Future of Pharma in 2020
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The driver of industry growth is Emerging Markets. While these markets are currently being driven by the growth of classic primary care products for major diseases – the very ...

The driver of industry growth is Emerging Markets. While these markets are currently being driven by the growth of classic primary care products for major diseases – the very
therapeutic categories that are being genericised in Western Markets, this situation is unlikely to persist. There is therefore a strategic dilemma because most companies do not possess an ideal Emerging Markets portfolio.

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Future of Pharma in 2020 Document Transcript

  • 1. PHARMACEUTICALSFuture PharmaFive Strategies to AcceleratetheTransformation of thePharmaceutical Industry by 2020kpmg.co.uk
  • 2. FuturePharmaFive Strategies to Accelerate theTransformationof the Pharmaceutical Industry by 2020ContentsExecutive SummaryKey Challenges Facing the Pharmaceutical Industry 11. Delivering shareholder/stakeholder value 2 - 62. Low growth business environment 7 - 103. R&D productivity 11 - 154. Rising risks and loss of trust 16 - 18AVision of the Pharmaceutical Industry in 2020 and Beyond 19 - 24Five Strategies to Accelerate IndustryTransformation 251. Reassess product strategy 262. Invest in the marketing and sales infrastructure of 2015 and beyond 27 - 293. Acquire more talent and experience from other industries 304. Use internal rate of return to prioritise and rationalise the R&D portfolio 31 - 325. Review and revise governance standards 33 - 34If you would like to discuss any of the ideas in this report or how theycan be implemented, please contact any of our pharmaceutical team.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 3. ExecutiveSummaryThis paper explores some of the majorchallenges facing the pharmaceuticalindustry today.Four Major Challenges Facingthe Pharmaceutical Industry:1. Delivering shareholder/stakeholder value2. Low growth business environment3. R&D productivity4. Rising risks and loss of trustWe believe that there is a realopportunity for the industry to redefineitself in the minds of shareholders,stakeholders, consumers andgovernments, following thedisappointing business and shareprice performance of recent years.Stagnation in matureWestern Markets(WM) combined with rapid growth ofEmerging Markets will change theshape and needs of the industry.Operating margins are peaking and theimpact of Emerging Market growth onthe current cost base will bring marginsdown. Businesses need to ensureinvestment in growth markets reflectsthe new industry and not a templatefrom the past. Social media andinformation technology offer potentiallysignificant new ways to contactprescribers and consumersmore efficiently.R&D productivity has been sub-optimaland poorly measured.We assess thatreturns on capitalised R&D spendinghave been steadily falling. A shift toan internal rate of return measure ofdevelopment spending is needed,together with some information aboutwhy the companies believe thatspending on development projects willgive shareholders a return greater thanthe cost of capital for the company.Scientific, political, legal and personnelrisks are all rising.We see a need for areview of governance standards fromBoard level downwards, together with afresh look at internal appraisal systemsto ensure the best qualified employeesare in the key roles and get the besttraining for the changing marketplace.Pharmaceutical companies must winback trust; they have created theperception that they put theircommercial goals above the interestsof governments, payors, prescribersand patients.This situation can be changed as part of aseries of transformational steps in boththe operations and culture including betterinternal and external communication ofrisks and more consistent compliancewith regulatory standards.There are many new relationships todevelop with government agencies inthe growth markets, in addition toincreasing complexity in relations withgovernments and payors in establishedmarkets. Improving these relationshipscan best be achieved by adopting betterstandards of governance at all levels ofthe industry.In our vision for 2020 we see an industrythat will be simpler for investors tounderstand not because it will bestructurally simpler: developing newmedicines will be an ever morecomplex process.But because the geographically diversenature of its business will increasewith the growth of Emerging Marketinfluence, the pharmaceutical industrycould take on the appearance of a highvalue consumer products industry to itsshareholders.Whether a diversified orspecialist business model is better tomeet the 2020 challenges is a muchmore company specific analysis thatwe have not attempted to cover here.We have identified five strategies toaccelerate the transformation of theindustry to meet them.Five Strategies toAccelerateIndustryTransformation:1. Reassess product strategy2. Invest in the marketing and salesinfrastructure of 2015 and beyond3. Acquire more talent and experiencefrom other industries4. Use internal rate of return to prioritiseand rationalise the R&D portfolio5. Review and revise governancestandardsThe industry is responding positivelyto a number of other important issues,such as working with governments andproviders to address the rising costof healthcare.The selective and focused approachthat we have chosen means that thispaper does not cover these otherchallenges in any detail.With well chosenstrategies combinedwith disciplinedimplementation, I believethe pharmaceuticalindustry has the platformfrom which to prosperover the next 10 years.”Chris Stirling, European Sector Leader“© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 4. 1 | Future PharmaKey ChallengesFacing the Pharmaceutical Industry1. Delivering shareholder/stakeholder value2. Low growth business environment3. R&D productivity4. Rising risks and loss of trust© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 5. Tobacco  Food  &  Beverages  Personal  &  Household  Goods  U8li8es  STOXX  Europe  600  Index  Europe  Pharma    US  Pharma  Future Pharma | 2Challenge 1Delivering Shareholder/Stakeholder ValueThe pharmaceutical industry hasperformed disappointingly over the lastten years relative to other industries(Figure 1). This is the result of acomplex ebb and flow of positive andnegative factors on both revenuesand profits that has marginally favouredthe negatives.Factors influencing revenues include:Positives:• ­Strong growth in Emerging Markets(Figure 2)• ­Aging populations• ­Price increases in the US(Figure 3)• ­Influenza pandemics• ­Enduring willingness of payors tosupport demonstrablyinnovative therapiesNegatives:• ­Increasing speed and intensity ofproduct competition (Figure 4)• ­Increasing rebates to governmentand third party providers in the US• ­Budget deficit driven price reductionsin Europe• Exposure to loss of revenuesfollowing patent expiration (Figure 2)• ­Ferocity of early generic competition• ­Higher regulatory hurdles, leadingto greater uncertainty and fewerproduct approvals• ­Greater restrictionson reimbursement• ­Declining R&D productivityFigure 1Relative Share Price Performancefrom 2005 Source: Bloomberg25020015010050007/01/200507/01/200607/01/200707/01/200807/01/200907/01/201007/01/2011KeySTOXX Europe 600 IndexHealth CareUtilitiesFood and BeveragesTobaccoPersonal & Household GoodsEurope PharmaUS Pharma© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 6. 