A new era approaches	December 2007

Med Ad News spoke with Michael Steiner, wealth manager, RegentAtlantic Capital LLC about the wealth management company’s new study on the market forces that will have an impact on the industry’s upper-middle and senior management.

Med Ad News: From a business standpoint, how are the findings from this study important to the pharmaceutical industry?

Michael Steiner: This study is drawn from interviews with more than 100 industry experts including several CEO’s, senior chemists and managers as well as venture capitalists, lawyers, consultants, executive recruiters, and academics. It also incorporates research done at multiple universities and by consulting firms.

The study serves three primary purposes. First, it looks at the major forces that are reshaping the industry and how they are changing its underlying economics. Second, it analyzes how the industry will have to evolve to adapt to these forces and how the industry’s business models and structure will change in the near future. Finally, and most importantly, the study translates what all of these changes will mean for individuals who work in the industry. How is their world going to be different? What will a career in this industry look like in the future? Where will be the best opportunities and what skills will be in the highest demand? More importantly, from a personal context, how exactly can someone capitalize on all of these changes and what issues should factor into one’s personal career planning? Our hope is that pharmaceutical managers and executive will be able to apply the information that we provide in the study to their own situations and to prepare for a new era in the industry.

Med Ad News: For upper-middle and senior management, what are the most important points to take away from this?

Michael Steiner: The industry is nearing the end of a long, prosperous cycle and a series of forces are dramatically changing the industry’s economics. Its revenues are being squeezed, its costs and risks are going up and the business of pharmaceuticals is no longer a U.S. and EU focused industry.

The industry is not only going to survive all of these changes, it will also likely thrive. However, the adaptation process it will have to go through to do so will affect the lives of thousands of upper-middle and senior management. Pharmaceutical companies will be under immense pressure to cut costs, boost productivity and shorten the time and lower the risks involved in bringing new products to market. They also will have to compete in what is now a global market for selling and developing new drugs.

Consequently, most organizations will shift away from fully integrated businesses to ones that increasingly focus on latter stage development and the commercialization/marketing of drugs. Everything that can be cost-effectively outsourced will be outsourced. Large portions of the future R&D of new drugs will be conducted in laboratories in developing countries such as India and China. Additionally, rather than develop new treatments from scratch, pharmaceutical companies in the future will acquire most of their new compounds from smaller, venture capital-backed companies.

On a more personal level, the paternalistic nature of the employee-employer relationship that has long been a hallmark of the pharmaceutical industry will simply no longer be economically feasible for most companies. Instead, it will become much more commercial and similar to that of the one between companies in other industries and their employees.

By one estimate, these changes will lead to the elimination of nearly 50,000 upper-middle and senior management jobs at pharmaceutical companies over the next decade. To be sure, many of these jobs will reappear in other forms – e.g., at small start-ups, as independent contractors or consultants, etc. However, these new positions will function in very different working environments than they do today.

Those individuals who remain with the same employer should expect to change positions within their company more frequently and will have to be more mobile. Their jobs will take them to different states and different countries.

While all of these changes may seem frightening to someone in the industry, we would hope that the most important thing that upper-middle and senior management will take away from our paper is that these changes will also create incredible opportunities for individuals who are prepared to capitalize on them. There will be thousands of new, higher-paying jobs for those with the right expertise, experience and skills.

But being able to capitalize on these opportunities will not happen by accident. It will require that an individual take charge of their own career, identify their personal skills and capabilities and position oneself to take advantage of the industry’s upcoming evolution.

Is it time to panic just yet? Absolutely not! Rather, if one can think about all of these changes, place them in context and then figure out how to best prepare to take advantage of them, what is about to happen will be exciting.

Med Ad News: How exactly will a lack of new blockbuster drugs in the pipeline affect the economic outlook of the industry?

Michael Steiner: Ten of the largest companies in the industry will lose more than a quarter of their revenue over the next five years from the expiration of patents on some of their highest revenue drugs. If they are unable to replace these revenues with new drugs and/or significantly change their cost structures, each of these companies will have no operating profits in 2013.

