Michael Dohrmann, Patrick Biecheler, Morris Hosseini, Hans Nyctelius

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Pharma's fight for profitability

Lifecycle-based operating models

Study

The Roland Berger Strategy Consultants global pharmaceuticals network

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Michael Dohrmann, Patrick Biecheler, Morris Hosseini, Hans Nyctelius

Pharma's fight for profitability

Lifecycle-based operating models

Study

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Content
From the authors

Executive summary

1. Lifecycle-based operating models Introduction to the topic

2. Strategic implications of lifecycle-based operating models

22

3. Outlook for lifecycle-based operating models

35

Sources

36

Contacts

37

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Pharma's fight for profitability

From the authors

For many executives of global pharmaceutical companies, mature markets
have lost much of their appeal. As a result, their focus is shifting: They have
started to build and enlarge their footprint in emerging markets as these
begin to play a more prominent role in the global pharmaceutical arena.
This development is fueled by two key drivers: In mature markets,
companies are faced with increasing challenges, many of which can be
attributed to ongoing healthcare budget cuts and restricted market access.
On the one hand, the current regulatory environment limits the rewards
that pharmaceutical companies can expect from their innovations. At the
same time, these companies are no longer as highly regarded as they were
in the past. In addition, even in-market products are subjected to cost-benefit
scrutiny (pursuant to new laws such as Germany's Pharmaceutical Market
Restructuring Act [AMNOG]). Emerging markets, on the other hand, appear
more promising, given both their current strong economic growth and their
forward-looking efforts to build healthcare systems.
In light of these developments, the traditional pharmaceutical business
model is under pressure, and it is becoming considerably more difficult for
companies to establish a competitive edge. Taking the value proposition
as a given, it becomes clear that the operating models currently used by
pharmaceutical companies require closer attention from their top executives.
For example, in an effort to optimize existing operating structures, some
companies are downsizing their sales force, especially in mature markets.
In addition, they are closing R&D and manufacturing sites and relocating
to emerging markets.
Generally speaking, the pharmaceutical industry is adjusting its operating
model in two main aspects: the lifecycle of its products and the lifecycle
of the individual market in which it operates.
Companies are strengthening those corporate functions such as market
access, R&D and medical affairs that they consider to be crucial to
safeguarding their top line. Simultaneously, they are reducing functions
that are pivotal to improvements in the bottom line (including existing sales
forces and manufacturing facilities in mature markets). The reasons for and
the extent of these changes depend heavily on both the portfolio's lifecycle
and the regions targeted by a given company.

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But the question remains: Is this the right approach?

As challenging as it may sound, Roland Berger Strategy Consultants believes
that the current situation provides companies with an excellent opportunity to
optimize and tailor their operating models to the requirements of mature and
emerging markets. Therefore, the core questions addressed by this study are:
> How must pharmaceutical companies adapt if they want to both
tap market potential and ensure profitable growth?
> Which functions need to be strengthened in the different regions
and market segments?

> What impact will a change in the operating model have on
the company's overall global footprint?
> And should top-line growth still be the compass that determines
the future direction?
This study looks at key trends and issues in the pharmaceutical industry.
Following on from our previous study "Fight or flight Diversification versus
Rx focus in big pharma's quest for sustained growth", the present study again
addresses a topic of key importance to executives in the global pharmaceutical
industry.
We surveyed top managers from companies that together account for more
than 45% of global pharmaceutical revenues. No fewer than 8 of the top 10
global pharmaceutical companies contributed to the survey, as did 14 of the
top 20.1) We also surveyed numerous top executives at small and mediumsized pharmaceutical players whose statements helped us form a clearer and
more detailed picture. In addition, we conducted one-on-one interviews with
chief executive officers, chief financial officers, the directors of R&D divisions
and commercial executives.
Our sincere gratitude goes to everyone who took part in the survey and
interviews. This study would not have been possible without their input
and their time.

Michael Dohrmann

Patrick Biecheler

Morris Hosseini

1) Rankings based on the 12th Annual Pharm Exec 50, published in May 2011

Hans Nyctelius

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Pharma's fight for profitability

Executive summary
Lifecycle-based operating models are driven by a variety of factors.
Of these, the changing healthcare environment, the growth of the
emerging markets and the R&D crisis are key.
The market conditions under which pharmaceutical companies operate have
become considerably more challenging. Competitive pressure has increased
significantly. Changing healthcare environments, suffering from drives to
contain costs and more restricted market access, have transformed operating
models into a fundamental factor of differentiation. In light of these shifts
in the business environment, 73% of the top executives that participated in
this study believe that the pharmaceutical industry is experiencing a strategic
crisis.
Of those same respondents, 78% see improvements in their operating models
as the solution to overcoming these challenging times. While executives are
generally not unhappy with the models they currently operate in mature
markets, they see plenty of room for improvement in emerging markets. This
is especially true for small and medium-sized companies, which perceive an
even greater need for efficiency gains.
Although many companies remain dependent on mature markets,
executives are predicting that pharmaceutical companies will increasingly
invest in emerging markets. This will take place across all functions, from
administration to R&D and commercial and technical operations. However,
most managers have not yet moved to align their operating models with
either the lifecycle of their products or the lifecycle of the markets in
which they operate.
Understanding the characteristics of market segments is essential to
the development of specific strategies for generating profitable growth.
Since markets can be emerging or mature and products can be new
or established, it is possible to identify four distinct segments:
> New products in mature markets: In the "Traditional Pharma Model", wellmanaged market access will develop into the dominant driver of business
success in the years to come. For companies wishing to optimize their top
line, however, it will become increasingly important to win the battle on
a scientific level. For them, effective and patient-benefit-oriented R&D
and medical field forces will be critical.

