Pharmaceuticals Companies Need Radical Transformation to be the Winners in 2020, According to KPMG’s Future Pharma Research



Pharma IQ News
10/20/2011

Global pharmaceutical companies need to undergo a radical transformation of their investment and business strategies in order to reverse a prolonged period of disappointing business performance and win back the trust of their stakeholders, according to a report by KPMG.

KPMG’s Future Pharma report, which examines how the pharmaceutical industry might look in 2020 and suggests five strategies for achieving their goals, has uncovered an industry facing major structural issues with a group of cynical stakeholders who no longer trust the sector to do the right thing.

Chris Stirling, European Head of Chemicals & Pharmaceuticals at KPMG, commented: “We see an industry in 2020 that needs to be much simpler for investors to understand, with improved governance and more predictable earnings. Those companies that can demonstrate the value of their products and are brave enough to price according to ability to pay will be the winners of the future.”

The KPMG report found that industry returns on R&D investment nearly halved in 2010 compared to 1990. Meanwhile, R&D spending has been running at a compound annual growth rate of 10% between 1999-2007, with very little information from pharmaceutical companies as to how this money is being spent.

At the same time, the global shift in sales growth to the emerging markets means a further squeeze is coming as margins in these markets are far tighter than in the West. The report anticipates that sales to emerging markets will triple from $154bn in 2010 to $487bn in 2020, more than doubling their contribution to global sales to 37% from 17% in 2010. However, this geographical shift will herald a marked reduction in pre-R&D operating margins across the industry from an estimated 48% in 2010 to 43% by 2020.

But while these issues have created a “pincer movement” on costs and margins on the sector, pharmaceutical companies must also face up to a far more fundamental issue; in the race for growth they have created the perception that they put their commercial goals above the interests of their biggest stakeholders and have subsequently lost their trust, with fines, court cases and product withdrawals all serving to draw attention to the industry’s weaknesses.

KPMG found that the number and value of pharmaceutical industry settlements with US state and federal government has risen dramatically since 1991 from less than five cases worth only $10m to a peak in 2009 of nearly 40 cases worth $4.4 billion.

Chris added: “In order to restore trust, stakeholders need a clear understanding of the risks the company is prepared to take and why. One trend we expect to see, therefore, is companies becoming leaner and forging collaborations with academia to allow smaller clinical trials with more power at lower cost.”

This will be especially important as the Future Pharma report also expected that, by 2020, there will be greater market fragmentation with more products selling less on average than today as a result of more targeted therapies and the genericisation of many of the major primary care therapeutic areas. 

Beyond the operational changes needed to improve the fortunes of the sector, KPMG believes that pharmaceutical company valuations will only fully benefit from the latent value in their development pipelines if they can convince investors that they are applying greater commercial scrutiny to their development decisions, to complement their scientific agenda.

Chris added: “The industry needs to wake up to a new way of demonstrating its focus on investment returns.  It should assess all research and development investment on an internal rate of return basis to more effectively establish which projects should be pursued.  By providing transparency on this critical decision-making process, improving governance and bringing in skills from other industries to deliver products to market more efficiently, investors will regain confidence in the industry’s ability to deliver predictable returns from its development opportunities.” 

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For further information please contact:

MHP Communications

Lucinda Kemeny / Katie Hunt / Giles Robinson

Tel: 0203 128 8758 / 8794 / 8788

Email: lucinda.kemeny@mhpc.com/ katie.hunt@mhpc.com/ giles.robinson@mhpc.com

About Future Pharma

KPMG’s Future Pharma report explores some of the major challenges facing the pharmaceutical industry today, which it identifies as:

1. Delivering shareholder / stakeholder value

2. A low growth business environment

3. R&D productivity

4. Rising risks and loss of trust

The report sets out KPMG’s vision for the industry in 2020 and how it can redefine itself in the minds of shareholders, stakeholders, consumers and governments, following the disappointing business and share price performance of recent years.  In particular, KPMG identifies five strategies to accelerate the transformation of the industry by 2020, as follows:

1. Reassess product strategy

2. Invest in the marketing and sales infrastructure of 2015 and beyond

3. Acquire more talent and experience from other industries

4. Use internal rate of return to prioritise and rationalise the R&D portfolio

5. Review and revise governance standards

About KPMG 

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff.  The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  KPMG International provides no client services.