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Stephan Danner, Dr.

Morris Hosseini, Patrick Biecheler

Study

What's next? Innovating the concept of


innovation in the pharmaceutical industry
How to prepare the pharmaceutical industry for the biggest
challenge to date

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Table of contents
From the authors

Executive summary

1. What makes innovation the fundamental challenge?

2. What it means and what it takes The Roland Berger


Innovation Framework

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3. Where to compete Choosing the therapeutic areas


of the future

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4. More than just selling pills Tomorrow's products

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5. Who pays the bill? Financing innovation

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6. At the forefront Ensuring technological innovation


and R&D excellence

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7. A people business Fostering creativity and innovation

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8. Overview of key insights

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9. Where to start

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10. Sources

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Contacts

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What's next? Innovating the concept of innovation in the pharmaceutical industry

From the authors


For the longest time, innovation in the pharmaceutical industry was product-centered. Everyone
knew what the product was and what it looked like a pill. It was also clear which instruments
contributed to innovation technology such as high-throughput screening (HTS) in target identification and compound libraries in lead development, for instance.
Today, many of these fundamental assumptions no longer hold true. Both industry and society are
forced to redefine their concept of pharmaceutical innovation. On a pragmatic level, executives
need to answer important questions: What business model will ensure breakthrough innovations
in the pharmaceutical industry of the future? What kinds of innovation will be acceptable to key
stakeholders (payors, physicians, patients, politicians) and will society therefore be willing to pay
for? What will the innovative pharmaceutical product of the future be both physically and in
terms of what it encompasses?
There are more fundamental questions for managers, too. How can we maintain our role as primary innovator in the healthcare industry? How can we provide breakthrough innovations even
in these difficult times? As one manager we spoke to in the course of our research put it: "We may
have all the innovation in medical science at our disposal, but that doesn't help us if we can't
translate it into medical innovation that is being appreciated by our key stakeholders."
For the fourth year in a row, this study by Roland Berger Strategy Consultants provides a snapshot
of current thinking in the pharmaceutical industry. The previous study, entitled "Pharma at the
crossroads Choosing directions in a changing healthcare world" was published in 2008. It looked
at whether the industry's operating model is sustainable. This year's study focuses on the grass
roots question of whether and how companies can maintain their high-risk, high-margin,
innovation-based business model.
The study is based on the results of a survey of top managers from companies accounting for more
than half of global pharmaceutical revenues. We also conducted more than 50 face-to-face interviews with Chief Executive Officers, Chief Financial Officers, Directors of R&D divisions and
Commercial Executives. With this report we do not offer specific recommendations for individual
companies. Instead, we paint a detailed picture of today's changing healthcare universe. In particular, we draw attention to the major challenges and opportunities facing companies today and the
challenges that will face companies tomorrow.
We would like to take this opportunity to offer our sincerest thanks to all those who participated
in the survey and interviews. Without their input, this study would not have been possible.

Stephan Danner

Dr. Morris Hosseini

Patrick Biecheler

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Executive summary
Even in today's challenging economic environment, the pharmaceutical
industry can still be considered an industry with good long-term prospects.
Expanding aging populations, increased wealth in emerging markets and
unmet medical needs, accompanied by rapid technological progress, are
fueling the demand for innovative drugs and will continue to do so in
the future.
Yet despite this fundamental trend, the environment for pharmaceutical
companies has deteriorated significantly in recent years. Growth rates and
margins have come under increased pressure. With R&D productivity down,
new products are failing to compensate for sales lost to the producers of
generics. With their cost containment efforts, public healthcare systems
have brought down prices and overall pharmaceutical expenditure. They
have also raised the stakes for what they consider to be real innovations,
and are forcing companies to offer more value for less money.
How times have changed. In the past, it was sufficient for pharmaceutical
corporations to contribute via their expensive clinical research. The authorities readily accepted the safe and efficacious drugs that the industry produced as innovative and worth funding. Today the challenges are greater. Socalled "me-too" products the cornerstone of many development programs
in recent years are no longer fully reimbursed. The fact that a company
conducts clinical research, previously thought of as the distinguishing factor
between the pharmaceutical and the generics industry, is no longer sufficient justification for a claim to innovativeness. To escape the pressure of
commoditization, the industry has only two options: It can aim for cost
leadership and offer generics or over-the-counter products, or it can develop
innovations that offer patients so much added value that society acknowledges their benefits and provides the necessary financing.
Focusing on R&D excellence is a prerequisite. But companies need to do
a lot more, too. The pharmaceutical industry must fundamentally reassess
what innovation really means and actively communicate these ideas to
society. The very concept of innovation needs to be innovated, and with it
the entire pharmaceutical business model. Innovation must replace marketing as the driving force behind the industry. If the industry fails to redefine
the concept of innovation, then the healthcare systems will do it for them
a trend that is already observable around the globe.

What's next? Innovating the concept of innovation in the pharmaceutical industry

Pharmaceutical companies must consider seven key issues:


> They need to rethink which therapeutic areas (TAs) they want to compete in. Future profitability and revenue expectations are important, but
they are not the only factors in the decision. Companies should also think
about their internal and external capabilities, as well as their strengths
and opportunities and derive their individual future portfolio based upon
this assessment
> When determining what physical products to offer, companies have to
think beyond the current "drugs only" approach. Also driven by raising
payor requirements regarding targeted therapies, they need to experiment, for instance by combining drugs with diagnostics or medical devices and pushing fundamentally new technologies such as stem-cell approaches for regenerative medicine. These would radically change not
only the underlying product but the entire value chain
> Beyond altering the physical product, companies need to innovate or at
least enrich the concept of their product. For instance, they can manage
patient data and provide key stakeholders (e.g. payors) with this valuable
information. Alternatively, a growing number of companies now offer
holistic treatment solutions
> When choosing TAs or innovative products, evaluating the prospects
for future financing is crucial. Statutory health insurance budgets are
currently stagnating and alternative funding (e.g. out-of-pocket payments
or co-payments) are growing in importance. Furthermore, within the
statutory budgets, corporations should seek out win-win cooperations
with payors who agree to finance innovative products
> Strategy and preparation are key. But the true enabler for pharmaceutical
R&D is having access to the latest technological innovations and organizing R&D accordingly. R&D teams need to leverage the best technologies
both internally and externally. R&D must be completely restructured
and new collaborative approaches introduced approaches that bring
together internal expertise and that of competitors or from outside the
industry. Many experts believe that pharmaceutical companies will
increasingly focus on development, market access and the commercial
side of the business, with external partners taking on more and more
research