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At the same time, today's sales forces and traditional marketing strategies
will lose much of their importance for this part of the pharmaceutical
portfolio. While manufacturing continues to be less cost-driven and
more influenced by issues relating to quality, safety and the protection
of intellectual property (IP), an increasing effort must nevertheless be
made to ensure the efficiency of manufacturing sites.
> Established products in mature markets: Market access is assuming ever
greater importance and is also becoming the major factor in the "Costefficiency Model". Yet it also plays a different role: As relentless pressure on
costs continues to pile up, the game will be won by those companies that
are able to offer attractive pricing solutions. Those aiming to compete in
this field must therefore do a lot to optimize their bottom line. Accordingly,
manufacturing will remain the key lever of bottom-line success. At the same
time, more effective sales force solutions also need to be implemented.
> Established products in emerging markets: One of the most important
reasons to operate the "Volume-Expansion Model" is the significant increase
in the customer base that is realized when companies enter emerging
markets. In addition, a broad presence in emerging markets provides the
opportunity to establish brand awareness and thus lay the basis for future
recognition. This central goal can be pursued specifically by introducing
branded generics. It is important to note that comparatively high margins
can be achieved with these drugs only as long as emerging markets are
reliant on pharmaceutical companies' investments to build up the local
healthcare infrastructure. After a certain time lag, market access will thus
emerge in the future as the key success factor. Although marketing and
sales units will continue to be highly important, fierce local competition will
force successful companies to optimize their manufacturing efficiency too.
This is more important here than anywhere else in the world.
> New products in emerging markets: Placing newly developed products in
emerging markets is as challenging as it is in mature markets, although the
challenges differ. Since the majority of the target customers pay out of their
own pocket, this "Ability-to-Pay Model" must aim to make drugs more freely
available. Furthermore, the goal is to develop new offerings that address the
individual needs of the customer base and take into account the status of
the local healthcare system. In order to make innovative medicine available
for state-funded patients too, R&D and medical affairs units will become
increasingly important as pharmaceutical companies seek to address patient
benefits on a scientific level. Although the importance of sales functions is
expected to be lower in emerging markets, this decline will not be on the
same scale as in developed markets.

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Pharma's fight for profitability

Taking all these aspects and dimensions into account, it becomes clear that
globally active pharmaceutical companies must adjust their operating models
to fit not only the different market segments and regions, but also their own
specific product focus.
To optimize their operating models and ensure profitable growth across
the range of products and markets, companies must develop strategies
to meet the specific challenges they face in each segment.
> Companies must first determine the current status of their portfolio
and market presence and clearly identify their future goals.
> Based on these findings, companies must then analyze whether they have
the competencies they need to compete in their target segments. The
organizational functions critical to success in these segments are described
in this study. However, each individual company must look more closely
at its own inner workings if optimal results are to be achieved.
Executives must also be clear about what they need to do to optimize
their top-line and bottom-line performance.
The top line versus the bottom line:
> One central finding of our survey is that, across all segments, market access
is the key driver for top-line development. As a result, the organizational
footprint grows, increasing awareness of its bottom-line impact in parallel.
For innovative products, market access is set to emerge as the second most
significant source of impetus for the bottom line.
> R&D productivity and medical affairs teams also play an important role in the
top line for new products. This trend is primarily driven by the need to create
true innovation in terms of patient benefits and to deliver them to the market
via medical field force teams.
> Marketing and sales will see their importance erode not only with regard
to new products, but also for established products in mature markets.
> Promotional elasticity is decreasing fast. In emerging markets, however,
marketing and sales units will continue to play an important role for the
top line, albeit on a lower level than today.
> Across all market segments, bottom-line results are driven mainly by
manufacturing. For established products, the focus lies on reducing costs,
for example by outsourcing to CMOs or shifting the footprint to low-cost
countries.

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By consequence, lifecycle-based operating models must become

a key priority for pharmaceutical companies.
> Executives acknowledge a substantial need to optimize operating models
and innovation in each of the four market segments. Almost all managers
surveyed in this study recognized the need for improvements that will
impact their company's overall operating model.
> Our interviews revealed that such transformations are among the top
priorities within the industry, and that they carry great weight for the
majority of executives. Most companies, however, have not yet made
the leap of faith that is needed to combine a strategic perspective with
a global, holistic approach.
Based on our experience, Roland Berger Strategy Consultants has developed
a three-step approach that helps companies to redefine their lifecycle-based
operating models.
> Step 1:
Map the existing footprint, the actual and target product portfolios and
the target markets to create a transparent basis for strategic decisions
> Step 2:
Develop a blueprint for the future operating model, taking into account
the challenges inherent in different markets depending on their particular
lifecycle stage
> Step 3:
Translate the strategic perspective into successful operational reality
by plotting a roadmap tailored to the specific characteristics of your
organization.

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Pharma's fight for profitability

1.  Lifecycle-based operating models Introduction

to the topic
Changing healthcare market environments are confronting pharmaceutical
companies with an array of challenges. Many executives even suggest that
a strategic crisis may be brewing within the industry.
The number of factors of influence that today's executives have to deal with
is growing all the time. First, they need to handle the pressure that inevitably
accompanies cost containment efforts. In addition, they must, at the very
least, find a way to stabilize their margins no mean feat considering the
growing restrictions on market access and the looming patent cliff.
It is not unreasonable to describe the mood among top business managers as
alarmed. Almost three quarters of our survey participants confirm not only
that the pharmaceutical industry is already in the middle of a strategic crisis:
They also foresee an acceleration of the current predicament (see Chart 1).

So what is the way out of this crisis? Which executives need to adapt
their operating model and how must they go about it?
Business models generally consist of two decisive elements: the value
pro-position and the operating model. The first focuses on the question
of what the pharmaceutical company is offering to whom.

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The latter gives an indication of whether it is delivering these offerings in a

profitable way (see Chart 2). For the sake of simplicity, we have elected to
concentrate on the fundamental issues surrounding the operating model.

It appears that the pharmaceutical industry still favors a top-line approach

in which sales growth remains the key focus. "We have not yet adapted
our operating models to market developments neither in mature nor
in emerging markets," said one of Germany's top pharmaceutical CEOs,
voicing an opinion shared by many of his colleagues.
This perception is reflected in the figures. While the top ten pharmaceutical
companies saw their sales increase noticeably in 2009 and 2010, their EBIT
margin dropped by almost 4%. Accordingly, over the course of only two years,
the top ten pharmaceutical companies alone have missed out on additional
EBIT totaling USD34 billion.

