate accountability and leadership

• pricing and intellectual property

• expanding innovation.

In the wake of recent court settlements stemming from drug promotion and selling misconduct and ImClone's FDA missteps, mitigating and managing legislative and regulatory risk have become a primary industry concern.

To meet the demands of a global economy, pharma companies must comply with many countries' high regulatory standards. Global laws have become so cumbersome, however, that niche industries have emerged to support the many different national regulatory processes.

Despite those hurdles, pharma companies have developed expertise in navigating complex regulatory environments to get their products to market. They can do so by aligning their vision with that of each government and the public it represents.

In response to the question, "What are the prospects for a full partnership between governments and the industry?," leaders in the following countries outlined how partnerships with government will lead to better knowledge of public health issues, streamlined drug approval processes, greater access to essential medicines, acceleration of R&D, and increased capital from joint funding for research.

United Kingdom. Alice Pomponio of the British Consulate points out that the UK's Pharmaceutical Industry Competitiveness Task Force has brought together the expertise and experience of industry leaders with policy makers to optimize and strengthen the competitiveness of the UK business environment for innovative pharma companies.

Canada. Health officials forged a deal with Bayer AG to produce Cipro (ciprofloxacin), preserving the manufacturer's patent rights while obtaining the medicines needed for stockpiling against the threat of bioterrorism.

United States. Innovative private/public partnerships have emerged in response to tight state healthcare budgets. In exchange for guaranteed savings to state Medicaid programs, pharma companies are being given preferred status on state formularies. Despite those successful efforts, some industry advocates fear that such collaboration will shift power to regulators by virtue of government's purchasing power and inevitably to price controls, thereby reducing the capital needed for future R&D.

Increased regulation, price controls, and government demands that pharma companies provide free and highly subsidized access to drugs challenge the industry to view government as a partner, rather than an adversary. Several governments worldwide want to be part of the solution and are reaching out to pharma companies to lend their expertise to remove barriers to access, thereby making more critical capital and resources available to accelerate drug discovery and protect public health. One opportunity to pursue that partnership involves efforts to combat bioterrorism. Applied more broadly, a partnership between the industry and governments would encourage regulatory harmonization and improve communication among disparate nations in the effort to surmount global disease.

Accountability and Leadership

Behind every headline announcing product discoveries, approvals, partnerships, and deals is a team of experts that knows how to navigate regulatory hurdles, weather economic conditions, and withstand public scrutiny.

It has never been more important for pharma companies to shape the public's perceptions and provide a vision for its many partners. But it has become increasingly clear that the industry cannot do that alone. Pharma also needs leaders who can transform the industry as its business model grows beyond the traditional blockbuster paradigm. To sustain growth in the innovative environment of discovering better therapies, industry leaders increasingly must have some mastery of science, technology, and medicine to open the pathway for better diagnostics and treatment. That shift will require leaders to be accountable for healthcare financing, product manufacturing, and regulatory compliance.

In "Partners with Vision," Denise Deman Williams of Bench International states that experienced leaders must also be calculated risk takers, innovative, and comfortable interacting with everyone from scientists and physicians to commercial leaders and politicians, all while keeping their company's vision set on its most important target-patients.

The pharma industry's current image is driven by the perception of rising out-of-pocket costs, seemingly irrational global pricing standards, and record DTC advertising expenditures. However, industry's message-that it is devoted to the creation of life-saving and life-enhancing medicines-has thus far failed to generate the level of public support necessary to dissuade policy makers from regulatory regimens. When industry leaders reinforce public and payer confidence, investor confidence will follow, allowing success to be measured by improved valuation and better public healthcare.

Pricing and Intellectual Property

Today's pharma companies must balance their own core mission with the mission of health policy makers to increase access to medicines throughout the world. The nonprofit healthcare sector has often quoted "no margin, no mission" as justification for business practices that support not-for-profit healthcare. Yet access and pricing issues are exerting financial pressure-challenging historic margin trends-on an industry whose mission is to make a profit through the development and manufacture of medicines.

