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Accelerating performance in biopharmaceuticalsSubscribe to Healthcare and Life Sciences 10/5/2017 Charles Moore and Brendan O'Brien
Beset by a combination of changing technology, market-access rules, and regulatory demands, many global biopharmaceuticals companies find themselves facing a moment of truth. What’s more, the industry’s usual competitive instinct—innovation—is increasingly being met with a double whammy of tightened public and private healthcare budgets. Only by developing a systematic approach to the elements that drive and hinder success in today’s market can biopharmaceuticals companies deliver that extra power needed to accelerate corporate performance and ensure sustained success. Indeed, those that do so first may gain an enduring advantage in what promises to be an increasingly competitive market in the months and years ahead.
Shifting payment burdens illustrate the pressures being exerted on research-based biopharmaceuticals companies. Public and private insurers around the world are striving to hold down costs, and in the United States, for example, this has led to moving more of the burden onto consumers in the form of higher deductibles and copayments. Indeed, up to three-quarters of US hospital systems and healthcare providers are insisting on up-front payments from patients before treatment, according to the Healthcare Financial Management Association.1
Meanwhile, tighter prescription drug budgets are being felt equally by publicly funded state health systems and private markets. This increased focus on costs is forcing the biopharmaceuticals sector to seek greater efficiencies. The trend toward shifting more of the costs to patients requires a greater understanding of consumers and how to satisfy their demands. To thrive, biopharmaceuticals companies must understand—and anticipate—these market changes and adapt to them.
A changing landscape
Biopharmaceuticals companies have traditionally followed a straightforward business model: develop drugs targeting specific diseases or complaints and demonstrate their effectiveness, usually to regulators and the medical community. The modern marketplace, however, has added complications to this model. For example, patients are now much more active in questioning their doctors’ orders, whether for prescription medication or entire therapeutic regimens.
As the industry has consolidated, competition has also become more intense. Between 1995 and 2015, through mergers and acquisitions, 60 pharmaceutical companies have consolidated into 10 monoliths.2 During a similar period, from 2000 to 2015, the combined market capitalization of the 10 largest biotech companies grew from $119 billion to $914 billion, according to S&P Capital IQ data.
But these biopharmaceuticals giants are facing challenges from generic manufacturers that are taking advantage of expired patents, often for medicines that have represented significant cash flows, as well as from smaller biotech companies that are exploiting new technologies to bring targeted medicines to the market. Between 2007 and January 2017, the number of medicines in the R&D pipeline nearly doubled, from 7,737 to 14,872.3
In addition to changes in the competition and consumer behavior, regulators also are putting more pressure on these companies, especially in pricing. Drug regulators in many markets are insisting on more evidence of a medicine’s effectiveness and unique properties before approving sales and, in markets with some level of state healthcare, before approving reimbursements from public programs. Public agencies are also negotiating reimbursement levels more aggressively.
Most large biopharmaceuticals companies are not ready to face this rapid onslaught of threats. Even those that began as nimble innovators have become slower and more rigid as they have grown. And in this environment, first-mover advantages can be significant. Sluggish reactions to the market changes can quickly erode the benefits of experience and reputation.
Pursuing accelerated performance
The combined effect of these changes is that the biopharmaceuticals sector is being forced to enhance its commercial operations, especially marketing, payor relations, and market intelligence. The effectiveness of drugs alone is no longer sufficient to guarantee success, and companies must create closer relations with patients and insurers, as well as medical staff, and be quick to respond to changes in the market. Above all, a mind-set shift is required.
Most of these companies are not organized to meet these challenges. The large, established companies tend to be mired in an inertia brought on by their own size and success. At the same time, smaller companies generally focus on their scientific prowess and short-term cash flows, while neglecting capabilities such as marketing and government relations that are necessary for longer-term growth.
To break free of these binds, companies must develop a clearer vision of the value they offer patients and practitioners and make internal changes to align the organization with that vision. They must move faster and with greater confidence, bringing products to market more quickly, satisfying patients’ needs better, and ultimately delivering greater revenues and value for shareholders. (For a closer look at our research into what high performance looks like for the top 500 companies in the world by market capitalization, see “VUCA, meet META: The 2017 list of superaccelerators.”)
The transformation involved can be radical (see figure). For many companies, it will mean shifting from a focus on product efficacy to one on customer needs and behaviors, from short-term financial outcomes to individual health outcomes, and from pitching to physicians to opening broader conversations with patients, insurers, and governments, in addition to physicians. In general, it requires that companies reorient themselves toward real external demands and away from internal assumptions.