3 | Future PharmaChallenge 1Delivering Shareholder/Stakeholder ValueThe balance of factorsinfluencing profits hascontributed to making theconsistent delivery ofshareholder/ stakeholdervalue more difficult andthis continues to bethe case.Factors influencing profits and earningsPositives:• ­ An industry-wide drive to reduce costsand improve efficiency• ­ Improved operating margins(Figure 5) and• ­ Strong cash flow growth fuellingincreased cash returns toshareholders through increaseddividend pay-out ratios and sharerepurchase programmes (Figure 6)Negatives:• ­ Royalty payments increasing due togreater collaboration and risk sharing• ­ Increased legal settlements withplaintiffs and governments• ­ Increased clinical trial demands• ­ Increased regulatoryfiling requirements• ­ M&A activity that has addedcomplexity, whilst rarely generatingobviously better returns• ­ Growing safety requirementspost-approvalFigure 2Emerging Markets are the KeyDrivers ofTotal Spending Source: IMS MarketPrognosis; KPMG1150110010507002010 Brand Patent Generic Emerging Other 2015E7508008509009501100$856bn$1081bn119 -1204715029TotalSpending$bngrowth expirations Markets© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 7. Future Pharma | 4Figure 3AverageAnnual Percent Change in US Retail PricesforWidely Used Brand Name Prescription Drugs Source: AARP RxWatchdog Report, August 20109%8%7%0%1%2%3%4%5%6%2005 2006 2007 2008 20096% 6.1%7%7.9%8.3%Figure 4Speed and Intensity of Competition Source: DiMasi and Faden; Tufts Center for the Study of DrugDevelopment, Working paper 2009; PhRMAPercent of first-in-class medicines witha competitor in phase II testing at thetime of approval.100%90%80%70%60%50%40%30%20%10%0%23%50%71%77%90%1970s 1980-1984 1985-1989 1990-1994 1995-1999© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 8. 5 | Future Pharma© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 9. Future Pharma | 6Figure 5Industry Pharmaceutical Division Operating Margins Source: KPMG estimatesAggregate pharmaceutical industry operating margins in USD33%2005 201032%29%OperatingMargin32%32%31%31%30%30%29%29%28%28%Figure 6Pharmaceutical Industry PostTax Cash Flows Source: KPMG estimates2008 2009 201068,46587,61298,233118,327123,104122,893144,797134,955IndustryPostTaxCashFlows$bn160,000140,000120,000100,00080,00060,00040,00020,00002003 2004 2005 2006 2007We believe that over the next ten yearsthe pharmaceutical industry coulddeliver growth in line with real GDP(3-5%), which is respectable and meritsa higher market value than that of today.We see a real opportunity forthe industry to redefine itself in theminds of shareholders, stakeholders,consumers and governments.This will require a shift in how theindustry operates, particularly regardinghow it spends its shareholders fundsand how it communicates the value ofits product and delivers its services.The industry has to demonstratethat it can deliver better returns oninvestment than in the past by changingmany aspects of how it operates.This is likely to be uncomfortable but willbe, we suspect, a continuation of aprocess which has already started.Novartis management has made a stepin the right direction by discussing cashflow return on invested capital, and howit planned to improve it for each division,at its November 2010 Strategy &Innovation Forum1.1http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17­generating-financial-returns-from-the-portfolio.pdf© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 10. 7 | Future PharmaChallenge 2Low Growth BusinessEnvironmentRevenue growth modestlyslowing in 2010-2015The pharmaceutical industry is facing afuture with lower growth prospects thanin the past. IMS forecasts global spendingon medicines will reach $1.1 trillion by2015 but the revenue growth rate willslow from 6% between 2005 and 2010to 3-6% between 2010 and 2015.The impact of $120bn of productrevenues losing patent protection inmajorWestern Markets from 2010-2015will be largely matched by on-patentbrand growth, leaving Emerging Marketgrowth and generic spending as themain drivers of global spending. Per IMSthe combined US and EUR share ofspending will shrink from 61% in 2005 to44% by 2015 and Emerging Markets willgrow from 12% in 2005 to 28% by 2015.Policy changes seen in 2010 in the US,Japan, Europe and China are unlikely tobe the last made as governmentsstruggle with growing budget deficitsand look for ways to spend moreeffectively on healthcare, furtherpressurising growth.Major therapeutic classes drivingbrand growth between 2010 and2015 are expected to be Oncology(+5-8% annually to $75-80bn), diabetes(+4-7% annually to $43-48bn) andautoimmune diseases (+6% to circa$30bn), with continuing if slower growthfor asthma/COPD (+2-5% to $41-46bn),angiotensin inhibitors (+1-4% to$28-33bn) and platelet aggregationinhibitors (+4-7% to $18-22bn), bothfor cardiovascular disease (Figure 7).Biologic therapies as a class are a majorgrowth contributor, forecast to growfrom $138bn in 2010 to $190-200bn by2015, or an increase from 16% of globaldrug spending to 18%.The impact of $120bn ofproduct revenues losingpatent protection in majorWestern Markets from 2011­2015 will be largely matchedby on-patent brand growth,leaving Emerging Marketgrowth and genericspending as the maindrivers of global spending.Figure 7ForecastTherapeutic ClassGrowth 2010-2015 Source: IMS Health$bn5090702030OncologyAsthma/COPDLipid loweringDiabetesAngiotensin inhibitorsfor CV disease6040802010 20152The Global Use of Medicines: Outlook Through 2015. IMS Institute for Healthcare Informatics May 2011© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 11. Future Pharma | 8Aggregate Emerging Market revenues are forecast to growat a compound 14% between2010 and 2015.IfWestern Market stagnation/declinecontinues and Emerging Market growthslows to around 10% per annum thenglobal revenues would grow on average4% per annum between 2015-2020(Figure 8).If the pressure on US and EU market lessens post the patent expiration cliff and low levels of growth return (say 3%) then global growth would be 4% between 2015 and 2020.Figure 8Pharmaceutical Industry 2010 to2020 by Major Geographic Market Source: 2010, 2015 IMS Health; 2020 KPMG estimates14001200100080060040020002010E 2015E$856bn188238300154303 487205 205195308 335 335$1,081bnCAGR 5%CAGR 4%$1,318bn2020E$bnUS EU EM OtherFigure 9Estimated Industry Cost andMargin breakdown Source: KPMG estimatesOperating Margins Peakingand Set to DeclineWe believe that the pharmaceuticalindustry currently achieves close to50% pre-R&D operating margins,on average.2010ERevenues 100%Cost of sales -25%General and administrative costs -7%Marketing & sales -20%R&D -16%Operating profit 32%Pre R&D operating profit 48%© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 12. 