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> A clear trend exists toward therapeutic centers of excellence. These


centers address key bottlenecks namely understanding disease mechanisms thoroughly, choosing appropriate technologies and employing the
right diagnostics to assess success during the pre-clinical phase. The
approach of pursuing excellence by "industrializing R&D" is now outdated; within R&D, research is now considered to be an art, not
a science
> Finally, managers must realize that innovation excellence in pharmaceutical companies is driven by the people who work there. Corporations
need to ensure they have global access to the best talent, especially in
emerging markets (e.g. China, India), which provide a unique opportunity for new patterns of thinking. Apart from recruiting externally,
companies need to foster a culture of entrepreneurship. They must also
revitalize the feeling of "scientific pride" among their R&D experts, for
instance by means of incentives

What's next? Innovating the concept of innovation in the pharmaceutical industry

1. What makes innovation the fundamental challenge?


The pharmaceutical industry is under pressure. Top-line growth is stagnating and the year-on-year growth rate of the global top-50 corporations is
expected to fall from 9% in 2007 to a meager 0.1% in 2013. 1)
A number of events lie behind this development. Statutory Health Insurance
companies (SHIs) are trying to contain costs and this reduces the prices that
can be realized with new and established products. The loss of patent protection is threatening a large slice of current revenues. R&D productivity
continues to be low. Stricter regulatory hurdles are reducing the probability
of obtaining final market authorization or keeping it for products already
on the market. Studies require ever more complex designs, so expenditure
on R&D is on the rise. Sales and marketing is less productive than in the
past. The overall transparency of the selling, general & administrative
expense (SG&A) remains limited. As a result, maintaining margins is
difficult.
The R&D dilemma
To tackle this challenge, pharmaceutical executives have turned their attention to R&D. Yet despite significantly higher investment, pipeline products
and new products are not compensating for the loss in revenue expected as
patents expire over the coming years. On top of this, fewer new drug applications (NDAs) are being issued and the number of newly registered drugs
is decreasing, especially in Japan and Europe (see chart 1.1).

1) Source: Datamonitor 12/08

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One of the executives interviewed for the purposes of this study commented
as follows: "The rising R&D cost figures are misleading. While the increasing
complexity of studies has driven up the cost for development, the actual
expenditure for research has shrunk." According to this interviewee, the
ratio has risen to 70:30, the budgets for development now exceeding those
for research by far. To make things worse, identifying new targets has become more difficult, since all of the low-hanging fruits have already been
picked.
Product innovation and patents formerly the driving forces behind
the industry have lost momentum. The share of total industry pipeline
generated by the big pharmaceutical corporations has shrunk2), indicating
that the traditional "big pharma business model" has become less effective.
After years of high growth for shareholders in the 1980s and 90s, significant
value has been destroyed since the turn of the century.
Revitalizing innovation Pharma's driving force
The old blockbuster business model has lost its appeal. The pipeline
has dried up and the number of commercially viable candidates is down.
Companies show limited willingness to have a large share of their sales
depend on just a few products. Health systems are challenging the highmargin business model of the industry, primarily by questioning the value
contribution of "pseudo-innovations" and "me-too" products. The result?
Fierce competition from generics and a growing focus on price in tender
business.
What does this mean? Soon the pharmaceutical industry will no longer
be able to impose the pricing approaches it formerly used for "me-too" and
follow-on products. On the contrary, given the cost pressure which is
exacerbated by the global financial crisis corporations must reassess their
pricing and profit models. Real innovation is the key. It is essential that the
pharmaceutical industry reclaims the role of primary true innovator within
the healthcare system.
This is quite a challenge. As one executive in our survey commented,
"We have to redefine what innovation is for pharma." Corporations need
to ensure that they can still make breakthrough innovations. Pharma needs
to map out where the greatest value for patients lies and identify what the
various stakeholders are willing to pay for. Such changes will have a huge
impact on today's concept of what the pharmaceutical business is. Executives need to think about different services, new financing and marketing
models. And there are plenty more challenges beyond.

2) Source: IN VIVO

What's next? Innovating the concept of innovation in the pharmaceutical industry

This study provides a roadmap that can help you analyze the strengths
and weaknesses of your company and identify areas that offer room for
improvement. In the following chapters, we answer some of the most
pressing questions facing industry executives: What is innovation? How
can I deliver it? How should innovation be positioned? How can I redefine
my business model? And how can I ensure access to the best talent
globally?

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2. What it means and what it takes The Roland Berger


Innovation Framework
What is innovation? One thing is certain: Innovation means more than
just talking about R&D productivity. To truly innovate, pharmaceutical
companies need to excel along five key levers, as summarized in the
Roland Berger Innovation Framework (see chart 2.1).

The five levers in the Roland Berger Innovation Framework represent the
most important aspects of innovation. We will investigate each of them in
turn. The survey provided us with primary quantitative findings for each
lever which were subsequently discussed with the executives in our interviews. We then looked at selected additional cases and carried out secondary research. At the end of this study, we assess the different levers and
indicate where we see the biggest room for improvement and where there
are "quick wins" for companies.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

3. Where to compete Choosing the therapeutic areas


of the future
The first step for executives in pharmaceutical companies is to review
which therapeutic areas (TAs) they are currently active in and decide
whether these are really the most promising ones. We asked the participants in our survey to name the TAs with the highest potential in terms
of revenue growth and profitability in the next five years.

As shown by chart 3.1, respondents' expectations for revenue growth


and profitability are correlated. We can differentiate three clusters: hematology/oncology is the clear leader, with the highest expected growth in
both categories; next comes a group we call the "medium cluster", which
includes immunology/inflammation, diseases of the central nervous system
(CNS), diabetes, vaccines and cardiovascular diseases; finally we have a
"low cluster" of TAs, including metabolism/endocrinology, respiratory
diseases, anti-infectives (excluding vaccines), gastrointestinal (GI) and
genitourinary (GU) diseases.

