by James Robinson, Director of Solutions, Model N
As with other markets, the Life Sciences industry has not escaped the effects of the global economic downturn, with the supplier/customer relationship undergoing radical change. Add to this the impact of changing regulation regarding patent protection, for example, and manufacturers are having to come to terms with a very different competitive environment in protecting profitability.
Today, the majority (58%) of Life Sciences companies continue to struggle with Excel spread sheets and multiple point solutions, which makes a companywide approach to margin optimisation all but impossible. A recent survey undertaken at the Model N/ePP Life Sciences Price and Profit Optimisation Forum also found that only 6% companies are able to centrally manage price and profit strategies by adopting integrated revenue management solutions linked to a global data source.
The impact is felt both financially and in the productivity of the teams, with studies by analyst firm IDC showing that productivity is a top three driver on today’s corporate agendas. Yet in the Life Sciences industry in particular, too few companies are taking advantage of advanced technologies to improve employee productivity and direct it towards maximising revenue and profit performance.
However, this is about to change, as companies increasingly learn from other industries such as airlines, hotels and consumer products in benefiting from integrated revenue management. And, with tailored solutions now available which meet the specific needs and challenges of the sector, this means that technology can play its full part in enabling consistent enterprise-wide processes and collaboration essential to maximise margin performance.
Changing markets, changing technologies
Within every sector, developments in technology directly reflect the priorities of the industry they serve. So, in the highly competitive world of fast moving consumer goods (fmcg), in which product lifecycles are typically short, best practice systems and processes have evolved to enable companies to be commercially agile and responsive to change.
By contrast, in a traditional ‘big brand’ pharmaceutical environment in which blockbuster drugs have benefited from patent protection, the principal focus has until now centred on technologies and systems to support R&D, with the result that CRM and pricing systems have remained embryonic.
However, the pharmaceutical sector is undergoing profound change, with new pressures to create competitive advantage forcing providers to be much more flexible in meeting the very different demands of today’s healthcare market.
Like any such industry-wide transformation, systems and processes typically lag behind, with short-term expedients such as the use of spread sheets and third-party expertise used to fill the gaps. With historic investment in ERP systems concentrated on production and supply chain processes, in the pharmaceutical arena, ‘sticking plaster’ solutions have focused on the lack of a management information layer and under-developed pricing and net margin management processes.
The need for a more thorough-going solution has become critical as, for the first time, businesses must invest time and money in protecting existing margins and maximising revenues and profitability over the lifetime of new products brought to market.
Controlling price and revenues
To improve their competitiveness, pharmaceutical companies have started by the traditional route of taking cost out of the business, streamlining processes, trimming R&D budgets and cost of sale and looking at partnerships to share the risk of building new product pipelines.
With costs optimised, the focus then switches to product and maximising the price at which it can be sold and at an achievable net margin. Until now, efforts in this area have been essentially siloed, with the pricing and market access teams focused on the price to be set at launch in each market and the finance department looking at net costs on a monthly basis.
With no-one directly responsible for the evolution of price and margin once the product has become established in each geography, the result of the new tougher commercial world of international reference pricing (IRP) has been significant, leading to rapid price erosion. This problem is made worse in that, with the technology underpinning pricing management restricted to the desktop, spread sheet and email, this also exposes the business to the further risk of fines for non-compliance, through an inability to report on pricing to the satisfaction of local regulatory regimes.
To address this issue effectively and put in place the right supporting technologies, there needs to be a greater understanding of the dynamics affecting pricing in different markets. For example, in order to determine the best price for each product over its lifetime, manufacturers have to come to terms with the growing impact of IRP and tendering, as well as understand what attributes customers value most.
Here the pharmaceutical sector can learn from the experience of fmcg, in which the tools to support customer segmentation, understanding buying preferences and the commercial supply chain are well-embedded as standard processes throughout the sector.
Insight, modelling and control
Best practice technologies are now available to help businesses put in place the necessary processes to achieve transformational change.
First, on the basis that you can’t manage what you can’t see, it is essential to have visibility of net margin segmented by product and customer groups. Until now this has only been achievable at a country level, via P&L reporting, but latest software solutions make this possible by abstracting data on all elements of the sale and invoicing process and then reporting these directly from the system, in order to provide management with the metrics required for analysis and corrective action.
Armed with these pricing insights, it is now possible to undertake complex modelling which allows manufacturers to explore scenarios around the potential impact of different target prices in various markets, as well as price changes over time and the effect of listing and delisting products. Critically, in a marketplace subject to rapid and unpredictable change, such modelling can be undertaken on an on-going basis, as assumptions and commercial circumstances evolve.
Finally, central visibility of pricing activity through automation also enables strategic pricing decisions to be controlled. As a result, head office and local management can work together to ensure that the deals struck in individual markets are closely aligned, yet with the flexibility to take into account local market conditions.
For this to take place effectively, management needs to understand the connected nature of the revenue lifecycle, involving the market pricing team, sales, marketing, finance and affiliates. In overcoming old siloed mentalities, it needs the buy-in and commitment of senior management, with all departments understanding how an integrated approach linking all pricing processes on a single platform will meet the tougher demands of a more competitive marketplace
For the business to achieve the desired ‘gross to net’ pricing targets, this cannot be achieved by taking tackling problem hot spots in isolation, but requires end-to-end process change. Similarly, a solution needs to be fit for purpose in automating the pricing and revenue lifecycle, with existing ERP systems unlikely to have the flexibility to address the challenges involved.
Such change may be transformational in that it impacts the whole business, yet the process of change itself must be undertaken in a practical and pragmatic way. In assessing where the business sits on the maturity curve, any change programme must take account of the speed at which new systems and processes can be introduced, as in most cases a step-by-step approach is likely to be more realistic and achievable than ‘big bang’ change.
Implemented effectively, the business and technology can work together harmoniously. Each department understands its role in the new cross-functional processes, fully supported by technologies and systems aligned to the unique needs of the pharmaceutical sector.
As a result, productivity is greatly improved, as employees at each level can focus on carrying out their appropriate function rather than, as often happens today, staff at all levels wasting time and effort chasing data and information from across the business. Equally, automation gives greater confidence in the quality of pricing data, avoiding the need for constant checking and re-checking, again freeing up time for more insightful and effective decision-making.
Any investment is not just about solving today’s problems but putting in place a template for the future. Those working in the pharmaceutical sector are agreed that the next few years will see even more change as market pressures increase. In response, technology will form a central pillar of a business strategy which demands full transparency and control of pricing and revenues as the basis of tomorrow’s competitive business model.
Model N will be participating at Pharma Pricing & Market Access Europe 2014 as Silver Sponsor. For more information about the event, click here