Next in pharma 2024: Reinventing for returns

Top C-suite agenda topics that will help shape the year

Today’s challenging environment

A healthy pharma sector produces positive outcomes for both patients and investors.

Over the last year, we’ve seen breakthroughs in vaccine development, cancer treatments, GLP-1 drugs that are revolutionizing obesity management, gene therapy and gene editing technology for rare diseases and new treatments for complex diseases like Alzheimer’s. Yet the value problem persists, and investors are still coming up short. The sector continues to experience under-performance in capital markets relative to the market index.

Reinventing the pharma business model is paramount:

The headwinds for pharma are real and sustained
Rethink the innovation strategy
Accelerate using AI and analytics
Lower costs, for real
M&A as a catalyst for transformation
Protect the enterprise

The headwinds for pharma are real and sustained

Every cost on the P&L is going up due to inflation, interest rates, new tax regimes and an increasing threat environment. As the cost of doing business rises, prices for some of the most-widely used drugs will be coming down with the implementation of the Inflation Reduction Act which, for the first time, will allow Medicare to negotiate drug prices. This will shift the definition of value and the relationship between value and price across each therapeutic area. Pharma companies are looking for strategies to help mitigate the negative impact these policies are expected to have on access to medicines covered by Medicare and on continued drug development.

The 2024 operating environment also faces continued risk from geopolitical tension, domestic political uncertainty and heated campaign rhetoric, and increasing attention on regulatory enforcement around the world. Whether pharma executives make planned strategic moves or take adaptive tactics in response to inevitable surprises, the industry can expect continued scrutiny of its actions — e.g., pricing decisions, M&A transactions, AI investments, workforce reductions — which means trust with stakeholders will remain a North Star.

In addition to these macro dynamics, there’s a fundamental truth about strategy in today’s pharmaceutical industry — there’s more competition fighting over the same space. The double-edged sword of scientific advancement is more head-to-head competition between on-market drugs within therapeutic areas, more investment in smaller patient populations and increased R&D dollars pursuing the same biological targets.

To outperform in this environment, leading companies can seize this moment to “reinvent for returns.” Companies with foresight will see 2024 as the year of delivering impressive results for both patients and investors. They will set their transformation agenda accordingly, which means rethinking the balance of R&D investments to increase focus on “white space,” accelerating products through the value chain with transformative investments in AI, lowering operational costs across the enterprise and using deals as a key enabler of strategy. While product launches and other growth strategies continue to be the lifeblood of the industry, planning growth on top of the same business model is likely to yield more of the same disappointing results in the capital markets. Instead, leading companies will use 2024 to reinvent the model in a way that matches the moment and sets the stage for competing differently in the years ahead.

Rethink the innovation strategy

Incremental change won’t be enough to deliver the results that the market and patients demand. Real change will be paramount to achieving meaningful growth in the short and long term.

Innovation should be ingrained in each aspect of the business model if companies are to break the cycle of margin compression and below-market returns. Starting with the R&D investment strategy, leaders can use 2024 to take a close look at the balance of investments directed at established areas versus white space. While investing in validated pathways and known mechanisms may seem to present lower risk, this is the same strategy that’s producing more head-to-head competition (Ref. Chart) and driving down returns in the commercial markets. It helps to explain why the upward trend in drug approvals is not translating into outperformance for the sector. Similarly, the shift of the last decade to concentrate R&D investment increasingly in specialty care categories means smaller patient populations on average. This may drive outperformance in areas with limited competition and/or strong pricing power, but as both of those circumstances become rarer the challenge of generating superior returns increases. Developments in the markets for obesity and Alzheimer’s may prove to be good examples of investing in white space — higher risk but less crowded commercial markets with large patient populations.

While rebalancing R&D investment isn’t all or nothing, R&D leaders can challenge their organizations on points such as:

Is the downstream commercial risk of competing in established spaces fully incorporated into NPV models?
Are advances in AI and computing being leveraged fully to accelerate the journey to new validated pathways?
Do we have enough external collaborations in the white space?
In which areas can we increase our risk tolerance based on our knowledge and capabilities?

