As 2022 draws to an end, political, economic and social instability continue to dominate the headlines.
With the impacts being felt far and wide and predicted to last into 2024, Paul Kuiken, G&L's Vice President of Transformation Services Practice, looks at the challenges and the potential opportunities of the current global situation.
Mergers, acquisitions, and partnerships
Venture Capital (VC)-backed deals declined in the pharmaceutical industry during the first half of 2022 because of economic changes.
Despite this, over 375 deals totalling around $13 billion were still struck between the USA and Europe.
In the context of a decreasing VC deal market, acquisition activity is increasing, with many deals being announced by large pharma. For those pharma companies that are acquiring, there is a real risk to business and usual operations as work is disrupted by unannounced, acute integration activity.
Regulatory and medical affairs departments are normally last to hear about such M&A activity. This often disrupts ongoing activity and most certainly has an impact on their ability to derive value from the new asset.
Considering this, we advocate adjusting business models to assess assets effectively and integrate acquired businesses, so this becomes a routine activity.
This can be driven by a playbook approach to ensure there is a clear understanding of what steps should be taken before, during, and after the acquisition, which helps improve confidence from all stakeholders.
External support can also be useful in providing objective due diligence for the asset in question or managing the day-to-day activity whilst key staff can perform the project-based task.
Finally, service companies may be used to support the acquired company, and this can be a safety net through continuity and knowledge transfer processes.
Failure to integrate acquired organisations promptly and effectively destroys value, erodes stakeholder confidence, and represents compliance risks.
Geopolitical and economic uncertainty
As seen most recently in the UK, the political environment remains volatile and uncertain.
Whilst new ideas and initiatives are required to address emerging challenges across the world, marked shifts in policy have been attempted in isolation from reality. Poor communication and leadership have led to financial market unrest and eroded confidence in organisations.
In its most recent forecast of October 2022, the IMF paints a grim picture of a significant and rapid slowdown in global growth to 2.7 per cent in 2023, the weakest figure in 20 years.
OECD estimates 2023 growth to be even lower at 2.2 per cent (OECD Economic Outlook, Interim Report September 2022). This slowdown has been exacerbated by the Russian invasion of Ukraine for which Western countries have imposed financial sanctions, resulting in supply issues and financial costs.
Required investment towards growth and productivity gains will be hindered because of uncertainty in cost/benefit calculations.
In addition to the global slowdown, inflationary pressures have outstripped the containment measures of the central banks. As a result, fiscal tightening by global institutions is inevitable and is likely to lead to a recession in many regions of the world.
The macro environment is looking serious, and the headwinds will be with us through 2023.
In the context of the cost-of-living crisis and economic downturn, we expect increased pressure on healthcare systems and related social support mechanisms.
Governments will be faced with difficult decisions to balance the public finances, and this is likely to impact healthcare spending. Following unforeseen expenditures during the pandemic, there is likely to be pressure on pharmaceutical companies to reduce prescription pricing, the first indication of this being seen in the US with President Biden’s Executive Order (14087 of October 14, 2022).
Follow-on effects of Covid-19
There are many knock-on effects of the Covid-19 pandemic, including a backlog of non-emergency procedures and social care issues.
However, as social distancing policies utilized during the pandemic ease, many commentators are expecting a challenging winter, featuring increased frequency and severity of respiratory disease and other seasonal infections.
For employers, this could mean higher levels of sickness over the coming months compared to previous years.
Meanwhile, as acute demand for Covid vaccines and treatments falls, pharmaceutical companies have announced a rise in prices.
There is likely to be tension between the health system’s financial pressures and the need for pharma to make its returns for shareholders. We have already seen increasing prescription prices communicated from vaccine manufacturers and this is likely to increase political pressure for the reasons described above.
Transformation requires a plan
Whilst there is a lot of noise regarding digital technology implementation in the pharma industry, it is our view that transformation in medical affairs requires a holistic approach.
Failure to get one’s house in order results in a reactive, emergent strategy (Mintzberg, 1978) that is largely driven by adaptation to digital technology, rather than a proactive, deliberate strategy.
This leads to unrealised opportunities, wastage, and hidden costs, largely because of a lack of inherent understanding of the operation of the system by technology companies and vice versa.
Hence, domain knowledge and digital expertise must be meshed through an effective interface to achieve success. Success is more likely considering all possibilities and building a coherent approach, as opposed to being drawn towards the shiny new toy that may unleash a Pandora’s box of issues.
Evidence from other traditional, non-digital origin sectors such as banking and automotive manufacturing shows a significant difficulty to create value from new technology that competes with digitally based newcomers (Siachou et al, 2021).
The threat from large tech players such as Amazon and Google in healthcare is substantial. Across the pharmaceutical industry, we see software implementation, viewed as digital transformation, simply overlayed on legacy business models causing inefficiency, additional cost, and unnecessary upheaval.
How does a traditional industry embrace new technology without destroying existing value chains?
We would argue that, firstly, the organization in question should be reviewed for its readiness for change and the implementation of new technology (Holopainen et al, 2022).
Secondly, we believe the business model, particularly in regulatory affairs and quality assurance, needs to be reviewed and improved as the precursor to implementing digital technologies.
Employing deep domain knowledge to explore the existing organization and sector-specific benchmarking analysis can enable the organisation to develop a transformed way of working.
There are significant cost efficiencies to be gained from this approach purely on its own and also when combined with a service-design thinking approach. The organisation can then be ready for digital enablement.
Regulatory outsourcing continues to grow
According to several research companies (Precedence Research, Grand View Research, Premier Insights), the growth of the regulatory outsourcing market is due to develop at a CAGR of 9-14 per cent between 2022 and 2030, reaching as much as $31 billion by the end of the forecast period.
North America and Europe represent over half the global outsourcing market with AsiaPac taking a third share.
Large pharma is expected to outsource 50 per cent of regulatory activity and the aforementioned M&A activity is driving pipeline development and requiring additional resources.
We see smaller companies outsourcing almost all regulatory activity to run as lean as possible and be ready for eventual partnership or takeover.
Conversely, large pharma is looking to reduce costs of regulatory through outsourcing and is attracted, in part, to the high-value assets that arrive without huge back-office teams to integrate.
Pressure on providers to source, develop, and retain talent against this growing demand for services is likely to be a critical issue for future success.