9 | Future PharmaChallenge 2Low Growth BusinessEnvironmentFigure 10Estimated 2010 Geographic Contribution toGlobal Pharmaceutical Sales and ProfitsSource: IMS Health;KPMG estimatesBased on data from various industrysources, we have estimated thecontribution by major geographicregion to industry pre-R&Doperating profit (Figure 10).This table highlights thelower margins availablein Emerging Markets.Region % 2010 globalrevenuesRevenues$bnEst Pre-R&DmarginPre-R&Dop. profit $bnUS 36% 308 65% 200EU 24% 205 43% 88EM 18% 154 33% 51Other 22% 188 40% 75Total 856 48% 415Figure 11Changing Geographic Contributionto Global Pre-R&D Operating ProfitSource: 2010, 2015 IMS Health;2020 KPMG estimatesGrowth of Emerging Markets couldresult in these countries togethercontributing as much to global profitsas the US by 2020 (Figure 11).100%90%80%70%60%50%40%30%20%10%0%18%12%21%48%20%21%16%42%21%30%13%36%2010 2015E 2020EUS EU EM Other© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 13. Future Pharma | 10Using the assumptions shown in(Figure 12) we conclude that globalmargins will inevitably come underpressure as the contribution from lowermargin Emerging Markets continues togrow rapidly relative to the matureWestern Markets.We find that thepre-R&D industry operating margincould decline from an estimated 48%in 2010 to 43% by 2020 (Figure 13).The importance of Emerging Marketsand the pressure on margins we believemerits a wholesale review of themarketing and sales investment in bothgrowth markets and those in decline,the personnel talent required to managethese businesses and above all the R&Dportfolio being developed to supplyappropriate products that payors willfund in these different markets overthe next 10 years.We find that the pre-R&Dindustry operating margincould decline from anestimated 48% in 2010to 43% by 2020.Figure 12Assumptions of CompoundAnnual RevenueGrowth and Geographic Margin 2010-2020 Source: IMS Health; KPMG estimates2010-15Revenue CAGR2015 Pre-R&Dop. margin2015-20 RevenueCAGR2020 Pre-R&Dop. marginAssumptionsUS 2% 60% 0% 60%EU 0% 38% -1% 38%EM 14% 33% 10% 35%Other 5% 40% 5% 40%Global 5% 45% 4% 43%Figure 13Pre-R&D Profit Margins Pressureddue to Emerging Markets Source: 2010, 2015 IMS Health; 2020 KPMG estimatesThis figure illustrates the profitmargin impact of the growth ofthe industry in Emerging Markets.2010E 2015E856108113184154745662020EPre-R&Dmargin 48%Pre-R&Dmargin 44%Pre-R&Dmargin 43%Revenues $bn Pre R&D op profit $bn© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 14. 11 | Future PharmaChallenge 3R&D ProductivityOver the past decade thenumber of applications forapproval of new medicalentities being made toFDA has averaged 30 peryear. However, in 2010 only23 applications were filed,the second lowest numberin a decade (Figure 14).Poor R&D productivityThe number of new medical entities(excluding line extensions) beingapproved in the US has not shownany trend change (Figure 15) overthe past decade. It is hard to correlateapplication numbers with approvalsbecause of the difference in approvaltimes. FDA data indicates that betweenJanuary 2006 and October 2009 61%of new medical entity applicationswere approved. Comparative data forthe equivalent European authority,the EMEA, indicates 68% wereapproved in the same period3.2011 is looking a lot better than 2010and could be an above average year.So far this year (through 7thJuly) 20new medicines have been approvedcompared with 21 in the whole of 20104.This looks like the pattern of 2005 and2009 being repeated.There is no basisto assume the overall number ofapprovals is on a long term up trend.Figure 14Number ofApplications forNew Medical Entities to FDA Source: FDA4035302520151050NumberofapplicationsfornewmedicalentitiestoFDAbyyear1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20103http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDER/UCM192786.pdf4http://www.firstwordpharma.com/node/886309© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 15. Future Pharma | 12R&D productivity based on numbers of approvals relativeto R&D spending is worsening.R&D spending has, however, beenclimbing inexorably, running at acompound annual growth rate of 10%1999-2007, although there has been asignificant slowdown since 2007 (CAGR1%).These calculations are based ondata for member companies of thePharmaceutical ManufacturersAssociation of America and thereforeunderstate global R&D spending.R&D productivity based on numbersof approvals relative to R&D spendingis worsening.Looking at R&D productivity another way,the industry success rate in bringing adrug from research to market was just4% between 2005 and 20095.This isclearly an unsustainably low rate.Figure 15New Medical EntityApprovals andAnnual R&D Spending 1999-2010 Source: PhRMA and FDA40NumberofnewUSdrugapproval3530252015105055,0001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010New drug approvals R&D spent50,00045,00040,00035,00030,00025,00020,000AnnualUSIndustryspent5Linda Martin KMR, Bernstein R&D Conference 2011, cited in Roche 1H2011 results presentation© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 16. 13 | Future PharmaChallenge 3R&D ProductivityR&D returns havenearly halved overthe last 10 years.Return on R&D fallingWe have made an illustrative calculationof the post-tax return on R&D spendingover 15 years (Figure 16).The steady decline over the past 20 yearsis no surprise, but it illustrates the need toaddress the expectations of future returnsfrom current spending both from a peaksales perspective and from a cost ofmarketing and sales support point of view.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 17. Future Pharma | 14Figure 16Illustrative PostTax Returnon R&D Expenditure Source: PhRMA data; KPMG estimates20%18%PostTaxreturnonR&Dexpenditure16%14%12%10%8%6%4%199019911992199319941995199619971998199920002001200220032004200520062007200820092010© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 18. 15 | Future PharmaChallenge 3R&D ProductivityA predictable delivery ofnew drugs over a multi-yearperiod is the most likelymeans for companies tocapture an element of theirpipeline value in theirmarket capitalisation.R&D ProductivityIneffectivelyAssessedIndustry focuses on numbers of projectsin R&D, not returns, nor forecastsCorporate presentation of the value ofR&D tends to focus on numbers ofproduct candidates in development.Mention of how much was spent rarelyfeatures prominently in the annual reportto shareholders and we could find onlyone company, GlaxoSmithKline, amongthe industry majors that highlights itstarget return on R&D spending.Phrases that industry participants use todescribe their R&D pipelines include:• ‘strongest’• ‘one of the best’• ‘one of the most innovative’• ‘strongest and most productive’• ‘uniquely broad’• ‘peer-leading’The subjective nature of thesedescriptions is not unreasonable.There islittle numerical basis for comparison withother companies whose needs for futuregrowth may be smaller or greater.Therecent history of the industry wouldsuggest that hubris is to be avoided at allcosts.The point is that these commentsand the detailed explanations of theindividual development projects give noinformation about why the companiesbelieve that spending on these projectswill give shareholders a return greaterthan the cost of capital for the company.Or put another way, why these projectswill result in a reversal of the long-termtrend illustrated in Figure 16.We believe that there is little or no valuebeing ascribed to pipelines, based oncurrent market capitalisations and thecash flow value of on market drugs.Some value should be allocated,although not too much given theinherent unpredictability of medicalresearch. A predictable delivery of newdrugs over a multi-year period is the mostlikely means for companies to capturean element of their pipeline value intheir market capitalisation. However,in the shorter term, exposition of anunderstandable assessment of thereturns that have been achieved andindications of why the future returnswill be better would also help.A systematic explanation of why productcandidates failed or why products had tobe withdrawn from the market and whatwas learnt from these failures would helpshow that the R&D process is moreconsidered than in the past and that pastmistakes are not being