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Pharma Management "There's a lot that can undermine the operating model, but there is a lot of value in getting an operating model lean, efficient, and effective, especially during these challenging times in life sciences." Greg Rotz, partner with Booz & Co. cil to paper to slash costs unrelated to core capabilities. For some, the price cutting was public, like Pfizer, which publically announced it would slash 30% of its research budget as part of a plan to focus on only the most promising areas, like cancer and Alzheimer's disease. For others, it was more a quiet battening down of the hatches that involved less visible reductions in budgets and headcount. "Many execs feel like they've been at this cost cutting for a long period of time in an industry that's historically been a growth industry. And now many are asking, WHAT YOU CAN GLEAN FROM LAST YEAR'S DRUG APPROVALS U.S. drug approvals in 2012 reached a 15-year high with regulators giving the thumbs up to 39 new drugs. Of the 39, 11 were for cancer treatments and almost 20 were designated orphan drug status. "The sheer number validates the shift of pharmaceutical companies over the last number of years focusing on more oncology drugs and developing drugs that meet unmet medical needs," says Rick Edmunds, a senior partner at Booz & Co. "The increase is suggestive of the future growth potential of the industry." Edmunds adds that these are the efforts of an industry that has spent the last 5 to 10 years pruning its portfolios to focus on unmet medical needs, areas that are attractive to payers, providers, and the FDA. This shows, he says, that receiving FDA approval is less than half the battle of bringing a drug to market. It is also about how the market — opinion leaders, physicians, payers, and institutional providers — perceive the value of the drug. "While we think the increase of approvals is great, LSLs should not be naïve to think that it's a panacea," says Edmunds. Greg Rotz, a partner with Booz & Co., adds that, "While the number of approvals has been going up over the last few years, the thing that keeps life science leaders awake at night is the number of drug launches that have missed their expectations; their uptake and adoption in the market is much less than any of us would like to see." So, while we may have more success moving through the regulatory hurdle, the point is that the commercial hurdle is vexing because studies suggest that between 2/3 and 3/4 of launches going back to 2009 to 2010 are underperforming expectations. "LSLs should be encouraged by the uptick in approvals from the FDA and learn lessons of past launch disappointments to make sure that these 39 molecules that we'll take to market this year are actually outperforming expectations as opposed to contributing to the disappointing skeletons along the road," says Rotz. 56 LifeScienceLeader.com April 2013 'What's next?' and 'How can I regenerate growth?' while still maintaining cost fitness," says Edmunds. The answer is that it requires identifying the capabilities that are most critical to the company's growth. "Reduce investment in the less critical capabilities so that you can fully fund building the muscles that will drive your differentiation," says Rotz. HOLD UP A MIRROR TO THE OPERATING MODEL To stay focused on the key capabilities discussed above, Rotz and Edmunds say it is critical to have the right organizational design (e.g. how the company organizes and runs itself, how it structures itself, how many layers of decision making there are, how quickly decisions get made, how the company compensates and incentivizes to get things done on a daily basis). And once decisions are made, is there follow through, and are people held accountable? "Holding up a mirror to your model means taking a critical look at how you make decisions and run a life sciences organization," says Rotz. "There's a lot that can undermine the operating model, but there is a lot of value in getting an operating model lean, efficient, and effective, especially during these challenging times in life sciences." One of those challenges, as Edmunds points out, is that large pharma companies with large product portfolios across the globe can face difficult decisions regarding how they spread out the dollars they invest and the capital in which they invest. "As a senior management team, these multitude of trade-offs can be very hard to make, whereas operating where the senior team stays primarily focused on the critical capabilities to drive success across the portfolio/markets enables a more streamlined concentration of management focus and true investment (versus just operating expense) prioritization," says Edmunds. PARTNER WITH PAYORS In the past, pharmaceutical manufacturers would negotiate with a payor to determine how much discount or rebate would be given for a particular drug based on that plan's membership. "We want and need to move from that transactional and contractual type of interaction with the large payors and hospital systems to a more collaborative dialogue about where the unmet need is in a certain population of patients," Rotz says. "That would be quite a fundamental shift on both the payor and pharma sides of the equation because that's not historically how they've done business." These partnership migrations are evidenced with the one-year research partnership between Humana and Novo Nordisk,