Vikas Bhadoria, Senior Partner, Mc Kinsey and Vivek Arora, Associate Partner, Mc Kinsey, talk about how the global industry is at the cusp of change in multiple ways and what factors will enable Indian pharma industry to unlock maximum value in the coming year
Trends in the healthcare industry have always generated a lot of interest around the world, with only a few economic dialogues that are able to circumvent this topic. As different players across the healthcare eco-system develop their strategy and business plans for 2017, some key trends developments are expected to offer disproportionate opportunities for value creation. However, these will not come without a fair share of challenges.
One of the fundamental trends in today’s global pharmaceutical industry is the growing pricing pressure on drugs. The US, the world’s largest pharmaceutical market, is witnessing increased competition and control over medicare costs. Globally as well, government policies, along with consolidating stakeholders such as payors, Pharmacy Benefit Managers (PBMs), providers, wholesaler buyers, and pharmacy chains are seen flexing their muscles to challenge drug pricing and new drug access.
However, fundamental demand drivers are strong, and growth is shifting towards emerging markets. The global branded and generic pharmaceutical market is expected to be around $950 billion1 by FYE2017, and is expected to grow further at about 5 percent to reach $1.2 trillion by 2022. While 70 per cent of the profit pool will still remain with the developed markets till 2018, the major share of future growth (up to 60 or 70 percent) is expected from developing markets. Driving the demand for pharma is the ever-increasing aging population (180 million people aged 70+, 550 million people aged 50+).
At the same time, customer centricity has never been more important. Customers are now more engaged and proactive in their healthcare choices. For instance, 90 million2 people discuss health online, 85 percent3 of the US online population seeks health info on the web and there are over 16,000 health and wellness applications available for smartphones4. Patients are increasingly expecting personal health-related information and services from pharma companies. Industry players may have to factor this trend into their product and service offerings going forward.
The fundamental value driver for the industry will continue to be research and development. Increasing competition and shrinking LOE (loss of exclusivity) opportunities are making differentiated products and ‘getting early to the market’ critical for success. This will lead to blurring boundaries between innovator and generic pharma. Generics players worldwide are increasingly developing generic molecules with patented delivery mechanisms, complex generics, biologics/ biosimilars, incremental innovation products and New Molecular Entities (NMEs). First-to-file generics products providing a 180-day exclusivity period to generics manufacturers also remain a rich source and reiterate the benefit of getting early to the high-value US market.
Patients are more engaged & proactive in their healthcare choices
Increasing exposure to these high-value pools will not be without risk of intense regulatory scrutiny. Regulators such as US FDA, UK MHRA and others are continuously raising the bar on Quality systems and processes required to supply to these high value markets. This has resulted in an almost 200 per cent increase5 in the number of product recalls, import alerts, warning letters and non-compliance observations over the last five years. Regulators worldwide continue to collaborate with increased information sharing, and follow a risk-based inspection model wherein companies with high export volumes or compliance deviations continue to experience more regulatory scrutiny.
To respond to increasing consolidation and the changing landscape of opportunities, pharma players have also spent more effort on expanding their own scale through a wave of M&A and re-structuring or divestiture transactions with varied objectives such as scale/ cost focus, corporate transformation, and access to new markets. The ‘Pharmageddon’ surge in deals between April-2014 and March-2015 has resulted in around 500 deals with a total value of over $4006. Additionally, around 500 deals took place between April-2015 and March-2016.
The growth in digitisation and advanced analytics is also likely to have a transformational impact on the industry. This is driven by reduced costs of data acquisition, storage and advanced computation, and enhanced visualisation capabilities that generate better, faster, and more robust insights. If applied appropriately to decision making, this could drive competitive differentiation through faster approvals, better patient satisfaction, improved productivity and quality levels. This trend too will be accompanied by greater risks of data reliability, cybersecurity and the need for enhanced traceability. Technology advancement also gives rise to a new string of competitors with giants such as Google, Qualcomm, Samsung, Apple and IBM investing in Digital Health. Industry leaders may have to take a big leap forward to embrace change.
Digital channels would be a strategic priority for pharma players
Given that the global industry is at a cusp of change in multiple ways, the big question is what will enable Indian pharma to unlock maximum value in the coming year.
Five crucial factors that could unlock the maximum value: (1) Improving efficiency of R&D to reduce development time and develop differentiated assets; (2) Developing deeper customer insights to build brands/ therapies, and adapt commercial models; (3) Improving operational efficiency and reducing the cost of poor quality; (4) Developing a digital and advanced analytic roadmap for the future; and (5) Building capabilities to embrace this change.
Indian pharma companies will need to increasingly invest in R&D to equip themselves with the right next-generation assets. India’s share of approvals in the 505b(2) and New Molecular Entity (NME) space can substantially go up from current levels7 (approx. 4 per cent for 505b(2) and 0 per cent for NMEs). While this will require the government to play a supporting role in funding a part of these investments, pharma companies will have to build new scientific capabilities to develop these products (e.g., drug-device combinations, biosimilars) and to introduce new manufacturing technologies. At the same time, organisations will need to improve R&D productivity, and hence time to market, through optimised development, regulatory and launch management capabilities. We will also see Indian companies acquiring more differentiated assets in India and globally. It will be imperative to identify assets which align with the broader business strategy and ensure substantial value creation.
Capturing deeper customer insights through various channels will help companies identify white spaces to shape their brands and therapies. Disruptive commercial models will also become increasingly popular. Digitally enabled healthcare delivery, digital apps and platforms will emerge as important commercial models. Telemedicine, healthcare apps, omni-channel communication will also become more prevalent in engaging today’s customers and physicians. In 2017, pharma companies could develop their commercial transformation roadmap and run smaller-scale pilots at select business units to build conviction and gather learnings.
Application of advanced analytics can drive substantial improvement in operations
Many Indian pharma companies will embark on the next wave of operational efficiencies through lean and cost excellence to counter pricing pressures. These will be driven through increased focus on improving productivity, equipment efficiencies and raw material and conversion costs. However, it is imperative to continue to resolve the quality and compliance issues which have had a significant impact on the profitability and reputation of the industry. Companies will continue to invest in improving their fundamental Quality Management Systems. Six-Sigma in quality will emerge as the next frontier as pharmaceutical companies look to improve their product robustness and process capabilities, and reduce the cost of poor quality. This will require an integrated approach to operations excellence and change management at scale.
The availability of digital tools, real-time data and advanced analytics capabilities will create opportunities across the value chain—in R&D (clinical trial productivity, predictive modelling,
disease pattern analysis, etc.), manufacturing and quality (manufacturing processes, real-time quality monitoring, condition – based maintenance, etc.), and marketing and sales (customer insights, physician education, sales force productivity, etc.). Indian pharma companies have a lagging starting position vis-à-vis their global peers on this front. In 2017, Indian companies could look to develop their digital foundations, drive select improvement initiatives and develop a multi-year roadmap to transform themselves into data and analytics – led enterprises.
Finally, pharma companies will have to equip themselves with the right set of capabilities to embrace these new trends and manage change. They will need to attract and develop the right talent. Given that the Indian pharma industry has traditionally not been at the cutting edge of many advancements, the search for talent may have to extend to sectors such as advanced industries and to other geographies.
In the coming year, we expect to see India pharma companies take important steps towards adopting some of these best practices. How well the players respond to the head winds and shape up for the future will define their success going forward.
1. Business Monitor International Database, 2015
2. The Associated Press
5. US FDA Website
6. Pharma Deals Database
7. Evaluate database, US FDA Website