repeated.Some measure of scientific quality isalso needed.The best science is notalways conducted in large-capitalisationpharmaceutical companies as illustratedby the industry seeking new ways topartner with academia6.62 March 2011 | Nature 471, 17-18 (2011© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 19. Future Pharma | 16Challenge 4Rising Risks andLoss ofTrustStaying close to governmentthinking will be critical tosecuring a continuing strongposition in the industry.Rising scientific riskIn the information age it is reasonable toassume that everyone knows everything,and therefore that competitors may beworking on similar biological targets withsimilar chemical or biological entities. Inthe recent past the speed with whichseveral companies have simultaneouslydeveloped new chemical entities istestament to this.We see it as key tounderstand the end game at the start:integrate information on what value anew drug or new drug class could bringand the attitude of those that will pay forthe medicine as early as possible into thedevelopment process.We were very surprised to find that only5/13 (38%) of major companies include aBoard committee with an explicit mandateto provide assurance to the Board aboutthe quality, competitiveness and integrityof the Company’s R&D/scientificactivities.This would seem an essentialcheck and balance on the path to greaterrigour on agreeing R&D expenditure giventhe importance of innovation.Rising political riskPolitical risk in the US and the EuropeanCommunity is well understood and willbe part of all companies’ planningprocess.There are probably noexpectations that pressure fromgovernments to reduce the cost ofmedicines and of treating chronicdisease is going to reduce.The industryis cash generative and relatively cashrich.Working with governments topromote innovation, while achievingadequate commercial returns, willbe important.We think that a systematic approachto the changing nature of governmentpolicy in Emerging Markets is key toreducing long-term political risk. In amajority of Emerging Markets, theconsumer pays for prescriptionmedicines, but governments influencethe price paid to varying degrees.Staying close to government thinkingwill be critical to securing a continuingstrong position in these markets.Rising legal riskIn spite of extensive risk managementinput to Board audit committees, therehas been a rise in the number ofsettlements for violations of a variety oflaws as exemplified by data from the USover the past twenty years with a veryrapid rise since 2003 (Figure 17,Figure 18).The industry needs toreverse these trends to beginto win back confidence andtrust from consumers andgovernments alike.This is no small task.We suppose that the rate of increase inthese settlements could be viewed bysome as a positive, because the decksare being cleared and historic longrunning litigation risk is being reduced.We see this as stretching the point.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 20. 17 | Future PharmaChallenge 4Rising Risks andLoss ofTrustFigure 17Number of Pharmaceutical Industry Settlementswith US State and Federal Government 1991-2010 Source: Public Citizen199119921993199419951996199719981999200020012002200320042005200620072008200920104035302520151050The value of these settlements has also risen dramatically over the past decade.Figure 18Value of Pharmaceutical Settlements withUS State and Federal Government 1991-2010 Source: Public Citizen1991199219931994199519961997199819992000200120022003200420052006200720082009201040004500$bn500035003000250020001500100010 22 1 0 10 7 4 3 1005000404889549967 999 106739761441 144544053517© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 21. Future Pharma | 18Rising personnel riskThe changing nature of the growth driverswithin the pharmaceutical industry andthe cultural shift in how the industryspends money suggest to us that thereis rising personnel risk. Risk becausethe best qualified staff may be temptedby competitors, or by opportunitiesfor career development. Risk becausethe wrong staff may be retaining keymanagement positions for too long.Risk because senior management hasnot asked the hard questions of itsemployees frequently enough. It couldbe argued that Boards of Directors andexecutive management should put inplace plans to increase the diversityof senior talent to match the evolvingneeds of the global healthcare market.In addition a review of managementstructures would also seem essentialto the growing importance of EmergingMarkets not only as growth drivers, butalso as important sources of scientificand medical research talent.Loss of TrustPharmaceutical companies havecreated the perception that they puttheir commercial goals above theinterests of governments, payors,prescribers and patients and lost the trustof these stakeholders. Investors tooremain sceptical of the longer termoutlook in the wake of serial R&D pipelinedisappointments. Justified or not, thepharmaceutical industry faces a scepticalaudience regarding the integrity ofits commercial operations. Goldenparachutes that reward executives inspite of poor performance exacerbate thesituation. Fines, court cases and productwithdrawals are all prevalent and serveto draw attention to the industry’sweaknesses.This situation can bechanged as part of a series oftransformational steps in both theoperations and culture including betterinternal and external communication ofcorporate priorities, corporateresponsibilities and of the risks that thecompany is prepared to take and why.Stakeholders need aclear understanding ofthe risk profile to whichthey are exposed either asemployees, shareholdersor both.There are many new relationships todevelop with government agencies in thegrowth markets, in addition to increasingcomplexity in relations with governmentsand payors in established markets.Improving these relationships andavoiding the creation of new risks canbest be achieved by adopting betterstandards of governance at all levelsof the industry.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 22. 119 |9 | FFututurure Phare PharmamaAVision of thePharmaceuticalIndustry in2020 andBeyond© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 23. Future Pharma | 20AVision of the PharmaceuticalIndustry in 2020 and BeyondCompanies that candemonstrate the value theirproducts (and services)bring to patients will beable to access broad patientpopulations in bothWesternand Emerging Markets.Having laid out some of the keychallenges that we believe the industryis facing, we outline a vision of how theindustry might look in 2020 and beyond.We believe that to be successful in tenyears’ time, companies will need to bedifferent from today in the way that theyare organised and operate. (Fig. 19)Companies that can demonstrate thevalue their products (and services) bringto patients will be able to access broadpatient populations in bothWestern andEmerging Markets. Scale will still beimportant but marketing muscle alonewill not be sufficient.Companies with the courage to priceaccording to ability to pay and not solelywedded to a global highWestern basedprice will reap the volume benefits, as forexample GlaxoSmithKline has reportedfollowing an Emerging Market price cutfor anti-allergy medication Avamys.7In addition, the pharmaceutical industryhas a significant opportunity to play animportant role in the broader healthcare“ecosystem” as the pressures toreduce cost, improve quality, andincrease access to care impact nearly allcountries’ healthcare systems. Paymentfor healthcare products