Find episode transcript below.
JENNY COLAPIETRO:
00:00:00:30 Welcome to our Next in Health podcast. I'm Jenny ColaPietro, PwC’s Vice Chair for Health Industries, working across pharmaceuticals, medtech, payers, and providers. And today, I'm excited to welcome back Glenn Hunzinger, who leads our Pharmaceuticals and Life Sciences sector, and Greg Rods, who leads our transformation consulting practice in Pharma and Life sciences. Greg, Glenn, welcome back.
GLENN HUNZINGER:
00:00:30:50 Great to be with you.
GREG RODS:
00:00:31:90 Thanks for having me.
JENNY COLAPIETRO:
00:00:33:00 Glenn, last year, we talked about the pharma sector continuing to outperform the S&P 500. Can you share a little bit about why this trend has continued and what can pharma companies do to address the gaps and drive growth this year?
GLENN HUNZINGER:
00:00:49:00 Thanks, Jenny. And it's a great question. You know, how can the pharma life science industry continue to get its appropriate capital allocation and continue to have the returns that they deserve? And I think, unless the challenges continue with revenue, top line reimbursement challenges between the IRA and everything else around reimbursement.
00:01:08:20 Costs are going up from inflation, interest rates, and across the board, labor, etc. And you have an environment around regulatory whether it's CFTC, whether it's the FDA, GMP, and geopolitical challenges, and a fierce, competitive landscape. And that just leads to a difficult environment to continue to sort of operate around.
00:01:30:30 I think what we're seeing companies do is really try to dial up the tech enablement side of things and not only as a cost play, but I think the efficiency, the speed, the transparency, and the ability to sort of take our industry and transform it while operating it much more efficiently is, I think, the way to continue to close that gap and to get us ahead of the curve here.
JENNY COLAPIETRO:
00:01:52:50 Thanks, Glenn. Rethinking that balance of R&D investments and focusing on white space. Greg, can you talk a little bit more about what innovation and R&D and investing in white space mean?
GREG RODS:
00:02:04:60 Yeah, I'm sure. Jenny, the good news is the mission of the industry remains unchanged to discover and develop and commercialize these life altering, lifesaving, innovative medicines. And the good news is that the number of assets being studied in R&D continues to go up.
00:02:22:10 The flip side of that coin, however, is there's a lot of drug discovery and drug development work going into the same areas, the same biological pathways, the same therapeutic areas. And that creates a challenge of just more head-to-head competition.
00:02:39:40 At the same time, we've seen a pretty big shift over the last decade into these more specialized disease categories, which definitely have significant unmet need. But the double-edged sword of that is that there are smaller patient populations. So, when you look at where we're headed, you see a growing amount of investment chasing similar spaces, and many of those spaces have smaller and smaller patient populations.
00:02:57:40 We all just remember from microeconomics back in university that, that's a recipe for lower returns. And in fact, that's what we're seeing. That's exactly what you and Glenn were just talking about, the depressed shareholder returns for our sector.
00:03:20:70 So what we're talking about in 2024 is taking a fresh look at that portfolio. Number one, do we have enough competitive intensity? And if we model the competitive scenarios sufficiently into those R&D models so that we have a really good understanding of the likely economic returns are.
00:03:39:80 Are there places where we can look to expand our risk tolerance, right, going after those white spaces is inherently more risky. And we certainly understand with all the uncertainty in the world, making more risky bets feels a bit uncomfortable.
00:03:53:60 But at the same time, continuing to bet in the same places, we know for sure is not generating the returns that the industry deserves. Are we tied in and off to that exciting science that's tapping upstream with collaborators with academics, and then finally, the last topic really on this is how can we double down on AI to accelerate and expand the efforts in drug discovery?
00:04:17:00 And our thesis is that if we can re-look at portfolios asking that handful of questions, that we can move the needle on kind of shaping the portfolio more into those white spaces that can change the equation on shareholder value.
JENNY COLAPIETRO:
00:04:31:30 Thanks, Greg. And you mentioned AI and I think AI and Gen AI are some of the hottest topics right now. Can you guys share what has pharma's response been in this area and where is the trend headed?
GLENN HUNZINGER:
00:04:45:10 I think the great thing here is when it comes to Gen AI or AI think the Gen AI conversation is continue to push overall AI and efficiency. And I think the overall industry has done a good job rethinking everything and questioning what can we do differently? How do we change, how do we leverage the technologies to drive these things forward?
00:05:07:30 And we're seeing massive gains happening. To Greg's point around R&D, when you think about trial design, your submission to the FDA, and getting better transparency in all the little pieces throughout that process. When you think about manufacturing and quality and some of those areas, so a lot of great examples around technology. Greg, would you like to add some more there?
GREG RODS:
00:05:28:70 I would just say that 2024 I think for us is gonna be the year to make it happen. As Gen AI burst onto the scene in a bigger way last year and I think the big change was that AI became democratized, right? Artificial intelligence has been around for quite a while, and in fact, our industry has been using artificial intelligence.
00:05:49:90 But I think the big development over the last year plus has been the democratization of this tool and the ability to put it into the hands of people who aren't advanced programmers or Ph. D data scientists. And while there was a lot of experimentation last year, a lot of upskilling, a lot of kind of roadmap development, I think this is gonna be the year to make it happen.
00:06:14.40 And in fact, that's what we're seeing, right? Companies are starting to deploy production level capabilities, tackling use cases in a way that's delivering real value. And I think that's really exciting.
JENNY COLAPIETRO:
00:06:26:50 And it's definitely exciting to hear. When pivoting a little bit, we know that the M&A activity remains strong in the sector, but how are companies thinking about deals and what strategies are they employing?
