Challenges faced by pharmaceutical and life sciences companies

In this market, skilled workers know they have a choice, and many will tend to favor organizations with relatively strong ethical standing. Others may be attracted by the possibility of working with individuals who are recognized as industry leaders, or may simply aspire to the financial benefits. Still others may be drawn to the excitement and agility of a biotech or a smaller pharmaceutical company over the traditional big players. To ensure they attract and retain people who will add value to the business, it is imperative that organizations plan meticulously and reward carefully.

Our point of view

PwC's human resource services practice provides organizations with access to a full range of services, from HR planning and strategy through highly detailed advice on tax-efficient rewards or employment law. We can advise on structured rewards and incentive plans for senior executives, and show how the principles of equity and performance-related earnings can cascade through the organization, including the design and implementation of flexible benefits plans.

For more information visit our global site, attracting and retaining a skilled workforce.

A rapidly changing, competitive global market and the heightened expectations of increasingly sophisticated customers force pharmaceutical and life sciences companies to critically evaluate supply chain performance. "One-size-fits-all" no longer works — the new buzzwords: segmentation, personalization and wellness. The supply chain of the future, built upon flexibility, responsiveness and reliability, will align dynamically to business and customer demands.

More flexible, responsive supply chain evolving

The supply enterprise will shift from a stock-based to a make-to-order model. Its characteristics will include:

Techniques to rapidly commission and decommission new products and markets

• Alternate supply models to match shifts in care provision: direct to the consumer or pharmacist, rather than through a wholesaler
• Advanced product design and packaging to drive patient compliance and protect intellectual property
• Postponement strategies in the packaging and distribution process
• Inventory-tracking tools to eliminate counterfeiting and parallel-importing risks

More advanced technology improving efficiency

Manufacturing operations will continue to invest in new technologies to:

• Target cost savings and flexibility
• Address historically inefficient, low-yield batch processes
• Correct inconsistent quality

Many companies will transition manufacturing from traditional low-tax locations in Ireland, Puerto Rico and Singapore to emerging markets, such as China and India. Agile supply networks will require companies to employ more advanced management tools to enhance operations, reduce risk and achieve robust financial and tax planning.

Our point of view

Pharmaceutical and life sciences companies must improve forecasting and support for the rapid technical transfer of products from research and development to commercial manufacturing. The rise of the agile supply model and selection of the right partners will drive the transition of the supply chain function from order processor to strategic business enabler. The supply chain will fully align and integrate into the broader business. It will be driven by the evolving requirements of the ultimate end consumer, the patient

In an era of rapid and unrelenting change, pharmaceutical, biotechnology, and medical device companies face unprecedented compliance challenges. Globalization, information protection, complex business partnerships, heightened transparency expectations, stricter reporting obligations, and stepped-up enforcement compel companies to reexamine their approach to governance, risk and compliance.

Scrutinize operations

Companies must constantly identify and monitor the corporate, reputational, and personal risks inherent in their worldwide business activities, including:

• Sales and marketing practices
• Transparency of company spending on healthcare professionals and organizations
• Clinical trial activity
• Patient safety and privacy

Embed risk management

Companies are squeezed on all sides by business, economic and regulatory pressures. They urgently need an approach to governance, risk and compliance based on a robust and agile risk-intelligent, technology-aided compliance foundation that integrates with performance objectives.

While companies must be able to respond quickly to litigation and compliance crises, they should shift away from expensive, inefficient approaches that react to regulations, inspections or audit findings with singular or redundant solutions. Instead, companies must embed into their everyday operations ethical, sustainable risk management and compliance processes that anticipate and manage risk.

Our point of view

Recent, highly visible investigations and aggressive prosecution have resulted in significant financial judgments and criminal convictions — not only in the United States, but also in several other territories, including emerging markets. These allegations and settlements have damaged reputations of individual companies and the industry.

A compliance and risk management strategy that aligns with your business goals and objectives and combines culture, processes and technology can help you avoid financial and reputational damage. An integrated approach helps you:

• Improve regulatory responsiveness
• Enhance processes and controls
• Identify key risk indicators that tie to performance goals
• Build competitive advantage
• Reduce compliance costs
• Increase transparency for stakeholders
• React quickly to mitigate financial losses when compliance breaches occur
• Achieve long-term compliance goals

As multinational businesses are increasingly affected by tax, legislative and regulatory developments throughout the world, understanding the impact of these developments on business operations, and on the effective tax rate, is vital for a company's survival.