and services,which has historically been based onunit or episode, is expected to move toa new economic system that rewardsdemonstrably better health outcomesand lower costs. In this scenario, theinterests of the pharmaceutical industrywould converge with those of healthcareproviders and payers in increasinglyintegrated delivery and financingmodels. Given pharmaceuticalcompanies’ deep knowledge of testingand measuring quality outcomes andrelated costs, the industry can play asignificant role in the evolving, broaderhealthcare enterprise.Figure 19Future Industrial Success Factors Source: KPMG estimateBases of competitive advantage today Bases of competitive advantage in 2020Development resources, sales and marketing scale Value of products and services, distribution strengthGlobal high prices, restricting access Pricing based on ability to pay driving volume upliftMultiple competitors in major therapeutic areas,scale permitting successFewer competitors in a broader range of diseasesMulti-billion dollar drug revenues covering high fixed costs More products with lower revenues and lower costsEnd to end operational capabilities for “self-sufficiency” strategySignificant outsourcing of operations such as manufacturingand support functionsAcquisitions of technologies and products to augmentproduct pipelineGreater collaboration with academia, biotech and peersFocus on mature Western Markets Focus on Emerging Markets7http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 24. 21 | Future PharmaA Vision of the PharmaceuticalIndustry in 2020 and BeyondHistorically, companies have facedcompetition at an ever increasing pacebecause markets have sustainedmultiple products with little orno differentiation (Figure 20).Weseethistrendslowlyreversingbecauseof the need to focus R&D spending on themost differentiated products. The growthofbiopharmaceuticals is also likely to havean impact on the number of competitorsper disease. New biological targets arebeing identified for less common butdebilitating or life threatening disease forwhich no treatments exist, including rarediseases. In these areas we expectfewer competitors.Figure 20Competing MedicinesRace forApproval Source: Tufts Center for the Study of Drug Development; PhRMAMediannumberofyears1210864201970s 1980s 1990sThe average time a medicine is the only drug available in itstherapeutic class has declined dramatically – from more than10 years in the 1970s to less than 2 years by 1998We think that by 2020 there will be moreproducts selling less on average thantoday as a result of more targetedtherapies and the genericisation of manyof the major primary care therapeuticareas. But new products should havebetter returns on capital thanks to moreefficient development spending, fewerfailures and much lower levels ofmarketing and sales investment.The scarcity of new product opportunitieshas driven up the price to in-licensedevelopment stage compounds. But theproblem is that the failure rates have beenrising for all late stage compounds andare higher for in-licensed compoundsthan for in-house projects.According to a recent report from theCentre for Medicines Research therewere 55 phase III drug terminationsduring 2008-2010, more than double thenumber of terminations during 2005 –2007; and in addition the number of drugsentering phase III clinical trials fell by 55per cent in 20108.We see a growing trendfor large pharmaceutical companies tobypass the small biotechs and forgecollaborations directly with academia.Wesee leaner organisations with networksof academic collaborations and smallcompany partnerships fuelling theresearch process and more focuseddevelopment organisations usinggenomic profiling allowing smaller clinicaltrials to be conducted with more powerand at lower cost. Companion diagnostictests will be much more common andwill be integral to development, marketaccess and penetration. More risksharing with other industry participantsshould help improve researchproductivity.The creation ofViiVHealthcare by GlaxoSmithKline and Pfizershould provide both companies with abetter outcome for their HIV therapiesthan either going it alone and is a goodexample of how to retain intellectualcapital on the one hand and access acommercial platform for developmentassets on the other. Companies will needto maximise the return on differentiatedresearch skills and avoid losingintellectual capital.8CMR 2011 Pharmaceutical R&D Factbook© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 25. Future Pharma | 22A predictable delivery ofnew drugs over a multi-yearperiod is the most likelymeans for companies tocapture an element of theirpipeline value in theirmarket capitalisation.Companies in the industry have alreadystarted unpicking, to various degrees,their long-established network of internalcapabilities that was built up duringthe heady days of free pricing andless competition.We see this trendaccelerating, with the potential forsignificant portions of not just primarymanufacturing being outsourced. It isof note that the markets to which manycapabilities are being outsourced are thevery same Emerging Markets that aredriving industry growth.Emerging Markets will be the driversof industry growth and successfulcompanies beyond 2020 will have deeplocal relationships including significantinvestments in R&D facilities, as well asthe already growing manufacturinginvestments in these key markets.We believe that there is a significantopportunity for creating shareholder valueby rebalancing the risk that shareholdersperceive they are taking with morepredictable rewards from betterorganised and governed companies.Returns need to be more predictable,and with the optional upside fromserendipitous discoveries not basedon the need to be creative to order.Shareholders need to see an explanationof the returns on historic R&D spendingand the criteria for future returns tobelieve that R&D spending is worthwhile.Boards of directors need to believe thiseven more and sooner.Successful companies in 2020 couldpursue either a diversified or a specialistbusiness model; the key will be tomaximise the individual company’sstrengths, to improve internal processesand to understand if the company’sproduct offering and future productoffering deliver sustainable value toits customers.Clear articulation of the strategy both toaccess Emerging Market growth whilenot missing opportunities in maturemarkets will be needed to persuadeshareholders that companies havemoved on from the old pharma model.Trust needs to be restored.Visibilityand honesty will be key to achievethis. Simpler, less complex businesseswill make this easier.Figure 21Potential Success Factors inCreating ShareholderValue Source: KPMG estimatesBases of competitive advantage in the past / today Bases of competitive advantage in 2020Serendipity and scale drive returns from R&D More predictability and efficiency drive returnsNumber of R&D projects the basis for a ”strong pipeline”Portfolio with range of IRR forecasts based onhistoric track recordEmphasis on earnings per share growth Emphasis on volume/revenue growthInadequate articulation of systemic risk Risk better governed and managedUnintended complexity Transparent and simpler business model – easier to understand© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 26. 