Big Cuts Coming to Big Pharma

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In a recent white paper , the IMS Institute for Healthcare Economics projects that the largest 17 pharmaceutical companies will need to cut over $35B through 2017 to maintain their current levels of research and development yet also maintain their operating margins. Why is that? With many companies facing patent cliffs of their blockbuster drugs (and the rise of generics) coupled with the increasing influence of payers, pharmaceutical companies are having a harder time generating top line revenue.

In IMS’ survey, they found that over 45% of executives planned to cut costs more than 10% over the next three years. The sources of cost cutting will vary, but with sales, marketing and administration accounting for over 30% of sales costs, these groups would seem the most likely targets. Within commercial operations, for example, 40% of those surveyed expect cuts to be more than 10% and 20% expect the cuts to be more than 15% over the next three years.

The question remains, however, how will the cuts be implemented? One way will be through outsourcing. Non-core functions, such as reporting, data storage, accounts receivable, and payroll are expected to be moved to vendors. A second way is via workflow automation – using technology more and people less to perform tasks more easily and faster.

The cost cutting is already underway. Just recently, for example, Novartis announced it expected to reduce costs by shifting 235 jobs from the U.S. to India. This is all part of an ongoing restructuring effort designed to shed costs at Novartis, following over 1000 layoffs in 2013.

Interestingly, despite the cuts, pharma spending is projected to increase in analytics and in particular cloud-based storage and applications. Cloud-based systems allow companies to outsource the talent needed to perform these activities and leverage pre-built systems, rather than start from scratch internally and pay high infrastructure costs and ongoing maintenance. For example, 56% of respondents already had a cloud-based CRM system, with another 22% planning to move over to one within five years.

When it comes to analytics, 74% said that they require a high or greater level of need in deriving insights from their data. Using a cloud-based, analytic solution tailored toward their industry will enable these cost savings and optimize existing analytics – 68% plan to increase their analytics investment in the next five years.Current trends are towards predictive analytics now (alerts and action items based upon current trends) with prescriptive analytics in the future (suggested actions to improve efficiency). And, the next generation of analytics will go beyond the standard Rx, payer and call activity analytics – they will need to integrate with newer digital data sets, such as EHR.

So, Big Pharma has its work cut out for it as it attempts to maintain profit margins. By eliminating, outsourcing and automating functions, it plans to achieve these necessary costs savings. Meanwhile, offsetting these cuts will be investment in technologies that will ultimately help them work smarter and more efficiently.

How do you plan to save money? Are cloud-enabled solutions in your company’s future?