Our point of view

With 32,500 dedicated tax professionals in over 153 countries, PwC's is a global market leader for tax services. We assist businesses, individuals and organizations with tax strategy, tax planning and compliance, while also delivering a wide range of business advisory services.

Corporate and financial strategy services

For more information visit our global site, Managing the effective tax rate.

Along with heightened regulatory scrutiny, a dearth of product approvals, mounting payer demands for product performance, and increasing pricing pressure, the pharmaceutical industry faces significant worries about future revenue growth. Leading companies will lose 14 to 41 percent of existing revenues as a result of patent expiries prior to 2012.

Additionally, expected revenue growth from personalized medicines has not yet materialized. While the development of specialized drugs based on individuals' genetic codes is progressing, the complexity of the task suggests that it will take a number of years before personalized medicine delivers substantial profit.

More promising in the near term are opportunities in the E7 countries (Brazil, China, India, Indonesia, Mexico, Russia and Turkey). By 2020, these countries might account for as much as 19 percent of the estimated US $1.3 trillion global sales. Any company that wants to serve these markets successfully will have to carefully tailor strategies to address diverse clinical and economic characteristics, healthcare systems, and IP protection policies. But multinational companies expanding into emerging geographic markets may realize additional bottom-line benefits as they negotiate tax incentives with local authorities.

Our point of view

For growth to be sustainable, pharmaceutical, life sciences, and medical device companies will need to reestablish a relationship of trust with patients, physicians, regulators and payers. This trust has been severely tested in recent years as fraud investigations, safety issues and the perception of over-pricing have entered public consciousness.

In the short term, companies can stimulate revenue growth by:

• Strengthening intellectual property management
• Increasing in-licensing while out-licensing non-core assets
• Targeting mergers and acquisitions
• Expanding into emerging markets
• Improving productivity

The healthcare market will expand as the world's population ages and becomes more affluent. The pharmaceutical company that makes intelligent investment decisions, embraces innovation in creating and exploiting its IP, and manages its relationships with stakeholders will benefit in revenue growth.

Corporate and financial strategy services

Sluggish demand and tight credit have forced companies worldwide to develop sustainable cost-reduction strategies not only to see them through tough economic times but also to lay the foundation for future revenue growth.

In economic downturns and times of financial crisis, companies often turn to short-term cost-cutting measures, such as reducing headcount and slashing operating expenses, which may not deliver anticipated return.

The first element for long-lasting cost reduction is to understand what money is being spent and why, as well as how much something should cost. Such knowledge provides clarity into the cost drivers of the business and strengthens financial planning and budgeting. Specifically, companies should analyze contracts (including aging outsourcing arrangements), procurement, shared services and IT.

The second element of sustainable cost reduction is mandating change around the way money is spent and creating a culture of cost consciousness. Improving cost management and control processes is essential.

Companies that address these two elements realize substantial tangible operating and discretionary cost savings. They also benefit from clarity of cost drivers, operating and discretionary cost savings, financial discipline, immediate cost control stabilization and waste elimination. By getting these foundational elements right, companies can set the stage for more transformational activities.

Our point of view

Quick-fix cost cutting allows expenses to creep back up over time. Sustainable cost reduction comes from long-term financial management and control, procurement and supply chain efficiency, streamlined business process execution, and performance improvement.

Failed cost-reduction initiatives damage corporate infrastructure and culture, leaving companies struggling well after a recession ends. For cost-reduction measures to stick, companies must clarify the business cost drivers and use that knowledge to create a culture of cost consciousness, in bad times and good.

Despite hard economic times and constant change in the marketplace, companies that make intelligent cost-reduction and investment decisions will be poised to take advantage of growth opportunities.

Corporate and financial strategy services

It is now clear that pharma's commercial operations need to change. But how should they change? At the same time as commercial operations are stagnating, the products coming through the pharma pipeline, increasingly, are specialty products, which are focused on smaller patient populations and specialists. And although these products promise much more in their ability to decrease morbidity and mortality, they will also come to market costing much more per course of therapy. This will accentuate the pressures between pharma commercial operations on the one side and payers and providers on the other.

We believe that to succeed, pharma's commercial operations must reach beyond just trying to create value for the industry, and adopt a posture of seeking to provide value to payers, providers and patients.

Our point of view

PwC pharmaceuticals & life sciences practice, offers a wide array of services to help pharmaceutical and biotech companies meet the challenges of this changing environment.

We are well positioned to help you research, develop and pilot novel approaches to marketing and selling your products be they for specialty or blockbuster and can help differentiate your organization in the market, forming the basis for sustainable commercial operations.