23 | Future PharmaA Vision of the PharmaceuticalIndustry in 2020 and BeyondScientific and medical research isunpredictable and serendipitousdiscovery will continue to occur.However, the competitive nature of thebusiness now (likely to be even moreso by 2020) means that in our view agreater element of predictability needsto be introduced to regain investors’confidence in the value the sector candeliver. Show regular and steadygrowth. Minimise business surprises.R&D in 2020 will be a much morenumerically driven process than today.We cannot see any way to justify thespending needed without bettermeasures of the historic return oncapital based on IRR.The seeds of anew approach are being sown, forexample at Pfizer9and Novartis10.The dominance of Emerging Marketeconomies by 2020 could result in ashift back to volume growth as a keymeasure of performance, with earningsgrowth following. Improving efficiencyis the right strategy but until it isaccompanied by sustainable revenuegrowth, it is not likely to see theindustry‘s valuation expand, all otherfactors in the stock market being equal.While returning cash to shareholdersthrough share repurchase or enhanceddividends is a positive use of excessfree cash flow, it is not likely to berewarded by a high valuation.We think successfulcompanies in 2020 will havea more dynamic approach torisk reporting, with greaterdisclosure of potential andactual risk.The industry willbe perceived to be bettergoverned as a consequence.Lastly, we see an industry in 2020that will be simpler for investors tounderstand not because it will bestructurally simpler; developing newmedicines will be an ever more complexprocess. But because the geographicallydiverse nature of its business willincrease with the growth of EmergingMarket influence, the pharmaceuticalindustry could take on the appearanceof a high value consumer productsindustry to its shareholders.9http://www.pfizer.com/files/investors/presentations/barclays_capital_031711.pdf10http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17-changing­the-practice-of-medicine.pdf© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 27. FFututurure Phare Pharmama | 24| 24© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 28. 25 | Future Pharma5Strategies toAccelerate theTransformation ofthe PharmaceuticalIndustry by 2020© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 29. Future Pharma | 26Strategy 1Reassess Product StrategyThe driver of industry growth isEmerging Markets.While thesemarkets are currently being driven bythe growth of classic primary careproducts for major diseases – the verytherapeutic categories that are beinggenericised inWestern Markets, thissituation is unlikely to persist.There istherefore a strategic dilemma becausemost companies do not possess anideal Emerging Markets portfolio.To what extent should investment intoday’s needs be made versus the longerterm? Because in the longer term, thekey Emerging Market consumers andgovernments will want access tothe very best medicines, but it is almostinconceivable that they will be preparedor able to pay the prices currently paid inthe US or even in Europe.The volumesand therefore the costs would simply betoo high.There could be twice as manypeople with income above $10,000 inthe top 13 Emerging Markets comparedwith the US and EU combined11.The recent volume increases reported bysome companies for products for whichprices have been substantially reducedindicate in our view the path the industrymust pursue in the long term althoughbalancing the need for affordable priceswith the risk of commoditisation.Valuedelivery must be demonstrable.Products must take into account the needs of consumers in Emerging Markets.Emerging Markets offer largely blankslates; the continuing application of anadapted“oldWestern” model of the drugindustry, which is currently ongoing, willmiss a significant opportunity to redrawhow the industry interacts with patientsand governments.There is an argument for focusingbusiness strategy on delivering highvalue modern medicines to EmergingMarkets at much lower prices than havebeen accepted inWestern Markets.This would underpin a root and branchreassessment of the costs of bringingthese medicines to market, the marketingand sales support required and the riskof counterfeiting and parallel trade.This should drive strategy in clinicaldevelopment, location of trials,marketing plans, sales infrastructureand manufacturing investment.Theopportunity for biologic therapiesfor cancer for instance is very large,providing the right pricing strategycan be developed12.Emerging Market governments aremoving rapidly to increase medicalconsumer spending.The“established”branded generic Emerging Marketsgrowth route could run out of steam asgenerics become commoditised.Thissuggests that every possible opportunityto drive consumer/OTC business inEmerging Markets should be explored inaddition to a focus on speed to market,lowering the costs of developmentand efficient delivery of appropriate,differentiatedqualityprescriptionproducts.11http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf12http://www.roche.com/investors/ir_agenda.htm?tab=2 Sanford Bernstein Conference 1st June 2011, p10© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 30. 27 | Future PharmaStrategy 2Invest in the Marketing andSales Infrastructure of 2015and BeyondAccelerate the modernisation of sellingand marketing in mature marketsNew technology has come relativelyslowly to the pharmaceutical industry.Now the challenge for the pharmaceuticalindustry is to balance innovation andcreativity in its use of new technologyagainst perceived value and the cost ofcreation.The key is mapping the newtechnology opportunity with the businessin a sustainable and updatable way.Integrating flexible technologies such asQR barcodes as a means for doctors tocommunicate with the industry usingsmartphones is one example of how atechnology investment could make asales force more efficient. It providesa more rapid and flexible responsemechanism for a physician to contactthe pharmaceutical company thansimply ticking a box or even filling inan online form.Partnership with technology companiescould be a route to more rapidintegration of modern technologyplatforms. Potentially partnership withconsumer companies might also revealopportunities for greater efficiency.Many companies have started to addressthe need to reduce marketing and salesinfrastructure in mature markets of the USandWestern Europe. However, we thinkthe pace of change could be acceleratedand may be a key component ofpreserving margins in the face ofincreasing pressure on price. Newtechnology, such as the iPad, is enablinggreater efficiency according to severalcompanies including Novartis13andOtsuka14. Pfizer launched an iPhone appto encourage doctors to send questionsdirectly to the company15and AstraZenecahas an iPhone, iTouch and iPad app tohelp educate healthcare professionalswith genetic testing for lung cancer16.AstraZeneca also recently launched a liveclick-to-chat function on its US Crestorand Nexium consumer websites17.The basis for assessing marketingand sales effectiveness needs tobe addressed.We see communication of evolvingcorporate strategy in the face of therapidly changing industry as essential.This is no straightforward or simple taskand merits a major commitment fromexecutive management.Focus on the longer termin Emerging MarketsEmerging Markets are not going toreplicate the development of thewestern pharmaceutical markets of thelast 25 years but will take new pathsdefined by the pressures from largepopulations, rapid growth of bothpersonal and national wealth andalso the clear need for individuals andgovernments to balance spending onhealthcare with multiple other demands.Business leadership in key