These companies do have many new drugs under development. However, for a variety of reasons (smaller numbers of potential patients for them, other alternatives which will soon be available in generic form, more powerful payers who will effectively cap what pharmaceutical companies can charge for their products, etc.) it is fairly unlikely that these new products will be able to offset much of the revenues lost. Consequently, these organizations have no other choice but to find ways to reduce their costs and/or acquire new products which they can commercialize.

This pressure of losing such a substantial portion of their revenues will also make pharmaceutical companies much better businesses over the long term. It is forcing them to innovate and improve how they operate.

Med Ad News: Will this challenge perhaps be the biggest determining factor in how companies could shake up management? If not, which one of the other forces mentioned is the one to be reckoned with the most?

Michael Steiner: There is no single factor that is forcing all of these changes on the industry. Instead, it is the confluence of many changes — expiring patents, a shortage of new potential high revenue drugs in the pipeline, much more powerful payers (including the largest payer of all, the U.S. government) higher R&D costs, harder and more complex drug targets, massive product liability litigation, more cautious regulators, etc. — all happening at once that is making the job of pharmaceutical executive an exciting one.

The biggest challenge facing the management of every pharmaceutical company is that their industry is shifting to a global market for selling drugs and for the expertise to develop them. Globalization is what we believe will bring about the most significant changes in their organizations.

The market for drugs in developing countries is growing in parallel to the increased affluence of these nations. And while most of their demand in the near term will be for generics, over time they will become substantial markets for all types of prescriptions drugs.

More importantly, much of the work involved in developing new drugs in the future is going to be done in the laboratories of countries such as China and India. And this shift to foreign laboratories is not just some futuristic idea. Rather, pharmaceutical companies already outsource substantial portions of the research and development of new drugs to them. For example, several major companies and multiple biotechs use these labs to conduct large portions of the medicinal chemistry necessary to develop new compounds.

Additionally, a substantial number of clinical trials of new drugs are already being done offshore. These laboratories are rapidly increasing in sophistication largely because they are staffed by U.S. university-trained scientists. And the cost of doing research in these labs is only about 10% of their counterparts in the US or EU. Over time, pharmaceutical companies will have to shift offshore as much of their R&D as possible if they are going to remain cost competitive.

This shift to global businesses will be an immense challenge for pharmaceutical company management because it is imperative for them to make their organizations function efficiently across multiple countries, regulatory environments, cultures and traditions, etc.

Med Ad News: These forces, as stated, could potentially displace as many as 50,000 positions over the next 10 years. You go on to say that “success at virtually every position will require a broader set of skills, career planning and an understanding of an employer’s strategy, capabilities, and pipeline.” Does this mean you expect the recent rash of job cuts within the industry to continue, or will this be some sort of transition period, where management may not lose their position within a company, but be required to “re-learn” an expanded responsibility?

Michael Steiner: The really bad news is not that the industry is going to lose 50,000 positions over the next 10 years. Rather, the 50,000 number refers only to the upper-mid and senior management positions that are likely to be displaced over the next decade. Instead, the total number of jobs that will be shed by large pharmaceutical companies will likely be much larger.

By one CEO’s estimate, about 90% of the people working at pharmaceutical companies are effectively tied to one treatment area at their company. As the patent protection expires on many of the higher revenue medications, these companies will need far fewer people to continue to further develop, market and commercialize these products.

And like any other industry that is restructuring, the jobs at greatest risk are the highest paying ones, typically held by individuals who have worked in the industry for two or more decades, As companies reshape their product lines, merge and outsource, a key element of their strategy will be to lower their costs by replacing senior positions with lower-paying ones wherever possible.

With regards to retraining, it is still unclear what pharmaceutical companies are going to do. However, they are facing such robust challenges that we believe that there will be fewer opportunities for lateral moves than there might have been in the past.

Med Ad News: In retraining managers for more responsibilities, do you expect more R&D staff to transfer or train in the marketing side? Which companies, in your opinion, could benefit the most from this retraining regimen?

Michael Steiner: It is unclear exactly how and whether many companies will retrain R&D staff or simply reduce the number of positions they have in their companies. What is clear is that for those individuals who remain at these companies, the days of these businesses effectively operating as “silos” is over. The economic pressures on the industry are going to force these companies to become much more efficient at developing and commercializing drugs. To make that happen the marketing and R&D staffs are going to have to work hand in hand throughout the process.