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Pharma's fight for profitability

Interestingly, although many executives admit that they have not yet made
the necessary moves, they evidently understand that a strategic crisis such as
the current one requires fundamental changes. In this context, 78% of our
survey participants cited new operating models as a potential way forward.

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For those executives wishing to take that first important step, this study
aims to answer the pivotal questions and provide a clear outlook for the
way forward:
> What are the drivers of new operating models and how are they influenced
by the current global position of the pharmaceutical industry?
> What key success factors ensure profitable growth and what are the
resultant strategic implications for pharmaceutical companies?
> And, most importantly, how do we move forward?
We asked our survey participants to name the individual drivers they consider
to be the most important with respect to operating models (see Chart 5).
Nine out of ten executives chose the changing healthcare environment. The
opportunities that emerging markets offer also ranked highly, as did the R&D
productivity crisis.

The changing healthcare environment

The financial crisis in the eurozone has accelerated the decline of European
drug markets, a situation that is expected to continue at least on into 2016.
The marketplace remains very nervous indeed a fact reflected in the
plethora of legislative measures that have been introduced recently with
the aim of reducing public expenditure on pharmaceutical products:

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Pharma's fight for profitability

> In Spain, the government has slashed 15% off the prices of medicines that
are excluded from the reference pricing system, that have been on the market
for 10 years or more and that have no generic competitor on the domestic
market. The stated aim of this move was to target innovative pharmaceutical
manufacturers.
> The UK is one of the few markets in the world where subject to a cap
imposed on overall company profit pharmaceutical companies are free to
set the prices for their medicines. However, the government has now
identified this as a potential area for budget reduction and aims to implement
a new value-based medicine pricing system at the end of 2014. This would
replace the Pharmaceutical Price Regulation Scheme (PPRS) that currently
controls the prices of the branded prescription medicines supplied to the
National Health Service (NHS).
> In Italy, doctors are now required to indicate on prescriptions whether
the prescribed patented drug can be substituted by a generic alternative.
> As financial distress intensifies in countries such as Spain, Greece and
Portugal, pharmaceutical companies too will find themselves coming under
increasing restrictions. At the same time, countries' diminished ability to pay
for delivered drugs is significantly impacting the hospital segment in particular.
Cost containment is by no means the exclusive preserve of the developed
markets, however, and is set to gain ground in emerging markets too:
> In India, prescriptions are limited to generic drugs for the majority of publicly
insured patients. If no generic drugs are available, the government can force
foreign pharmaceutical companies to license their patented products as
generics, as was shown in the cases of Novartis' Gleevec and Bayer's Nexavar.
> After seeing public drug spending surge by 300% between 2003 and 2010,
Brazil's Ministry of Health has started to manage its spending more rigorously.
To realize savings, the Ministry of Health is now both leveraging its bargaining
power and comparing market prices with reference prices in other countries,
including Australia, Canada, France, Greece, Italy, New Zealand, Portugal,
Spain and the US. By targeting expensive innovative and orphan drugs, the
ministry was able to negotiate significantly lower prices for its public health
system Sistema nico de Sade (SUS), leading to lower overall costs in 2011
compared to the previous year.

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Opportunities in emerging markets

Between 2011 and 2016, the global pharmaceutical market is predicted to see
a compound annual growth rate (CAGR) of around 4.5%. However, a detailed
analysis of the figures reveals substantial differences between mature and
emerging markets.
Mature markets are expected to stagnate. Expiring patents and market access
hurdles will further slow the increase in drug spending. Emerging markets,
on the other hand, are expected to grow at a rate of 11.6% (CAGR), as larger
populations drive the greater use of medicines and economic development
drives the financial capabilities of a growing middle-class.

This macroeconomic development has a direct and crucial impact on the

individual business plans of pharmaceutical companies, as sales growth in
emerging markets is driven by volume rather than by price. Moreover, the
margins in these markets are significantly lower. That is why it has become
more important than ever to optimize the bottom line and hence to adapt
the operating model.

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Pharma's fight for profitability

R&D productivity crisis

This phenomenon is characterized by the fact that, although R&D investments
are growing, the output of new drugs is shrinking. While expenditure has
increased by 80% over the past decade, the number of new medical entities
(NMEs) has dwindled by 43% in the same period of time.
Due primarily to more complex study requirements, the development of
new drugs now takes 30% longer than it did in the past. In addition, given
ever-tighter market access constraints and growing cost pressure, only three
in ten marketed Rx drugs produce revenues that match or exceed the average
R&D costs. The outlook is even grimmer for pipeline drugs: Only one in eight
approved compounds is expected to generate returns that are in line with
their communicated targets.
It thus comes as no surprise to discover that a large proportion of
pharmaceutical executives no longer believe R&D to be truly lucrative.
As a result, R&D outsourcing and licensing have increased dramatically.

To optimize their R&D effort, pharmaceutical companies need to tread

new paths. Aside from placing more emphasis on team structures and the
cost base, many executives are looking to intensify cooperation with other
suppliers (contract research organizations, or CROs).

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The importance of emerging markets has also increased in this context.

While conducting trials in such countries is controversial, in many cases
they are a necessity. There are good reasons for collaborating with local
partners: Cost structures tend to be lower and recruiting opportunities are
more diverse. Furthermore, prevalence rates and the knowledge possessed
by specifically trained experts can help drive joint venture projects. In
addition, pharmaceutical companies are looking to these countries to develop
innovations independently. For example, Indian biopharmaceutical company
Biocon is currently in talks with top global players who may be interested
in forming a marketing alliance for their oral insulin drug. As a general rule,
farming R&D out to emerging markets results in substantial cost advantages.
To summarize: If we take the value proposition of both pharmaceutical
companies and their products as a given (and one that is of particular
relevance to markets characterized by increasing competitive pressure
and decreasing R&D productivity), then operating models clearly have
the potential to become a key competitive differentiator in the future.
There is clearly a growing awareness that operating models have become
more relevant. Some pharmaceutical executives have begun to redefine
their approach, shifting away from a mere top-line view to a hybrid
perspective that also includes the bottom line.
We now turn our attention to how strongly the lifecycle of the products and
the lifecycle of the markets must be reflected within these different operating
models. Since both markets and product environments are very dynamic,
operating models must be able to respond accordingly if they are to defend
existing competitive advantages or help a company gain new ones.
Coming from a top-line focused background, the pharmaceutical industry has
begun to readjust its focus to a more complex standpoint that also takes into
account the bottom line. Some companies are now adopting what has been
referred to as a "smart bottom-line perspective", which includes a thorough
evaluation of their assets and organizational footprint.
So far this year, many major corporations such as Merck KGaA, AstraZeneca,
Sanofi and Stada have announced and/or launched workforce reduction
programs. Rather than concentrating only on such operational initiatives,
however, the aim of this study is to focus on the strategic options available
to executives.