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Oncology: High hopes, initial doubts


In the survey, 84% of respondents said that oncology showed the highest
growth potential. The industry's high expectations of hematology/oncology
are reflected in the current focus of many corporations. However, as one
executive commented: "The ranking is absolutely true for the next five years
but the issue is the time afterwards." Some experts fear that the industry
will run into a "development tsunami" that will leave the market overcrowded in the face of financing limitations by public healthcare systems. In this
context, some respondents pointed out that revenues are being created
without sufficient lifetime expansion or increase in quality of life. As one
respondent said: "I doubt payors will continue to pay for this." Indeed,
almost all executives believe that prices will come under pressure even
if budgets get relief by the large number of patent expiries in the coming
years.
CNS: Off the beaten track?
The verdict on CNS diseases was mixed. Most respondents clearly believe
in the business potential of this TA, comparing it to that of oncology in the
1990s. In particular, many executives believe that the incidence rate will
make the treatment of Alzheimer's attractive in business terms. One respondent commented as follows: "CNS truly has potential for two or three
winning companies. It is not as crowded as oncology." But not everyone
is convinced. Another respondent: "I hear a lot of promises but have not
seen any realistic delivery." A main concern lies with the level of science in
CNS. In the past, it was sufficient to prove that a drug works clinically. Now,
it is also necessary to understand and lay out the underlying mechanism of
action. As one respondent put it: "There is no clinical progress beyond
science."
Cardiovascular: A fallen star?
Cardiovascular was formerly the "king of TAs". Today, it is no longer seen
as a primary area for progress. It came at the bottom-end of the medium
cluster; indeed, respondents dealing with R&D saw it as having even less
potential. All is not lost, however. One respondent: "There is still a very
high medical need in hypertension or chronic obstructive pulmonary
disease." Another respondent agreed: "This is not just about lipids. If
somebody finds medication for hardening of the arteries, this could drive
the next wave of innovation."
To summarize, many respondents raised doubts about whether tried-andtested TAs would be able to maintain their past performance. Some explained their doubts by pointing to financial issues: "This is the industry
drawing up a wish list." For years, politicians and payors focused on general

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What's next? Innovating the concept of innovation in the pharmaceutical industry

practitioners and their activities. Now they are likely to turn their attention
to specialty areas. "Reimbursement will only be ensured if pharma succeeds
in increasing targeted therapies with clear end points."
Comparing the past performance of different TAs shows that the strongest
revenue growth is expected mainly in TAs that experienced either a high
total sales volume or a strong growth rate in the past. Another factor in the
calculation is the penetration of generics: revenue expectations decline in
TAs already affected by generics. This underlines the challenge of ongoing
commoditization (see chart 3.2). Since expectations of revenue growth and
profitability are correlated, plotting the historical data against future profitability would produce a similar result.

Science as a growth driver


One of the key parameters for predicting future revenues and profits is
the progress that science can be expected to make in the coming years.
In the majority of cases, a direct correlation exists between the advances
that the respondents expect in a particular field and the expected revenues
and profitability. Accordingly, it is expected that revenue and profit growth
in oncology/hematology will be driven primarily by advances in science.

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Diabetes is an exception. Expected revenue growth here is significantly


higher than the expected scientific advances. Many experts believe that
large incidence numbers will continue to drive diabetes as a TA. However,
some respondents warned of a possible caveat in the medium term: A huge
part of the disease is related to lifestyle and it is highly unlikely that society
will continue to pay. One respondent commented: "Overweight people
will become outcasts and will be asked to pay for the treatment themselves.
Diabetes could well become the first showcase in which the business model
evolves from the statutory healthcare budget-driven market into a new
out-of-pocket-fueled mindset."
Interestingly, the planned investment levels for TAs do not always match the
expected scientific advances. While hematology/oncology comes out on top
in all dimensions, both CNS diseases and vaccines receive less investment
than their scientific progress would lead one to expect (see chart 3.3).
Overall, corporations tend to over-invest in relative terms in TAs in the
low cluster. This may be a sort of defense strategy part of the lifecycle
management that aims to make minimal changes to the molecular structure
of drugs to obtain new patent protection.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

What can we conclude from this? Pharmaceutical companies need to update


their R&D portfolios. Crucially, they must understand that TAs have a lifecycle: As with products, new discoveries lead to strong growth. With time,
the TA matures and competition increases.
Finally, generics appear on the scene and ring in the decline phase. Corporations need to focus their efforts on TAs that have both a largely unmet
medical need and a high current cost structure, which will force payors to
look for cheaper alternative methods. Obviously, selecting the right TAs
to focus on is a challenge. Any changes here need to be evaluated carefully
beforehand. Three critical levers determine the potential of a TA: the incidence rate, the potential power of innovation and the uncertainty with
regard to potential prices.

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4. More than just selling pills Tomorrow's products


For many years the typical product manufactured by the pharmaceutical
industry was the pill or capsule containing small molecules surrounded by
galenic technology. This has changed dramatically in recent years and more
changes are on the way (see box 4.1). We asked participants in the survey
what type of physical pharma product they thought would gain most in
importance in the coming five years. Here's what they said:
> Biologicals will be the strongest growth drivers in the next five years
(49% of respondents)
> Combinations of pharmaceuticals and diagnostics were ranked second
(30%)
> Small molecules came third (9%) a dramatic drop in the ranking
from previous years
> Cell-based therapeutics came a close fourth (7%)

Box 4.1: The growing importance of biologicals


According to forecasting firm EvaluatePharma, seven of the top-ten drugs in
2014 will be biotech in origin; this compares to five in 2008 and just one in
2000. In terms of total sales of the top-100 drugs, biotech drugs are expected
to account for 50% in 2014; this compares to 28% in 2008 and 11% in 2000.

