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Integrity driven performance in the pharmaceutical industry

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The foundation of any sustainable and profitable business model requires the trust of consumers, regulators, investors, and creditors. Relative to their counterparts in other sectors, however, ...

The foundation of any sustainable and profitable business model requires the trust of consumers, regulators, investors, and creditors. Relative to their counterparts in other sectors, however, pharmaceutical companies find themselves party to a more involved and demanding social contract. The public expects pharmaceutical companies to address social needs as well as earn a financial return.

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Integrity driven performance in the pharmaceutical industry Integrity driven performance in the pharmaceutical industry Document Transcript

  • Recapturing the vision:Integrity driven performance in thepharmaceutical industry*PricewaterhouseCoopers’ Health Research Institute
  • In the coming months, PricewaterhouseCoopers’ Health Research Institute and the firm’s pharmaceutical industry leaders will explore issues that intersect with public trust. This paper is a preface to a series of future reports covering those topics.PricewaterhouseCoopers 2
  • PricewaterhouseCoopers 3
  • The foundation of any sustainable and profitable business model requires the trustof consumers, regulators, investors, and creditors. Relative to their counterparts inother sectors, however, pharmaceutical companies find themselves party to amore involved and demanding social contract. Scientific successes havepositioned modern medicines as vital components to the overall state of publichealth; they are indispensable keys to survival and good health for millions ofpeople. As such, the public expects pharmaceutical companies to address socialneeds as well as earn a financial return. It may be argued that in many cases thisexpectation exceeds what is reasonable or even possible. At the very least, it is acall for action far beyond the mandate of the ordinary profit-making company.For many years, the pharmaceutical industry was highly Meanwhile, other forces are exerting unique pressures onrespected for its role as a leader in the advancement and pharmaceutical companies:improvement of the human condition. The continuous Between 2005 and 2007, 11 blockbuster drugs withinnovation of new and improved drugs has driven the dramatic combined sales of over $20 billion will come off patent,growth and profits of the industry. But recent highly visible resulting in a void not likely to be filled by sales fromcompliance failures, some of which occurred despite existing new drugs.legal requirements and established processes, have ledconsumers to believe that pharmaceutical companies have lost Processes around discovery, development, andtrack of their original vision. Combined with the questions about commercialization are becoming more complex as reflectedthe pervasiveness and appropriateness of Direct-to-Consumer in the significant investment and time required toadvertising, drug safety complications, and the number of commercialize new products, the growing use of“me-too” drugs being commercialized in recent years instead outsourcing vendors to provide many of the services onceof innovative ground-breaking treatments, the public and performed internally by the pharmaceutical companies, andgovernments are forming the opinion that instead of bettering recent failures of some drug companies to comply with thethe human condition, the pharmaceutical industry is more myriad of applicable regulations.interested in satisfying its shareholders. Direct and indirect price controls are squeezing margins in the US and abroad.The damage to the industry has been pervasive, resulting incostly settlements on pricing and promotional practices, Ongoing merger and acquisition activity in the industrydifficulty obtaining clinical trial subjects, high-profile drug could further exacerbate the issue of broken andwithdrawals, and an inability to produce and sell product due to inefficient processes as companies struggle to integratemanufacturing halts. Moreover, compliance problems have led new operations.to new industry regulations, raising the industry’s total costs of These pressures have exacted a toll on the pharmaceuticalcompliance as well as financial and reputational risks should industry’s reputation while fueling the political agenda. An evennoncompliance occur. Since 2000, pharmaceutical companies higher levy may be in store if the industry does not respondhave paid a total of more than $3 billion in regulatory settlements effectively to the issues and forces that have already threatenedand criminal fines. public trust. Aggressive investigations and expanding regulation4 PricewaterhouseCoopers