Researchers will not have the luxury of focusing solely on scientific discovery. They will have to regularly demonstrate that the commercial potential from the work they are doing justifies the large investment required by the company for them to do so. At the same time, the management teams of these companies are going to have to ensure that they do not change the operating environment of the laboratories to the point that they inhibit the creativity that is essential to scientific discovery.

Med Ad News: You state that in order to combat these changes in the industry, “merger and outsourcing activity will accelerate and many companies will spin off or sell non-core business lines.” Does this mean you expect there to be an eventual frenzy of moves by pharmaceutical companies in the upcoming years to shed these non-essential portfolios? What would be the possible ramifications of this?

Michael Steiner: There has already been a merger and acquisition frenzy in the industry. What were once 51 large companies are now merged into ten. However, the pressures on the industry to lower costs and for pharmaceutical companies to find new products that they can commercialize and market will lead to even more mergers in the future.

There are also numerous examples of pharmaceutical companies spinning off or divesting non-core business lines perspective – a trend that we believe will continue. Pfizer sold its consumer healthcare division to Johnson & Johnson in 2006. Novartis spun off its antibiotic research unit in 2006. Sanofi-Aventis sold its R&D services for anti-aging in 2004. Bristol-Myers sold its hormone therapy business in 2002 and its consumer medicines business in 2005. And these are just a few.

Going forward, every company will have to decide which activities remain core businesses and which really do not make sense for the long term. The latter category will be either sold or spun off.

The ramifications of this — if you happen to work in one of these units — are not good. Generally when a non-core unit is sold to another company, most of the people from the unit being sold are let go as the acquirer is mostly focused on getting the products under development and not necessarily the people in the unit.

Med Ad News: You mention that the expiration of patent protection on many of the industry’s highest revenue medications could play a factor here. Are there any new drugs in particular you have in mind when mentioning this? Are there one or two standouts that could significantly alter the industry once they lose protection?

Michael Steiner: The most obvious one in this category is Lipitor, the world’s best-selling drug. Over the last 10 years, sales had skyrocketed and were $3.358 billion in first-quarter 2007. Its patent protection expires in 2010.

However, there are a multitude of other drugs that make up a large portion of companies revenues and are going off patent in the next five years. For example, six treatments generated almost 49% of Pfizer’s revenues in 2006, and nine drugs constituted more than 42% of GlaxoSmithKline’s 2006 revenue. Five drugs represent 22% of Johnson & Johnson’s revenue, while six drugs constitute 57% of AstraZeneca’s revenues. Three drugs represent 37% of Wyeth’s revenues, and five drugs account for 60% of Eli Lilly’s revenues.

Med Ad News: With some of its best selling products soon to lose patent protection, Pfizer is looking for more efficient ways to reach the doctors who prescribe its medicines. The company just made a deal with Sermo, the social networking site for physicians, which will allow Pfizer’s hundreds of staff doctors to view postings and reply. What is your overall impression of this deal, and could a move like this become a blueprint for some of the other top pharmaceutical companies to follow?

Michael Steiner: I think it’s an interesting move by Pfizer, especially because most physicians have little time or desire to meet face-to-face with pharmaceutical sales reps and companies are looking to cut costs. In reality, however, one of the bigger changes sweeping through the industry is a shift away from the “physician-prescriber” model to the “payer-stakeholder” model. In other words, in the past, drugs were largely sold by persuading physicians to prescribe them for their patients. Doing so in the future remains a necessary, but insufficient condition for success.

Instead, payer organizations (such as HMO’s, PPO’s, other managed health care companies, etc.) have now managed to interject themselves into the decision process of which drugs patients use. They have done so by manipulating the out-of-pocket costs of patients depending upon whether or not they use a drug that is in their formulary or is generic. For those medications outside of the formulary, the out of pocket cost can be as much as ten times greater for the patient. Thus, although a physician may have prescribed a particular treatment, the patient will have it filled with a lower cost alternative to avoid having to pay a higher co-pay.

We believe that the future marketing efforts of pharmaceutical companies will be increasingly focused on these payer organizations, trying to understand how they make decisions, which non-economic factors affect them, etc.