Pharmaceutical margin preservation

Healthcare reform always raises concerns about cost controls crimping Pharma margins to a point where it will compromise investment in R & D.  Well,  Pharma has a long ways to go in retooling their infrastructure and reducing their operating expenses. The easy cuts are in sales (e.g., laying off sales people) and marketing (e.g., cutting advertising) followed by cutting misfit or obsolete research programs and facilities.  Regardless of how much is cut in these areas it will not get Pharma to where they need to be.  Many operating expenses that Pharma sees as necessary would be considered luxury items in most smaller companies.  Large organizational size just further compounds the inefficiencies of legacy operational infrastructure.  So what’s the solution?

Essentially, invest in the right people and the right projects…everything else is an expense that must be managed out if it is not essential. Here’s how:

1) Focus and fund only the highest priority R & D projects, cut what doesn’t fit
2) Build teams of expertise (pay for the best you can find) in Leadership, R & D , and managed markets marketing/sales.  Three ok candidate hires are not the same as hiring an expert.

3) Unfortunately, managers have a tough time downsizing their own organizations when they have been brought up to “empire build”, so getting lean and ruthless about operational expenses has to come from the top or outside the organization.  Even CEOs want a “Big Pharma”.
4) Where to start with cuts? If it is not regulatory or legally required, it better be customer required or it goes.  If it is not apparent and you need to rationalize an expense, this is a good place to start.
5) Go back to point one and do the process again until you get it right.

This is not just a cost cutting process.  It is a way to “find cash” from operations while preserving margins to invest in the right people and the right R & D projects rather than building and maintaining cash consuming infrastructure. Most companies have to get to bankruptcy before leadership has the courage to go through this process.

Favorable Health Care Reform Legislation Impact on Pharmaceutical Companies

It appears the pharmaceutical industry may have dodged a few healthcare reform bullets, at least temporarily, with the pending legislation.  Again, maintaining the industry business model status quo while enhancing their potential customer base by tens of millions of newly insured patients.

So the industry “bought” some time.

It is not clear that companies have figured out that the need for change is still there.  Even the hot legislative issues of government negotiated prices,  additional rebates or other price control strategies,  and importation are not going away. Market expectations also remain high for more effective and safer products at market sensitive, value-based prices.   The market is also no less weary from the “hype”, questionable ethics,  and financial “conflicts” of traditional sales and marketing tactics.  Public trust and confidence has probably not improved as a result of the multimillion dollar lobbying campaign.

Healthcare reform should be acting as a catalyst for change.  Now is the time for pharmaceutical companies to formulate new, more market receptive strategies, and retool their R & D to deliver truly innovative new products, dramatically reduce their operating expenses, and reestablish corporate cultures that embrace integrity.  Unfortunately, the “dodged bullets” and “bought time” may have just mitigated the organizational “need for change” and  sense of urgency.

Companies that remain committed to change, address their organizational challenges, and correct the market driven concerns will find they are creating a competitive advantage for when the market, and not legislators, decide how to employ pharmaceuticals in the delivery of healthcare.  An increasingly cost conscious “managed” market with expectations to have better treatments for more patients at lower costs awaits the industry.


Leadership Courage to Change

The pharmaceutical industry will need to make dramatic changes to how they do business in the evolving new healthcare market.  From product liability litigation, billions of dollars in legal settlements and fines to restrictions on marketing and sales activities and congressional inquiries about conflict of interest, you would think pharmaceutical companies would also get the hint that it is time to change.  They need uncompromised integrity, more expertise, more productive R & D, smaller, more manageable organizations, dramatically reduced operating expenses, better appreciation for market expectations, and a complete overhaul of commercialization strategies and tactics.  If pharmaceutical company executives know what needs to be done, why do they opt for modest incremental change or resist change all together?

It took the auto industry the threat of bankruptcy and a government bailout to get them to make the changes they could have done years earlier to avoid their near death experience.  What kept them from doing something earlier?  Leadership with the courage to change.