  • To achieve success, pharmaceutical companies need to implement a strategy that balances the contending forces of profitable and sustained growth while effecting integrity-driven performance across their operations. Pharmaceutical growth integrity Industryhave arguably distracted the industry from its key role as an comprehensive and systematic approach must be built, basedinnovator. And in the absence of trust, the public may demand on a full understanding of risks, equipping employees with thethat government further regulate the industry, driving it toward an tools to achieve compliance, building a culture of compliancealternative business model in which research, development, and that includes a clear and vocal tone at the top, and rewardingdrug sales are heavily monitored by the government; or worse, employees for behavior that supports public trust.partially or completely annexed by the government. For To renew public trust and begin to reverse the damage to theexample, the current concerns over drug safety, if unchecked, industry, we believe that pharmaceutical companies mustcould lead regulators to demand lengthier clinical testing periods demonstrate that they have recaptured their originaland slower time to market in the interest of promoting drug humanitarian vision. During 2005 and extending into 2006,safety. Therefore, industry’s ability to recover or even profit from PricewaterhouseCoopers’ Health Research Institute andcostly and risky investments in research and development may pharmaceutical industry leaders will undertake a researchbe impaired. agenda to explore issues that intersect with public trust. In thisPharmaceutical companies are acutely aware of the importance report, a preface to that research, we map a strategy that weof trust issues. In fact, the public has witnessed the industry’s believe will provide far-reaching benefit to pharmaceuticalpast attempts to address trust issues through significant companies by enabling them to increase trust with stakeholdersinvestments in compliance and governance processes. Many of and prevent future breakdowns that could otherwise cause athese investments have occurred as a reaction to developments return to the current situation. By implementing a strategy thatrather than a proactive assessment of risk. Moreover, new layers will be further refined in our upcoming reports, we believe theof added compliance load have led to bottlenecks and pharmaceutical industry will have a greater ability to define,inefficiencies in the system, causing both increased costs as well target, and manage its business, growth, profit, andas difficulty in obtaining the complete buy-in of operating communication strategies on its own terms, while also effectivelymanagement, potentially leading to future non-compliance and managing regulatory and compliance requirements.reputational damage. Aligning Corporate Behavior WithIn 1949, Charles Franklin Kettering warned that “we should all be Stakeholder Expectationsconcerned about the future because we will have to spend the Until recently, drug companies were perceived as profitable andrest of our lives there.” Past failures have proven that a more powerful innovators. Championing the blockbuster model ofPricewaterhouseCoopers 5
  • CHART 1: NEW REALITIESPercentage of those surveyed who think industry is doing a good job serving their customersWhen it comes to reputation, pharmaceutical companies’ star has fallen farther. 90 80 70 60 50 40 30 Computer hardware companies Car manufacturers 20 Pharmaceutical and drug companies 10 Oil companies 0 Tobacco companies 1997 1998 1999 2001 2002 2003 2004 Source: Harris Interactive Surveyimproving and promoting health for profit, the pharmaceutical tremendous benefit in terms of cost savings and quality of careindustry thrilled its stockholders with high rewards. But drug that its products provide. If the expectation gap andcompanies operate in a precarious world in which perception corresponding issues are not reduced or resolved, thedictates reality, and today’s reality is that the public’s trust has pharmaceutical industry could easily find itself at the mercy ofbeen shaken. As illustrated in Chart 1, Harris Interactive survey legislators mandating price controls.data indicates that the pharmaceutical industry has suffered a To remedy the situation, pharmaceutical companies must firstdecline of 35 percentage points since 1997. define and understand an ever expanding list of stakeholders.We believe that pharmaceutical companies should better Current stakeholders are arguably more savvy and less beholdenappreciate the breadth and severity of today’s perception gap to stock performance than the stakeholders of years past. Ourand the resultant impact that this gap can have on their business research and interviews will provide clarity on the expectationsin the future. A failure to identify all stakeholders and their and role that this group of public shareholders, governmentexpectations without considering those views in their overall officials, physicians, clinical trial administrators and participants,strategy and to effectively communicate the industry’s continuing academics, and other health industry executives seeks to havecontributions to the quality of medical care could result in even in shaping the future of the pharmaceutical industry. This articlemore costly and invasive regulations, and could also fuel will seek to define the industry’s key stakeholders and theircontinued negative perception in the media. Serious expectations and provide a high-level assessment of the currentimplications exist longer term if an expectation gap is allowed to expectation gaps that the industry must address as a first stepexpand. For example, the pharmaceutical industry has recently to restore public trust.experienced critical legislative scrutiny, due in part to the factthat the public’s perception of the industry drives political Creating A Culture Of Integrity-drivenagendas. Specifically, in the area of drug pricing, Performancepharmaceutical companies struggle with the expectations of Pharmaceutical companies are navigating a proliferation of newtheir shareholders for continued profit growth and return on laws, regulations, and standards across the globe. They areinvestment, the expectations of the public as to availability and challenged to do so in a way that supports performanceaffordability of drugs, and the expectations of payors who objectives, sustains value, and protects the organization’s brand while also balancing the identified stakeholder expectations andalready believe they are paying too much for drugs. Yet addressing related gaps.companies often fail to appropriately communicate the6 PricewaterhouseCoopers
