Global pharmaceutical sector searches for new innovation model

• Limited healthcare budgets and the financial crisis are turning up the heat on the industry
• 84% of those surveyed see the greatest growth potential in oncology, followed by CNS (43%), diabetes and immunology/inflammation (42% each)
• Development of industry products is tending toward biological medications and combinations of pharmaceuticals and diagnostics for more targeted treatments
• 59% of those surveyed see financing from sources besides the health insurance companies as a key growth factor
• A majority of respondents expects a restructuring of the R&D business model – low research productivity causes a trend toward external partnerships and further outsourcing

Health insurance companies are cutting costs, patents are expiring and the competition from makers of generics is on the rise. Although pharmaceutical companies around the world are investing more in research & development (R&D) than ever, productivity remains low and innovations have thus far been unable to offset declining sales. Companies therefore must fundamentally redefine "innovation" and make it top priority. The Roland Berger study entitled "What's next? Innovating the concept of innovation in the pharmaceutical industry" analyzes trends and innovation concepts among pharmaceutical companies worldwide that manufacture primarily patented prescription medication. The participating companies represent 21 of the world's largest 30 pharmaceutical groups and over half of global pharmaceutical sales.

"Innovation is the greatest challenge for the pharmaceutical industry," says Stephan Danner, Partner in charge of the pharmaceutical practice at Roland Berger Strategy Consultants. "An aging population means that global demand for medications will rise, while at the same time many governments are keeping closer tabs on healthcare spending, particularly given the financial crisis." Only true innovation can close this gap. "This is why pharmaceutical companies have to rethink their traditional business models and make innovation their top priority – even ahead of marketing." The study identifies five areas of innovation with discernible trends: therapeutic areas, product portfolio, financing models, R&D and cultural aspects.

Innovative treatments: Oncology to see greatest growth

Regarding therapeutic areas, 84% of those surveyed view oncology as having the greatest growth potential. Over the next five years, this area will receive the heaviest investment. At the same time, the rapidly expanding number of market players will considerably increase the competitive and price pressure in this area. According to the study respondents, CNS, diabetes and immunology/inflammation (approx. 40% each) are other future markets of interest. Cardiology, one of the growth drivers in recent years, has fallen to sixth place, but those surveyed still see further growth potential here for the medium term.

Biological medications drive growth

In product portfolios, 49% of those surveyed expect innovative growth mainly in biological medications. Besides these, the combination of medications and diagnostics is becoming increasingly important in the product range. "This combination makes it possible to target treatments more precisely, a feature health insurance companies are demanding more and more, particularly for very expensive medications. However, many companies will need more than five years to implement this."

New approaches in financing

The global growth of the pharmaceutical industry will increasingly require financing from beyond health insurance companies, read: from patients. Especially in the BRIC countries, all exhibiting robust growth, private healthcare financing has already established itself. At the same time, however, innovative partnerships with payors have sprung up in the established markets as well, particularly in light of increasing cost pressure: Survey respondents are placing priority on value-added models (43%) and risk-sharing models (38%).

Reorienting R&D toward the outside

The majority of companies surveyed will soon be fundamentally restructuring their R&D business models. Given the low productivity in research, more and more managers are questioning the necessity of large internal research departments. Instead, they see the pharmaceutical industry's competence more so in development, ensuring market access, marketing and sales. 51% of those surveyed would like to secure access to innovation via cooperative agreements and partnerships. "The time of industrializing R&D on a grand scale is over. Companies have realized that nowadays other criteria are more important. To improve their innovative strength and profitability, they must manage their innovation networks more intensively. These networks are comprised of external research institutes and small biotech companies, but also traditional competitors," says Danner.

Innovative firms look for talent in the BRIC countries too

52% of those surveyed view corporate culture plus the qualifications of employees (42%) as crucial to a pharmaceutical company's innovative power. Specifically, access to top talent in the BRIC countries is increasingly becoming a competitive advantage, as companies hope to find new and creative ways of thinking and working. Internal corporate culture is also being rediscovered as a competitive factor. All too often, R&D divisions still tend to be bureaucratic instead of entrepreneurial and creative. According to survey respondents, the compensation structures of R&D employees should also be configured with an eye toward external innovations.

"The pharmaceutical sector has become used to success, but is now faced with major upheaval. This is precisely why innovation has to be put at the top of the agenda," says Danner. "Innovation includes not just new products, but also the pharmaceutical industry's entire business model. Less integration and more cooperation with external partners are essential for continued profitable growth."