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Recession threat means Big Pharma "must speed up transformation plans"
 
 
  13 November 2008 www.pharmatimes.com
 
With current global financial conditions and the threat of a broad recession, the world's largest drugmakers must accelerate their timetables for implementing transformational changes in their organisations, Ernst & Young's bi-annual global pharmaceutical report has warned.
 
In the face of unprecedented challenges related to patent expirations, pricing and regulatory pressures, thin late-stage pipelines, shifting demographics, efficacy issues and globalization, the majority of companies have announced major strategic shifts and choices that have the potential of transforming the business and the business model. However, most of them have yet to adopt the organizational and functionality changes needed to power these new models, it says.
 
"Many companies are facing initiative overload and need to find a way to increase the speed of change by prioritising, allocating resources effectively and exercising rigor in project management," says Pamela Spence, UK pharmaceutical leader at Ernst & Young.
 
The report's global survey of senior executives from 15 major drugmakers finds that improving new product flow is now their top priority, with 72% reporting that the "thinness" of their pipelines is a chief concern. Other top pressure points include producing and sustaining products of value in the current demanding marketplace (47%), pressures of global regulatory authorities (44%) and the redefinition of the customer and rise of payors (36%).
 
The study also found that pharmaceutical executives are aiming to rely less on cost-cutting campaigns that ignore or imperil long-term growth plans and are exploring more strategic, sustainable approaches in order to create lasting cost advantages. Only 40% of the executives polled said that optimizing costs was their most important initiative; in 2007, 92% of executives had ranked cost reduction as their priority initiative.
 
"Growth in emerging markets will play a key role in driving product flow, although this strategy does not come without risks," comments Ms Spence. "Companies need to consider how they are interacting with third parties across their value chain including distributors, healthcare professionals and policymakers to ensure that the nature of these interactions meet the high standards of compliance required," she adds.
 
The new research also reveals that industry leaders are searching for new ways to transform business models to drive innovation and better demonstrate the value of their products. 66% of the executives interviewed reported that reinvigorating R&D is the most important strategic initiative currently underway in their organizations, while 40% ranked expansion into new markets and becoming more customer-centric as their primary areas of focus.
 
Although the strategic changes should be transformative in making the business much more effective, most pharmaceutical executives are not fully advancing more radical business model shifts, the survey reveals. Transforming the finance function is a critical first step in preparing to implement the kinds of broad organizational and business model changes now needed, the report advises.
 
"To deliver real value to shareholders, the finance function of the future will be tasked with driving more sophisticated financial strategies. Real financial leadership will come from the application of different weighted costs of capital to different parts of the business that have fundamentally different profiles. This will drive decisions that are more specifically targeted on value creation," says Ms Spence.
 
Pharmaceutical industry needs to speed up transformation to meet changing market dynamics, according to Ernst & Young report
 
Survey of industry executives identifies risks and opportunities in global pharma

 
New York, 13 November 2008 - Leaders of the largest global pharmaceutical companies recognize the need for transformational change in their organizations, but will need to move swiftly to ensure sustained growth for the sector. Current global financial conditions and the threat of a broad recession have accelerated the timetable for implementing change, as the industry confronts lower corporate stock prices and an increasingly cost-averse customer. These and other findings were released today in Progressions, Executing for success: powering new business models, Ernst & Young's bi-annual global pharmaceutical report.
 
The Progressions report reveals findings from a global survey of senior executives from 15 major pharmaceutical companies. It identifies the top concerns of these leaders and the progress they have made in transforming their businesses.
 
The industry faces unprecedented challenges related to patent expirations, pricing and regulatory pressures, thin late-stage pipelines, shifting demographics, efficacy issues and globalization. While the majority of companies have announced major strategic shifts and choices that have the potential of transforming the business and the business model, most have yet to adopt the organizational and functionality changes needed to power these new models, the report says.
 
"All of the top 15 pharmaceutical companies have undergone senior executive-level changes within the last two years, bringing in an influx of new C-suite talent that includes many individuals from industries that have successfully tackled the challenges now confronting Pharma," said Carolyn Buck Luce, Global Pharmaceutical Leader, Ernst & Young. "These leadership changes should help innovative companies to transform their finance function, organizational design, and business models in ways that enable them to continue to prosper in a challenging time."
 
