-Zeneca, Pfizer are the Top Performers, A.T. Kearney
Study Index Shows
Business Editors
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.
--30--flb/ny*
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