Encouraging long term returns not short termism
The MSI Consultancy
The pharmaceutical business is inherently long term. Molecules take years to bring to market, and the benefit of patents means that the organisation has a delineated and protected period in which to make a return on that investment.
We also know that the blockbuster model is broken – while there are thousands of drugs in development the focus appears increasingly to be in more specialist rather than mass population therapy areas.
A compounding factor is that only 2 out of 10 new medicines produce revenues that match or exceed average research and development costs, which in themselves are mounting year-on-year.
So all in all there is increasing pressure to achieve the most you can from the molecule.
So should we be rethinking what we are trying to achieve and how we try to achieve it?
In the past the rapid uptake of medicines and fastest time to peak sales, to maximise the ‘area under the (revenue) curve’ appears to have been the major driver to delivering revenues during the patent protected period.
What then happens is that companies have historically attempted to drive sales across as many patients as possible as quickly as possible.
In contrast our customers, the healthcare systems in Europe, are not necessarily looking for widespread use of new medicines particularly when they only affect the health of smaller populations of patients or offer marginal benefits. Rather they are looking for what is best for the patient and what is the best (most cost effective, evidence/outcomes based) solution for the healthcare system.
Consequently, in our experience, when talking to clinicians and payers about new drugs there appears to be a loss of credibility. You get the feeling that they increasingly see pharmaceutical companies profit motive as being at odds with the more medium to long term aims and objectives of the healthcare providers and payers.
We believe that the net result is that payers and healthcare systems are increasingly limiting new drug introductions and slowing their uptake so that new medicines risk not achieving their true profit potential long-term as uptake may be sub-optimal.
So how can the situation be improved?
Needless to say there are many facets to this challenge. The one I want to focus on is apparent short-termism and the lack of true customer focus – driving short term results at the expense of long term profit maximisation and sustainability.
Delivering results on an annual business is an inherent fact of commercial life. There is no point in working towards a bright future if the business goes under in the short term.
There are cultural differences across countries which are reflected in attitudes to return on investment and building for the future, but generally in the pharmaceutical environment, commercial results seem to work to a short cycle at the operational level.
The annual budget setting (and cutting) process in our experience seems to work against long term investment. Yes of course we have to deliver acceptable returns on investment each year, but not in such a way that unless the investment is seen to payback fast it is not considered.
This short termism also translates to customers. Health care management treat pharmaceutical companies and their motives with a high degree of scepticism. When talking to health care providers, their view is that pharma companies are not really interested in true partnerships. While pharma may provide support for a particular initiative, the moment it does not provide the returns required pharma pulls out leaving the healthcare system with the problem and the cost. From a commercial perspective that may make short term sense but not if we really want to create partnerships with our customers.
It is strange tension because as an industry we do invest significantly in key opinion leader development, which by its very nature is to a certain extent long term, yet in other commercial areas we seem to be driven by a different time scale.
What we believe would be far more beneficial is the development of a culture of long termism in pharma corporations where managers truly care about and are incentivised to drive long-term returns, while also safeguarding annual performance.
We believe more of a long term perspective would result in managers focusing on building the firmest foundation first, by getting greater penetration in those segments where the drug is the most suitable for the situation, instead of a short term volume drive. While initial volumes may be lower with a more focussed approach costs should also be lower making the approach more profitable. This would also meet our customers’ health gain agendas as well as ours.
A true customer focus, something with which the industry has struggled for many years is also vital. While many companies strive to do this, there seems to be a lack of true customer focus across the industry. The subject of another article I suggest.
Then the company can build into new patient segments from a position of strength. We believe this would result in long-term profit maximisation and public welfare maximisation.
But this requires a sea change in management attitude, behaviour and skill.
Long term planning becomes far more important and hence the quality needs to be improved. Strategies and forecasts need to be properly pressure tested, with enough time and commitment given to the process. Not just the mad 2 month dash in the early summer!
We need to see true strategic options i.e. different combinations of patient segments over time, not just adjusting the marketing budgets, to give senior management the confidence we have considered a number of different approaches and are recommending the best one, while also having contingency plans should there need to be a mid-course adjustment.
Planning discussions should be around strategic options, with the thinking behind the numbers being valued, not just a focus on revenue and profit. We have all been in situations where management have only really been interested in the numbers and if they are not right demanding a change with little reference to the logic base.
Use of robust return on investment and market-based forecasting approaches to help judge the effectiveness of short, medium and long term strategies becomes even more critical.
But this does require a significant level of skill among the marketing team, which sometimes is sorely lacking.
Once agreed the strategy should be adhered to, subject of course to the usual checks and balances. But we have to avoid the classic problem of change of commercial manager meaning a change in strategy. Yes there will be course corrections along the way, but not a wholesale change of direction unless something significant has gone wrong.
Finally management behaviour needs to change. We need to ensure people are properly managed and incentivised to take that longer term view, while also ensuring that senior management behaviour does not encourage short term reaction rather than long term strategy.
The specialised markets which are smaller, so the potential volume usage of these products is comparatively low, although not revenues necessarily, lend themselves particularly well to this sea change in approach. They are also often in areas where clinical evidence of health gain is far more important.
With a long term view we believe it is perfectly possible for patient, clinician, healthcare systems and pharma companies’ interests to align resulting in a true partnership, potentially producing cost-effective health gain while reducing costs for pharmaco and thereby increasing profitability. Win-win.
About the authors:
Paul Stuart-Kregor is a Director at The MSI Consultancy, based in the UK.
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