This shift in product types is expected to have a major impact on the pharmaceutical value chain. Thus, pharmaceutical companies seeking approval
for expensive biologicals will need to clearly demonstrate the additional
benefit of their drugs in order to ensure reimbursement. Indeed, in the
survey, 74% of respondents considered reimbursement and market access
the biggest challenges faced in the pharma value chain (see chart 4.1).
Combinations of pharmaceuticals and diagnostics were ranked second
after biologicals. Clearly, pharmaceutical companies see them as a potential
solution to the challenge of reimbursement and market access. If companies
master this challenge, they will most likely be able to justify the increasing
costs of treatment with biologicals. Many experts believe that it will take
more than five years before the effects of combinations of pharmaceuticals
and diagnostics will fully materialize. However, most agree that they do
have great potential.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

A strong foothold in this field would represent a significant strategic advantage for companies, allowing them to push targeted therapy approaches.
Although not all interviewees planned to invest in diagnostics directly,
the number of partnerships is expected to rise.

For some companies, this could represent a first step toward building
a new business model. By moving toward stratified medicine and owning
the resulting data, these companies could evolve from product providers
into true partners for stakeholders such as payors. As one executive asked:
"Why should we stop at providing the product and leave the huge market
for clinical data to other players?" If pharmaceutical companies do not
exploit the great potential, other players such as pharmaceutical benefit
managers (PBMs) certainly will.
Differentiation is key
As we have seen, the type of physical product dominating the industry is set
to change. Yet many players will move in the same direction. Consequently,
companies need to decide how they will differentiate their products from
those of competitors.

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In terms of potential methods of differentiation, nearly two-thirds of participants in the survey mentioned treatment solutions (33%) and price- or costbenefit advantages (30%). First-in-class characteristics came third (23%) and
best-in-class fourth (14%; see chart 4.2). A number of interviewees claimed
that this was simply a continuation of today's marketing-driven approach.
The fact that best-in-class came last also surprised many of those we spoke
to. One executive commented as follows: "This shows that the industry
does not trust its own innovation capabilities which is shocking!" The
combination of two findings treatment solutions are ranked highly and
first-in-class is perceived as important led many interviewees to the conclusion that the industry is sticking with its old model of "coming up with
a mediocre innovation and then marketing it like hell."
Another bone of contention was the idea of offering more treatment solutions. Cardiovascular and diabetes patients, for instance, can now choose
to be monitored via special medical devices. These devices automatically
submit data to specialists who, if required, can adapt the treatment. However, companies that aim to move into solutions need to make drastic
changes to their operating models. Even today, patients with osteoporosis
can sign up for deals which oblige the pharmaceutical company to pay for
unsuccessful medication and any additional treatments that may become
necessary (see box 5.1). Such packages involve extensive risk management,
and pharmaceutical companies choosing this model will have to develop
skills similar to those of insurance companies.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

To summarize, the executives we interviewed expect two kinds of companies to develop: companies focusing on cost-benefit advantages and bestin-class and companies focusing on treatment solutions and first-in-class.
Pursuing both models at the same time would become increasingly
challenging.
Forward integration?
Many of our interviewees thought that a possible consequence of companies
offering solutions would be forward integration with companies becoming
service providers. Nearly 50% saw this as a trend for the future. But the
people who would actually be responsible for making this happen (by means
of acquisitions) are skeptical: Not one of the respondents working in the
field of business development or mergers and acquisitions saw this as a
future trend (see chart 4.3). One manager commented as follows: "Be it solutions, hospitals or even fitness companies we have tried it all and failed."
Another said: "Every attempt of pharma to leave the product business and
enter into services has failed. You cannot combine a product-centered
company with a service company."

Forward integration is thus not inevitable in the pharmaceutical industry


in the forthcoming years. Indeed, many experts view it as an attempt to shy
away from the key issue facing the industry. The general recommendation
was for pharmaceutical corporations to continue to focus on developing
innovative products. Nevertheless, should an attractive opportunity arise
that fits into a company's portfolio, there is no reason why that company
shouldn't initiate at least a pilot project.

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5. Who pays the bill? Financing innovation


Demographic change and technological advance are driving the demand for
pharmaceutical products. But most pharmaceutical companies operate in
markets which are not liberalized. In such markets, prices are not the result
of supply and demand but of restrictive governmental healthcare systems
that limit market growth. In light of the financial crisis and the resulting
large fiscal debts, growth is set to slow even further. We therefore asked the
participants in our survey to name the financial source that they thought
would fuel the growth of the R&D-based pharma business model in the
coming five years. (We made it clear that by "financial source" we meant
the source of payment for products and services, not investors.)

The respondents believe that to a large extent non-statutory healthcare


budgets will fuel the growth of their products (see chart 5.1). Although the
US, Russia and China are expected to increase SHI expenditure significantly,
other regions such as the European Union are likely to cut costs.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

What is more, in the markets that will drive future growth China, Latin
America and India, for example patients must usually make substantial
co-payments. On a global scale, the share of state funding will thus decrease
and the importance of the "private payor" as a customer will increase.
Companies need to strengthen their existing sales and marketing skills to
address this target group within the regulatory boundaries.
But it's not only the source of financing that is expected to change in the
coming years. In light of the increasingly difficult market environment and
the active role that payors are carving out for themselves, the industry is
developing a range of innovative financing models. These models are designed to drive sales by creating win-win situations between pharmaceutical
companies and new stakeholders, particularly payors (see box 5.1).
Survey respondents thought that value-added models (43%) and risk-sharing
(38%) would be the most important financing models in future to prevent a
decline in sales and profits. Some 10% mentioned discount agreements and
9% cost sharing. Many managers see risk-sharing as an option for innovative
products, while discount agreements would appear to be more suitable for
off-patent products. Most interviewees thought that discount agreements
were ranked too low compared to other models as they were perceived as
the established model. One interviewee commented as follows: "Just look
at the US. For years, we talked about their high prices when in reality their
net prices after discount were much lower."
One respondent asked: "Why stop at the classical models of discounts, costor risk-sharing?" A major source of growth in crowded TAs can be combinations of existing patent-protected products. From the payor perspective,
such combinations cannot simply work by adding the prices. To leverage
this potential, novel partnering models between pharma companies would
be required.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

Time for a change


Implementing innovative financing models requires a change in mentality.
A portfolio view within the organization featuring portfolio-based incentives must replace the traditional product and sales force-oriented thinking
within the industry. As the industry increasingly focuses on expensive
biologicals to drive growth, financing will become even more difficult. The
question therefore arises: what forms of innovation will succeed in securing
financing? Accordingly, cost-benefit analysis is expected to play an even
greater role than at present although according to the survey, companies'
research and development functions currently lack the necessary skills
(see chart 5.2).