For more information visit our global site, Optimizing commercial operations

Corporate and financial strategy services

Realizing value from M&A

As companies review their corporate growth strategy, they will need to consider the optimal approach to funding, whether through debt, private or public equity fundraising. Early stage companies may need to raise funds or enter into strategic alliances with big pharma. Companies with products coming to market may be ready to float on a public stock exchange. Established companies may wish to grow by acquisition, or to divest some of their activities. Some of these divestments may be to management teams, backed by private equity. We have a Corporate Finance team dedicated to providing corporate finance advice to companies in the pharmaceutical sector.

Realizing value from alliances and collaborations

Strategic Alliances continue to grow at a staggering pace in the pharmaceutical, biotech and medical device industries. These alliances most commonly take the form of licence agreements, requiring independent due diligence of the assets under consideration, and on completion of the deal, an appropriate alliance management review system.Business development & licensing is key to obtaining fresh funding, validating new technology or simply growing the business. In creating the deal, prospective licensees will be considering the potential value of the product, synergy with the R&D portfolio, the risks and costs of developing the product. We help to explore these questions and how different licensing parameters (Milestone Payments, Royalties, Equity) affect the value of the deal.

Our point of view

For more information visit our global site for Pharma and Life Sciences Services

Pharma's traditional strategy of placing big bets on a few molecules, promoting them heavily and turning them into blockbusters worked well for shareholders for many years. However, its productivity in the lab is now plummeting, as it switches its attention from diseases that are relatively common and easy to treat to those that are much more complex or unusual.

This "innovation deficit" has enormous strategic implications for the industry as a whole. Many pharmaceutical companies need to decide what they want to concentrate on doing, and identify the core competencies the activity will require, a process which may involve exiting from some parts of research and development (R&D). Those that regard R&D as a core element of their business will have to make fundamental alterations in the way they work.

Our point of view

With many of our consultants drawn directly from Pharma R&D, we have deep expertise in reducing both the time and cost in R&D supporting key business decisions and sustained performance improvement through integrated resources, portfolio, and project, financial, and R&D Key Performance Indicator (KPI) management and reporting.

We have extensive experience of improving the performance of global cross-functional R&D teams achieve key milestones and in optimizing stage-gate, project governance, and core R&D processes. We know how to manage and sustain change in the R&D environment. In addition to optimizing the actual R&D processes, our global tax R&D specialists are well equipped to review such costs to optimize tax savings.

For more information visit our global site, Optimizing commercial operations

For more information visit our global site, R&D productivity and the innovation deficit

Despite uncertainty about timing of the move to International Financial Reporting Standards (IFRS), US companies are already feeling their impact.

US Generally Accepted Accounting Principles (GAAP) continue to converge with IFRS, and an eventual full adoption of the international standards in the United States is likely to follow. Even under this scenario, US companies with foreign subsidiaries will experience significant change and opportunity in the near term as the rest of the world continues to adopt IFRS. Many territories are beginning to allow or require IFRS for local statutory purposes. Additionally, US businesses will face an unprecedented wave of GAAP changes influenced by and, in many instances, conforming to IFRS.

Pharmaceutical and life sciences companies will need to pay special attention to the following challenges:

• Differences in accounting for development costs, including acquisitions of compounds in development Tax accounting impact, including potential changes in transfer pricing, given the complex supply chain employed by many companies in the sector.
• Need for systems to support the full volume of IFRS disclosures

IFRS will have a broad impact on:

• Processes
• Systems
• Tax compliance
• Cross-border transactions

Benefits of the IFRS transition include:

• Comparability with global competitors
• Facilitation of cross-border mergers and acquisitions
• Streamlined reporting for non-US subsidiaries
• Reduced compliance cost
• Consistency
• Enhanced disclosures for investors

Our point of view

US companies should act now:

• Focus on the challenge. Whether changes arrive through convergence, an SEC-mandate, or continued IFRS adoption by subsidiaries and counterparties, the effect will be considerable.
• Perform an assessment. Consider business, accounting, tax, investor, control, systems and work-force issues.
• Be ready to adapt to ongoing change. Incorporate likely convergence and adoption into strategic thinking.
• Monitor actual changes. Consider how SEC, FASB and IASB actions will influence non-US counterparties (customers and vendors) and affect reporting, long-term contractual commitments, tax structures, financing, systems, and controls.
• Maintain corporate oversight. Influence transition timing, strategies and policy decisions of non-US subsidiaries.
• Identify what you can do now. Focus on aspects of convergence and conversion with a long lead-time. Consider incremental change.