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Rotz discusses a report he co-authored for PwC about how life sciences companies perform on the S&P 500.
A recent report from PwC detailed the struggles life sciences companies have performing in the S&P 500. One of the reports authors, Greg Rotz, spoke with Pharm Exec about why this happens and how Pharma companies can avoid these struggles.
(Pharm Exec:) What causes Pharma companies to lag in the S&P 500?
Rotz: There’s not a single answer to that, but if you look at what’s happened to the sector overall, there are some headwinds that have been particular to pharmaceuticals. One of those is pricing pressure. Historically, the economic model for pharma has benefited greatly from upward mobility on prices and over the vast period of time, there’s been a lot more scrutiny on prices and a lot more pressure to manage prices, so that lever of the economic model has been under more pressure.
We also see that the advance in precision medicines has created a larger number of drugs that are serving smaller patient populations. The ability to generate return on investment has to happen over a smaller patient population, which is different than some of the past eras of the mega-primary care blockbusters.
Finally, competitive intensity has increased quite a lot across many categories, meaning that the cost to compete has increased. This puts more pressure on the economic model.
Those are some broad headwinds that have been putting pressure on the sector overall. In addition, a number of companies have been dealing with some very specific items over the past few years, such as the opioid crisis. These have caused further economic pressure on these companies in terms of their PNL and balance sheets.
(Pharm Exec:) What can Pharma companies do to prevent this lagging?
Rotz: Anytime you see headwinds across the market, putting downward pressure on the average economics, what’s important is to make sure that you, as a company, are better positioned than the others in the sector. In other words, competitive advantage is more important than ever and what we’re talking to our clients about is that great science needs to be part of the competitive equation, but great science alone isn’t enough. We need to see the same innovation in management practices and how businesses are run that we see in the discovery labs and scientific efforts of these companies.
(Pharm Exec:) What are the five key actions you detailed in your report and how did you determine these actions?
Rotz: To develop competitive advantage in the future, we’re talking with our clients about a number of actions. One is increasing the focus on differentiated capabilities. So assets, such as products, are great things to have but they have a life to them. Products launch, they have a life cycle, patents come, and the products go away. Capabilities can be an enduring source of competitive advantage and we’re advocating that companies should dial up their focus on strategic capabilities as a source of competitive advantage.
These capabilities are mostly represented in two central themes. One of which is tech enabling and moving pharma companies into the digital age. The other is bringing the patient clearly into the center of what’s happen on the inside of pharmaceutical companies. Those management teams that are effective in martialing their organizations to pick up these themes and deliver on these capabilities will be further ahead than those that do not and that will be one source of enduring competitive advantage.
(Pharm Exec:) What makes investments in AI and cloud technology important right now?
Rotz: In an environment where competitive advantage is more important than ever, our work shows that companies that can move faster and more efficiently than others will have a leg up. AI, analytics, and automation offer a lot of promise to increase speed, efficiency, and take friction out of the system. Those are all important to out-performing. What we see in other industries, they move faster down the curve on adopting new technologies and delivering real value out of them. Pharmaceuticals have been slower to travel down that curve and have been somewhat frustrated that they haven’t yet to see the returns from these investments.
We have seen pockets of success in certain parts of the value chain, but what this paper is proposing is that management teams need to be much more focused on driving big benefit across the enterprise at scale from these emerging technologies to really drive speed and efficiency in a new way.
(Pharm Exec:) How can companies hold on to talent or attract new talent during the war for talent?
Rotz: Our research says that one of the keys to retaining talent is to ensure that the talent feels like they are doing meaningful work and they can do that work in ways that work for them with the right flexibility and the right support. There have been lots of conversation over the last few years about wage inflation, retention bonuses, and financial moves to increase compensation to retain talent, and that is an important part of the equation. Even more important is making sure that top talent feels and understands the impact of the work they’re doing, the mission comes to life for them in very real ways, and increasingly that they have the flexibility and support in terms of the work environment, work-from-home policies, and other related policies to feel like they can have that impact in ways that work for them.
So, increasingly, culture is becoming more and more important in the acquisition and retention of talent. In pharmaceuticals, that’s especially important because there is a lot of sophisticated talent that’s required to discover and develop drugs. Chemists, biologists, health economists, data scientists, and similar types of talent are in high demand. Pharmaceutical companies need to go well beyond the standard types of retention and compensation moves and bring to life meaningful work. They need to double down on culture of appreciation, trust, and inclusion and make sure the whole equation works for pharmaceutical talent.