Companies must ensure that health-economic clinical endpoints the


necessary basis for thorough cost-benefit analysis are integrated into the
development process as early as possible. This task is by no means straightforward: Health-economic parameters can vary from country to country and
this is not easily addressed in a centrally-organized R&D organization. Dealing with this task is a prerequisite for successfully implementing innovative
financing models.

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6. At the forefront Ensuring technological innovation


and R&D excellence
Access to the latest technological innovations is a key enabler for pharmaceutical research and development. To be truly innovative, companies must
effectively leverage cutting-edge technology. This is especially true for areas
where there are bottlenecks in the research pathway pre-clinical testing
and pre-discovery, according to the survey (see chart 6.1).

In the area of pre-clinical testing, existing predicting models are considered


inadequate. Most experts that we spoke to underlined the need for better
animal models of human diseases. IT solutions, in-silico testing models and
greater compound libraries need to become more powerful or else they will
fail to live up to expectations.
Pre-discovery and target validation are complicated by complex, hard-tounderstand disease mechanisms. These mechanisms also make predictive
models less powerful. Furthermore, many excellent, validated targets cannot be dealt with under current therapeutic approaches because, as many
experts claim, they are not "druggable". To deal with these bottlenecks, the
experts we spoke to recommended a stronger focus on systems biology and
predictive toxicology. As one interviewee commented: "Pharma needs to
step up its basic research if it wants to become part of the innovation game."
Moving further down the development pathway, interviewees identified
phase IIb and study design as bottlenecks, as well as post-approval the
reimbursement decision (see chart 6.2).

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What's next? Innovating the concept of innovation in the pharmaceutical industry

These findings indicate that the most important parameters along the R&D
value chain are selecting the right goals early on and choosing the correct
inclusion and exclusion criteria for recruiting patients. Having a professional
study design is seen as a means to demonstrate the value added to drug
authorities. However, pharmaceutical experts consider the relationship with
regulatory officials to have "fundamentally broken down," as one manager
put it. Interviewees criticized officials for being unduly risk-averse and very
slow in accepting new methodologies such as adaptive clinical trial design.
At the same time, the pharmaceutical companies are making some headway
in battling for reimbursement and have begun to collaborate with payors
early on in the R&D process (see box 6.1).

Box 6.1: Why early collaboration with payors is key


Stricter regulations on reimbursement are making it increasingly difficult for
pharmaceutical companies to benefit from their large R&D investments. As
a result, some companies now involve payors early on in the development
process. We anticipate that this trend will continue in the future, as it creates
a win-win situation: The clinical outcome for the patient improves while the
company enjoys commercial success. Failing to involve payors early on creates
significant business risk. One of the reasons why Pfizer decided to withdraw
Exubera inhaled insulin from the market, for example, was because they had
failed to secure reimbursement in the major markets. Pharma companies
can begin working collaboratively by initiating joint pharmacoeconomic trials,
developing actions to increase patient compliance and co-developing new
care protocols with payors, for instance.

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Understanding the art of R&D


Pharmaceutical companies need to ensure that their R&D operations are
organized in a way that allows them to leverage the full potential of the
pipeline. We identified seven key drivers for R&D excellence:
1. Ensure effective decision-making along the R&D value chain to maximize
R&D efficiency (e.g. by shifting the attrition curve through "early killing")
2. Involve health economics early on in the development process to
demonstrate favorable pharmacoeconomics
3. Build pharmacogenomics excellence to ensure significant added value
of products (e.g. by targeting sub-populations)
4. Strategically outsource parts of the R&D value chain
5. Ensure continuous exposure to the latest technology through close
collaboration with research institutions and academia
6. Secure ongoing access to the newest product platforms by means
of business development and in-licensing
7. Establish appropriate incentive systems for supporting effective
decision-making and adequate allocation of funds

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What's next? Innovating the concept of innovation in the pharmaceutical industry

According to participants in the survey, the first four of these drivers have
the biggest impact on the results achieved by R&D. However, they are also
the areas with the greatest potential for improvement (see chart 6.3).
R&D is not an area that can be industrialized easily. Technological innovations such as high-throughput screening (HTS) and genomics brought with
them high hopes, but results to date have been disappointing. One interviewee commented as follows: "The key is to have a sound understanding of
disease mechanisms. R&D truly remains an art."
Other earlier trends such as centralizing R&D are now seen as more critical.
To ensure access to research expertise, innovation and the best talent,
executives are focusing on partnerships and collaborations. Indeed, 51%
of survey respondents saw this as the key trend in R&D organizations
(see chart 6.4). One insider commented: "Innovation management with
the external world will become a key lever in the future."

Past experience shows that big mergers rarely if ever help reduce pipeline risk or improve R&D productivity. Hence the majority of senior executives now believe that pooling, and not acquiring, resources may represent
the business model of the future. They hope that this will lead to improved
ROI and reduce not only the amount of low value-adding "me-too" products
but also the crowding in the most attractive therapeutic areas such as oncology. This trend has already become reality in recent deals (see box 6.2).

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Box 6.2: First steps toward pooling


In a recent speech at Harvard Medical School, Andrew Witty CEO of GSK
advocated the pooling of patents. Not only does GSK want to exploit this
approach to develop treatments for tropical diseases, it also recently announced a new joint venture with Pfizer for the development and commercialization
of HIV drugs. In July 2009, J&J announced a USD 1 billion investment in
the Irish drug maker Elan. As part of the deal, J&J also acquired the rights to
Alzheimer treatments co-developed with Wyeth. These treatments will be
placed in a new joint venture between J&J and Elan.

Some managers are already taking pooling a step further, questioning


the necessity of carrying out research in-house at all. As one interviewee
explained: "'Big pharma' faces a challenge when it comes to large-scale
research organizations. They are very often biased, so they frequently fail
to evaluate external opportunities objectively."
Although companies will always need experts with an in-depth understanding of the TAs they are active in, a growing number of executives have
realized that true innovation can be better found in small entrepreneurial
units (see box 6.3). They would prefer "big pharma" to take on the role of
organizing competitions for the best solutions. Another interviewee commented as follows: "We need to move away from the Microsoft model of
doing everything in house toward the Linux model." In this model, the
industry would focus on aspects where it has a proven track record;
product development, market access and M&S would be kept in-house
and "industrialized" so that they are as efficient as possible.

