Pharmaceutical & healthcare

Forces causing systemic change in the pharmaceutical industry

Today’s pharmaceutical company is reinventing itself to stave off competition and ensure profits. But with global restructuring of healthcare systems, plus demographic trends and economic pressures, it is hard for pharmaceuticals to know what to adjust for, how wide-spread and deep the changes need to be, and how to plan for the future.

Signs of the industry’s problems and the forces behind them are everywhere:

Despite record investments in R&D, the pipeline of new drugs to replace those going off-patent is thin
Spending on sales & marketing in the U.S. has increased 13% a year for the past 8 years but ROI has dropped by 15%
Shareholder values for pharmaceuticals is declining

It’s helpful to step back, understand the entire healthcare/pharmaceutical picture, identify the critical changes for pharmaceuticals, and then prioritize possible actions companies can take to come out ahead in the transformation. A.T. Kearney’s recent research of 25 healthcare systems – including the pharmaceutical industry – provides the requisite big picture and resulting systemic changes. As we analyzed these systems, we also mapped stakeholder shifts, applied demographic trends, compared needs and innovations from related industries, and determined priority actions.

We have identified three fundamental changes that dissolve long-held assumptions about the pharmaceutical industry and will lead to new ways of doing business.

1) Selling pharmaceutical service models rather than therapies

Although physicians make the ultimate prescribing decision, they are increasingly constrained by formularies, influenced by guidelines, prompted by IT systems, and incentivized by financial mechanisms. These mechanisms are driven by payers and regulators or by organizations responding to payer costs and political pressure. It’s a complex and changing system, which is no longer just based on the physician’s perception of patient need.

Complexity is exacerbated by payers, which varies by country and therapy, and depends on information about everything that is relevant – such as costs, patient compliance, and the effectiveness of the treatment pathway. As they increasingly define a drug’s value so it is compelling to payers, pharmaceuticals will shift the industry towards providing entire service models.

2) Maximizing pharmaceutical revenue through global, mass markets

The U.S. has dominated the pharmaceutical (and healthcare) industry, with more than half of all drug sales and R&D spend. Therefore, much of R&D has focused on therapy areas important to the U.S. and prices have been based on what the U.S. market can bear. But demand is shifting to developing countries: by 2020, China’s middle class will be an estimated 742 million people, and India’s will be 124 million.

These growing middle class markets will have Western-style healthcare needs and expectations. To benefit from this shift, pharmaceuticals need to move away from high cost, Western, niche markets to global, mass markets at lower costs. If today’s pharmaceutical companies don’t adapt to this market, new competitors will enter the R&D market, most likely from within the developing countries.

3) Rewiring the pharmaceutical organization to be more connected

Today’s pharmaceutical companies will struggle to survive with these systemic changes. Typically, globally-integrated companies will be too large, unfocused, and unwieldy to successfully connect with payers, providers, and potential partners in their many markets. They will need to shift from being R&D-driven to market-driven, so they can build broader relationships with healthcare systems and form partnerships with local providers.

From working with and studying additional and relevant industries, A.T. Kearney experts have identified critical competency areas for pharmaceutical companies:

Mastering the market – focus on key therapies and markets, demonstrate real-world value, and develop local partnerships and delivery models
Sourcing innovation – align the innovation pipeline with markets, establish a market for innovation across technologies, and find and exploit disruptive technologies
Managing the supply chain – ensure low-cost manufacturing, integrate global supply chains, and manage outsourcing and contracts

These changes are underway. But as daunting as it will be for pharmaceuticals to transform, there’s a path forward and new opportunity awaits – at least for the bold and the quick.

Learn more

To learn more about the forces impacting pharmaceuticals and far-reaching changes to companies and the industry, read “Pharmaceuticals Out of Balance – Reaching the tipping point”
To read a recent commentary on pharmaceuticals, see “Pharma: reaching the tipping point,” by Jonathan Anscombe

Media highlights

In the eye of the beholder: of values & value - 2
5 November 2009 — eyeforpharma.com
Pharma Expert Contributor, Fatima Moncrieffe, explores the concept of value in the pharmaceutical industry, referring to A.T. Kearney's research and experts, who explain that the current U.S. debate is a critical issue for the entire world.

Pharma at the tipping point III: From R&D to markets
5 November 2009 — eyeforpharma.com
A.T. Kearney research shows that one of the most fundamental problems for pharma companies is that much of the industry's R&D efforts focus on therapy areas that are not particularly important to payers and aren't targeted at mass market solutions.

Pharma at the tipping point II: Emerging markets
21 October 2009 — eyeforpharma.com
Healthcare demand is shifting rapidly toward the developing world, where 96% of global population growth is expected over the next 50 years. For pharmas faced with pricing pressures in developed markets, emerging markets will become too attractive to continue to ignore, and pharmas, AT Kearney says, will need to establish prices in a way that maximizes revenue over a drug’s entire lifecycle and across global markets.

Pharma at the tipping point I: Price versus value
21 October 2009 — eyeforpharma.com
Why is the industry operating on the precipice? AT Kearney observes that even as healthcare budgets are rising, drug sales in most developed countries are forecast to be flat. Pricing pressures are increasing globally, and even the normally safe haven of the US has become a challenging market. The problems, AT Kearney says, are symptoms of a shift in the nature of healthcare systems.

Pharmaceuticals out of Balance: Reaching the Tipping Point
21 September 2009 — A.T. Kearney
A.T. Kearney presents evidence that the current pharmaceutical model may become irrelevant in the context of 21st century’s global healthcare needs. With the current dialogue on healthcare reform and the healthcare system in urgent need of restructuring, there is a commensurate impact on the pharmaceutical industry.

The tipping point that could spell disaster for big pharma
17 September 2009 — Pharma Television
Interview with Jonathan Anscombe.
Select topic from menu on right.

White Paper addresses pharma model
16 September 2009 — PMLive
Management consultant firm, A T Kearney, has highlighted key areas of the pharma model that it believes must be addressed for future success... These relate to what the industry sells, to whom, and how it must be organised.

Pharma “has now reached three tipping points”
16 September 2009 — PharmaTimes
Healthcare is currently out of balance and so therefore is the pharmaceutical industry, as its fortunes are driven by healthcare systems, virtually all of which are now restructuring, says a new report.

Pharmaceuticals: Reaching the Tipping Point
14 September 2009 — www.atkearney.com
There is a danger that the current pharmaceutical model may become irrelevant in the context of 21st century’s global healthcare needs. Healthcare is out of balance and, therefore, so is the pharmaceutical industry. The fortunes of the pharmaceutical industry are driven by the healthcare systems it serves – and virtually every healthcare system is restructuring.