Executive insights from the report include:
 
* Improving new product flow is the top priority among pharmaceutical executives. Seventy two percent of executives indicate that the "thinness" of their pipelines is a chief concern. Other top pressure points include producing and sustaining products of value in today's demanding marketplace (47%), pressures of global regulatory authorities (44%), and the redefinition of the customer and rise of payors (36%).
 
* Pharmaceutical executives are exploring more strategic and sustainable approaches to create lasting cost advantages. They aim to rely less on cost-cutting campaigns that ignore or imperil long-term growth plans. Only 40% of executives ranked optimizing costs as their most important initiative, compared to a similar study in 2007 in which 92% of executives ranked cost reduction as their number one initiative.
 
* Industry leaders are searching for new ways to transform business models to drive innovation and better demonstrate the value of their products. Sixty-six percent of interviewees ranked reinvigorating R&D as the most important strategic initiative underway in their organizations, and 40% ranked expanding into new markets and becoming more customer-centric as primary areas of focus.
 
Although the strategic changes should be transformative in making the business much more effective, most pharmaceutical executives are not fully advancing more radical business model shifts, according to the survey results in Progressions. For example, there is little focus on developing complementary alternative businesses in the "health-care" arena to compete with other sectors (e.g. food, financial services, consumer products) that are targeting the pharmaceutical industry's customer base. The majority of companies continue to exclusively pursue a product only business model at the expense of advancing service based offerings that could expand customer relationships. Furthermore, the survey reports that some initiatives may not be transformational enough - pharmaceutical companies are not pursuing aggressive overhaul of the discovery, development and life-cycle management of their human capital pipeline in response to the dramatic demographic changes in the global talent pool.
 
Transforming the finance function is a critical first step in preparing to implement the kinds of broad organizational and business model changes now needed, according to the report. Finance's mandate has broadened in the current environment beyond its traditional role as scorekeeper, custodian and analyst. The finance function has become a central player in identifying the specific strategies needed to meet the changing demands of industry stakeholders and creating a sound decision-making framework for value creation to address them.
 
"In this period, it is more critical than ever that companies tackle a host of issues that, to date, have not been fully embraced - from the fragmented ways in which risk is managed, to the need to adopt a 'grow lean' culture or best allocate scarce capital," said Mark Hassenplug, Global Pharmaceutical Markets Leader, Ernst & Young. "As the industry's focus shifts from driving top-line revenue growth to managing for return, the need to transform finance has grown especially urgent."
 
Ends
 
About the survey

 
Ernst & Young commissioned Broderick & Company, an independent market strategy firm to conduct a global market survey of 40 senior executives from 15 major companies from around the world. The interviewees included a diverse mix of senior executives in each organization, including CFOs and other financial titles - divisional CFOs, vice presidents of finance, controllers, regional finance directors and treasurers; chief information officers (CIOs) and information technology (IT) directors; leaders of major business areas; and members of boards of directors.
 
About the Global Pharmaceutical Center
The Global Pharmaceutical Center is the focal point of Ernst & Young's pharmaceutical practice. It serves as the central hub of a network of senior professionals providing quality assurance, tax, transaction, risk management and business advisory services to pharmaceutical companies and others in the pharmaceutical value chain worldwide. The Ernst & Young Global Pharmaceutical Center fosters a collaborative environment where our seasoned professionals work together to provide clients with tailored services, thought leadership, forums and education to address the complex issues facing the pharmaceutical industry.
 
About Ernst & Young
 
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
 
For more information, please visit www.ey.com.
 
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
 
This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.
 
Pharmaceutical CFOs are driving change
 
Friday, 28 March 2008
 
Two separate Ernst & Young surveys underscore important changes in the role of the chief financial officer (CFO) and finance function in driving the success of pharmaceutical companies.
 
With many multinational pharmaceutical companies welcoming a new CFO to their organisation over the past two years, the survey results emphasise the key role the CFO will play as companies move away from a focus on driving top-line revenue growth to one on managing for return.
 
Global cost reduction key issue
 
To achieve this change, 74 per cent of respondents in an Ernst & Young global survey of senior pharmaceutical industry executives agreed that CFOs will need to shift their time from low value functions such as defensive monitoring and reporting to a focus on partnering to help shape growth strategies that enhance business performance.
 