A multiyear Heidrick & Struggles research project has looked into the factors that can help and hinder companies as they seek accelerated performance, which we see as an organization’s ability to build value and change direction faster than its competitors. The findings can provide biopharmaceuticals companies with a systematic approach to overcoming obstacles that prevent them from excelling in changing markets. Focusing on four themes—mobilizing, executing, and transforming with agility (or “META”)—can help managers accelerate the performance of specific functions to deliver maximum impact.
By exploring these themes, biopharmaceuticals companies can identify the drag factors that block progress as well as the drive factors that help create a more dynamic organization.
Be prepared for change
Refocusing strategy toward external needs and behaviors—whether those of patients, practitioners, payors, or policymakers—means that biopharmaceuticals companies must be ready to change and to mobilize the entire organization under a new vision.
At many successful companies, change is prevented by internal inertia. Companies generally focus on what has delivered profits in the past, and managers are reluctant to risk new ventures, especially into unfamiliar terrain. In biopharmaceuticals, the reluctance goes beyond commercial inertia and includes internal emotional attachments to flagship medicines that have improved the lives of patients for decades.
In addition, as the largest biopharmaceuticals companies consolidate and achieve higher market capitalization, the emphasis on quarterly performance and consistent dividend payments has increased. Left unchecked, this fixation on short-term results could come at the expense of longer-term and sustained market differentiation. Moreover, the internal focus that often accompanies short-termism can lead to misalignment among senior executives and a reluctance to wrestle with the uncertainties inherent in bringing new products to market. In other words, the essence of a company’s prevailing view of the future is built around an internal construction of the past rather than a clear sense of the external forces at work.
For example, one company that was strong in treating diabetes was facing a bleak outlook because the patent for its flagship product was about to expire. Even though managers understood the threat and the company had a healthy pipeline of drugs under development, it struggled to chart a clear path forward. Too many senior executives focused almost exclusively on defending current cash flows and profit-and-loss statements and were unwilling to release resources for new efforts.
These drag factors—internal focus and confusion—can be overcome, in part, by greater clarity around the need for change and energizing upper management. The CEO in this case generated shared enthusiasm among the senior team members and convinced them of the value of disciplined investment to capture new opportunities. The company also initiated concrete measures to capitalize on the common vision, including establishing an in-house incubator to pursue new opportunities. Within the incubator, for instance, a longer time frame was tolerated for expected return on investment, and incentives were adjusted to reflect this.
At another biopharmaceuticals company, one focused on oncology, a country general manager was brought in and soon announced an aggressive goal of double-digit annual growth over the next five years. The target dumbfounded many in the company because sales in the country had been stagnant and the company’s anemic operating model seemed a bad fit for promoting new products that were just reaching the market.
The manager, however, mobilized the organization with a clear vision of the internal changes needed to accomplish the aggressive goal, a belief in the product’s value for patients, and personal confidence in reaching the target. Driven by this bold goal, the manager mobilized the staff to reshape the organization and allocate resources as needed to achieve it. Deliberate and frequent communications reinforced the effort, and every major decision considered how customer value would be affected and how it would contribute to success. Within three years, company annual revenues in the country were up by more than 50%, and the company’s reputation internally and externally had strengthened.
From vision to reality
In reshaping a company, execution is the other edge of the sword. With the organization sharing a vision, efforts are needed to carve that vision into reality by bringing together the company’s resources to concentrate on its strategic goals.
For many biopharmaceuticals companies, unnecessary complexity can get in the way of excellence in execution. The threat is especially present in large companies that are burdened with layers upon layers of processes that were developed over years of building a vast diversified portfolio. Overlapping processes for handling regulatory requirements—including ones that may be outdated—also contribute to the burden of complexity.
Further, excessive complexity can be exacerbated by managers who are reluctant to address duplication and redundancy. When revenues and profitability streams were more predictable, such overlap had a marginal impact on financial performance, but in today’s dynamic and uncertain market, unnecessary layers of complexity can inhibit performance noticeably.
In addition, and perhaps ironic for research-based firms, biopharmaceuticals companies tend to be risk averse. The very nature of the business—products that affect the workings of the human body—demands a level of care that can lead to redundant safeguards. Managers are wary of any changes that might inadvertently reduce the safety of their products.
