Next in pharma: Thriving in 2023

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

Every new year brings exciting possibilities, and we expect 2023 to offer another wave of promising innovations in medicine. What will be different is the market environment in which these innovations are discovered, developed and commercialized.

In 2023, delivering for patients and investors will happen against a backdrop of high inflation, talent shortages, rising capital costs, challenging foreign exchange impacts, pressures on consumer spending and ongoing Federal Trade Commission (FTC) scrutiny of transactions. These headwinds come on top of blockbuster patent expiries, rising competition across most therapeutic areas and the impact of the Inflation Reduction Act (IRA) of 2022. In a recent PwC survey, 90% of executives said they were worried about the macroeconomic environment, with many already taking action to adjust strategic plans.

Leading pharmaceutical and life sciences companies can seize this moment to transform their businesses in bold ways. Across the sector, companies will need to operate with lower costs and shorter timelines while maintaining quality and encouraging innovation. That means reimagining work, tech-enabling the organization and advancing the portfolio to achieve multiple objectives simultaneously. Investors demand both growth and profitability at the same time. Given the increasing separation between leading and laggard performers in pharma, as well as growing activism in capital markets, the reward for getting it right and the penalty for missing the mark demand an agenda that delivers sustainable business outcomes that are quickly reflected in profit and loss (P&L) statements.

Getting fit for growth quickly

Budgets are coming under more scrutiny and the bar for spending is higher. In the boardroom, capital allocation should be examined across business units through the lens of higher returns. Businesses should demonstrate tangible advantages from being under the same corporate roof, such that the portfolio is more valuable than the sum of its parts. Across organizations, business units will need deeper insight on the productivity of talent and financial resources measured by function, geography and product (Figure 1). Value-based planning — that is, a systematic approach for allocating resources to help increase value — is a must-have in 2023.

Even sophisticated pharmaceutical and life sciences companies that have undergone cost reductions might consider 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 by applying cost discipline (Figure 2).

Redesigned operating models, new choices on service delivery

Similarly, fundamental operating model choices should be back on the table for pharma and life sciences executives. Even companies with a historical commitment to decentralized structures are taking a fresh look at globalizing capabilities and centralizing operations to scale efficiencies. The traditional boundaries of global business service organizations will likely be pushed into new areas, with a renewed focus on outsourcing, as the pandemic proved that even consultative service roles do not need to be co-located.

Companies will likely be asked to justify non-core services that are performed in-house, especially as third-party markets can provide tech-enabled, market-based solutions for resource-intensive processes. We see this in our own business as PwC’s solutions for healthcare provider contracting and payment, Sunshine Act reporting and tax services are among the high-growth services propelling our managed services with clients. Even the standard practices of organizing general and administrative (G&A) into traditional functions such as HR, legal and finance, will be questioned as companies rethink what’s needed to run their business. We imagine a role for a global enabling operations officer (EO2), responsible for overseeing a portfolio of tech-enabled managed services, backed by strategic business partners and a network of cost-effective internal service centers providing back-office support.

No operating model review will be complete without rethinking governance. Like other features of the operating model, decision-making constructs need to deliver multiple objectives simultaneously, namely speed and quality, without adding risk. This means strong leadership alignment on strategic priorities; leading data and analytics capabilities to support real-time decision-making; increased use of simplification techniques such as archetypes and investment principles; and empowerment of frontline leaders to make decisions, move quickly and be accountable.

Growth remains the lifeblood of the industry as it means more patients gain access to more medicines. PwC’s fit for growth transformation approach can help companies deliver both growth and returns, separating themselves from the rest of the pack.

Embedding better analytics in the business enables better judgment. It’s a key component of value-based planning — making it possible to create up to 20% more flexibility in the budget even after previous cost transformation exercises.

Digitizing the value chain

This is the year to monetize investments in digital technology. Advanced analytics, automation and artificial intelligence have proven use cases across the value chain for driving transformation (Figure 2). Many of these technologies are in early development and are already delivering a big impact. As one example in drug development, a neuroscience business saved nearly 40% on a pivotal Phase III study and reduced the timeline by 25% by harnessing the power of intelligent clinical trial design. Multiplied across a portfolio of Phase III assets, this equates to approximately hundreds of millions of dollars in potential savings and countless benefits for patients awaiting new treatment options.

Digital pharmaceutical and life science companies of the future can invest now to create standout capabilities:

  • Artificial intelligence-enabled discovery in research
  • Smart factory technologies in production facilities
  • Omnichannel orchestration in the commercial organization
  • Control tower technologies connecting the supply chain
  • Insights on demand in finance
  • Next generation automation in many enabling functions (for example, HR, tax, compliance)

While virtually every company has a digital program, industry executives need to determine if they are delivering at the pace and value needed to truly transform how the company operates. They should ask themselves:

  • How many hours of work should be eliminated over the next two years?
  • How much faster will outcomes be achieved in a digitally-enabled environment?
  • How much improvement in quality will potentially be realized?

We are seeing an uptick in the number of companies thinking differently about the value metrics tied to their digital agenda and how to achieve scale. PwC’s digital transformation services help companies achieve these metrics through quarterly “value drops” — releases of digital products that can change how work is done and deliver sustained outcomes for the business.