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Pharma's fight for profitability

Our findings raise two central, challenging questions:

> How can companies use their commercial, operational and administrative
operating models to tap the potential of the global pharmaceutical market?
> Is it possible for a company to simultaneously ensure profitable growth and
reflect both the lifecycle of its own portfolio and that of the major markets?
The global footprint of today's pharmaceutical industry does not yet match
the importance of the different market types.
Growth rates in mature markets, which are still open to best-in-class
medicine, are expected to more or less stagnate in the years ahead. At the
same time, emerging markets where the focus often lies on "good-enough
medicine" promise attractive growth rates for both Rx and generic drugs.
Consequently, as demonstrated by our survey, pharmaceutical managers
are expecting a major shift across all functions (see Chart 8).

Many of today's business plans, however, do not yet reflect this development
and need to be reformulated.

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Recent examples underscore the fact that a growing number of companies

are questioning their existing operating models and replacing them with
new and innovative ones:
> Bayer has partially shifted its commercial departments for mature products
from the EU to China and is centralizing/outsourcing administrative
functions.
> In an attempt to optimize its R&D sites, Sanofi is currently on the lookout
for a long-term R&D partner in India. Part of the company's strategy is
to achieve a more global perspective in the conduct of clinical research.
Such a partnership is expected to be particularly beneficial with regard
to diseases that have a high prevalence in India.
> BioMerieux, the French biotechnology and in vitro diagnostics specialist,
was one of the pioneers when it set up research and production sites in
China as far back as 20 years ago. Today, it employs 400 staff there and
is reaping the results of its investment. After a solid first six months of
2012 and with 48% organic growth, BioMerieux China has grown into
the group's third largest unit.
> Pfizer announced at the end of 2011 that it would build a pharmaceutical
manufacturing and packaging facility in Saudi Arabia, the largest market in
the region. The company has joined Sanofi in entering the King Abdullah
Economic City, with both firms hoping to take market share away from
domestic pharmaceutical manufacturers and GlaxoSmithKline (GSK), the
only multinational of note in the country.
> Novartis is currently building a new USD 150 million manufacturing
plant outside St. Petersburg. This is part of a plan to invest a total of
USD500million in Russia over the next five years.
> The pharmaceutical industry is not alone in its struggle to deal with
tightening budgets. The same is true of medical instrument companies
too. Irish company Covidien, for example, recently announced that, due
to cost pressures, it would relocate its manufacturing plant from South
Carolina to Costa Rica. Covidien is already active in China after investing
in R&D operations there.

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Pharma's fight for profitability

For executives who are not yet willing or able to build new production
sites in emerging markets, establishing strategic partnerships with domestic
producers can provide an attractive alternative. "We are producing most
of our branded generics with Indian CMOs," the leader of one mid-sized
company told us. "However, sharing the IP on our patent-protected portfolio
is still too risky for our business."
Although our interviewees agree that the greater part of future sales growth
will come from emerging markets, they are taking a more cautious approach
than many other observers. While market projections forecast that about
85% of future sales growth will come from emerging markets, our survey
participants estimate that the number will be more like 55% (see Chart 9).
Even this figure still constitutes a major shift from today's sales allocation of
20% plus in emerging markets. The other side of the coin, however, is that
margins will be significantly lower than in mature markets.

Interestingly, our survey results reveal that despite increasing activities

to contain costs pharmaceutical executives still believe innovative drugs
will remain a major driver of growth in mature markets. The other lever at
their disposal is to introduce and further enhance established products in
emerging markets.

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In China, for instance, branded generics account for as much as 70% of the
domestic pharmaceutical market. Consequently, Pfizer recently announced
that USD295million will be invested in its joint venture with Chinese
pharmaceutical company Zhejiang Hisun Pharmaceuticals. Such market
opportunities are attractive to foreign investors, particularly since awareness
of these drugs is already high following longer-term marketing in mature
markets.
However, investments in branded generics must be chosen carefully. "If a
country has a budget of USD X billion for healthcare, it will continue to have
that budget no matter how much we can drive volumes," one top CEO said
in our interviews. "We can see how effective such cost-cutting measures are
in Turkey, a good indicator for the future development of today's emerging
countries. These cost-containment measures are particularly impacting
branded generics, since 99% of such drugs are paid for by governmental
healthcare funds."
Another CEO added: "Once China stops needing the infrastructure
investments that international pharmaceutical companies currently provide,
price pressure, especially on branded generics, will significantly increase.
However, medication paid for privately will continue to grow significantly
where middle-class societies continue to expand in size and buying power."
But successful activities in both developed and emerging markets require
adjusted operating models. Existing assets in mature markets must be
weighed against the need to support sales growth in emerging markets.
As our interviewees confirm, companies used to mainly focus on rapidly
building up f operations in emerging markets in order to participate in
local market growth and gain market share. Today, in an effort to optimize
and harmonize operating models on a global level, market players need
to include commercial operations, technology operations and their
administrative footprint in both emerging and mature markets. Historically,
most HQ functions are situated in mature markets. In the current situation,
however, this can make management slower to perceive the need for the
changes that are necessary when operating in emerging markets.

 21 |

Pharma's fight for profitability

This perception is corroborated by our survey participants. While the

operating model in mature markets ranks highly for overall excellence,
pharmaceutical company managers are not satisfied with their operating
models in emerging markets with small and medium-sized companies
demonstrating even lower levels of satisfaction (see Chart 10).