After all, change and venturing into new, unexplored territory involves dealing with fear of the unknown.  Will the changes work? Historical success is probably irrelevant for the future so how do I forecast? How long will it take to recover?  What if it doesn’t work?  How will it affect our P & L?  Will our investors understand what we are doing and will they continue to invest?  Will our employees and suppliers understand our need to change?  They will certainly understand they may be negatively affected by the changes.

An even greater fear that today’s corporate officers have to face is the fear of personal loss resulting from initiating these massive, business restructuring changes.  The dramatic nature of the changes needed are a break from the traditional business model, are untested, and fraught with uncertainty.    I know how to do the old model; I’m not so sure about these changes.  Will my career suffer? Will my bonus opportunity be compromised? Am I putting my retirement at risk?  If I can keep the current business model going for a few more years, I’ll be out of here with my retirement package.

It often takes bankruptcy, or the threat of bankruptcy in the case of the auto industry, to provide clarity, answers to many of these questions, and to mitigate the personal consequences of making the necessary changes.  Without courage (or bankruptcy) corporate leadership will continue to make modest adjustments, incremental restructurings, and token modifications so as not to disrupt the status quo, to keep investors happy,  and to protect their personal interests.

The pharmaceutical industry needs leadership with the courage to change.

“Managed market” teams of expertise

With the inevitable US healthcare reform,  delivery of healthcare will become even more “managed” than it is today.  Traditional sales and marketing tactics are already becoming less effective and will eventually become obsolete in the evolving new healthcare market where the ability to influence individual prescribing practices will be significantly limited.  This is especially true for proprietary branded pharmaceuticals which are an easily identified, tangible target for restricting use by private and government payers looking to control the rising cost of healthcare.

Traditional marketing and sales will be replaced in this evolving new healthcare market with “managed market” teams of expertise.   These teams will require a new level of expertise to navigate the increasingly complex labyrinth of bureaucracy, to understand the points of influence within the multiple tiers of decision making, and to negotiate product availability, unrestricted use, and favorable pricing.  Managed plans already have a strong preference for generic drugs with over 60% of the prescription market today.  This means proprietary branded products, regardless of how effective and safe,  will be vying for a diminishing share of the prescription drug market as time goes.  Successful commercialization in this increasingly challenging market will depend on the expertise and credibility of the “managed market” teams.  Finding “world class” or “best in the industry” managed market teams of expertise is a critical success factor for pharmaceutical companies in the evolving new healthcare market and one of the three most important areas of a pharmaceutical company to build teams of expertise.

Leveraging teams of expertise for the greatest value

It is hard to argue that pharmaceutical companies don’t need expertise throughout their organizations.  Expertise has value in virtually every functional position within a pharmaceutical company.  Technical, functional, and support staff expertise can significantly enhance the efficiency of daily operations.  For pharmaceutical companies this is critical for increasing productivity and keeping operating costs in check.  But, as much as companies might aspire to have it, they don’t need “world class”, “best in the industry” expertise in every position in the company.  It is not only impractical but also limited in leveraging for value.  Again, this is not to say you don’t want the best people you can recruit, hire, and train.

So in addition to research, where can a pharmaceutical company leverage teams of expertise for the most value in the evolving new healthcare market?  If they represent a primary source of revenue, the first place to look is at a company’s “core competencies”.    Otherwise,  in the evolving new healthcare market, the next two highest value teams of expertise (after R & D) for pharmaceutical companies will be the leadership team (executive and senior management) and the  “managed market” team.

The complexities of the science, the business, and the market make it essential that the leadership team have “world class”, “best in the industry” expertise.  The leadership team impacts the entire organization and it is difficult to attract (recruit and hire) and manage expertise when the leadership team lacks expertise itself.  From setting goals and objectives to performance management for productivity a leadership team of expertise will set high standards for itself and the organization.  They will know how to get the most out of organizational resources and will have the discipline to deliver results that are consistent with market expectations.  Their diligence in managing the organization will mitigate opportunities for making mistakes and poor decisions.  Their interpersonal skills and attention to the work environment will energize employees and maximize their performance.  Most importantly, a leadership team of expertise will understand the value of integrity, set uncompromising example, and build it into the fabric of the corporate culture.

In the next post we’ll discuss “managed market” teams of expertise.