Governments, with public support, are demanding that the pharma industry pursue a course of action that, taken in toto, no other business would even consider:

• invest billions to drive innovation through R&D

• develop and manufacture products for market

• surmount many regulatory hurdles

• produce a healthy return on investment for shareholders and partners

• deliver those same therapies at no cost or at charitable price levels.

The industry must better position itself to gain that protection by educating the public and policy makers about the conflicts posed by such a multiple mission and to align that mission with opportunities to support shared public health policy goals.

Fundamentally, the debate must center on ways to increase access to prescription drugs. There are many barriers to that access-only one of which is cost-that can be addressed without destroying the industry itself. Other barriers include inadequate insurance coverage, the cost of R&D, lack of regulatory relief throughout the R&D to manufacturing segment, and the slow pace of scientific advances. If those issues were addressed, the pressures for price controls and other onerous regulation would likely decrease.

Strategic Alliances

As the frontiers of science have expanded, it has become apparent that pharma companies need partners to produce breakthrough treatments. Between 1995 and July 2000, pharma and biotech companies established 2,661 alliances, collectively valued at more than $28 billion. Yet, a perception exists that Big Pharma lags behind biotech. Instead, as a result of mergers and acquisitions, partnering, and alliance activities, most pharma players have integrated biotechnology into their core development activities.

In the future, pharma and biotech companies will be increasingly more difficult to differentiate. Partnerships have also allowed the industry to get closer to its end customers as pharma companies ally with health educators, agencies, and providers to focus on the wellness of individuals.

Analysts estimate that roughly 50-60 percent of external alliances in the life sciences arena fail to fully meet the participating companies' expectations. For partnerships to succeed, pharma companies must treat those alliances with the same commitment, focus, and attention that they would an internal product or division.

Most large pharma companies have a dedicated team for closing those deals. But that is just the beginning. Best practices include dedication to the integration and operation of those alliances, with a focus on building trust, credibility, shared values, and sustained commitment.

Although industry consolidation has made headlines, it may not lead to more products or sales. "Simply getting bigger will not solve the productivity problem," says Anton Gueth, director of alliance management at Eli Lilly. Gueth points out that, from the mid- to late 1990s, companies that never merged experienced annual sales of 15-20 percent, while merged companies experienced increases of only 2-12 percent.

Recent mega-mergers appear to have worked successfully in some situations, but not in all. Time will tell regarding the success of the largest: the Pfizer-Pharmacia merger. In fact, their pending merger has renewed speculation among industry analysts that further consolidation is likely, both within the pharma industry and across biotech, informatics, and other technology sectors.

The profit models of past decades-disease category leadership and blockbuster products-are changing. Patrick Gage, former president of Wyeth-Ayerst Research, believes that while blockbusters and mega-blockbusters will remain an industry staple, specialty products will play an increasingly important role in the industry's future. That is largely because the medical value of novel specialty drugs to patients is often far greater than mass-market products.

This decade will see a blend of various models, including large pharma companies leveraging the innovative business models of their partners: biotechs, universities, biopharmas, payers, providers, health educators, and CROs, among others. Strategic alliances are the future of the pharma sector, emerging as a powerful strategy to help companies embrace change, extend their reach, reduce risk, and offset market vulnerability.

Beyond executing and integrating each individual alliance, pharma companies are placing greater emphasis and value on an extended enterprise of alliances, partnerships, joint ventures, and minority investments outside their own walls. New and modified business processes are necessary to drive value, mitigate risk, and operate within a control framework that is acceptable to all parties.

Toward the Future

Whether improving communication among stakeholders, bridging the gap between science and medicine through research and development, or improving access to critical treatments and bringing them to market, pharma companies have a unique opportunity to take a leadership role in ensuring that everyone benefits from their knowledge and investment.

From proteomics to genomics to bioinformatics, never has the outlook for biomedical-or biopharmaceutical-research and development of new products been more promising. With a nurturing climate for innovation and strong public and private partners, the pharma industry can continue to push ahead in a new age of profitable discovery and development to improve the health of people around the world.