Managing in a Cost-Constrained Environment

Business of Biotech

By Jill E. Sackman, D.V.M., Ph.D., Senior Consultant, and Matt Levy, J.D., Business Analyst, at Numerof & Associates, Inc. (NAI)

The pharmaceutical industry has entered a critical period of transition. Business models that have proven remarkably successful over the past 20 years are now encountering major challenges. As biotech companies grapple with the leading symptoms of these challenges – pricing pressures, pipeline productivity concerns, a growing public distrust, and greater political and regulatory scrutiny – it is becoming increasingly clear that a profound shift is underway in what it takes to be successful in this environment.

Biotech business strategy has tended to emphasize market size above all else. This has been translated into a focus on blockbuster drugs and mega mergers, passing on “singles” and “doubles” in the quest for “home run” opportunities. Heavy reliance on such home runs raises the inherent risks, costs, and time involved in clinical development, especially in an environment of heightened regulatory scrutiny. At the same time, the pharmaceutical industry’s increasing reliance on external sources of novel compounds has bid up the price of the compounds, further exacerbating the cost and risk of drug development — and as a result, the public backlash over rising drug costs.

The natural dynamics of maturing markets have become increasingly problematic. With a tradition of reliance on patent protection, brand-focused pharmaceutical companies cannot avoid competing with their own past success. Once generic equivalents are available, the economic attractiveness of other, new branded drugs for a given disease declines rapidly, particularly drugs in the same class. While new drugs typically offer some important advantages over existing therapies, these advantages must offset massive price differentials when compared to generics.

With the management of healthcare costs reaching crisis proportions, payers are raising the bar … insisting on hard evidence of clinical and economic value in comparison to therapies that already exist. In practice, the FDA has also begun factoring unofficial requirements for superior clinical value into the approval process. In this environment, innovation and differentiation play a more significant role than ever before.

Many biotech companies have implemented changes to their R&D process and capabilities. Most haven’t gone far enough. Sustainable leadership in this market requires a radically different development engine. The key requirement is to build a scientific foundation for highly differentiated and sustainable franchises around selected disease states — based on integrated diagnostic and therapeutic capability, extensive product portfolios that address needs over a disease continuum, strategic market insight, and in-depth preclinical and clinical expertise.

While excellent science must be a given, it is not enough by itself.  Biotech companies will also need to master several critical building blocks:

  • Build critical supporting infrastructure and core competencies in strategic marketing, economic and clinical value, and portfolio management. Most development programs have appropriate focus on the pathway for regulatory approval of new products. In the current market environment, it is equally important to make optimal decisions on which compounds to move forward, which indications to pursue and in what order, how to position products competitively based on relative economic and clinical value, and what evidence needs to be generated in support of the value proposition.  Most companies do not currently have the capabilities in place at a sufficiently sophisticated level to do this work well.
  • Integrate development programs more effectively to improve the risk/return profile of the pipeline.  Without constant diligence, R&D practices easily devolve in ways that run counter to effective program management.  One common example is the evolution of organizational silos that limit effective engagement across critical boundaries, such as the division of preclinical and clinical research.  Companies must thoughtfully redesign processes, redefine roles, and ensure competencies are in place to capture the benefits of integration.

  • Reduce clinical development costs through integrated global programs, comprehensive outsourcing strategies, and improved program management capabilities. In addition to making wise portfolio management decisions, companies must find ways to take cost and risk out of their product development process.  Most of the easy savings have already been found. The next steps will require more sophisticated program management capabilities at a strategic and operational level to streamline programs, access lower-cost resources, and leverage global synergies while remaining responsive to local market needs.

Realistic implementation of any major organizational transformation also needs to limit the risks of disrupting the current business. Fortunately, you don’t need to execute a monolithic solution all at once.  Instead, you can select one or two “lead” therapeutic areas to build true franchise capabilities in alignment with your commercial strategy.  Because a siloed organization will not be able to execute such an integrated approach, you must break down barriers across the company and build new, cross-cutting capabilities around your franchise focus.

Leaders throughout the biotech industry need to be proactive in their preparation for a market where new winners and losers will be determined based on their ability to create a new product development infrastructure — one that delivers new products with differentiated economic and clinical value propositions … with lower risks and costs.

Jill E. Sackman, D.V.M., Ph.D. is a Senior Consultant, and Matt Levy, J.D., is a Business Analyst at Numerof & Associates, Inc. (NAI). NAI is a strategic management consulting firm focused on organizations in dynamic, rapidly changing industries. We bring a unique cross-disciplinary approach to a broad range of engagements designed to sharpen strategic focus, increase revenues, reduce costs, and enhance customer value. For more information, visit our website at www.nai-consulting.com. Dr. Sackman and Mr. Levy can be reached via email at [email protected] or by phone 314-997-1587.

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One Response to Managing in a Cost-Constrained Environment

  1. Anonymous says:

    Yes. I agree with that. Low cost and risk for drug development is pretty much important. A low cost in production, a possible higher profit earn from sales. Patent protection is not just a shield to protect market but also avoid other competitors.

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