Rethinking pharma productivity
Many
companies’ efforts to do more with less have stalled. Six situations present
opportunities for executives to reignite programs that optimize efficiency and
cost.
The fundamentals of the
pharma industry remain strong. A
growing and aging population with significant unmet needs is creating high
demand. New technologies are emerging; these could revolutionize the way new
medicines and devices are developed, tested, and marketed, as well as the way pharma
companies interact and build relationships with their customers.
But today’s industry
also faces considerable headwinds. The outlook for pricing and volume expansion
is becoming less attractive across all regions, given sustained pressure on
drug pricing in Europe, the growing size and bargaining power of payors in the
United States, the looming biologics patent cliff, and mounting competitive
pressure in emerging markets. Meanwhile, advances in technology and analytics
are opening up opportunities for powerful tech entrants to engage with patients
and consumers in radically new ways and to launch innovative healthcare
offerings in conjunction with payors and providers. These entrants threaten to
disintermediate pharma companies as the primary owners of patient data and take
control of their value story. Should that happen, it would have drastic repercussions for pharma’s R&D and commercial models.
Faced with these
pressures, pharmaceutical companies have been striving to improve their
productivity since the beginning of the new millennium. They scored early
success by bringing down selling, general, and administrative (SG&A)
expenses between 2004 and 2011, but more recent cost-reduction efforts have yet
to reshape the structure of their P&L.
While some companies
have bucked the trend by achieving more impressive productivity gains, pharma
as a whole still has a long way to go to match the progress other industries
have made in rethinking the way they operate to cut costs and contain staffing
levels (see sidebar, “A tale of two industries”). This holds true regardless of
subsector. Big pharma, smaller companies, healthcare conglomerates, and
generics manufacturers may have different cost structures, but all have
struggled to drive step-change productivity gains. As Exhibit 2 illustrates,
the only companies that managed to reduce their average cost of goods sold
(COGS) between 2011 and 2014 were those operating in the highly cost-sensitive
generics sector. And over the same period, only midcap pharma was able to bring
down its SG&A expenses.
Firing up the productivity engine
As the need for higher
productivity in pharmaceuticals becomes ever more acute, standard industry
responses are losing their effectiveness. The main levers that companies have
pulled over the past decade to increase productivity—reinvesting in R&D,
reallocating resources to emerging markets, and improving COGS—will not be
enough to deliver the scale of improvement that the industry needs to thrive in
today’s challenging environment.
Reinvesting in R&D.
Over the past five
years, pharma companies have refreshed their innovation pipeline, improved
their decision making, and reversed their decade-long decline in clinical
success rates. A recent Nature article noted, “For the first
time since we started analysing such data, cumulative success rates are up in
the three years to 2014, compared with the previous three-year period.”1However, companies will
need to commit to significant further investment if this upward trend is to
continue. Funding is needed in three areas in particular: developing new
capabilities such as advanced analytics to improve R&D effectiveness,
capturing the promise of new tools and technologies such as immuno-oncology and
gene editing, and reshaping business development and licensing (BD&L) as
deals with small start-ups and other external partners become an increasingly
common route for accessing innovation.
Reallocating resources
to emerging markets.
The pharma industry has
sought to benefit from faster market growth and lower operating costs by
shifting frontline resources from developed to emerging markets, but this
strategy has recently received a double blow. Growth rates are slowing,
particularly in Brazil, Russia, India, and China, while labor-cost advantages
are eroding quickly. In addition, local competitors are eating into
market-share gains in many countries.
Improving COGS.
Generics companies have
led the industry in reducing COGS by optimizing their procurement and
manufacturing processes. However, this gain has been offset by a shift to more
expensive-to-produce drugs at other pharma companies, leaving COGS flat across
the industry as a whole. Future improvements will be difficult to achieve, now
that generics manufacturers have exhausted the easy gains. At the same time,
originators in small molecules and biologics will come under increasing
pressure to reduce costs as competition from biosimilars intensifies.
The recent surge in
pharma M&A has also been prompted by the quest for higher productivity, as
well as other factors such as increasing specialization. As a recent In
Vivo article explained, “This [M&A] boom was fueled partly by the
overcapacity that persists throughout the industry, particularly in support and
commercial functions.”2The article notes that
the largest deals have declared significant cost synergies even if that was not
their chief objective.
As these established
levers become less and less effective, we believe the industry urgently needs
to find new ways to bring about the next S-curve in pharma productivity.
Toward a systematic approach to productivity improvement
To equip their
companies for a rapidly changing pharma landscape, executives need to seize
every opportunity to embed productivity in their thinking and incorporate it
into every change effort they undertake. As leaders consider their company’s
path forward, any improvement program, whether limited and local or broad and
far-reaching, should have productivity at its core.
Drawing on recent
conversations with a number of pharma CEOs, we have identified six situations
that make excellent triggers for executives to drive their productivity agenda
. Each needs to be handled in a different way. Together the situations
represent a full spectrum of possibilities, beginning with functionally focused
initiatives at the narrow end of the spectrum and ending with whole-company
transformation at the broad end. Our advice to any company facing one of these
situations is to make productivity improvement a central plank of its response
and to bear in mind lessons learned by other pharma companies as they plan and
execute their transformations.