In light of this strategic shift in the dynamics of global pharmaceutical

markets, it is not surprising that many pharmaceutical companies are
developing strategies to expand their geographic presence and increase
their market share. But how are pharmaceutical companies positioned
with regard to emerging markets as opposed to mature markets?

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2.  Strategic implications of lifecycle-based operating

models
Based on the lifecycle of the product and the market, four segments
can be identified from two dimensions:
> The product perspective: The maturity of a company's product portfolio, i.e.
whether it is still relatively innovative, patent-protected and "hard to make",
or whether it is already off-patent and competing with a number
of generic or biosimilar products
> The market perspective: The maturity of the markets to which a company
offers its portfolio, i.e. whether they are young, fast-moving emerging
markets or mature markets where regulations have become the primary
barrier to market access
Examining these two dimensions reveals four distinct market segments.
Each has its own characteristics, drivers and constraints that will impact
any future operating model.

As shown in Chart 11, we analyzed the product lifecycle by defining two

typical stages while also giving due consideration to the given market lifecycle. We then asked our survey participants to rate which key functions
they consider to be important for development of the top and bottom lines.

 23 |

Pharma's fight for profitability

The crucial factor in determining the importance of corporate functions is the

stage in the product lifecycle, not the market lifecycle. This means that the
ranking given to key top-line functions in both market segments for innovative
products (segment 1: new products in mature markets, or the "Traditional
Pharma Model" and segment 4: new products in emerging markets, or the
"Ability-to-Pay Model") is identical (Chart 12). A similarly strong correlation
exists between both classes of bottom-line functions (see Chart 13).

Chart 12 shows that, in all market segments, top-line development is driven

by market access. In the case of innovative products, R&D productivity and
medical affairs units in which experts are able to convincingly discuss patient
benefits and identify the best mode of action will also play a key role.
These findings can be interpreted as follows:
> Executives see realizing and maintaining revenues at an optimal price level
as the primary goal.
> This is followed by the need for appropriate innovations and the ability to
successfully introduce and market products from a scientific perspective.
It is important to note that marketing and sales capabilities are not ranked
within the top three functions.

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In contrast, marketing and sales capabilities once again become a top priority
when the focus is on established products in both mature and emerging
markets, as shown in Chart 13.

Our survey results show that, generally speaking, manufacturing (including

the supply chain) is regarded as the predominant driver for bottom-line
growth. This is true across all market segments. It also becomes apparent
that the importance of market access has grown, especially for innovative
products, where it is becoming the most important bottom-line force after
manufacturing.
However, it is more difficult to evaluate the real impact of bottom-line
functions as their effect is more diverse than is the case with top-line
functions.
Interestingly, our interviewees ranked medical affairs as the least important
bottom-line function across all market segments. They also expect its
significance to increase only slightly. This supports the view that medical
affairs teams will evolve into a key driver of the top line. In other words,
medical affairs will become a central function that does not necessarily drive
down costs, but that actively promotes product benefits and drives revenues.

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Pharma's fight for profitability

Chart 14 summarizes the role of key functions for top-line and bottom-line
development:

What do these findings mean for attempts to optimize operating models

in the various market segments?
Market segment 1: New products in mature markets
(the Traditional Pharma Model)
This market segment typically constitutes the classic pharmaceutical operating
model, which seeks to introduce innovative new chemical entities (NCEs) or
biologicals into established markets.
In markets like these, the necessary infrastructure has already been
established: Healthcare professionals diagnose and prescribe, pharmacies
dispense. In order to enable rapid market penetration, this model is heavily
dependent on marketing and sales functions.
Given the ever-growing cost pressure on healthcare systems, however, market
conditions have changed in recent decades. Top executives have already
learned that market access is the key driver that can secure their top line.
This is hardly a surprise, since many of the recent reforms across Europe
specifically target the revenues of innovative pharmaceutical products.

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Having said that, it is evident that we are still only at the beginning of a major
paradigm shift that will dramatically change the way the pharmaceutical
industry operates. When asked about the importance of individual functions
in the future, executives stated that although R&D, marketing and sales
functions are currently by and large equally important to safeguard the top
line, the significance of the latter two is poised to decline dramatically. At the
same time, the importance of market access and R&D will continue to grow.
In the future, even more so than today, bringing a product to market and
using smart marketing and sales initiatives to sell it will not be the way
forward. Those companies that wish to successfully sell state-of-the-art
products in mature markets must be able to provide genuine innovation
in terms of patient benefits, not just new compounds.
This development is also reflected in the sharp increase in the importance of
medical affairs units. While traditional sales forces will play an increasingly
minor role in the future, the influence of medical experts will shape the
game. This will naturally challenge the existing organizational setup of
pharmaceutical companies, causing areas of responsibility to be significantly
altered. It will require smart and compliant solutions to organize, steer and
incentivize this type of medical field force. Although they play the key top-line
role in promoting future products, compliance regulations set very tight limits
within which real business targets must be combined with their activities.

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Pharma's fight for profitability

Market segment 2: Established products in mature markets

(the Cost-efficiency Model)
This market segment highlights the key question for future pharmaceutical
business in mature markets: How do you advertise and sell established
products in an increasingly competitive and price-sensitive environment?
In this context, market access is again of growing importance. However, it is
essential to understand that, while market access is vital to securing revenues
for innovative products, it plays a slightly different role for their established
counterparts. Most pharmaceutical companies have long since organized their
pricing experts in the market access department. And over the years, these
specialists have grown more influential, since tenders and rebate contracts are
imperative for established products in mature markets. Since medical topics
are also expected to play a role in such pricing negotiations, medical affairs
teams too will have a greater impact on the top line for established products.
This is especially true for biological products, because biosimilars and even
more so upcoming biosimilar antibodies are not identical to the original
product.
Consequently, the widespread and rapid use of tenders will dramatically limit
the promotional elasticity of established products. Marketing and, in particular,
sales functions will therefore forfeit much of their current importance to the
development of the top line. The sales force will continue to play a role in the
future, but only with regard to those products whose promotional elasticity is
not affected by tenders.
Despite these challenging developments, it would be wrong to assume that
established products no longer hold opportunities in mature markets. Rather,
pharmaceutical companies are still looking for innovative solutions for this
segment. The growing importance of R&D indicates that many executives still
believe in innovation. For example, Daiichi Sankyo, with its triple fixed-dose
combination of antihypertensives, has successfully marketed an innovative
offering based on established compounds.
Optimizing the bottom line nevertheless remains one of the key challenges for
established products in mature markets. This being the case, manufacturing
remains of the highest importance. For innovative products, the challenge
is to deliver both high quality and safety for new and increasingly complex
molecules, whereas the manufacture of established products is a conventional
process that concentrates on cost efficiency.

