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Battle Ready

In many industries, the drive for business and profit means that competing against other companies can be something of a war. The pharmaceutical market may not like to agree with that assessment – after all, its ultimate aim is to save lives rather than ruin them – but in reality it is very much a battle.

It is no coincidence that business can be seen in terms of warfare. Indeed, there are many military attributes and metaphors in today’s business English – a recruited army of executive officers around the world sit in their headquarters working on strategies and campaigns to fight competitors and capture the target market.

Furthermore, according to the ancient Chinese military philosopher Sun Tzu, profit – not victory – is the ultimate goal of war. Part of this involves forming alliances, and in today’s pharmaceutical industry, the increase in mergers, acquisitions and collaboration activity to gain financial and pipeline synergies reflects this.

However, industry R&D – akin to a military reconnaisance team, if you follow the warfare metaphor – is on difficult ground, having to take immediate action to ensure survival. It is fortunate then that the sector has substantial expertise and recommendations on how to address the challenges and transform (1). That said, according to Deloitte, Big Pharma’s operating margin for 2013 is forecast at about 20 per cent, down from more than 24 per cent during 2003- 2009 (2). This means that less money is available for reinvestment in the business, namely in R&D – so less new drugs, less revenues, less margin.

Emerging Battleground 

Adapting and changing direction is required, which is why emerging markets are such a critical battleground. The so-called ‘pharmerging countries’, which account for nearly two-thirds of the world’s population, will average $91 in drug spend per capita in 2016 (3). Of the major emerging markets, strong growth is expected in Russia, where pharmaceutical sales are expected to more than double by 2016 to $179 per capita.

Even though the total estimated 2016 sales in BRIC countries will account for $267 billion, or about 25 per cent of the global pharmaceutical sales, their R&D potential is yet more promising in the clinical trial area – and they are much more attractive for the R&D avant-garde, rather than the Big Pharma sales army. 

But of course it is common for Big Pharma to conduct clinical trials in emerging markets. In some cases, it is even pushed by the local legislation to do so – for example, in Russia, clinical data from local sites is a prerequisite to a drug registration. Another common Big Pharma trend is the creation of strategic partnerships with global contract research organisations (CROs) to reduce clinical phase and early stage R&D costs (4).

Revenue Growth

The key question is who to partner with? Are global CROs the right partners for emerging markets – and flexible enough to promptly adapt to the constantly changing regulatory and operational landscape? Or are they an integrative part of the ineffective innovative R&D system that we arguably see today?

The ultimate key performance indicator for any business is the bottom line of its profit and loss statement – which raises the question: how good are global CROs? An evaluation of three leading CROs, based on data publicly available on their websites (specifically, their 10-K and 20-F US Securities and Exchange Commission forms during 2008-2012) revealed some interesting findings.

In 2012, Parexel demonstrated the strongest revenue increase of 45 per cent over the 2008 figure. During these four years, its number of employees rose by 58 per cent, and the operating income went up by only two per cent. The operating margin decreased from nine per cent in 2008 to 6.4 per cent in 2012.

During the same period, Icon’s revenue grew by 29 per cent; the number of employees rose by 30 per cent; operating income dropped by 32 per cent; and the operating margin fell from 11.5 per cent in 2008 to 6.1 per cent in 2012. Covance is as demonstrative as others: revenue grew by 26 per cent; employee numbers rose by 23 per cent; operating income decreased by 56 per cent; and the operating margin dropped from 15.3 per cent in 2008 to 5.3 per cent in 2012.

Inflexible Structures

The revenue growth looks extensive rather than intensive, but it does rest on Big Pharma’s increasing R&D costs. It would be difficult to increase R&D productivity with allies whose effectiveness is constantly decreasing. But, again to follow the warfare comparison, while their battle formations are well-shaped and their armies are strong, they are arguably too large to maximise opportunities from emerging markets, and not set up to adjust quickly to uncommon manoeuvres.