growthEmerging Markets needs to develop a planfor investment in the markets that thesekey countries will become, not those thatthey are today. Merely adding more andmore sales reps on the ground in atraditional model does not seem anappropriate strategy for the future. It couldbe valid to build a presence but the paceof change is such that plans should beregularly reviewed and realigned.13http://www.pharmalot.com/2011/03/novartis-the-ipad-35000-more-visits-to-docs/14http://www.bloomberg.com/news/2010-06-08/ipads-to-help-otsuka-pharmaceutical-sales-force-market-drugs­to-doctors.html15http://www.pharmalot.com/2010/06/one-more-way-to-minimize-the-sales-rep/16http://www.astrazeneca.co.uk/Media/latest-press-releases/2010/FIRST_IAPP_TO_HELP_EDUCATE_HPa_ON_EGFR_GENETIC_TESTING?itemId=1216702917http://astrazeneca-us.com/about-astrazeneca-us/newsroom/all/12379170?itemId=12379170© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 31. Future Pharma | 28The diverse nature of Emerging Marketsmerits a careful refinement of investmentstrategy; while Brazil, Russia, India,China, Mexico andTurkey may contributehalf of Emerging Market sales, dozensof other smaller markets make up theother half.One recent example of the need to planfor change can be found in China. Animportant element of the historic growthexperienced by most internationalcompanies has come from brandedgenerics, where the manufacturer’sname is a proxy for high quality. Brandedgenerics have enjoyed higher prices(referred to as separate pricing) than localequivalents that are limited to a lowermaximum price (known as generalpricing). A new price list issued inNovember 2010 reduced separate pricingon nearly 50 drugs out of 200 on theEssential Drug List. It is believed thatseparate pricing could be reduced oreliminated across the board over thenext 4 years.At the same time there is likely to be agovernment push to increase use ofOTC drugs sold at retail pharmacies.These moves by government will verylikely result in material changes in theChinese market and will need differentinfrastructure from 2011 to maximiselong term returns.Accelerate development andintegration of social mediaand mobile-health policyThe pharmaceutical industry has laggedother major industries in its use of socialmedia.At face value this is understandablegiven the high levels of regulatoryscrutiny imposed on all aspects of theindustry’s interaction with patients,prescribers and payors.Since 2009 there has been a significantinvestment in social media.From a survey of the websites of the 13companies that we define as the largecapitalisation pharmaceutical industry,15% have a blog, 54% are on Facebookand 77% are now onTwitter.However it is clear that there is anopportunity not only to lead theregulators and help develop regulatorypolicy but, for internal planning purposes,being prepared to use social mediamight be a key competitive advantagein many markets.For instance Emerging Marketpenetration of social media use is higherthan inWestern markets, with over70% of the population of the Philippinesand Malaysia for example as activeonline users.Figure 22Social media use by Fortune100 Companies in 2009 Source: Burson-Marsteller: Social Media Use byFortune 100 Companies 29th July 2009IndustryPercentage witha blogPercentage onFacebookPercentage onTwitterTelecommunications 75% 100% 100%Computer, officeequipment67% 100% 67%Specialty retailer 50% 50% 100%Food and drug stores 17% 33% 50%Pharmaceuticals 33% 0% 33%© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 32. 29 | Future PharmaStrategy 2Strategy 2Invest in the Marketing andSales Infrastructure for 2015and BeyondFigure 23Global Social Network Penetration Source Global Web IndexPhilippinesIndonesiaMalaysiaBrazilRussiaIndiaSingaporePolandMexicoHongKongUSCanadaChinaAustraliaNetherlandsUKItalySpainFranceGermanySouthKoreaJapanGlobalAverage80%70%60%50%40%30%20%10%0%%ActiveonlineusersThe rising power of patient groups inthe data age will continue at pace. Ifthe past five years has seen the industryfocus on regulatory and reimbursementoutcomes then the next five years shouldsee a greater emphasis on how toimprove the outcome for patients.Thespread of social media use seemscertain to be giving patient groups agreater voice and empoweringindividuals, with a potential impact atall levels of healthcare provision anddelivery.The use of social media offersthe industry a route to restoring trustwith patients from its current low ebb18.The industry needs only to look backin history at the power exerted byorganised patient groups (e.g. in thefast-tracking of the first AIDS drugs).Patient groups are becoming moreorganised, better informed, andconnecting across borders using socialmedia. Greater interaction with suchgroups in a structured way shouldbenefit all aspects of the pharmaceuticaldevelopment process and the safe andappropriate use of medicinesonce marketed.18Financial Times 12th March 2010, Patients’ groups distrust ‘big pharma’© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 33. Strategy 3Future Pharma | 30Acquire moreTalent andExperience from other IndustriesThe growth markets of the future lookmore like consumer brand driven marketsthan the traditional pharmaceuticalmarkets of the 20th century.This begsthe question of what leadership talent willbe required to capture the opportunitiespresented by these new markets whilemaximising the most efficient returnsfrom matureWestern Markets.Our research indicates that in aggregateless than 20% of executive teammembers within the industry havecome from outside the pharmaceuticalindustry within the last 5 years, within arange of 0%-50%. The most commonrole now filled by individuals withindustrial experience from outside thepharmaceutical sector is that of chieffinancial officer. The impact of theattendant fresh thinking has been visibleon how individual companies spendshareholder funds and the scale andspeed of efficiency programmes.More diversity of talentthroughout any givenorganisation should enhanceand strengthen the business.This could cover all major business areas.Manufacturing and administration areareas in which new talent has beenrecruited by some companies but theneed for greater urgency is pressing.Even in R&D there have been some verysuccessful hires of highly skilled academicresearchers to lead drug discovery.We believe that seniormanagement in the industryshould actively seek talentand experience from outsidethe traditional group ofpharmaceutical competitors.However, it could be argued that lookingfor fresh approaches to key accountmanagement in the changing world ofmarketing and sales is the businessactivity with the greatest need, given theshifting nature of both traditionalWesternand Emerging Markets. In particularregional and country management wouldbenefit from having experience fromother sectors, as opposed to just fromthe pharmaceutical industry.With the old“sales rep calling on doctor” model nowbeing gradually consigned to history, webelieve that the industry should look toimport key account managementtechniques from other sectors,notably in the consumer space.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 34. 