Carolyn Buck Luce, global pharmaceutical sector leader at Ernst & Young, pointed out that CFOs and the finance function were driving the business transformation that is now at the forefront of the industry.
 
"In an era when pipelines are erratic, patents are expiring, and pricing is under pressure, the role of the CFO and finance function will become pivotal in driving improved returns, enhancing reputation and creating value," she predicted.
 
Ernst & Young's global survey showed that a large majority (92 per cent) of respondents rated global cost reduction as a key issue for their business, with 25 per cent saying cost reduction has been a focus for more than two years and 35 per cent saying it has been a focus "for as long as I can recall."
 
Over half (56 per cent) felt it was the CFOs role to lead cost reduction initiatives and that competitive pressures (58 per cent), profitability (58 per cent), and the need for better returns for investors (33 per cent) were the key drivers for cost reduction.
 
Increased regulatory and compliance requirements
 
Along with managing for return, the CFO and the finance function are also critical to a company's ability to achieve the right balance of risk and opportunity, and optimise risk as a key driver of value.
 
In fact, the survey reported that the top three drivers that are transforming the role of CFO are increased regulatory and compliance requirements (46 per cent), increased corporate governance obligations (36 per cent) and increasing risk management responsibilities (32 per cent).
 
"The risk profile is critical because the external environment is growing more risk averse while the changing nature of the business requires the industry to, in fact, take on a lot more strategic and operating risk to drive value," added Buck Luce.
 
Thirty-two per cent of respondents feel that the CFO of their organisation does not have enough understanding of the wider issues their business faces.
 
Outsourcing
 
More pharmaceutical respondents are considering outsourcing and shared service models for certain internal functions than those in other industries.
 
Sixty-four per cent of respondents are currently considering outsourcing certain internal functions as part of a cost-reduction measure versus 46 per cent of respondents from a cross-industry population.
 
Respondents were least comfortable in outsourcing clinical trials (36 per cent), followed by sales and marketing (33 per cent).
 
Similar to the changes on a global level, a survey of pharmaceutical CFOs in India, conducted by Ernst & Young, found that they foresee a change in their roles.
 
Within the survey, however, there were distinct differences in the responses from CFOs of India-based subsidiaries of major multinational pharmaceutical companies (MNC) compared to those from CFOs of India-headquartered pharmaceutical companies (IPC).
 
Most notably, human resource challenges are more acute for MNC CFOs, with 67 per cent ranking employee attrition as a key concern versus only 25 per cent of IPC respondents.
 
Moreover, three-quarters of MNC respondents say they are unable to attract the best talent compared to one-third of IPC respondents.
 
Unsatisfied with current risk mitigation measures
 
"The differences in the concerns of CFOs in Indian-headquartered companies versus India-based subsidiaries of multinationals are significant. As the market matures, we expect these differences will start to disappear," said Murali Nair of Ernst & Young's health sciences practice in India.
 
Consistent with the global survey, respondents in both groups cited bottom-line pressure as a key concern (76 per cent overall), however the focus of their cost-cutting efforts varied.
 
CFOs of India-headquartered pharmaceutical companies are more concerned about cutting costs in the supply chain (67 per cent) compared to 44 per cent of MNC CFOs.
 
Fifty-eight per cent of IPC respondents report being unsatisfied with current risk mitigation measures compared to only 11 per cent of MNCs.
 
CFOs from Indian pharmaceutical companies agree on the following top four drivers of change: improving shareholder value, responsiveness to business needs, globalisation, and cost pressures.
 
This is in contrast with the global survey results for MNCs where compliance & risk are major change drivers.
 
Increase time spent on partnering
 
Although 81 per cent of respondents have implemented enterprise resource planning (ERP) systems, 50 per cent of MNCs and 67 per cent of IPCs either do not or only partially extract performance measures from their ERP systems.
 
Forty-two per cent of Indian pharmaceutical company CFOs feel that the "ability to maintain and drive growth" is a key challenge over the next three years.
 
To address this challenge, 70 per cent MNC CFOs and one-third of IPC CFOs would like to increase time spent on partnering.
 
The findings are published in Progressions, the Ernst & Young bi-annual global pharmaceutical report presenting a collection of articles and viewpoints from pharmaceutical industry and Ernst & Young executives on key industry trends.
 
 
 
 
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