GLENN HUNZINGER:
00:06:38:40 The great thing for this industry is transactions are a fabric of the industry and I think everybody is looking at their portfolio right now and trying to use every lever and their ecosystem to figure out how they can continue to drive shareholder value.
00:06:52:90 So we think about the key levers is divestitures. You know, companies are continuing to look at both ways to free up capital and divesting products, businesses, etc. And more importantly, now they're looking at structured transactions, particularly around the R&D.
00:07:08:40 Every business is challenged with P&L burden. There's only so much they can have on the R&D line as well as just general capital. And how do you get more shots on goal around R&D while partnering some of this with some of the financial institutions?
00:07:20:90 So that's been a lot of the, the avenues right now is just figuring out how do you pull all the levers around the ecosystem, how do you pull structured transactions that give yourself more opportunity around launching products in the future?
00:07:34:80 When we look at just general acquisitions, there is still a lot of appetite. I think the capital is there to deploy it and people need to continue to shuffle their portfolio. So, we're pretty optimistic about how that's gonna go forward. I think the interesting things that we're seeing right now is company needs to place the right bets.
00:07:53:00 As Greg alluded too, you have to figure out those right bets to continue to sort of invest around your business. That gives you a different competitive landscape. You know, why are you the best companies to own these assets?
00:08:00:40 And I think we're seeing along that technology curve a similar way of using AI and Gen AI to not only identify unique assets but also bring to the table what do you as a company bring here that allows you to create more value? Why are you the best order of that asset?
00:08:20:70 So I think the transparency, the efficiency of really looking at that, and really continuing to leverage our ecosystem is what will continue to drive M&A in the future. A good thing now is, you know, the expectations around the science that's gonna happen this year, 65 anticipated approvals in 2024. I think that gives a real good tailwind here around the M&A activity.
JENNY COLAPIETRO:
00:08:44:20 Yeah. Placing the right bets and focusing more innovative partnering and collaboration across the ecosystem. Greg, lowering cost is always important, but in PwC's 2024 outlook for pharma, you said cost management needs to come with, “bigger ambitions”. Can you expand on that?
GREG RODS:
00:09:02:90 Yeah, sure. Jenny. Glenn hinted in the opening that every line item in the P&L is going up. Input cost, labor costs, capital cost because of interest rates, tax costs because of Pillar Two and global harmonization, there's just no relief in the upward pressure on the cost base.
00:09:21:00 And at the same time, net prices in many categories are falling and that's what is behind the point that we need to have bigger ambitions on cost management and efficiency.
00:09:36:00 And while digital can certainly play a role there, we know some of those savings take a while to be realized fully. So, a lot of the conversations we're having are about some of the tried and true measures, right? Organizations had to adapt and, in some cases, carry additional infrastructure because of all the uncertainty through the pandemic.
00:09:57:70 But now that we're significantly on the other side of that, this is the time to re-look at organizational design and spans and layers as companies have globalized and added global scale. Obviously, centralization as a lever comes more to the forefront, and there's bigger savings opportunities to create more centralized capabilities and for those centralized capabilities, looking at geo locations, right?
00:10:23:00 Are we leveraging the talent base and the global capabilities in places like India enough in our big pharma companies? So those types of things, they're not necessarily new ideas, but taking a fresh look in light of today's pressures, today's environment, and honestly what's possible now with these capabilities is kind of all what's behind this notion of let's take a fresh look at the ambitions and the levers we can pull to better manage the costs.
JENNY COLAPIETRO:
00:10:53:60 Makes sense. To take a fresh look, reducing cost and looking at a more value-based approach. Glenn, we often hear about the damage to companies when stakeholders lose trust in an organization. What are you seeing in pharma?
GLENN HUNZINGER:
00:11:07:50 Yeah, this is a really important one, Jenny, ‘cause I think the continued focus around protecting the enterprise and really continuing to have trust with all stakeholders and maybe even enhancing that trust. When you think about patients, the regulators, employees, shareholders, there's no lack of stakeholders that need to continue to have trust in an organization.
00:11:27:80 And listen, it starts with the patient. Do patients believe the new medicine will help them? Do regulators believe that this medicine is safe? Do shareholders view this as a creative right? All these things need to align together, and there's no doubt it's a very difficult environment.
00:11:43:20 You have to be able to operate and continue to have trust while you're dealing with cyber attacks, quality and regulatory challenges, ethical challenges at companies and legal and tax.
00:11:56:01 When you just think about on a tax perspective and the changing rules around Pillar Two and what that does from a headwind standpoint and the incremental cost and impact to cashflows that companies are gonna have. That offset is a reduction in R&D and other things you need to drive the business.
00:12:11:80 So how do companies in a fair and ethical way go about Pillar Two in that environment while making sure they balance their shareholders? When we think about just broader compliance, there's a lot of rules and regulations to follow.
00:12:25:40 And how do companies do that and do that in an efficient manner while not adding more cost to the system, which is not easy. So, a lot of challenges as far as continue to grow the business and grow revenues without growing your infrastructure.
00:12:39:13 And there's no doubt protecting the enterprise is a critical thing. But the challenges are how do you make sure you have enough capital and how do you make sure you're operating efficiently to protect all those challenges?
JENNY COLAPIETRO:
00:12:50:10 Glenn, Greg. Thank you both so much for outlining these key trends in pharma this year and how this sector can really reinvent itself for greater returns in 2024 and beyond.
GLENN HUNZINGER:
00:12:59.70 Always fun to get together, Jenny.
JENNY COLAPIETRO:
00:13:03:60 For more on these topics and other health industry insights driven by policy, innovation, and care delivery changes, please subscribe to our podcast at pwc.com/us/Next in Health podcast and to listen to our older episodes. Until next time, this has been Next in Health.
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