1. Surgical functional intervention
Sometimes companies
need to reduce costs or improve productivity in an individual business function
such as procurement, clinical operations, supply chain, finance, or HR, with a
view to achieving rapid results in a matter of months. These are usually healthy
organizations looking to capture incremental benefits from superior clinical
operations or back-office functions. For instance, an innovator company may
want to optimize its clinical-trial operations by improving its site selection
or extending its outsourcing relationships.
To maximize
productivity improvement in a functional strike, we recommend executives take
several steps:
·
Start by creating a clear picture of the
function in question. What are its main activities? How does it create value?
How does it connect with other functions? How do its practices compare with
best practice in other sectors, such as consumer goods or advanced industries?
One company we worked with decided to rewire its marketing function to take out
30 percent of the cost base. It started by defining key deliverables and
reallocating roles and responsibilities between global, regional, and local
marketing to reduce duplication between layers and cut any noncritical
activities. The company exceeded its target savings and was able to reinvest in
the marketing capabilities it needed for future success.
·
Map out which activities are truly mission
critical and should be kept in house and which can be outsourced. Similarly,
identify which capabilities are needed to carry out these activities, and find
ways to ring-fence them. After reorganizing, one company added so many
reporting and controlling demands that it ended up with a finance function
twice the size of its peers’. By challenging the scale and granularity of
reporting and delegating preparatory work to a low-cost shared-services center,
the company was able to improve productivity in the function by 30 to 40
percent.
·
Ensure that the transformation is run by a
capable and dedicated team and is visible enough to senior leadership that it
doesn’t disappear into a functional silo. Successful pharma transformations
strike a fine balance between making local line leaders accountable for results
and providing support from the center. Senior leaders must have a clear view of
performance and support local teams in finding the best path
forward. The most successful transformation programs are those that focus on
improving efficiency and effectiveness at the same time.
2. Business-unit turnaround
Sometimes a company has
broadly successful operations but feels that one of its business units needs
improvement. Perhaps its performance is weak in a certain therapeutic area, or
its sales force needs to be more responsive to changing market needs. This kind
of effort is usually confined to the business unit itself and has little or no
effect on the rest of the business. It typically addresses one or two specific
objectives over about six months to two years.
In our experience, a
few efforts are important for companies tackling such a situation:
·
Set ambitious productivity targets, and
ensure they’re fully supported by the board or corporate center. For the best
results, corporate leaders need to summon the courage to take radical steps.
One deep cut is preferable to a long series of salami slices, because it allows
the unit to complete its transition much more quickly.
·
Lay out a vision for the future of the
business unit to ensure it is not alienated from the rest of the business. One
company separated a unit from the rest of the organization without explaining
what would happen to it. Speculation spread that it was destined for a
sell-off, and staff became disengaged. Even though the company did not actually
sell the unit, the uncertainty and poor morale caused its performance to
falter. That could have been avoided if the company had set out a clear vision
for the unit from the start.
·
Keep energy levels high, and minimize the
drag on other parts of the business by ensuring the turnaround does not spill
over into other business units that are performing well. The management team of
the affected unit needs to own a big portion of its P&L, not just its cost
centers. Locate full accountability with the unit, and charge its management
with turning the business around and achieving a target for earnings before
interest, taxes, depreciation, and amortization. Make it clear that any failure
will have serious consequences, such as the sale of the unit.
3. ‘Good to great’ transformation
Every so often, we
encounter a pharma company that is striving to move from good to a
best-in-class standard. Unlike the companies in the previous examples, it isn’t
trying to fix the basics—which are already in good shape—but instead seeks to
improve its costs and revenues by using more sophisticated levers, such as advanced
analytics to raise R&D productivity, or advanced segmentation to identify
priority customers. This more ambitious type of transformation tends to take
longer, perhaps one to three years.
Companies can best
improve their productivity in this situation by doing a few things:
·
Communicate the rationale for change to
everyone in the organization, check that it is widely understood, and foster a
sense of ownership for the effort. Building a solid fact base that identifies
sources of waste and areas where productivity gains are needed—and
realistically can be captured—will help to minimize disruption in the business
and forestall any impression that leaders are pursuing change for its own sake.
·
Compensate for the lack of a burning platform
to motivate the organization by creating and articulating a clear vision based
on how the industry is likely to develop and what the company’s new operating
model will look like. The vision should include a carefully calibrated level of
ambition to energize the organization. One pharma company we worked with
explained to its staff that it was changing the way it operated not because its
performance was lacking but because it sought to become a partner to the health
system. Since many employees had joined the company because they wanted to
create a better world, the introduction of a vision that was in tune with their
aspirations deepened their sense of ownership and increased engagement
throughout the organization.