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As a result, this aspect provides many companies with opportunities to either

outsource entirely, to insource (enabling them to exploit spare capacity) or
to relocate sites to low-cost countries and hence reduce fixed costs.
Given the rising clamor for rebates, the game will be won by those companies
that are able to manufacture reliable quality at the lowest price. In most
cases, this will not be possible in mature markets. And since IP protection is
not a main concern in the context of established products, a continual shift
of resources to developing countries is to be expected. In mature markets,
however, cost pressure on CMOs has already led to consolidation.
The bottom line can also be improved by a more efficient sales force structure.
Since the importance of established products to the top line is waning,
resources must be organized in a way that facilitates high call frequencies
at lower cost. One popular way of resolving this dilemma is by combining
product-specific sales lines with larger sales lines. This results in smaller sales
regions with more specific targeting of practitioners and, hence, less travel
between calls.

 29 |

Pharma's fight for profitability

Market segment 3: Established products in emerging markets

(the Volume-Expansion Model)
This segment embodies the conditions pharmaceutical companies have to
deal with in emerging markets. They seek to market established products in
what, for them, are generally new market environments. In the process, they
also aim to optimize their volume sales. This would allow them not only to
benefit from scale effects, but also to establish truly global brand awareness.
Emerging markets vary, so there is no typical benchmark. Accordingly, the
unique situation of each one must be analyzed on its own merits. The necessary
healthcare infrastructure for diagnosing, prescribing and dispensing medicines
tends to be relatively underdeveloped in most cases. The challenges facing
pharmaceutical companies thus vary greatly and are often completely new.
In addition, multinational companies come up against the significant market
power of local companies in what are often heavily fragmented markets (see
Chart 17). To gain a foothold in these markets, multinational companies are
very often required to either cooperate with local market players or enter
into joint ventures. The nature of such cooperation will be of even greater
importance in the future, as companies from emerging markets are themselves
looking to expand into other markets. For example, roughly 75% of all drugs
consumed in Nigeria are imported from India and China. Indeed, many
companies from abroad are now looking to grow their share of the European
market, as can be seen by the efforts of Korea's Celltrion and India's Dr.Reddy's.

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Given that existing operating models are comparatively lean, the executives'
perspective is usually skewed more toward the top line than the bottom
line. Nevertheless, even in these countries, pharmaceutical companies have
to deal with certain market access restrictions. As we saw earlier, many
pharmaceutical companies focus on branded generics in emerging markets.
Since most of the larger pharmaceutical companies require reliable and
coherent healthcare infrastructures and standards in the target countries, they
actively support their development. So as long as such investments are needed
and wanted, most countries will not aggressively attack the lucrative business
of branded generics. This also explains the relatively high importance that
marketing and sales units are expected to have in the future in these markets.
However, pharmaceutical executives are well aware that this support for their
branded generics is likely to change once their investments in infrastructure
are no longer required. Market access will then become a more important
issue, especially with regard to pricing and tendering strategies. The
challenges will, however, remain very different to those in mature markets.
Since local competitors are likely to pose a threat, especially in China, India
and Brazil, activities in these countries must include efforts to build alliances
with relevant local players. This could help companies to secure top-line
growth in the long run.
Similarly to established products in mature markets, rigorous management
of the bottom line is fundamental in this segment. Manufacturing will
continue to play a major role as multinationals are forced to measure their
cost base against that of local competitors. Since the quality level of locally
produced drugs is normally acceptable for domestic markets, local players
have a cost advantage over multinationals. However, if local companies wish
to expand further afield, they will need to improve to meet global standards
which will increase their cost base too.
Efficiently reorganizing the sales force remains another huge challenge. For
example, since many companies rely on external local sales representatives
in emerging countries, improving efficiency and reliability may prove to be
a constant process.

 31 |

Pharma's fight for profitability

Market segment 4: New products in emerging markets

(the Ability-to-Pay Model)
This market segment is a blueprint for a newly developing model, with
pharmaceutical companies introducing highly innovative NCEs or biologicals
to emerging markets. Demand for such highly priced medicines is increasing,
as both total personal disposable income and average incomes are on the rise
in emerging markets (see Charts 19 and 20). Accordingly, it is no surprise
that future growth in the global middle class between now and 2030, an
astonishing two billion new members will join this "club" will stem almost
entirely from non-Western economies. Whereas today a majority (54%) of
the global middle class can still be found in Europe and North America, fully
79% will live outside these two regions by 2030.

 32 |

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 33 |

Pharma's fight for profitability

At the same time, infrastructure is evolving and insurance coverage is

improving. Given the global distribution of populations and their growth,
pharmaceutical companies are already investing heavily to make sure
they achieve critical mass in emerging markets.
As is the case in mature markets, the Ability-to-Pay Model is characterized
by a clear top-line focus. Since products target the rapidly growing upper
middle class, customers' expectations are developing along similar lines
to those in other globalized regions. Hence, the dominant functions are
identical: Here again, market access is the overriding function and is
expected to gain even greater importance.
Since the majority of targeted consumers are either privately insured or
relatively wealthy or both, regulatory oversight of market access is not as
advanced as it is in mature markets. Nevertheless, any company wishing
to secure access to the greater part of the population will need to develop
innovative solutions tailored to emerging markets. Challenges will
include pricing and reimbursement topics, but also the need to establish
accessibility to innovative drugs in the markets concerned.
More importantly, market access can also help determine whether
companies can indeed uphold their offering of innovative products.
As was recently announced in India, governments may look at ways
to reduce healthcare costs by generally limiting the use of innovations.
If pharmaceutical companies want to continue to target all patients
who stand to benefit, they will need to address such concerns and
develop suitable cooperation models.
Since such debates can be won only with scientific arguments and truly
innovative products, medical affairs teams and R&D will become decisive
factors for the success of new products in emerging markets. Traditional
marketing and sales approaches, however, will lose some of their current
impact on the top line. Since these changes are expected to occur neither
as fast nor as dramatically as they are doing in mature markets, a slower
pace will be adopted in emerging markets.