Simply put, the market has created a great deal of competition in the same spaces, resulting in more expensive investments in sales and marketing efforts, higher acquisition costs per patient, potentially lower peak sales and lower margins. The opportunity exists to reshape R&D strategies and ask hard questions about whether enough of the budget is going toward white space.

Differentiate investments to grow revenue and serve patients

CEOs

Reset expectations for shareholder value performance along-side the patient mission. Drive business model reinvention agenda.

Chief Commercial Officers

Drive higher-ROI promotional model through portfolio investment choices and nextgen customer capabilities; double-down on white space market input to R&D.

Accelerate growth through AI and analytics

Pharma companies should increase speed across the value chain through faster drug development and faster uptake in the market. This means a full-throttled and responsible embrace of AI and analytics with use cases that can move the needle at scale. AI and generative AI (GenAI) have the potential to unlock high-value opportunities across the pharmaceutical value chain, including areas like drug discovery, clinical trial design, medical writing, promotional content generation and customer engagement. In fact, there are more than 200 use cases where GenAI can make a material difference in the work of a pharmaceutical company.

This is not just technology for the sake of technology. Instead, it’s about unlocking returns by deploying digital technology specifically to go faster, connect dots and release capacity. A PwC analysis shows the projected value of AI-enabled intelligent automation and advanced analytics:

A 60% to 70% reduction in process timelines: Due to on-demand/near real-time intervention in clinical trials, supply optimization, and true data driven decision-making with ability to codify and automate institutional knowledge.
Reduced burden for patients, providers and life sciences companies: Through operational improvements and AI-assisted decision and task optimization. Impacts across ecosystem of patients, providers and value chain players.
A 30% or more reduction in operational costs: Due to improved efficiency in delivering operational productivity improvements driven by content automation, improved data quality, automated collection and processing.
A 40% or more reduction in project delivery timelines: Prototyping in weeks not months, deployment in months not years — changing IT from an enabler to a digital partner.

Leading companies will likely invest in digital technologies such as AI, data analytics and machine learning to help accelerate the drug development process and leverage predictive insights to determine the direct costs to operationalize the portfolio from discovery through commercialization. Using these technologies can allow companies to increase speed across the value chain from drug development to approval and ramp up sales faster.

To capitalize on this next-generation technology, executives should have:

A clear vision of where and how they will unlock value with nextgen technology, including measurable, quantified objectives and a clear assessment of what new technology means for future roles and skills.
A responsibility framework that outlines their company’s practices for the ethical use of AI and builds trust with stakeholders.
An ambitious portfolio of use cases which, just like the drug portfolio, includes projects with blockbuster potential (i.e., the ability to be truly transformative) and program management discipline that moves these use cases from idea to production.
A backbone that can scale, either via in-house resources or through a partner.

Combine tech and business strategy for greatest gains

CIOs

Lead the enterprise’s ‘art of the possible’ thinking across the value chain; ensure ‘value-first’ approach to emerging technology while also providing safeguards.

CFOs

Embed stronger disciplines on resource allocation linked to value creation across the company; leverage M&A as opportunity to transform beyond traditional synergies.

Lower costs, for real, with bigger ambitions

While top-line growth remains essential, cost management is moving up the agenda, and it needs to come with bigger ambitions. Innovating in white spaces and increasing speed to market can help, but those levers won’t deliver change quickly enough to offset industry headwinds that are already dragging down P&Ls. Some companies started to deal with this reality through organizational restructuring and other cost actions in 2023. As a result, cost benchmarks are in flux.

In 2024, industry leaders will take additional steps to confirm spending is fully aligned with value creation. Strategically, this means being clear-eyed about what really drives competitive advantage for the enterprise and recycling investment from other areas to the differentiators. Traditional budgeting processes typically aren’t effective at driving trade-offs in resource allocation. This means corporate leaders will likely need supplemental steps in 2024 to confirm investment dollars are well-aligned with those few strategic priorities that can really deliver out-sized returns.