Box 6.3: Gaining access to the best innovators and inventors An example
from outside the world of pharma
IdeaConnection.com is an example of how innovation can be made to work
across corporate boundaries. Companies can use the on-line platform to
launch a contest to solve their particular problem, search for an attractive
technology or ask for expert advice. These inquiries are then worked on by
a collaborative team of inventors and innovators.

Building centers of excellence


Another key trend is the creation of therapeutic centers of excellence.
Recent reorganizations of R&D operations offer some examples here.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

Pfizer has addressed the flexibility of its R&D operations by including development in its commercial business units. Similarly, GSK has created centers
for excellence in drug discovery (CEDDs) as part of a shift toward smaller,
pathway-focused drug performance units.
The effectiveness of R&D in pharmaceutical companies relies strongly on
support from other key functions. These functions include:
> Business development and in-licensing to supplement the company's
product pipeline and build a world-class portfolio
> Clinical/regulatory strategy to ensure appropriate study design
> Pharmacoeconomics to demonstrate a favorable cost-benefit ratio
and secure reimbursement after market authorization
> Medical affairs to ensure that R&D generates products that meet
patient needs
Looking ahead, participants in the survey believe that business development,
in-licensing and clinical/regulatory strategy will gain in importance for the
results achieved by R&D (see chart 6.5). Respondents who themselves do
not work in R&D believe that pharmacoeconomics and reimbursement will
become more important in the future. These findings again underline the
trend in the pharmaceutical industry toward external growth and partnering.
They also emphasize the fact that pharmacoeconomics will become more
important in the future. In times of restricted health budgets, there is a clear
need to demonstrate increased value to both patients and payors.

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7. A people business Fostering creativity and


innovation
Let's recap. We have examined the key levers for creating an optimal environment for innovation. We have pointed out how important it is to focus
on the right therapeutic areas (TAs). We have seen why it is crucial to evaluate a company's offering in the context of future financing. And we have
shown how it is possible to determine the technical requirements and,
if necessary, adapt the organization to maximize its efficiency.
But creating the right framework for innovation is not enough. The people
who work within the framework are also vital. Below, we address the
following key questions: How can pharmaceutical companies gain access
to the best talent and skills? And how can the industry establish a culture
of entrepreneurship and creativity, rather than one of bureaucracy?
Ensuring the right culture is a prerequisite for innovative organizations
Pharmaceutical companies show much room for improvement. One interviewee commented as follows: "Our people start out as highly motivated
and bright young talent. But over time, as they are bribed by the system,
they become lazy and conservative in their thinking." Consequently, it is
hardly surprising that the majority of respondents (74%) believe that the
culture of their organizations would benefit most from improvements in
the competencies and behaviors of their employees (see chart 7.1).

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What's next? Innovating the concept of innovation in the pharmaceutical industry

Improvements in this area are not expected to significantly affect the other,
"harder" levers. Nevertheless, 38% of respondents working in the area of
R&D think that improving competencies and behaviors would also potentially drive technology. One executive commented as follows: "We have
become too commercial and we need to increase the acceptance and appreciation of R&D within the firms again." Another added: "We need to foster
a culture which encourages real debate if we want to avoid having too
many streamlined scientists in R&D."
What can I do to improve the culture within my company?
The majority of respondents in the survey (78%) said that the first step
would be to improve the personal or "soft" skills of their employees (see
chart 7.2). Specialist expertise is also seen as major challenge by respondents working in the area of R&D. One such respondent commented as
follows: "It is not only about those soft skills. You need the top people
with the top specialist know-how for those TAs you want to play in."

To achieve cultural excellence, pharma executives intend to focus on three


levers: (1) gaining access to the best talent; (2) fostering entrepreneurship
rather than bureaucracy; and (3) focusing on the scientific culture in R&D,
incentivizing employees accordingly. We will discuss each of these levers in
turn below.

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Lever 1: Gain access to the best talent


As shown by chart 7.2, respondents are primarily looking at bringing in
external expertise such as by means of staff exchange or recruiting people
who have the skills that the organization lacks. This applies to the entire
company but is especially true for R&D. For many executives, the key
challenge will be to gain access to talent. Talent is increasingly to be found
outside of the traditional markets, in developing countries such as China
and India. These regions offer great potential for creativity and new ways
of thinking. Many managers believe that this could trigger the next wave
of innovation. Consequently, all the big players are currently setting up R&D
centers in emerging markets. A prime example is China, where numerous
multinational pharmaceutical companies have already established R&D
sites (see chart 7.3).

Lever 2: Foster entrepreneurship not bureaucracy


Many corporations already employ outstanding researchers and developers.
However, a number of the executives we interviewed questioned the innovation capabilities of employees in "big pharma". One manager said that
it was "no wonder" that breakthrough innovation always came from the
outside: "What kills innovation in pharma is that people turn into system
conformers and lack the courage to change things." To avoid this trap,
companies need to fight unnecessary bureaucracy and inflexible structures
both within and outside R&D. Employees must be given sufficient freedom
to make their own decisions and take their own risks (albeit within their
own area of responsibility).

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What's next? Innovating the concept of innovation in the pharmaceutical industry

They must feel free to communicate new ideas upwards and be praised
for it. One interviewee commented: "For sure, some of these new ideas
will fail. But with the right understanding, we will learn from them and
do better the next time round. What we need is entrepreneurship and
creativity."
Lever 3: Focus on the scientific culture in R&D and incentivize employees
accordingly
As shown in chart 7.2, less than one-third of respondents felt that performance management needed to be changed. This was not confirmed
by the interviews, however. Interviewees saw a need for a new approach
to incentives, especially in the area of R&D. As one manager commented:
"One of the key issues in pharma is that we tend to incentivize our R&D
experts like the rest of the firm. We really need to move away from the
classic monetary-driven approaches that work for commercial guys and
think about appropriate rewards for researchers." R&D incentives should
refocus on aspects such as peer challenging, peer motivation, respect for
the profession and medical breakthrough. R&D staff can be provided with
platforms or given academic rewards. They can be allowed to develop a
different, more scientific culture within the organization. Schemes that
not only offer monetary incentives but also honor creative behavior will
go a long way to increasing the motivation of R&D staff, and so foster
innovation.