  • Drug companies operate in a precarious world in which perception dictates realityOf course, issues of risk are not unique to pharmaceutical Very few CEOs (7 percent) view GRC as related solely tocompanies. The 2005 Global CEO Survey from laws and regulations, and a majority (54 percent) considerPricewaterhouseCoopers focuses on governance, risk GRC to be an integrated set of concepts and practices.management, and compliance, (“GRC”) a subject of interest to Yet, only 25 percent state that they are managing GRCCEOs across the world, and of particular importance to effectively, a concern for those in highly regulatedpharmaceutical companies. More than simply a response to industries, such as pharmaceuticals.burgeoning laws and regulations, GRC is being embraced by the While a majority of CEOs are very confident that theirglobal business community as a means to enhance reputation, organizations can respond to GRC matters related tobrand, impact stakeholders, and drive growth. domestic laws and regulations (68 percent) and to internalPwC surveyed more than 1,300 CEOs to probe their attitudes policies and procedures in domestic business units (57about GRC, to gauge their progress, and to determine their percent), only 26 percent are very confident that theirperceptions of GRC benefits. We discovered that CEOs organizations can respond to similar matters related torecognize the significance of GRC and of both the difficulties it foreign laws and regulations and only 24 percent to mattersentails and the benefits it can potentially provide, particularly at a related to internal policies and procedures in foreigntime when these global leaders are exhibiting as much caution business units.as optimism in their thinking and actions. Despite changing The CEOs indicate that, in various stages of development,economic and social conditions, bold ambitions among the eight significant elements of effective GRC, as furtherworld’s business leaders persist. Realizing those ambitions outlined in the CEO survey, are in place at theirrequires careful choices. As the CEO survey report strongly organizations. However, when asked about fullsuggests, effective GRC can provide the context within which development of these elements, responses ranged from asuch choices can be better assessed and executed. high of only 53 percent to a low of 22 percent.We believe that the survey results are especially relevant to the The majority of CEOs surveyed recognize that governance,pharmaceutical industry’s effort to renew the trust of their risk management, and compliance have a positive effect onstakeholders, and invite you to read a copy of this report. For enhancing reputation and brand. Fifty-eight percent of theexample, the survey reported: CEOs indicate that GRC expenditures are primarily an investment. These executives believe that GRC is a valuePricewaterhouseCoopers 7
  • The integrated model should effectively coordinate the organization’s people with process and technology capabilities so that an integrity driven performance strategy is embedded in the fabric of the organization and linked to individual reward and sustainable shareholder value driver and a source of competitive advantage. However, Linking Enterprise Risks and Business only 17 percent of CEOs surveyed said that they can very Objectives accurately measure GRC costs. As drug companies have grown in size, so too have the sizeTo address the identified risks to its business model, we believe and complexity of their operations. Given the intricacies ofthat pharmaceutical companies must re-engineer a performance today’s pharmaceutical operating processes, drug companies,model that integrates business integrity, ethics and values as like many other large and complex organizations, have difficultydrivers of success, while also positioning governance, risk and recognizing risks from both internal and external sources, andcompliance accordingly. The integrated model should effectively consequently struggle to effectively manage such risks.coordinate the organization’s people with process and Furthermore, managing risk is more difficult as antechnology capabilities so that an integrity driven performance organization’s size increases. In the wake of growth, whetherstrategy is embedded in the fabric of the organization and linked internally or through mergers and acquisitions, pharmaceuticalto individual reward and sustainable shareholder value. In this companies must first learn to define and understand risk, andarticle, we will seek to build on the identified expectation gaps to then to manage risk from a broader strategic enterprise view.define a best-practices approach to governance, risk and A multi-faceted approach to break down risk management siloscompliance issues customized to the needs of pharmaceutical and connect all related compliance obligations, while