Cost-Cutting Done, Pharma Heads Weigh New Challenges
The NJBIZ Interview: Carolyn Buck Luce
By Shankar P.
12/1/2008

Pharmaceutical companies in New Jersey and elsewhere are rearranging the pieces on their strategy chessboards, according to the latest “Progressions” report on the industry that was released in November by consulting firm Ernst & Young. Carolyn Buck Luce, Ernst &Young’s New York-based global pharmaceutical sector leader who co-authored the report, says cost-cutting remains one area of focus. But pharmaceutical executives are also mulling the new opportunities and challenges universal health care would bring, and new ways of defining the customer and tapping new markets in the emerging economies. Buck Luce shares the report’s key takeaways with NJBIZ Staff Writer Shankar P.

NJBIZ: What did you set out to achieve with the “Progressions” study?

Buck Luce: This was a survey of 40 top executives at 15 global pharmaceutical companies to get their perspectives not just on the transforming role of their functions, but also the emerging business model and the organization to power the new business model. This is the sixth report so far and the second volume this year, and we completed the interviews between May and September this year.

NJBIZ: Did pharmaceutical companies in New Jersey lead the trends?

Buck Luce: New Jersey has many global pharmaceutical companies, and in many respects led the industry in terms of the trends that impact their competitors globally. What happens in New Jersey for the pharmaceutical industry is a critical component of what drives the industry globally.

NJBIZ: What are the main takeaways from the “Progressions” report?

Buck Luce: There is a tremendous amount of change. The question is: how do you manage some of the short-term risks and pressures, and at the same time be able to take advantage of the good news?

The fundamentals are good. Globally, more and more people are coming into the emerging middle class in high-growth countries like China, India, Russia, Turkey, Mexico, Korea, Brazil, et cetera. This is a growth-market opportunity for the pharmaceutical industry.

In the U.S., on the one hand, there is continuing pressure on prices, which will continue in the new administration. On the other hand, the new administration has a commitment to universal health care. What constitutes the bottom line is the price of the product and unit value, and how well you manage costs to bring products to market.

NJBIZ: Cost-cutting is no longer a prime focus area, the report suggests.

Buck Luce: In our previous report, cost containment was one of the most important initiatives. In this report we found more of a balanced approach where optimizing cost was [just] one the many objectives. Only 40 percent of the executives said optimizing costs was their most important initiative, compared to a similar study in 2007 where 92 percent of those surveyed ranked cost reduction as their main initiative.

In the latest survey, 66 percent of executives said the most important strategic initiative was reinvigorating the R&D pipeline, while 40 percent said expanding into new markets and restructuring their marketing and sales programs to become more customer-centric were their main areas of focus.

NJBIZ: What are the top concerns on a pharmaceutical executive’s mind?

Buck Luce: We asked the executives what they felt were the most important pressure points forcing changes in their business models. Seventy-two percent said driving product growth with a robust pipeline is the most important aspect forcing change; while others said it was about producing and sustaining product value, global regulatory pressures, redefinition of the customer, managing patent challenges, and eroding industry reputation.

NJBIZ: What makes a pharmaceutical company successful today?

Buck Luce: These current times are creating a sense of urgency to look at short-term tactical responses to be able to preserve shareholder value and make sure costs are under control. There was an awful lot of focus on costs a year ago, when companies realized there was a lot of fat in their companies and a lot of opportunity to cut costs.

But there is only so much you can cut before you begin to impair the infrastructure for the future. There is now a balance about how you optimize costs in a way that it doesn’t impair your ability to compete in the long term. They have spent a lot of time in the last 12 months on cost-cutting programs; now they have to manage growing both the top line and the bottom line.

NJBIZ: Are companies cutting back their capital expenditures?

Buck Luce: We don’t get a sense that there would be cutbacks. The pharmaceutical industry spent $60 billion in R&D last year and biotechnology firms spent $50 billion — that is a $110 billion spend. Life sciences invests in innovation for the future.

The question is how to get a better return. The pharmaceutical industry has never aggressively managed its balance sheet the way lower-margin industries have done. So in the last 12 months, we have seen a much greater focus on receivables and inventory management to get a greater return.

NJBIZ: How are pharmaceutical companies faring in boosting their product pipelines?

Buck Luce: A large portion of companies’ new drug pipelines has come from alliances and acquisitions of biotechnology firms; we expect that to continue and speed up. The unfortunate aftermath of the credit crunch is the drying up of capital for biotechnology companies, and the moderation of their valuations.

Even though this is an opportunity in the short term for pharmaceutical companies to be successful acquirers, the pharmaceutical executives surveyed agree that a constrained biotechnology industry is not a good thing in the long term, because a tremendous amount of research takes place there.