For Shareholder Value, Schering-Plough, Johnson & Johnson, Astra-Zeneca, Pfizer are the Top Performers, A.T. Kearney Study Index Shows
January 14, 1999 9:38 AM
NEW YORK--(BUSINESS WIRE)--Jan. 14, 1999--A study of 17 of the world's leading pharmaceutical companies released today by A.T. Kearney named Schering-Plough, Johnson & Johnson, Astra-Zeneca(1) and Pfizer the top performing companies in the industry. The top performers were determined using a novel economic indicator created by A.T. Kearney called the Value Creation Index (VCI).
A.T. Kearney's VCI is a uniquely designed formula of economic return(2) plus the estimated net present value of marketed and pipeline drugs. Unlike other financial indicators, A.T. Kearney's VCI both accounts for the capital needed to generate earnings, as well as estimates the company's future value. With a 73% correlation to market capitalization, A.T. Kearney's VCI is the strongest predictor of a company's ability to increase its stock price, outperforming traditional indicators like return on invested capital, return on assets, operating margin or earnings per share.
At the same time, the study shows that while competency in drug discovery will obviously continue to be a critical success factor, pharmaceutical companies will have to become more "outside-in" to improve research & development productivity. As the industry is experiencing a technological revolution, companies need to access these new technologies (combinatorial chemistry, genomics, pharmacogenomics, high throughput screening and bio-informatics) to gain a significant strategic advantage. This can be done either through alliances or building in-house capabilities. "To succeed, large pharmaceutical companies will become much more open to utilizing external expertise by outsourcing non-core capabilities and creating virtual networks propelled by state-of-the-art information technology," said Raymond H. Hill, a vice president in A.T. Kearney's Health Industries Services consulting practice.
Among the other key findings of the study:
- While mergers - even mega-mergers - can be successful if well
planned, most fail to increase the combined economic return of
the predecessor companies. However, after critical mass in
revenue is reached, profitable growth can be achieved by building
a dominant position in a few well-defined therapeutic areas.
- With product redundancies flooding the market, sales and
marketing superiority will be a critical differentiator for
success. Adopting best practices in this area, such as those used
in the consumer products industry, can have a significant impact
on value creation.
- Analyzing the levers - marketing, sales, research and development
- to improve the VCI rankings gives management a clear yardstick
of the actions they must take to improve share price.
Size Does Matter - Therapeutic Focus vs. Economies of Scale
According to Hill, a new and different kind of merger and acquisition mindset will drive the industry in the next millennium. The focus will not be on companies that pursue a widely diverse portfolio, but on companies that build a dominant position within their chosen therapeutic segments. These companies will generate the highest future value, equating reward from the stock market, without the risk of a failed merger.
Pfizer and Schering-Plough, two of the VCI "top performers," have already adopted this position with much success. For example, Pfizer built its cardiovascular franchise around Procardia, XL(R), and extended it to Norvasc(R), and Lipitor(R). Pfizer creatively used licensing agreements, health outcome data and alternative selling strategies to sustain franchise dominance.
Changes in Drug Development and Discovery
The industry will continue to invest heavily in research and development, and large pharmaceutical companies will adopt a new "discovery and development model" based on four improvement drivers:
- Disease-specific deals will be made with emerging technology
players. The pharmaceutical firm will focus on commercializing
therapeutics and the provider will focus on its technology skill
base.
- To meet the high volumes of data generated and appropriately
assess and categorize information, pharmaceutical companies will
need to significantly upgrade their information technology
capabilities.
- To leverage human capital, the best companies will have to
implement flexible career models that offer more entrepreneurial
opportunities and more competitive compensation systems.
- Companies will adopt a shift in the discovery, development, and
launch processes to account for alliances with external resources
that enhance the company's capabilities and products.
Consumer Best Practices
To increase market share, pharmaceutical companies will need to closely evaluate the return on their marketing investments, rather than relying on revenue from blockbuster drugs, according to A.T. Kearney. Product competition within therapeutic areas has increased significantly, making marketing and sales initiatives the key differentiators to increase revenues. According to the study, pharmaceutical companies now need to adopt analytical models, similar to the "best practice" systems used by consumer industries. These systems evaluate how sales and profits are driven by each of the key marketing levers (pricing, advertisement placement, volume, timing, media vehicles, etc.). Using this system, pharmaceutical companies will be able to identify top-line growth opportunities, eliminate unprofitable marketing programs, reallocate expenditures, and improve forecasting and planning processes to dominant sales in their select therapeutic categories.
A.T. Kearney is one of the world's largest and fastest-growing management consulting firms, generating annual revenues in excess of US $1 billion. With a global presence that spans every major and emerging market, A.T. Kearney provides strategic, operational and information technology consulting and executive search services to the world's leading companies. A.T. Kearney (www.atkearney.com) is owned by information services leader EDS.
This information is intended for general information purposes only and does not constitute investment or other business advice.
(1) Pro forma basis, assuming merger. (2) A.T. Kearney defines economic return as the ratio of earning before interest and tax, minus applicable taxes, minus capital charge (economic capital times the weighted average cost of capital), divided by economic capital. Unlike other financial indicators, economic return deals with the specific financial requirements of the pharmaceutical industry by addressing the long-term character of research and development as well as marketing spending.
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