31 | Future PharmaStrategy 4Use Internal Rate of Return toPrioritise and Rationalise theR&D PortfolioResearch spending is the minor part ofindustry R&D investment (circa 30%).It should be reviewed for how and whyspending is taking place but alsoscrutinised as to who is doing thespending i.e. the quality of the individualsleading the projects.This scrutiny, which could be along the linesof“is this best biology/best molecule/besttarget and are these the best people”, begsthe question of how do you know that youhave the best of anything?Patent applications filed, scientific paperspublished (and the proportion in theprestigious journals, such as Nature andScience), and the number of timesscientists working in research have beencited by their peers all spring to mind aspotential measures of quality. Assessmentby an independent panel of experts is afurther possibility.Development spending and the postlaunch investment needed to deliveracceptable returns is the big issue.We believe all companies should have astandardised approach to be able to showon an ongoing basis what internal rate ofreturn (IRR) has been achieved on pastinvestment and an internal perspectiveon what range of returns is forecast fromthe current investments, and whatassumptions are used in these projections.Such analyses should also include offbalance sheet funding through partnershipsand minority investment in third partycompanies (typically developmentstage biotechnology companies).We believe this type of IRR basedinformation could transform theinvestment decisions recommended bysenior management in the industry andsigned off by Boards of Directors.If more efficient development can beachieved, and marketing and salespractices are modernised, lower peakrevenue numbers will still permit internalrates of return well above the industry’scost of capital.There is also a need to be clearabout the true cost of capitalfor any individual company.It is hard to believe that every late stageportfolio in the industry is optimal and thatnone of the projects carries a potentiallymarginal or negative return.Werecommend re-evaluation of the valueproposition of all phase II, phase III andregistration assets on an IRR basis.This review should include a detailedreview of the assumptions thatsupported development of theseassets. Consideration could be givento whether the forecast returns couldbe improved by partnerships orco-marketing arrangements.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 35. Future Pharma | 32We think that the most successfulcompanies have complementedtheir scientific agenda with businessperformance management goalsand an integrated approach to R&DFinance. R&D Finance is key to reducingoperational obstacles that slow theprogress of product candidates tomarket by timely analysis and financialreview through the introduction of earlywarning indicators and go/no gocheckpoints based on financialanalysis and evaluation.We also recommend the following actions as part of the R&D review:• Set up an R&D team with the express role of working out how to beatthe company’s key innovative compounds - an internal fast follower team• Assess whether the compounds with the highest potential return areoptimally funded to bring them to market as rapidly as possible with thebest possible label• Consider introducing an external perspective to this process• Host an internal R&D day for all R&D employees worldwide to showcasetheir research to each other and drive higher levels of collaboration• Clearly articulate policy on collaborations with academia, biotechnologycompanies and smaller pharmaceutical companies as well as with peers• Look for ways to maintain a return on the intellectual capital built up duringperiods of success in any given therapeutic area.Too often companiesdiscard this intellectual capital once patents have expired© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 36. 33 | Future PharmaStrategy 5Review and ReviseGovernance StandardsChange should start at the top. It couldbe argued that the industry is stillperceived poorly by consumers andsome parts of government.The aimshould be to revise and improve Boardgovernance standards to not onlya higher level than any industrycompetitor, but to the best practicelevels seen in any industry.Companies need to conduct a rootand branch review of governance andenterprise risk management across theentire value chain – to understand betterthe activities, appreciate the impactfrom speed of change and theincreasing pressures on each link ofthe chain– from early research anddevelopment, through late stagedevelopment, manufacturing to salesand marketing.We see using a specialist approach asthe best way to deal with these newrisks, whereby personnel are employedin specialist risk/governance roles,together with a three-step approach:1. Internal independent checks andbalances where people review eachstage and have a reporting lineoutside of that area’s particularvertical with direct access toC-Suite executives.2. Give power and credence tointernal audit groups and focuson their outputs.3. Use completely independent andexternal experts who are allied withethics, risk and governance as a finalcheck and balance for each elementof the value chain.We expect all companiesin the sector will have inplace robust and modernemployee appraisalsystems.We think athorough review of allsenior management jobdescriptions should be acomponent of the reviewof the product portfolioand the investment inmarketing and salessupport described earlier.Changing elements of the value chain where we see these newpressures include:• Increased (volume and value of) research collaborations to source innovation• New social media use leading to exponential growth in data collectionand storage• Changing IT landscapes (e.g. cloud computing)• Doing business in Emerging Markets (e.g. competitive landscape,“the waythings are done around here”, anti-bribery and corruption, intermediary risk)• Regulators all gaining teeth – regulators tend to regulate – rules are not going toget any easier going forward• Increasing use of third parties (e.g. CROs in late stage development, CMOsin manufacturing, IT organisations)© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 37. Future Pharma | 34Changeshould startat the top.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
  • 38. Contact usEuropean Sector LeaderChris StirlingKPMG in the UKT: +44 20 7311 8512E: chris.stirling@kpmg.co.ukBelgiumLudo RuysenKPMG in BelgiumT: +32 382 11 837E: lruysen@kpmg.comDenmarkLau Bent BaunKPMG in DenmarkT: +45 381 83 530E: lbaun@kpmg.dkFranceWilfrid Lauriano do RegoKPMG in FranceT: +33 1 55 68 68 72E: wlaurianodorego@kpmg.comGermanyVir LakshmanKPMG in GermanyWirtschaftsprufungsgesellschaftT: +49 211 475 6666E: vlakshman@kpmg.comItalyJohan BodeKPMG in ItalyT: +39 026 7631E: johanbode@kpmg.itNetherlandsLex GardienKPMG in the NetherlandsT: +31 10 453 4163E: gardien.lex@kpmg.nlSpainJorge Rioperez OrtaKPMG in SpainT: +34 914 568 080E: jrioperez@kpmg.esSwedenBjorn FlinkKPMG in SwedenT: +46 8 7239482E: bjorn.flink@kpmg.seSwitzerlandErikWillemsKPMG in SwitzerlandT: +41 44 249 45 20E: ewillems@kpmg.comTurkeyNesrinTuncerKPMG inTurkeyT: +902 12 317 7400E: ntuncer@kpmg.comGlobal ChairEd GiniatKPMG in the UST: +1 312 665 2073E: eginiat@kpmg.comGlobalAdvisory LeaderDavid BlumbergKPMG in the UST: +1 267 256 3270E: dblumberg@kpmg.comGlobalTax LeaderFrank MatteiKPMG in the UST: +1 267 256 1910E: fmattei@kpmg.comAsia Pacific ChairNorbert MeyringKPMG in ChinaT: +86 21 2212 2707E: norbert.meyring@kpmg.comkpmg.co.ukThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such informationis accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG networkof independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in theUnited Kingdom.Printed in the United Kingdom.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.RR Donnelley | RRD-257365 | October 2011 | Printed on recycled material