·
Build success stories early on, and share
them widely in the organization. One large pharma company had a specialty
business unit with a strong pipeline and great performance in general, but a
mixed record for drug launches. To improve its capabilities, the company
selected a handful of launches in different countries and used them to pilot
innovative new approaches. By communicating the success stories and explaining
how they could be scaled up, leaders were able to combat skepticism about the
transformation and energize the organization.
4. Event-triggered transformation
Some transformations
come about as the result of an external event, typically a merger or
acquisition or the intervention of activist investors.
The recent boom in M&A in the pharma industry is partly the result of attempts to address
short-term productivity challenges. An acquiring or merging company typically
designs organization-wide integration programs to capture synergies, especially
in costs. Such programs usually take up to three years to complete and deliver
results.
Pharma has also seen a
rise in shareholder activism in the past few years. Although companies often
regard them as antagonists, activist investors can prompt positive action that
brings benefits in both strategy and long-term value creation.
A couple of efforts can
help companies make sure they capture the full scope of productivity
improvements during integration programs:
·
Develop a clear vision of what the merged
entity should look like and what productivity gains can be achieved. In
discussions with partners—whether newly merged entities or activist
investors—they should address productivity issues with an open and
collaborative mind-set. McKinsey analysis shows that reaching
agreement with activists tends to lead to higher shareholder returns over a three-year time horizon.
·
Use the merger or acquisition as an
opportunity to capture efficiencies across the whole business. One pharma
company that went through a very large merger found this out the hard way.
Relying on overoptimistic growth synergies, it decided only to address
back-office savings, not front-office opportunities. This left inefficiencies in
place, and when increased austerity measures in Europe caused a market
slowdown, the company had to go through a series of further restructurings to
finish the job.
5. Digital transformation
Over the past
decade, more and more companies have turned to digitization and automation to streamline
and speed up their processes and to capture efficiency and productivity gains.
These efforts generally cut across functions, involve rethinking entire
processes from end to end, and deliver results quickly, within three months to
a year. They are undertaken for a wide range of reasons, from reducing the cost
base to improving agility or creating a superior customer experience.
Companies can take a
few measures to gain the maximum benefits in these circumstances:
·
Apply an agile, iterative test-and-learn
approach, rather than running long and expensive development processes to
concoct the perfect solution. One specialty-pharma company we worked with set
up a stand-alone unit to develop digital solutions for patient engagement and
new customer-interaction models. The unit was designed to have a start-up
culture and an innovation process that took an idea to minimum viable product
in no more than 100 days.
·
Roll out the new process by incorporating it
into existing business processes so that the company can start operating in the
new way as soon as possible. The specialty-pharma company deliberately kept its
new unit separate from the existing organization but located it in the same
city so the two could be in regular contact. In addition, the company set up an
advisory board that not only guides the start-up but also exposes company
executives to new ideas.
·
Set up business-led, customer-centric
transformation teams staffed with A-grade talent. In reworking its
customer-interaction model, the specialty-pharma company ensured that its
idea-generation sessions were led not by IT (though the group was closely
involved) but by sales, because this function had the deepest insight into what
customers value. Later in the process, the fact that sales leaders took visible
ownership of the new interaction model helped increase buy-in among frontline
employees.
6. Extreme makeover
When a company commits
to rethinking its strategic direction and embracing a new vision, culture, and
way of doing business, improving productivity will usually be central to the
effort. A total transformation is often undertaken in response to a crisis or
financial distress—circumstances where the organization needs to act fast to
improve its performance immediately. It will strive to achieve results in as
little as three to six months so that it can demonstrate its ability to turn
the situation around, save money to fund later stages of the transformation,
and build momentum and conviction in the organization for broad, long-lasting
change.
To keep productivity
central to the effort, companies in this situation should home in on a few
areas:
·
Articulate a clear change story that does not
focus exclusively on the immediate crisis but acknowledges the organization’s
strengths. It is important to remind people of what unites them, what they can
be proud of, and why they have what it takes to go through a difficult
transformation.
·
Set targets by taking an independent,
clean-sheet approach to encourage more radical thinking. Leaders are often
preoccupied with last year’s performance and confine their strategy to cutting
back on the current model. Starting from scratch forces them to set a new level
of ambition that goes beyond what seems possible today. Our experience
supporting businesses with transformations indicates that such an approach
typically identifies two or three times more potential impact than that suggested
by an initial internal assessment.
·
Never underestimate the importance of the
“soft” skills. In interviews with industry leaders, we found that four practices
in particular make a transformation more likely to succeed: communicating openly, leading by example, engaging
employees, and fostering continuous improvement.
As the productivity
imperative in pharmaceuticals looms ever larger, now is the time for companies
to think through their strategic options. In particular, leaders facing any of
the six situations described here should put productivity at the heart of any
change program or improvement agenda they undertake.
The best practices outlined for
these situations are intended not as a comprehensive checklist but as a
starting point for discussion. To be sure, these are conversations worth
having. A healthy, productive pharmaceuticals industry benefits the whole
world.
By Gayane Gyurjyan, Shail Thaker, Kirsten
Westhues, and Carla Zwaanstra
http://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/rethinking-pharma-productivity?cid=other-eml-alt-mip-mck-oth-1701
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