 34 |

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With regard to the manufacture of innovative products, guaranteeing

product quality and safety must be the ultimate goal. In emerging markets,
however, manufacturing can also be important as an entry ticket, a way of
demonstrating commitment.

 35 |

Pharma's fight for profitability

3. Outlook for lifecycle-based operating models

Given the significant changes in key drivers of success that we have
identified and discussed, it is evident that the pharmaceutical industry must
completely rethink its operating models. The need is all the more pressing
because the underlying factors that are driving this change vary not only
as a function of the stage in the lifecycle, but also from market to market.
Particularly in our executive interviews, respondents confirmed the
importance of these issues. The pharmaceutical industry has identified
what it sees as the most important ones; and top managers have made first
tentative steps toward aligning their operating models and functions with
their new strategic goals. It would appear that, in light of current market
conditions, this process will not be rapid and will take a number of years.
A true competitive edge, however, can only be achieved by those companies
that seize the opportunity to be early movers in each of the four distinct
segments.
We asked our interviewees where they see the greatest need to innovate
and optimize operating models: An impressive 96% stated that they do
indeed perceive the need for change (see Chart 22).

 36 |

Study

The findings of this study have enabled us to establish a comprehensive

baseline for the pharmaceutical industry. Yet it is crucial that companies
identify and evaluate where they stand right now and map out their own
strategic goals. Making the next move can prove to be difficult, however.
In many cases, regions and even individual affiliates have already launched
their own initiatives initiatives that are generally not aligned throughout
the wider organization.
The challenges are many and varied. However, those organizations that
begin to optimize their operating models sooner rather than later are the
ones that will gain the greatest competitive advantage. Our experts at
Roland Berger Strategy Consultants can help you move faster along
this path.

Sources
> For the purposes of this study, Roland Berger Strategy Consultants
conducted a major quantitative survey and carried out a large number
of interviews with top industry executives.
> Our focus was on both patent-protected pharmaceuticals and generic
drugs.
> A total of 40 global pharmaceutical companies together accounting for
more than 45% of global annual pharmaceutical revenues participated
in the quantitative survey. Participants included 8 out of the top 10 and
14 out of the top 20 pharmaceutical companies.2)
>W
 e conducted in-depth interviews with executives from international
pharmaceutical companies. More than 30 face-to-face discussions yielded
a wealth of valuable qualitative insights. The interviewees included
chief executive officers, chief financial officers, directors of R&D and
commercial executives.

2) Rankings based on the 12th Annual Pharm Exec 50, published in May 2011

 37 |

Pharma's fight for profitability

Contacts

Michael Dohrmann
Partner

Mies-van-der-Rohe-Str. 6, 80807 Munich
E-Mail:
Michael.Dohrmann@rolandberger.com

Phone: +49 (89) 9230-8276
Michael Dohrmann is a Partner at the global Pharma & Chemicals Competence Center at Roland
Berger Strategy Consultants and is based in Munich. He holds an MBA from the Universities of
Passau and Port Elizabeth and accumulated 10 years management experience at a leading
pharmaceutical and medical devices company prior to his consulting career. Numerous international
projects have enabled Michael to develop profound expertise across a broad spectrum of top- and
bottom-line topics, including corporate strategy, go-to-market strategies and holistic efficiency
programs in the pharmaceutical and medtech industries.

Morris Hosseini, PhD
Partner

Alt-Moabit 101b, 10559 Berlin
E-Mail:
Morris.Hosseini@rolandberger.com

Phone: +49 (30) 39927-3350
Morris Hosseini is a Partner at the global Pharma & Chemicals Competence Center at Roland Berger
Strategy Consultants and is based in Berlin. He holds a Ph.D. in biomedical engineering from the
University of Toronto and joined the Pharma and Medtech practice in 2000. Since then, projects with
leading international pharmaceutical and medtech players have given him expertise in commercial
operations, marketing effectiveness, medical affairs, market access, business development and
corporate strategy. Morris co-founded and now sits on the Supervisory Board of Directors of a
Canadian biotech company that works with mesenchymal stem cells.

 38 |

Study

Contacts

Patrick Biecheler
Partner

11, rue de Prony, 75017 Paris
E-Mail:
Patrick.Biecheler@rolandberger.com

Phone: +33 (1) 53670-902
Patrick Biecheler is the Partner who leads the French Pharma and Healthcare Competence Center
at Roland Berger Strategy Consultants in Paris. He has amassed 16 years consulting experience,
mostly in pharmaceuticals, healthcare and consumer goods. Aside from his consulting activities,
he has gained extensive experience as a managing director in the pharma-ceutical industry.
Patrick holds a degree from ESSEC, Paris, and from the Chaire Sant. His project experience focuses
primarily on strategic planning, go-to-market strategies, new business models, sales and marketing
excellence, and comprehensive efficiency/cost and operational optimization projects.

Hans Nyctelius, MD
Partner

Sveavgen 13-15, Hus 2, 16 tr, 11157 Stockholm
E-Mail:
Hans.Nyctelius@rolandberger.com

Phone: +46 (8) 410438-88
Hans Nyctelius is the Partner who heads our Pharma and Medtech business in the Nordic countries.
He holds an MBA and a medical doctorate, specializes in pediatrics and cardiology and has 10
years clinical practice to his name. Hans also gained five years management experience as COO
of Q-Med and CEO of SwedenBIO. Rooted in more than 150 international projects, his consulting
activities focus primarily on corporate strategy, sales build-ups and market entry, partnering and
operational excellence in the pharmaceutical and medtech industries.