But undue complexity must be addressed to improve an organization’s ability to execute swiftly and to compete with smaller start-ups that often have streamlined processes built around a specific field or even a single product. Simplifying and eliminating processes that don’t add value and don’t support the mission of the company is necessary in creating a nimble organization. Managers must be disciplined in reviewing the organization’s full menu of processes, separating those, for instance, that genuinely enhance safety from those that merely give the appearance of added security.
Along with complexity, most biopharmaceuticals companies face a second drag factor that hinders execution—a skills gap—and will have to develop or bring in a new set of capabilities that reflect the new focus on customer satisfaction and needs. Areas that were neglected in traditional business models, such as consumer marketing, as well as emerging skills, such as digital media, will need to be built up quickly.
For example, one global biopharmaceuticals company recognized that the success of its product portfolio internationally was increasingly dependent on a deep understanding of consumer behavior. Unfortunately, the company’s traditional approach to the market was oriented toward communicating with healthcare professionals rather than the consumers themselves. After overcoming internal resistance, the company began drawing from the consumer goods sector as a new source of marketing talent with expertise in understanding consumer needs and behavior.
Biopharmaceuticals companies can be guided by a common lodestar and execute brilliantly, but if they continue the path they’ve traveled for years, or even decades, performance goals will likely remain elusive. Company managers must work diligently to transform the organization into an innovative machine that responds to changing customer needs with novel products that are brought to market quickly.
Fear and complacency present significant drag factors to transforming biopharmaceuticals companies. Ironically, large companies in this industry began as strong innovators, but—like leaders in many industries—as they matured, many became complacent and burdened by organizational inertia, resting on past breakthroughs. While they continue to develop new products, a focus on short-term results, immediate shareholder value, and protecting a venerable portfolio means many are slow to embrace new ideas fully.
One large biopharmaceuticals company with tens of billions of dollars in annual sales, for example, sought to establish a business in biosimilar medications, which mimic complex medical compounds whose patents have expired and are often marketed with the approval of the original innovator. The move was a big step into a new product line for the company, and it set up a semiautonomous unit to lead the effort. But rather than freeing the unit to pursue its market, the organizational structure bogged down the unit with requirements to follow less relevant corporate processes and to seek approval from headquarters for portfolio investments, among other factors. Adding to the burden, the unit was held to the same financial performance and profitability metrics as other units in the organization, even though these metrics were a mismatch for the biosimilar unit’s mission. With too much drag from its corporate anchor, the unit was unable to compete with biosimilar rivals that were more focused.
Smaller companies can also be challenged by the need for continuous innovation. Though many see themselves as the disruptors in the industry, as the successful ones mature they can also be stricken by a fear of change. For these companies, the required innovation often has an inward focus: developing commercial functions, such as marketing and government relations, that match the speed and agility of their product-development unit.
One method for shifting corporate attitudes toward innovation and away from fear and complacency is to set clearly defined priorities and goals and to demonstrate the discipline needed to meet these challenges. The transformation requires a commitment to working collaboratively and breaking organizational silos.
One company focused on oncology therapy was facing increased competition in its core products, including from generic manufacturers. Rather than accept stagnation or languid growth, one of the company’s regional general managers announced a new strategy based on an innovative approach to developing new, highly differentiated products. A crucial component of the transformation was to rearrange the organization into collaborative, cross-functional teams. To emphasize the drive for innovation, the manager set up a program for any employee to submit ideas for extracting growth from mature products.
Decisions were also accelerated. The leadership team met monthly to review progress and, if necessary, shift resources from underperforming projects to ones with greater potential. Annual planning processes were virtually abandoned in favor of more frequent investment decisions that had an immediate impact on operations and personnel deployment. Within a year of implementing the program, two of the three oncology products targeted in the effort were posting the highest revenue growth rates globally in their category. In addition, the program fostered a spirit of cross-functional collaboration that permeated the organization, and internal surveys showed record levels of employee engagement, which contributed to faster time to market for these products.
Looking into several futures
More and more often, failure is indeed an option for biopharmaceuticals companies—and one that should be embraced. In many ways, these companies have already addressed the easier problems in human health. From nasal congestion to clogged arteries, solutions have been around for so long that original patents have expired and generic copies are widely available. The diseases and maladies being addressed today are much more complicated. Even with the advantages of greater data, improved technology, and better analysis, breakthroughs will more often be preceded by disappointing results from clinical tests or other setbacks.
