What are the 3 Strategic Questions that keep Big Pharma CEOs awake at night?

This blogpost was first published on the 2nd of February, 2007.


Apropos my earlier post “Who moved by Blockbuster cheese?”, we see evidence of considerable turmoil in the Big Pharma segment from the often unforeseen impact of a blockbuster drug falling off the pipeline in the very late stages of development, as experienced by Pfizer recently from the loss of Torcetrapib, as well the more publicized loss of Vioxx by Merck.

Given the potential loss of almost $ 16o Bn in revenues from expiring blockbuster patents by 2015, year over year declining margins, and some of the challenges I have highlighted in “Who moved my Blockbuster cheese”, it is my hypothesis that the economics of Big Pharma will potentially see a significant structural change with the questionable sustainability of this current model. The math is pretty simple – if you have market segments that cannot deliver $ 1 Bn annual revenue streams per drug, then you cannot produce these drugs at a cost of $ 800 MM to $ 2 Bn per molecule at the rate of one molecule in 25 turning into a commercially viable product, since you would be hard pressed to recover the fixed cost of the drug development, and also fund your innovation pipeline from the resulting profits. As well, spending 30 to 35 cents of every sales $ on sales, marketing and advertising – almost 3-4 X that spent on R&D become unviable.

Given these game changing and economics altering issues that is already causing a huge churn in CEOs and negatively impacting their tenures, what are the top three questions that Big Pharma CEOs need to challenge themselves with, and find solutions to?

1. Given the potential decline of the Blockbuster Factory model, what can we do today to dramatically reduce cost and time-to-market and significantly improve R&D productivity to preserve grow our revenues and market capitalization?

* How can we leverage Pharmacogenomics (Bio-Tech) and related technologies to decrease the concept-to-patient lifecycle from the current 7- 9 years and lower the current attrition rate of 1 drug from 25 compounds by 50% or less?

* How can we significantly lower the cost of development per drug ($ 800 MM to $ 2 Bn) by 30- 50%, to render it viable for smaller targeted market segments?

* How can we “fail” unviable products early in the product life-cycle to minimize astronomically expensive losses late in the development cycle, which can potentially impact our very survival as an organization?

* How can we leverage our brand to secure incremental generics revenue streams from drugs that will lose patent protection in the foreseeable future?

* How can we “re-position” existing drugs in the market for new indications and incremental revenue streams?

* How can we enter new markets with cost-effective delivery models, especially in emerging markets like the BRIC (Brazil, Russia, India and China) countries?

* How can we improve our acquisitions/ alliance / licensing management processes to improve agility in bringing products to market?

* How can we viably outsource non-core processes like Clinical Trial Management to high-skill/ low-cost locations like India, especially for re-positioning existing compounds?

* How can we leverage scientific/ technological advances to assure superior therapeutic outcomes in our target patient population?


2. How can we embrace Operational Excellence to significantly improve efficiencies across our business processes, and reduce operational costs to grow our operating and net margins?


Financial Ratio Benchmarking Analysis by Andy De based on publicly available company data.

* How can we collaborate effectively with our customers to drive a more accurate demand forecast?

* How can we integrate our supply chain with those of our customers and trading partners to deliver high customer service levels and minimize stock-outs, with significantly lower inventory, given that we practically have the largest inventory levels of any industry and the lowest inventory turnovers (see graph above) and yet fail to deliver service levels comparable with our peers in consumer products and hi-tech as examples?

* How can we produce product of the highest quality in all of our manufacturing facilities (and those of our contract manufacturing partners) using Good Manufacturing Practices (GMP), and in compliance with national/ local regulatory requirements?

* How can we embrace Lean and Six-Sigma to lower waste and operational expenses and continuously improve processes across our manufacturing and supply chain?

* How can we ensure product authentication and track and trace products from product to patient to combat counterfeiting and fraud?

* How can we deploy analytics via role-based dashboards to monitor, measure, analyze, control and improve performance across people, processes, partners and assets?

* How can we secure a 360 degree view globally, of all our compliance requirements and automate and manage these by exception, at the lowest cost of compliance?


3. Given possibly the highest sales and marketing spend (see figure below) that we currently have relative to any other industry, how can we improve sales and marketing productivity, lower costs, and provide superior information delivery on-demand, to providers, patients, payers and the general public?


Financial Ratio Benchmarking Analysis by Andy De based on publicly available company data.

* How can we train and effectively rationalize and deploy our sales reps. across product lines and geographies to eliminate overlaps and ensure maximum return per provider interaction?

* Given the information overload that physicians are subjected to, how can we effectively detail our offerings and train them to appropriately position our offerings to patients?

* How can we proactively leverage the Internet as a channel and CRM/ Portals /e-detailing and similar technologies to effectively deliver information to providers, patients, payers and the general public on demand, and also lower cost of information dissemination?

* Can we leverage thought leaders and media leaders effectively as spokespersons for the benefits delivered by our products, to influence and shape patient demand?

* How can we effectively monitor, measure, analyze and improve (on a 360 degree basis) our sales and marketing initiatives to drive revenue and brand uplift at a lower cost of SG&A?

I firmly believe these are the key questions that CEOs of Big Pharma companies need to challenge themselves with, analyze and find solutions to, to prepare themselves for the game change in the economics of the pharma industry that will unfold over the foreseeable future.


Financial Ratio Benchmarking Analysis by Andy De based on publicly available company data.

The good news is that with the highest margins of any mainstream industry (see above) and innovative technologies like Proteomics, Genomics and Pharmacogenomics that present incredible possibilities, Big Pharma is well positioned to deal with this structural change if and only if, CEOs can ask the tough questions to challenge the status quo and lead the change management needed to alter the well-entrenched and highly inefficient processes and practices that have served Big Pharma well in the Blockbuster years, like Jeff Kindler, the new CEO of Pfizer is attempting, in sharp contrast to some of his peers. We will find out soon enough whether he succeeds or not!

I will analyze each of these challenges and their business implications and potential solutions, in my future posts – please stay tuned. Please let me know if I am addressing the pertinent questions and issues or am way off mark – I welcome your feedback and perspectives.


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