The roots of this problem were highlighted in a report sponsored by Quintiles and prepared by The Economist Intelligence Unit in 2011 (5). Here, the top six challenges cited by 282 senior pharma and biotech executives to improving innovations were:

  • Cost
  • Time involved in drug/product development
  • Regulatory restrictions
  • Cultural attachment to current approaches
  • Lack of necessary research/business talent
  • Company structures that make increased internal collaboration difficult

The last point is particularly noteworthy. Hierarchal organisational structures may look solid and steady, but they are often too fixed and inflexible to meet rapid changes and the unlimited overhead expenses that can result. More generally, the global economic crisis is a proof of this. To survive in the 21st century and beyond, business formations should be more informal, flat, project-oriented and organic.

Moving Proof of Concept

The attrition rates in Phase 2 clinical trials are increasing and the lion’s share of costs are allocated from less successful candidates. It is the basic insurance principle – healthy pays for unhealthy; a blockbuster pays for all (6). However, the burden should be lightened not only by moving proof of concept trials to emerging markets, but also by outsourcing them to emerging partners.

Consider this: according to Pharmalot, today’s average per patient cost for a Phase 2 trial worldwide is $36,070 while, for example, in Russia it is only $9,094, which means that a single average 100-patient study can save almost $3 million. Put some new science on top of that, such as adaptive design, modelling and simulation, apply Bayesian methodology – and the savings could potentially be doubled.

However, some caution is advised against conducting proof of concept studies in emerging markets. Drug researchers are debating the quality of data these trials produce. Some of them still think that clinical data that comes from an emerging market may be suspect, and its further re-evaluation can offset the savings. Some say there is no way of assessing the quality of research in emerging markets. But the number of overseas Food and Drug Administration (FDA) inspections in emerging countries is comparable to the developed markets, and the results are self-explanatory.

There is also an increase of Good Clinical Practice (GCP) inspections in third countries (those outside the European Union) conducted by the European Medical Agency since the implementation of the GCP inspection policy in 2006, with a significant increase in routine inspections. Countries with the highest number of requested inspections are the US (21.57 per cent) followed by India (4.48 per cent), Canada (4.48 per cent), Russia (3.08 per cent), Argentina (2.24 per cent) and China (1.68 per cent) (7).

Local CROs

So why not outsource proof of concept studies to local CROs? The most common reason given is quality; their staff are perceived to be not qualified enough, their processes not well standardised. However, this is a misperception: local CROs are arguably more capable. They have come a long way in the last decade and are not only focused, but flexible and quick to learn. In addition, they know and understand the local landscape, so are therefore best placed to navigate through the regulatory process. Generally, they are at least as effective as global CROs, and probably more cost-effective.

Rather than changing the way Big Pharma does things, is it now time to change the things it does?


1. KPMG, Future pharma: Five strategies to accelerate the transformation of the pharmaceutical industry by 2020, 2011

2. Deloitte, 2013 Global life sciences outlook: Optimism tempered by reality in a ‘new normal’, 2012

3. IMS Institute for Healthcare Informatics, The global use of medicines: Outlook through 2016, 2012

4. KPMG, Outsourcing in the pharmaceutical industry: 2011 and beyond, 2012

5. The Economist Intelligence Unit, Reinventing biopharma: Strategies for an evolving marketplace, the innovation imperative in biopharma, 2011

6. McKinsey and Company, Invention reinvented, Pharma R&D compendium, 2010 7. European Medicines Agency, Clinical trials submitted in marketing-authorisation applications to the European Medicines Agency, 2013

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Igor Stefanov is General Manager of Synergy Research Group. He received an MBA degree in Economics from Moscow International University in 1993 and went into the business consulting area, developing and implementing localisation strategies for the Fortune 500 pharma companies operating in Russia. Prior to joining Synergy in 2007, Igor served as General Manager for SmartLock, a Russian hi-tech biometric company, and was recognised as an entrepreneur of the month by the Russian edition of Forbes magazine in 2005.
Igor Stefanov
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