alsocompanies and their stakeholders. We will also seek to define aligning external and internal risks with regulatorythe elements of a strategy around integrity-driven performance requirements, stakeholder expectations, and businessfor the pharmaceutical industry. Our ideas will focus on processes will assist pharmaceutical companies in integratingapproaches that adapt existing governance, risk, and a culture of integrity-driven performance while also providing acompliance activities to incorporate a vision that appropriately framework for monitoring performance. Had risk managementconsiders the needs of all relevant stakeholders and supports tactics been in place in the past, we propose that the industrycompliance with both the letter and spirit of relevant laws and would not be situated in the defensive position in which it findsregulations. The rewards of implementing such a strategy will itself today, as it would have identified and reacted to problemsalso have a direct impact by improving reputation, efficiencies, earlier in the cycle and thus avoided many of the issues ignitingand stakeholder satisfaction. recent attention.8 PricewaterhouseCoopers
  • About PricewaterhouseCoopers Global Pharmaceutical Industry Group PricewaterhouseCoopers’ Global Pharmaceutical Industry Group is dedicated to delivering effective solutions to the complex business challenges facing pharmaceutical and healthcare products companies. As the global leader serving the industry, we have extensive experience in working with companies on industry-specific strategic, operational and financial issues. Our expertise includes assurance, tax and advisory services, as well as specialized capabilities in regulatory compliance, risk management and performance improvement. In helping our clients, we draw on the full knowledge and skills of the firm’s professionals. More than 120,000 people in 143 countries connect their thinking, experience and solutions to build public trust and enhance value forMany organizations are utilizing the recently established COSO clients and their stakeholders.ERM framework, which is quickly becoming the acceptedstandard for enterprise risk management (“ERM”). ERM is a Health Research Institutecomprehensive, systematic approach for helping organizations PricewaterhouseCoopers’ Health Research Instituteidentify events and measure, prioritize and respond to the risks provides new intelligence, perspective and analysischallenging their most critical objectives and related projects, on trends affecting all health-related industries,initiatives, and day-to-day operating practices. We believe that including healthcare providers, pharmaceuticals,pharmaceutical companies must use enterprise risk health and life sciences and payers. The Institutemanagement techniques to understand and embed risk helps executive decision-makers and stakeholdersmanagement into business processes, including strategic navigate change through a process of fact-basedplanning, capital budgeting and performance management and research and collaborative exchange that draws onreporting, to drive a successful and reputable business model. a network of more than 4,000 professionals withOtherwise, pharmaceutical companies will continue to take a day-to-day experience in the health industries. Thereactive approach to issues and challenges, and risk additional Institute is part of PricewaterhouseCoopers’ largercompliance and reporting regulation requirements. initiative for the health-related industries that bringsIn this article, we will describe a framework and considerations together expertise and allows collaboration acrossfor implementing an ERM approach that operationalizes all sectors in the health continuum.integrity-driven performance strategy to adapt or build theinfrastructure necessary to meet refined corporate objectives,stakeholder expectations, and management expectations.PricewaterhouseCoopers 9
  • PricewaterhouseCoopers ContactsPharmaceutical Industry Group Health Research InstituteAnthony Farino James H. HenryUS Pharmaceutical Advisory Services Leader Partner and Chairman Health Industries Group+1.312.298.2631 +1.678.419.2328anthony.l.farino@us.pwc.com jim.henry@us.pwc.comMark Simon Kelly BarnesUS Pharmaceutical Industry Leader Partner in Charge+1.973.236.5410 +1.214.754.5172mark.d.simon@us.pwc.com kelly.a.barnes@us.pwc.comSimon Friend Sandy LutzGlobal Pharmaceutical Industry Leader Director+44.207.213.4875 +1.214.754.5434simon.d.friend@uk.pwc.com sandy.lutz@us.pwc.comPeter Claude Alison DetwilerPartner Research Manager+1.973.236.4289 +1.703.610.7459peter.claude@us.pwc.com alison.detwiler@us.pwc.comPat RochePartner+1.973.236.4844 For copies of this report and also to obtain a copy ofpat.d.roche@us.pwc.com PricewaterhouseCoopers’ 8th Annual Global CEO survey, please contact:Advisory BoardBrian Riewerts Attila KaracsonyPartner Marketing Director, Global Pharmaceutical Industry Group+1.410.783.8920 +1.973.236.5640brian.riewerts@us.pwc.com attila.karacsony@us.pwc.comJonathon Kellerman Lucy MairDirector Senior Marketing Manager, European Pharmaceutical Industry Group+1.267.330.2466 +44.121.265.5360jonathan.l.kellerman@us.pwc.com lucy.mair@uk.pwc.comNY-FP-05-1026-A © 2005 PricewaterhouseCoopers LLP. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, a Delaware limitedliability partnership or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is aseparate and independent legal entity.10 PricewaterhouseCoopers
  • www.pwc.com/pharmaPricewaterhouseCoopers 12