By: Nigel Walker, Partner & Managing Director, Energy & Life Sciences Services, TPI
The pharmaceutical industry has not seen a lot of new molecular entities (NMEs) in recent years and, as patent expirations are rapidly approaching for many blockbuster drugs, there is a real concern about the imminent revenue drop among the majors. This has caused pharmaceutical companies to scale back its R&D spending. This, in turn, is accelerating a review by the major pharmaceutical companies of their internal cost structures - especially head office shared service activities such as IT, HR, Finance and Accounting (F&A), Procurement, and Real Estate.
Sourcing is turning out to be a major consideration and a viable option for cost reduction, efficiency improvements, and increased productivity. Our statistics show that decent savings can and have been achieved at pharmaceutical companies via this alternative with potential savings in the range of 8-27% - depending upon the area analyzed. TPI is often hired to help quantify those potential savings using our Mark-to-Market service. With this service, we compare internal cost structures of company service operations not to their peers, but to the sourcing alternatives or the service provider community. We are able to do this because TPI has been involved in a large number of transactions, thus allowing us to make accurate judgments on the reviews and enabling major sourcing strategy decisions to be made with confidence. We have also performed Mark-to-Market on in-flight contracts and offered advice on whether the company has current market based pricing.
Other pharmaceutical companies have utilized TPI’s “Fairness Opinion” whereby they have often struck a deal with a service provider in a sole-source situation and asked for our opinion as to whether the Terms and Conditions, Pricing, and Service Levels are equal to what they could have achieved in a competitively bid transaction.
As the major pharmaceutical companies continue to feel the pinch from blockbuster drugs reaching the end of their patents, senior management must be prepared to implement strategies that will put these companies in a position to grow.
This is a big problem that a lot of my clients in the Life Sciences industry are grappling with too.
One of the strategic actions that Pharma companies have been taking over the last couple of years is to acquire other pharmacos or biotechs with complementary drug pipelines or therapeutic focus areas to stave off the impact of the patent expirations in their own portfolios. E.g being Roche-Genentech, Pfizer-Wyeth, Merck-Schering Plough etc. Other companies are diversifying into developing a Generics portfolio or pushing into the OTC segment to balance the potential downturn they see in the patented drug segment. Some of them, like Merck and Pfizer have made public announcements regarding closing down overlapping R&D sites, to merge internal operations and reduce their non-performing assets. Companies have started looking at enterprise-class solutions and offerings for their once fragmented and dispersed R&D set-ups, and taking a closer look at potential shared services structures to align them with broader IT processes.
But the underlying problem of restructuring the underlying cost and operational model to protect the bottomline as much as possible while the topline shrinks is one of the most pressing issues facing the industry. R&D IT processes and systems now finally have to grow up!
Posted by: R Arun Kumar | July 15, 2010 at 02:31 AM