By Morris Hosseini

Pharmaceutical companies face ever-increasing pressure as revenue growth slows down. This leads to the pharmaceutical blockbuster model being challenged by personalized therapies and smaller patient populations.

Cost-effectiveness is key as top-line growth trick falters

Pharmaceuticals companies must operate more effectively and efficiently. As high-margin businesses, drug makers have traditionally seen performance improvement as a less pressing response to declining sales margins. Rather than managing costs, companies were able to increase revenues as an antidote to margin pressures. A new round of investment in research and development or business development and licensing typically delivered new high-margin products, boosting sales and profitability. But this top-line growth trick is becoming more elusive. A Roland Berger analysis of 80 leading publicly listed pharma companies – representing about 70% of the market – shows that annual revenue growth fell by more than two thirds in the last three years.

Pharma companies' traditional response to eroding margins has come under pressure in recent years. Healthcare systems all over the world have striven to better control expenditure. While drug development can target individual patients much more effectively today, it has become ever more difficult to create blockbuster drugs to serve broader patient populations. These targeted developments often require more complex manufacturing processes, which require end-to-end process control and effective steering of cost of goods sold (COGS).

High margins are a prerequisite for organic growth and Mergers & Acquisitions (M&A)

The maintaining of high profitability is of vital importance to all pharmaceutical manufacturers. High margins allow them to fund the next cycle of investment in new drugs and to play an active role in industry consolidation. Even only slowly declining margins signal declining market share in the future, and declining investment funding and acquisition power today. Companies caught in this downward spiral must invest time management and resources to conceive and implement performance improvement measures.

This shift from pursuing revenue growth to achieving cost improvements demands a new corporate mindset. Executives running high-margin businesses like drug companies are typically used to dealing with long-term investment strategies, rather than short- to mid-term performance improvement programs. They are often not used to broadly addressing cost issues, and this is compounded by the fact that weakening margins tend to erode slowly – communicating and justifying painful measures is hard. To overcome this double difficulty, pharmaceutical executives can build on the proven Roland Berger framework to help master three crucial elements essential to performance improvement:

1. Adequacy
   Our goal is to put a high-margin company that has little or no experience of such a task into a position in which it can conceive and implement the right measures to ensure more effective and efficient operations. Together with company executives, Roland Berger examines governance structures and chains of command to ensure that responsibility for decisions is adequately assigned and in line with cost accountability. Adequacy is the prerequisite for all subsequent steps.
2. Effectiveness
   With Roland Berger's help, company executives allocate resources according to the current or potential profitability of products, projects and the countries involved. Executives will as a result, be able to prioritize activities: accelerating high-potential projects, maintaining profitable operations, and winding down or divesting low-profitability operations, products or projects will significantly raise the effectiveness of spending in key areas like manufacturing, marketing and sales, and Research and Development (R&D). All pharmaceutical companies face different challenges in an increasingly digital and automated environment.
3. Efficiency
   Lastly, Roland Berger advises company executives on how to make operations leaner and more transparent. Activating this third lever for performance improvement leads to marked gains in operational efficiency – and ensures that every action taken by a company has a measurable result. Executives must abide by the rule that all measures must be revenue-neutral – also to stop reticent colleagues from proposing revenue-damaging actions designed to be rejected. Transparency allows the adoption of consistent "one truth" reporting – the whole company must work with the same data to track the effective delivery of agreed savings and defined follow-up actions. The key to success for executives is to proactively engage with the organization.