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8. Overview of key insights


As we have seen in the preceding chapters, the challenges facing pharmaceutical companies have never been greater. Statutory Health Insurance
companies (SHIs) are cutting costs. As drug patents expire, competition
from generics is fierce. Despite bigger investments in R&D, new products
have so far not been able to compensate for eroding revenues. The traditional high-risk, high-margin model is at risk. Managers need to redefine their
concept of innovation, previously the industry's driving force. In the words
of one interviewee: "We have to move away from non-inferiority and back
toward first-in-class."

Using the Roland Berger Innovation Framework, we asked executives to


prioritize the various levers. Where do they see the largest area of improvement and the highest potential impact?
While some executives found it difficult to prioritize, there was a basic
consensus that Levers I ("Choosing the right portfolio of therapeutic areas")
and IV ("Being at the forefront of technological innovation and building R&D
operations excellence accordingly") were critical for achieving innovation
excellence (see chart 8.1).

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What's next? Innovating the concept of innovation in the pharmaceutical industry

As one interviewee commented: "Our business needs to be driven by the


self-induced demand from our customers. If we offer them a real opportunity to improve and prolong a healthy life, financing will be available."
As discussed in Chapter 1, being innovative has become much harder in
recent years. On the R&D side, all the low-hanging fruits have already been
picked. Due to more complex study designs, the budgets for development
now exceed those for research. Consequently, the output generated the
traditional way is no longer sufficient. In addition, cash-strapped authorities
are increasingly questioning the added value provided by the industry,
making it more difficult for "me-too" products to secure reimbursement. As
a result, companies can either aim for cost leadership or reinvent themselves as the primary innovators within the healthcare system. The industry
requires a fresh perspective on its entire business model and must redefine
the role which pharmaceutical companies play within society.
Choosing the right battlegrounds is key in any war. As outlined in
Chapter 3, executives view oncology and diseases of the central nervous
system (CNS) as the most promising therapeutic areas (TAs) with regard to
revenue, profit, scientific advancement and investment. However, this view
was questioned by a number of our executive interviewees and with good
reason: There is no one-size-fits-all solution when it comes to choosing the
right TAs. Every company needs to reflect on its own internal and external
capabilities plus its strengths and opportunities, and then carefully make
its decisions.
Changes are also underway on the product side. Expensive biologicals
are increasingly important, and pharma companies will need to step up
their efforts in order to ensure market access. Furthermore, combinations
of pharmaceuticals and diagnostics could support the trend towards targeted
therapies. However, as discussed in Chapter 4, relying solely on product
characteristics is no longer enough. Nearly two-thirds of respondents think
that offering treatment solutions and playing out price or cost benefit advantages will drive differentiation in the coming five years. Despite this, forward integration which would require an even more radical change to
the business model is not expected to be a key trend in the coming years.
Whether choosing TAs or developing new products, it is essential to
evaluate the financing prospects. Cost containment measures by SHIs are
becoming more and more common. As discussed in Chapter 5, respondents
expect non-statutory healthcare budgets to fuel growth of their products in
the coming years.

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The "private payor" will be an increasingly important customer for the


pharmaceutical industry; companies need to hone their existing sales and
marketing competencies so as to specifically address this target group within
the regulatory boundaries. Innovative financing models will also become
more relevant, above all value-added and risk-sharing models. Although
reimbursement will require a more thorough cost-benefit analysis in the
future, participants in the survey thought that R&D was not up to the job
at present.
Strategy and preparation are key, but the true enabler for pharmaceutical
R&D is access to the latest technological innovations. As discussed in
Chapter 6, companies must leverage cutting-edge technology effectively,
especially in fields such as pre-clinical testing and pre-discovery where
managers identify bottlenecks. Work in these areas is complicated by inadequate models and a lack of basic research. The importance of professionally
designed studies with regard to approval and reimbursement is undisputed.
However, while executives consider the relationship with regulatory
officials to have fundamentally broken down, they have begun to collaborate
with payors early on in the R&D process. Despite this, the pathway to creating new products remains an art. Following on from the earlier approach
of centralizing R&D, executives are now focusing on partnerships and
collaborations as a way to ensure access to research expertise, innovation
and the best talent. Some managers are already taking this a step further,
questioning the necessity of undertaking research in-house at all. They
believe that "big pharma" should take on the role of organizer of competitions to find the best research solutions.
Finally, in Chapter 7 we analyzed the importance of corporate culture.
We mapped out why culture is recognized as an important factor that
determines the ability to be innovative. Corporations must ensure global
access to the best talent and focus specifically on emerging markets, the
home to new, creative patterns of thinking. To fully unlock their employees'
potential, companies must foster a culture of entrepreneurship and
creativity. They must avoid bureaucracy at all times. Additionally, companies
should remember that R&D staff need to be rewarded differently from
their commercial colleagues, which means a different incentive scheme,
a culture of scientific merit and a system of reciprocal challenging.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

9. Where to start
At Roland Berger Strategy Consultants, we have a wide range of experience
in laying the foundations for innovative organizations and business models.
We have supported numerous clients within the pharmaceutical industry
and helped them analyze the different aspects of the Innovation Framework.
We tailor our support to the specific needs of our clients by leveraging a
wide range of proven methodologies, tools and approaches developed
and applied in the pharmaceutical industry and beyond.
Typically, we perform a performance health check that looks at each of the
key levers in the Roland Berger Innovation Framework in turn. We identify
the areas that offer the greatest room for improvement and apply specially
adjusted analytical and diagnostic tools to determine how the client is
performing compared to industry standards. Once the burning issues have
been singled out, we derive strategic initiatives. These are then prioritized.
Implementation begins in the areas where the biggest impact can be
achieved for the least effort.
We have helped our clients evaluate their current product portfolios and
TAs in light of the expected pipeline outcomes. By reviewing clients' strategic context and internal capabilities, we can define new models that challenge the traditional approach of pushing physical products only. With our
provider and payor practices, we have assisted pharmaceutical companies
in analyzing cooperation models so as to ensure innovative ways of financing.
We regularly help clients in the areas of R&D and manufacturing excellence.
Our work involves using levers such as organizational and structural set-up,
smart outsourcing, streamlined decision-making, effective project teams
and common performance goals. Within the pharmaceutical industry and
beyond, we have set standards in the areas of diversity and inclusion initiatives, helping stimulate an entrepreneurial and creative high-performance
culture in large companies.
Subsequently, we have helped clients develop implementation plans and
assisted them in executing them. In a nutshell, Roland Berger Strategy
Consultants can help pharmaceutical companies in all aspects on innovation
excellence, from defining winning strategies to putting them into practice.

