pharmaceutical industry challenges- part 4

Realizing tangible value from strategic alliances, joint ventures and partnering arrangements

As drug pipelines among major pharmaceutical manufacturers have become less productive, many companies have increasingly sought to establish a variety of partnering arrangements such as strategic alliances and joint ventures with small, innovative biotech companies as a source for new products. Further, the high cost of Research & Development (R&D), risk management considerations as well as market demand, makes it increasingly attractive for industry players to form alliances, often in the form of licensing or co-marketing/co-promotion agreements.

The resulting benefits of these alliances include:

• For licensors, out-licensing maximizes the value of a compound while freeing the organization from many of the risks associated with manufacturing, providing services and establishing distribution channels;

• For licensees, in-licensing can be very profitable by allowing companies to fill new product pipelines; and

• For co-marketers and co-promoters, the collaboration with marketing partners allows for broader distribution of products. Companies spend significant amounts of time and resources researching and negotiating various alliances.

 However, many companies fail to effectively monitor the royalty and other revenue streams that are negotiated with their partners and as a result, often leave significant amounts of revenues on the table. This lack of monitoring is often the result of poor coordination among legal, accounting/finance and sales departments as well as the turnover of personnel responsible for oversight. As the number of alliances has grown and the complexity of the compensation arrangements has increased, the monitoring of these arrangements has struggled to keep pace.

Reputation management

For many years, the pharmaceutical industry was highly regarded for its role as a leader in the advancement and improvement of human health. For many years, the continuous introduction of new and improved drugs has also driven substantial revenue growth in the industry. But there have been a number of recent product recalls despite well established quality assurance processes and regulatory requirements. These, incidents have led many consumers to believe that pharmaceutical manufacturers have lost sight of their original vision, and instead of focusing on bettering the human condition, are more interested in bettering their profits.

 The damage to the industry has been pervasive, resulting in costly settlements on pricing and promotional practices, difficulty in obtaining clinical trial subjects, high-profile drug withdrawals, and an inability to produce and sell product due to manufacturing halts. Moreover, compliance problems have led to additional industry regulations, raising the total cost of compliance as well as the financial and reputational risks should non-compliance occur. Since 2000, pharmaceutical companies have paid a total of almost $4 billion in settlements and fines.

 These developments have exacted a toll on the pharmaceutical industry’s reputation while fuelling political rhetoric. An even higher levy may be in store if the industry does not respond effectively to the issues and forces that have already lowered the public’s sense of trust. Aggressive investigations and expanding regulation alone have arguably already stifled innovation. And in the absence of trust, the public may demand an alternative business model for the pharmaceutical industry, one which may impose unacceptable controls and operating restrictions. The industry’s past attempts to address concerns around trust through compliance and governance policies has occurred as a reaction to developments rather than a proactive assessment of risk and an integrated approach to compliance management. Moreover, new layers of added compliance load have led to bottlenecks and inefficiencies in operations.