Operationally, the everyday operating costs of running the company should be on every leader’s agenda. There needs to be scrutiny of decentralized structures that may be duplicating activities; to enhance their value, offshore centers should take on new functions; organizational charts will need to be flatter; and lower value routine processes may need to move to tech-enabled managed services.

Considering the cost management imperative, leading companies are creating deeper insights into the talent and financial resources’ productivity by function, geography, therapeutic area and asset. There’s an internal drive to understand the drivers of work across the enterprise and learn more about which spending choices are really creating a return. Even sophisticated companies that have undergone cost reductions are considering ways to reallocate spending using a stronger value-based approach. Analytics can make underlying drivers of work more transparent — alongside more granular insights on productivity gains — and reveal possibilities for material savings through increased cost discipline.

Accelerate growth through M&A: Transact to transform

Transact to transform is the deals mantra for 2024, which means using M&A as a catalyst for real transformation. Each deal represents an opportunity to improve the business and reinvent how it works.

As pharma companies look to reshape drug portfolios, drive scale/cost efficiencies and embrace technological advances, deals of all types will continue to play an essential role in 2024. M&A activity will comprise collaborations and partnerships, divestitures to cut low-/no-growth businesses, spin-offs to get back to core businesses (as reflected in recent deal activity), and ecosystem plays that bring traditional and nontraditional stakeholders together to solve problems.

There seems to be a new paradigm emerging in biopharma M&A against a backdrop of higher risk-free rates, economic and geopolitical headwinds, and the implications of the Inflation Reduction Act. Margin accretion will take center stage over growth-driven dealmaking, and, with a clearer understanding of regulators’ positions, there may be some larger deals. IPO markets will gradually reopen in 2024, but it's likely that only companies with strong clinical data and differentiation will actually go public as the economics of me-too products are unlikely to attract investors.

Creativity in M&A will also be imperative in 2024 leading to more innovative structures around R&D funding and partnering / collaboration (to provide P&L or capital relief), a larger role for private equity and private credit, continued focus on divestitures, critical importance of eco-system building early-on and perhaps even some asset swaps to enable scale and margin accretion.

The sector should also widen the types of investments it’s willing to target, including smaller biotech, research universities, equity investments, collaborations and venture capital.

Building trust and protecting the enterprise

Trust continues to be an essential ingredient for success. Asking patients to take a new medicine, regulators to approve a new product and employees to act in a compliant manner are just a few examples of the important role trust plays in the pharmaceutical sector.

Maintaining trust with pharma’s many stakeholders means anticipating threats and managing risks. Many of the threats are familiar — cyber attacks, quality and regulatory compliance deficiencies, ethical lapses, and evolving legal, tax and other compliance obligations — and every year brings new variations. The new Pillar Two tax environment is one example, making a clear, defendable — yet agile — tax strategy key to long-term success. And advocating for tax policy that continues to incentivize pharma’s investment in R&D will be important, no matter the outcome of the November presidential election.

More broadly, as regulatory and enforcement agencies develop methodologies for using AI and other technologies to analyze data in more sophisticated ways, we expect enforcement in the months and years ahead to become more stringent. From increases in audits of transparency programs (including heightened requests for years of historical data from companies) to increases in FDA inspections now that the pandemic has passed, regulators are likely to more proactively and effectively enforce current and emerging regulations.

Compliance and risk functions should consider coordinated investments in people, processes and technology to maintain the distinctive capabilities necessary to help safeguard their organizations. Taking a compliance-by-design mindset in designing and launching new strategies can help pharma companies as they look to innovate and win — baking-in quality, compliance and trust as an essential part of all forward-looking investments.

Safeguarding the enterprise while also transforming it to move faster and operate with lower costs isn’t easy, but there’s really no choice. Executives focused on growth alongside the risk agenda know that trust is critical to the mission. Strong risk and resilience capabilities can be the difference between those that thrive and those that fight to survive.