Wednesday, December 12, 2007

A Challenge to the Life Sciences Services/Consulting Industry

When one thinks about the money invested by the Life Sciences industry in the services business to improve its processes (likely over $100 billion over the last 10 years; my estimate basis is in excess of $5-10 billion per year predicated on a spend on services equal to 1-2% of yearly worldwide revenues), it is reasonable and of concern that the value and results achieved fall far short of expectations. My challenge is to question how to improve the value received by our clients based on measurable results to date. The evidence suggests our clients are at a crossroads and their ROI and trust in our advice, products and services has not served them well.

Witness a recent article in the Wall Street Journal (12/7/07) that points out that over the next few years, the pharmaceutical business will hit a wall. It states that "Some of the top-selling drugs in industry history will become history as patent protections expire, allowing generics to rush in at much-lower prices. Generic competition is expected to wipe $67 billion from top companies' annual U.S. sales between 2007 and 2012 as more than three dozen drugs lose patent protection. That is roughly half of the companies' combined 2007 U.S. Sales. At the same time, the industry's science engine has stalled." Where are the benefits of all the improvement projects undertaken? Was this crisis unavoidable or could have the "consultants" provided "better vision"?

One particularly challenging issue is that R&D productivity has decreased by 50-75% over the last several years (based on the number of new NCE's approved as a function of R&D spend). The WSJ article further suggests that "during the five years from 2002 through 2006, the industry brought to market 43% fewer new chemical-based drugs than in the last five years of the 1990s, despite more than doubling research-and-development spending.". Combine this with a glut of new sales and marketing initiatives and resources that are yielding at optimistic best little return; significant overcapacity in manufacturing capacity and an overall bloated SG&A component of the balance sheet, management and its advisors should think about a different way of doing their business.

Lest we think that the gurus of Wall Street and other worldwide bourses haven't noticed, valuations of pharmaceutical shares, once considered safe havens worthy of a Price/Earnings premium to the rest of the stock market have witnessed a valuation decrease of nearly 20% while in the last 5 years while the overall market has gained nearly 75%!!! Of further concern is that Moody's Investment Services recently lowered the rating of Pharmaceutical Industry debt to negative (not far from the Sub-prime debt that has caused worldwide turmoil).

My suggestion is that while there are numerous external forces at work and many potential issues to address, it would behoove our brethren in the advice giving industry to think more out of the box and create a win-win situation to help our key clients. Your thoughts are invited.

Contributed by Lawrence J. Rothman, PhD

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