Agile organizations respond to such failures—as well as disruptive technologies, changes in customer behavior, burgeoning opportunities, and other market events—more rapidly than their competitors. They do this by focusing on the future, rather than the past; by accepting failures as learning experiences; and by creating room for flexible responses to changing markets.
A global biopharmaceuticals company, for example, was seeking to expand the use of its medicines in the fiercely competitive field of immuno-oncology, and a significant share of its revenue growth expectations rested on the success of this effort. However, a regulator in a major market rejected its initial application because of concerns about the clinical-trials program. Rather than allowing the setback to sidetrack its growth targets, the company moved to redirect its strategy against the background of this new reality, and within weeks came up with a new approach. The swift response was aided by earlier high-level discussions that considered worst-case scenarios, no matter how improbable they seemed at the moment.
Inflexibility is a treacherous drag factor that thwarts organizational agility. Focusing on a single vision of the future, for instance, prevents managers from adapting to unexpected events and undermines resilience to uncertainty. Most agile companies consider three or four competing versions of the future—some rosy and some gloomy—and discuss how they might respond to each. They look, for instance, at which core advantages would endure across the range of possibilities and where weaknesses might be exposed.
Practical elements of creating an agile organization include opening direct lines of communication so, for instance, all functions can share crucial market insights with product-development teams without delay. This is often accomplished by ensuring that functions throughout the organization—specifically, sales, marketing, and medical—work together on teams. Clear leadership from senior managers is also needed to amplify and support the shift toward faster and nimbler corporate reflexes.
Pfizer’s experience with torcetrapib, a medicine intended for patients with high levels of cholesterol, illustrates the dangers of becoming too dependent on a single view of the future. Torcetrapib was being developed as the heir apparent to Lipitor, a treatment for high cholesterol that generated more than $125 billion in sales between its launch in 1997 and 2011, when its patent expired, accounting for about a quarter of the company’s revenues.4 The company invested heavily in torcetrapib, and cholesterol treatments generally, including conducting one of its largest clinical trials ever.
Despite early concerns about the safety of the medicine, Pfizer chose an optimistic view of its prospects. In total, it invested about $800 million in the effort and was blindsided when evidence mounted that torcetrapib was linked to a sudden increase in mortality.5 The program was halted in 2006, and, by focusing myopically on torcetrapib’s expected success, Pfizer faced the potential of a substantial gap in the company’s revenue pipeline once Lipitor’s patent expired.
In contrast, in 2015 Janssen Research & Development, part of Johnson & Johnson, announced it was creating the Disease Interception Accelerator, which focuses on identifying indicators of imminent diseases that have yet to show symptoms and developing treatments that could delay their onset. The center chose more than 80 diseases to explore initially. In 2017, the core team comprised 11 people, but scores of others in the organization collaborate with the center on its mission. Decisions, including investments, follow a streamlined process that requires approval only from the global head of the company’s research and development center and its chief financial officer. The effort has a long-term time horizon, with products from the program not expected to reach the market until the 2020s.
For centuries, scientific discovery has been a slow and methodical process. Except in the rarest cases, years—even decades—of thought, study, research, lab work, and testing have preceded those “eureka” moments. It’s not surprising, then, that the culture of biopharmaceuticals companies, whose diligence is needed to protect the health of patients, is rooted in these protracted, methodical processes.
But markets and technology are changing rapidly, and accelerated performance is as vital for the biopharmaceuticals industry as any other sector. By following a structured approach built around mobilization, execution, transformation, and agility, biopharmaceuticals companies can create organizations that respond more quickly to these changes and orient their efforts toward customer needs, while preserving the integrity and safety of their science.
About the authors
Charles Moore (email@example.com) is the regional managing partner of Heidrick & Struggles’ Healthcare & Life Sciences Practice for Asia Pacific and the Middle East; he is based in the Singapore office.
Brendan O’Brien (firstname.lastname@example.org) is a principal in the New Jersey office and a member of the Leadership Consulting Practice.
The authors wish to thank Rohit Yadav for his contributions to this article.
1 Michelle Andrews, “Doctors and hospitals say ‘Show me the money’ before treating patients,” Kaiser Health News, December 6, 2016.
2 Ravi Vij, “Pharma industry merger and acquisition analysis 1995 to 2015,” R&P Research, February 17, 2016.