LS Executive Exchange: April 2011

The year 2011 is off with a bang and promises no rest for the weary. Wall Street is worried about the patent cliff and lack of replacement revenue leading to increased pressure on profits. Ironically, the public commonly views Life Science compa­nies as too focused on profits, instead of the safety and integrity of their products. In the past, Life Science companies have been able to serve both these groups by offering innovative products that both improved patients’ lives and demanded premium prices.

Those days are gone, but the challenges of increased regulatory scrutiny, pricing pressures from governments, and diminishing pipelines remain. There is no clear path to future success as companies make tough decisions about keeping development in-house or looking outside the four walls for pipeline boosts, market expansion, and how to balance the demands of regulatory bodies with the expectations of shareholders. As earnings reports are released we continue to read about the differing strategies that companies are utilizing for future growth.  Where should Life Sciences companies focus their efforts this next year?

• Address the revenue gaps created by healthcare reform through increased brand loyalty, replace lost revenue through emerging markets, and minimize the impact of new fees and taxes through continued efficiency changes.
• Life Science companies have more ways to reach patients than ever before, but to truly influence the decision to purchase, Life Science sales forces need a transforma­tion.
• Social media continues to gain influence on the market. While the FDA has yet to issue its official guidance on how companies can use social media, the agency’s new focus on transparency allows companies to get a good feel for requirements that will be in the guidance.
• Supply chain challenges lead to new opportunities for differen­tiation. Commonly accepted practices can be improved, like supplier quality programs and supplier auditing.
• Developing strategic partnerships with contract manufacturing organizations (CMOs). Developing these relationships first requires a hard look at current partnerships and identifying those to strengthen and those to replace.  Then find suppliers that are on the cutting edge of their industry with technology and integration.

The chal­lenges facing the industry are coming from regulatory bodies, shareholders, and the general public. However, the need for the benefits Life Sciences companies provide to the world has never been greater. A world population with rising socioeconomic status demands products that will improve quality of life. The Life Sciences landscape is going through a transformation with the leaders emerging under different business and operating models from those that got them to this point. The question is how quickly Life Science companies set the new path and begin to execute on it.

Investors are looking to the future and top Pharmaceutical companies are disclosing their plans for success, yet there seem to be no clear answers.  Although the earnings reports have on average shown moderate growth across the industry, all have been delivered with a note of caution for the future. While the strategies to resolve the issues are different, the issues remain the same. Healthcare reform will have a financial impact on Pharmaceutical company earnings in 2011, and the patent cliff is imminent. Looking at the challenges ahead will one strategy emerge as better than another?

Growth through Acquisitions
Mergers and acquisitions are not going to slow down in 2011 for the industry. As pharmaceutical companies define whether they will provide a diversified portfolio of products, addressing markets from cradle to grave, or maintain a core group of products addressing a specific sub-segment and spin-off non-core business the real answers will only be realized by sticking to the strategy, not straying if things get rocky. Strategic partnerships will be a key part of both these strategies and will require that companies focus on the right opportunities that will provide the most financial and strategic value.

Investing in R&D
The need for new and innovative products is clear. The question the industry is asking is do you invest in R&D in-house, or look outside? The product pipeline has been a concern for over a decade and yet the right strategy has yet to surface. Even the top pharmaceutical companies in the industry are taking differing approaches in the development of new products – Pfizer is decreasing spend while Merck and Eli Lily are increasing their internal spend. What is the right answer, no one knows as both strategies carry risks. The answer truly is in the details and execution, and only time will tell.