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How pharma can fix its reputation and its business

February 6, 2017
Life sciences

The business model of research-based pharmaceutical companies is under significant pressure. Their return on R&D investment has dropped to its lowest levels in decades, and their public reputation in the United States and abroad is worse than ever.

One antidote to these problems is to transform “access to medicine” from a relentless activist slogan to a fully-fledged business strategy. By that I mean that pharma companies should develop innovative treatments for pervasive unmet medical needs; avoid corruption, collusion, and other unethical marketing practices; and make sure that their products reach as many patients around the world as possible. This strategy will tap potential growth in emerging markets, limit the risks of misconduct, and improve public trust in the industry.

It’s a fact that the current business model of pharma companies is not working efficiently. For each $1 billion spent on R&D, the number of new medicines approved has halved roughly every nine years since 1950. The estimated return on these (fewer) products has itself declined substantially since 2010, from 10.1% to 3.7%.

This decline can be partly explained by the transition from one-size-fits-all blockbuster drugs to niche therapies (which have smaller patient groups). However, it also reflects stronger pressures to lower medicine costs in traditional pharmaceutical markets. In just the last few months, President Trump made a commitment to bring down drug prices, high-ranking government ministers in the Netherlands published a strong call to develop alternative pharmaceutical business models, and the OECD released a report that recognized the need to rebalance the negotiating powers of payers and pharma companies.

This represents a disquieting trend for companies whose profit growth heavily depends on price increases. According to a Credit Suisse analysis of 20 leading global pharma companies, 80% of their growth in net profits in 2014 stemmed from price increases in the United States.

Undoubtedly, these findings (and related controversies over drug prices) further undermined trust in the industry. According to the 2016 Harris Corporate Reputation Poll, only one-third of U.S. citizens have a positive opinion of big pharma. An August 2016 Gallup Poll found that no industry is held in lower esteem by U.S. citizens than pharmaceuticals (the sector’s worst showing in 16 years).

This worrisome mix of little growth potential and low reputation is the main explanation for why investors are increasingly interested in how pharma companies manage access-to-medicine opportunities and risks, which range from developing new treatments for neglected populations and pricing existing products at affordable levels to avoiding corruption and price collusion.

For instance, 60 institutional investors, collectively managing more than $5.5 trillion in assets, have committed to taking into account the findings of the Access to Medicine Index while conducting their investment analyses and running their engagement meetings. (The Access to Medicine Index, which my organization produces, assesses 20 of the world’s largest pharma companies according to their efforts to reach the 2 billion people who still lack access to medicine in low- and middle-income countries.)

Improving access to medicine is also promoted by BlackRock and Ceres, a nonprofit advocate of sustainability, in its guide for institutional investors seeking to engage companies on sustainability issues, and by Morgan Stanley in a report outlining a framework for incorporating sustainability performance data into the investment-analysis process. And it is the first topic of the provisional standard for the pharmaceutical sector produced by the Sustainability Accounting Standards Board. The standard states that “a strategic approach to access to medicines can yield opportunities for growth, innovation, and unique partnerships, which can enhance shareholder value.”

Expanding access to medicines will help pharma companies enhance shareholder value in several ways:

Unlock growth potential in emerging markets. These markets are already responsible for about one-quarter of the revenues of several research-based pharma companies, and are expected to contribute 50% to 75% of the growth in global spending on pharmaceuticals in the next four years. In order to fully benefit from the growth of these countries, pharma companies should help reduce barriers to access to medicine and participate directly in the development of sustainable markets.

Mitigate the risk of unethical conduct. Companies need strict policies and strong compliance systems to avoid unethical practices (from corruption to anticompetitive measures). This prevents fines and settlements, damage to their reputations, and more burdensome regulation. Ethical conduct is particularly important in emerging markets where companies rely heavily on governments’ goodwill for market access and health care investments.

Enhance corporate reputations. A bad reputation is obviously not good for business. Restoring public trust in pharma companies would enhance their capacity to attract the best talent, encourage patients to participate in clinical trials, and obtain premium prices for truly innovative products. Also important, it could help them retain the strong patent protection that their products now enjoy.

The success of new business models depends on both the willingness and the ability of pharmaceutical companies to fully integrate access to medicine into their business strategies. Companies should take a patient-centric approach, where barriers to access are first fully understood and then proactively addressed. Moreover, they should partner with other actors, including governments, NGOs, and private foundations, to build capacities into the pharma value chain while avoiding conflicts of interest.

The message is clear: Pharma companies should treat underserved demographics as a growth opportunity, not as a lost cause.

By Damiano de Felice

Source: Harvard Business Review

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