No digital transformation program can deliver its full potential without attention to the core enterprise resource planning (ERP) systems. In today’s fast-paced, competitive environment, business and digital transformation are inextricably linked to ERP capabilities. It’s not about simply installing the next upgrade. Like other investments in 2023, deployments of enterprise software solutions should be subject to a higher bar for value creation. Business cases should go beyond IT-first savings like application rationalization. Instead, these investments need to reshape the economics of the business (for example, how inventory is managed and how customers are served) and reset the foundation for what’s possible on top of an enhanced and secure data environment.

Digital as a team sport

In 2023, chief information officers (CIOs) and chief data officers (CDOs) will continue to have an essential role in driving the digitization of the value chain in ways that are innovative, cost-effective and secure. They should lead the vision for what’s possible, act as catalysts for change and serve as architects for the next generation of collaborative relationships necessary to deliver digital value at scale.

The role of business leaders throughout the company is just as important. In 2023, tech is business. General managers need their own ideas for how to disrupt their businesses with digital technology, leading with conviction and the willingness to take action. Chief financial officers (CFOs) should insist that the company scorecard shows how the organization is becoming more digital in all areas, and how those advances impact the P&L. HR leaders need ambitious plans for digital upskilling across the workforce to enable both digital invention and digital adoption can be employee-led as well as business-led.

Digital transformation is a multidisciplinary undertaking that impacts every part of the company. In 2023, all members of the leadership team — whether “digital” is in their job title or not — play a major role in delivering value from digital technology across the enterprise.

Adapting to continued pressure on drug pricing

The Inflation Reduction Act put drug pricing front and center again. Among other requirements, the IRA establishes a price negotiation process for buying certain drugs for Medicare beneficiaries, and redesigns Medicare Part D to provide less-expensive coverage to beneficiaries.

Pharma and life sciences companies have completed their initial impact models, updated long-range plans and reset goals for volume growth and cost savings to mitigate the impacts on pricing.

Now, as 2023 unfolds and the realities of the IRA are absorbed, companies will consider which strategic levers should be pulled to drive value. IRA considerations will be built into the 2023 planning cycle, including processes related to portfolio management and product strategy. Management teams will likely have to tackle new questions, such as:

  • How should we reorient disease area investments and future M&A decisions to account for increased risk in therapeutic areas more heavily concentrated in the Medicare population?
  • How does the time-to-negotiation difference (+13 years for biologics, +9 years for small molecules) change pipeline and route of administration decisions given the advantage afforded to biologics and revenue pressure small molecules will now face earlier (compared to the 14-year historical average time to generic competition)?1
  • How will the IRA affect research and development (R&D) planning, indication expansion, and launch sequencing, especially life cycle strategies for cancer drugs?
  • How will the Medicare Part D benefits redesign coming in 2025 affect how plans cover (or not cover) key drugs/classes, providing either a headwind or tailwind to portfolios and pipelines?
  • How should late life cycle management strategies be updated, including prioritization of successor drugs and settling of patent threats?

While the IRA passed with an agenda focused on pricing and market access, the ramifications will likely ripple across the enterprise from commercial strategy through R&D decision-making. With new pricing pressures starting in 2023 through Medicare inflationary rebates, Part D plan redesign coming in 2025 and price negotiation starting in 2026, the way manufacturers begin to adjust in 2023 will potentially provide a critical foundation for the rest of the decade.

Even as the IRA creates a new set of pricing dynamics to consider, the old dynamics are not going away — traditional pressures may become more acute in a recessionary environment as patients become more sensitive to out-of-pocket costs and governments struggle with affordability. Capabilities in evidence generation, gross-to-net management and payer insight generation should keep advancing even as access and pricing teams prepare for the IRA as well as other pricing reforms that may emerge globally.

Winning in M&A in 2023

In 2023, companies that create shareholder value through M&A will need to deploy capital with the right balance of build vs. buy. In transactions, pharmaceutical and life sciences companies may also need to strike the right combination of acquiring in-line/Phase III products to meet near-term portfolio needs with longer-term (Phase I and II) value creating pipeline assets. Combining this with an effective ecosystem to work with on both in-license and out-license R&D financing transactions can help bolster top-line growth. And those companies that also leverage digital capabilities to enhance both the front end of patient experience as well as product development, will drive value-creating capabilities in the longer term.

While 2022 was a challenging year for PLS mergers and acquisitions (M&A) — the industry saw multiyear lows amid headwinds on multiple fronts, including risk-off sentiment and market dislocation, we expect M&A in 2023 to revert to prior-year levels in terms of investment dollars and expect higher volume of transactions, including strategic business partnerships, joint ventures and alliances.

Areas of high expected future growth, such as oncology and immunology, will likely see growth, along with drugs targeting central nervous system and cardiovascular diseases. Vaccines are another place we believe the market will place a significant premium on therapeutic leadership. Biotech deals in the $5 billion to $15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.

The premium placed on category leadership necessitates proactive portfolio renewal to help generate the highest relative shareholder returns. Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns. Additionally, with competition for mitigating risk science ever greater and the pressure on drug pricing and deal models now better understood, the importance of building a vibrant ecosystem that enables the “not made here” agenda is ever greater. Management teams that adopt these strategies at scale and remain agile in 2023 are more likely to not only deliver above market returns, but also to keep activists at bay.

1Rome B, Won C, Kesselheim A. “Market exclusivity length for drugs with new generic or biosimilar competition, 2012–2018.” Clinical Pharmacol. 2021;109(2)367-371.

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