For their valuable contribution to this study, we are particularly grateful to Jonas Haentjes,
Timo Schwemer, Georg Selle, Shan Qiao, Karin Brning and Lennart Bsch.

 39 |

Pharma's fight for profitability

Roland Berger Strategy Consultants Company profile

Roland Berger Strategy Consultants, founded in 1967, is one of the world's
leading strategy consultancies. With around 2,700 employees working in
51 offices in 36 countries worldwide, we have successful operations in all
major international markets.
Roland Berger Strategy Consultants advises major international industry
and service companies as well as public institutions. Our services cover all
issues of strategic management from strategy alignment and new business
models, processes and organizational structures, to technology strategies.
Roland Berger is an independent partnership owned by around 240 Partners.
Its global Competence Centers specialize in specific industries or functional
issues. We handpick interdisciplinary teams from these Competence Centers
to devise tailor-made solutions.
At Roland Berger, we develop customized, creative strategies together with
our clients. Providing support in the implementation phase is particularly
important to us, because that's how we create real value for our clients.
Our approach is based on the entrepreneurial character and individuality
of our consultants "It's character that creates impact."
All employees at Roland Berger Strategy Consultants are committed to
our three core values: entrepreneurship, partnership and excellence.
Entrepreneurship We are a network of entrepreneurs who provide
pragmatic and practical solutions.
Partnership We build trust-based relationships in our company and
with our clients, and we are committed to constructive teamwork.
Excellence We achieve excellent results and develop global best
practices for measurable and sustainable success.

 40 |

Study

Pharma & Chemicals Competence Center

Our Pharma & Chemicals Competence Center helps all players in the
healthcare market to seize opportunities and master their challenges
in a constantly changing context.
Alongside traditional areas of consulting such as marketing, organization,
cost cutting and M&A, we also give clients the benefit of our intensive
analysis of current market trends and developments.
A large number and broad spectrum of projects means we know all player
types and can adopt an integrated approach to the healthcare market. Where
appropriate, we bring different players together to help them collaborate
and gain a competitive edge.
Our leading-edge projects in strategic realignment, profit boosting/cost
cutting, market access, medical affairs, marketing/sales, organization and
M&A help make the healthcare market more innovative. Our expertise
builds on a proven and highly competitive global network of experts.
For further information, please visit www.rolandberger.com or contact
us directly.

The Roland Berger Strategy Consultants global pharmaceuticals network

AUSTRIA
Roland Falb
Freyung 3/2/10, 1010 Vienna
Roland.Falb@rolandberger.com
+43 (1) 536 02-200

FRANCE
Patrick Biecheler
11, rue de Prony, 75017 Paris
Patrick.Biecheler@rolandberger.com
+33 (1) 53670-902

NIGERIA
Christian Wessels
39 Alfred Rewane Road, Ikoyi, Lagos
Christian.Wessels@rolandberger.com
+23 481 5268-8826

BELGIUM
Eric Baart
100 Blv. du Souverain/
Vorstlaan, 1170 Brussels
Eric.Baart@rolandberger.com
+32 (477) 36-0821

GERMANY
Michael Dohrmann
Mies-van-der-Rohe-Str. 6, 80807 Munich
Michael.Dohrmann@rolandberger.com
+49 (89) 9230-8276

POLAND
Krzysztof Badowski
Pl. Pilsudskiego 3, 00-078 Warsaw
Krzysztof.Badowski@rolandberger.com
+48 (22) 32374-14

Martin Erharter
Mies-van-der-Rohe-Str. 6, 80807 Munich
Martin.Erharter@rolandberger.com
+49 (89) 9230-8276

ROMANIA
Codrut Pascu
Str. Dr. Burghelea Nr. 5,
024031 Bucharest
Codrut.Pascu@rolandberger.com
+40 (21) 30605-00

BRAZIL
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04543-906 So Paulo (Itaim Bibi)
Jorge.PereiradaCosta@rolandberger.com
+55 (11) 3046-7111
Marcos Salla
Av. Presidente Juscelino Kubitschek 510
04543-906 So Paulo (Itaim Bibi)
Marcos.Salla@rolandberger.com
+55 (11) 3046-7111
CHINA
Matthew Chang
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1515 Nanjing
Matthew.Chang@rolandberger.com
+86 (21) 5298 6677-886
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1515 Nanjing
Bruce.Liu@rolandberger.com
+86 (21) 5298 6677-858
CROATIA
Vladiimir Preveden
Trg bana Jelaia
5, 10000 Zagreb
Vladimir.Preveden@rolandberger.com
+385 (1) 4804-840

Morris Hosseini
Alt-Moabit 101b, 10559 Berlin
Morris.Hosseini@rolandberger.com
+49 (30) 39927-3342
HUNGARY
Frigyes Schannen
Sas utca 10-12, 1051 Budapest
Frigyes.Schannen@rolandberger.com
+36 (1) 30170-77
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Satoshi Nagashima
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Tokyo 107-6023
Satoshi.Nagashima@rolandberger.com
+81 (3) 358 76-683
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Seoul 110-714
Soosong.Lee@rolandberger.com
+82 (2) 738-6100
NETHERLANDS
Benno van Dongen
WTC - Strawinskylaan 581,
1077XX Amsterdam
Benno.vanDongen@rolandberger.com
+31 (20) 7960-630

SWEDEN
Hans Nyctelius
Sveavgen 13-15, Hus 2, 16 tr,
11157 Stockholm
Hans.Nyctelius@rolandberger.com
+46 (8) 410438-88
SWITZERLAND
Beatrix Morath
Holbeinstrasse 22, 8008 Zurich
Beatrix.Morath@rolandberger.com
+41 (43) 336-8630
UK
David Stern
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David.Stern@rolandberger.com
+44 (20) 30751-115
USA
Gillian Morris
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Chicago, IL 60606
Gillian.Morris@rolandberger.com
+1 (312) 662-5512

Michael Dohrmann, Patrick Biecheler, Morris Hosseini, Hans Nyctelius

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Pharma's fight for profitability

Lifecycle-based operating models

Study