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10. Sources
For the purposes of this study, Roland Berger Strategy Consultants conducted a major quantitative survey and carried out a large number of
interviews with top industry executives. In both cases, our focus was
on patent-protected prescription drugs.
A total of 35 global pharmaceutical companies participated in the quantitative survey. These were responsible for more than 50% of global annual
pharmaceutical revenues. Participants included 21 of the global Top 30
pharmaceutical companies.
We conducted in-depth interviews with executives from international
pharmaceutical companies. During more than 50 face-to-face discussions,
we were able to generate a wealth of qualitative insights. Interviewees
included Chief Executive Officers, Chief Financial Officers, Directors
of R&D divisions and Commercial Executives.

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What's next? Innovating the concept of innovation in the pharmaceutical industry

Contacts
Stephan Danner is a Partner in the global Pharmaceutical & Healthcare Competence
Center at Roland Berger Strategy Consultants in Berlin. As leader of Roland Berger's
global pharma and medtech practice, he works with pharmaceutical clients to design and
implement corporate strategies, effective operating models and performance improvement
programs along the entire value chain. Innovation management, marketing and sales,
organizational development & restructuring and post-merger integration are among his
key areas of expertise. Stephan is the author of several publications and has made
presentations at many international conferences and events.
Alt-Moabit 101b, 10559 Berlin, Germany
Stephan_Danner@de.rolandberger.com
+49 (30) 39927-3556
Dr. Morris Hosseini is a Principal at the global Pharmaceutical & Healthcare Competence
Center at Roland Berger Strategy Consultants in Berlin. He holds a Ph.D. in Biomedical
Engineering from the University of Toronto and co-founded a biotech company in the area
of mesenchymal stem cells. Due to his comprehensive scientific background, he is in charge
of Roland Berger's ongoing study of innovation and R&D in the pharmaceutical industry. He
has also advised global clients on topics besides R&D, such as commercial strategies, medical
affairs, launch management, market access, sales force excellence and organizational
effectiveness.
Alt-Moabit 101b, 10559 Berlin, Germany
Morris_Hosseini@de.rolandberger.com
+49 (30) 39927-3350
Patrick Biecheler is a Principal in the Paris office of Roland Berger Strategy Consultants.
A wealth of experience both at Roland Berger Strategy Consultants and as a marketing
director in the pharmaceutical industry has made him an authority on a wide range of
marketing and sales topics. His expertise covers areas such as strategic positioning, parallel trade, generification management, post-merger integration and operational effectiveness. Patrick has successfully implemented performance optimization strategies in various
projects and shared his knowledge in a series of reports and articles on the key lessons
learned. He is involved in Roland Berger Strategy Consultants' ongoing research into
innovation and commercial effectiveness.
11, rue de Prony, 75017 Paris, France
Patrick_Biecherl@fr.rolandberger.com
+33 (1) 53670-902

A special thank-you for their significant contribution to this study goes to


Dr. Markus Schfer, Dr. Marc Dreiner, Dr. Matthus Rimpler, Martin Oelschlegel,
Michael Baur, Clemens Huber, Martina Friedl and Karin Brning.

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Study

The Roland Berger Strategy Consultants global


pharmaceuticals network
AUSTRIA
Roland Falb
Freyung 3/2/10, 1010 Vienna
Roland_Falb@at.rolandberger.com
+43 (1) 53602-200

NETHERLANDS
Benno van Dongen
WTC Strawinsky laan 581, 1077xx Amsterdam
Bennovan_ Dongen@nl.rolandberger.com
+31 (20) 7960-630

CHINA
Yan Kang
Gateway Plaza 18 Xiaguangli, Beijing 100027
Yan_Kang@cn.rolandberger.com
+86 (10) 84400088-668

POLAND
Krzysztof Badowski
Pl. Pilsudskiego 3, 00-078 Warsaw
Krzysztof_Badowski@pl.rolandberger.com
+48 (22) 32374-14

FRANCE
Patrick Biecheler
11, rue de Prony, 75017 Paris
Patrick_Biecherl@fr.rolandberger.com
+33 (1) 53670-902

RUSSIA
Vladimir Boroutski
1. Tverskaya - Yamskaya ul. 23, Moscow, 125047
Vladimir_Boroutski@ru.rolandberger.com
+7 (495) 72119-55

GERMANY
Stephan Danner
Alt-Moabit 101b, 10559 Berlin
Stephan_Danner@de.rolandberger.com
+49 (30) 39927-3556

SPAIN
Christoph Beseler
Paseo de la Castellana, 140, 28046 Madrid
Christoph_Beseler@es.rolandberger.com
+34 (91) 5903-141

HUNGARY
Frigyes Schannen
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Frigyes_Schannen@hu.rolandberger.com
+36 (1) 30170-77

SWITZERLAND
Aleksandar Ruzicic
Neumuensterallee 12, 8008 Zurich
Aleksandar_Ruzicic@ch.rolandberger.com
+41 (44) 38481-67

ITALY
Monica Bravi
Via Sirtori, 32, 20129 Milan
Monica_Bravi@it.rolandberger.com
+39 (02) 29501-232

UK
David Stern
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David_Stern@uk.rolandberger.com
+44 (20) 7290-4865

JAPAN
Masugi Kaminaga
107-6023, Tokyo, 1-12-32 Akasaka
Masugi_Kaminaga@jp.rolandberger.com
+81 (3) 35876-365

USA
Antonio Benecchi
2401 West Big Beaver Road Suite 500, Detroit, MI 48084
Antonio_Benecchi@us.rolandberger.com
+1 (248) 729-5125