PHARMACEUTICALS

FuturePharma
FiveStrategiestoAccelerate
theTransformationofthe
PharmaceuticalIndustryby2020
kpmg.co.uk

Future
Pharma
FiveStrategiestoAcceleratetheTransformation
ofthePharmaceuticalIndustryby2020
Contents
ExecutiveSummary
KeyChallengesFacingthePharmaceuticalIndustry 1
1.Deliveringshareholder/stakeholdervalue 2-6
2.Lowgrowthbusinessenvironment 7-10
3.R&Dproductivity 11-15
4.Risingrisksandlossoftrust 16-18
AVisionofthePharmaceuticalIndustryin2020andBeyond 19-24
FiveStrategiestoAccelerateIndustryTransformation 25
1.Reassessproductstrategy 26
2.Investinthemarketingandsalesinfrastructureof2015andbeyond 27-29
3.Acquiremoretalentandexperiencefromotherindustries 30
4.UseinternalrateofreturntoprioritiseandrationalisetheR&Dportfolio 31-32
5.Reviewandrevisegovernancestandards 33-34
Ifyouwouldliketodiscussanyoftheideasinthisreportorhowthey
canbeimplemented,pleasecontactanyofourpharmaceuticalteam.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Executive
Summary
Thispaperexploressomeofthemajor
challengesfacingthepharmaceutical
industrytoday.
FourMajorChallengesFacing
thePharmaceuticalIndustry:
1.Deliveringshareholder/stakeholdervalue
2.Lowgrowthbusinessenvironment
3.R&Dproductivity
4.Risingrisksandlossoftrust
Webelievethatthereisareal
opportunityfortheindustrytoredene
itselfinthemindsofshareholders,
stakeholders,consumersand
governments,followingthe
disappointingbusinessandshare
priceperformanceofrecentyears.
StagnationinmatureWesternMarkets
(WM)combinedwithrapidgrowthof
EmergingMarketswillchangethe
shapeandneedsoftheindustry.
Operatingmarginsarepeakingandthe
impactofEmergingMarketgrowthon
thecurrentcostbasewillbringmargins
down.Businessesneedtoensure
investmentingrowthmarketsreects
thenewindustryandnotatemplate
fromthepast.Socialmediaand
informationtechnologyofferpotentially
signicantnewwaystocontact
prescribersandconsumers
moreefciently.
R&Dproductivityhasbeensub-optimal
andpoorlymeasured.Weassessthat
returnsoncapitalisedR&Dspending
havebeensteadilyfalling.Ashiftto
aninternalrateofreturnmeasureof
developmentspendingisneeded,
togetherwithsomeinformationabout
whythecompaniesbelievethat
spendingondevelopmentprojectswill
giveshareholdersareturngreaterthan
thecostofcapitalforthecompany.
Scientic,political,legalandpersonnel
risksareallrising.Weseeaneedfora
reviewofgovernancestandardsfrom
Boardleveldownwards,togetherwitha
freshlookatinternalappraisalsystems
toensurethebestqualiedemployees
areinthekeyrolesandgetthebest
trainingforthechangingmarketplace.
Pharmaceuticalcompaniesmustwin
backtrust;theyhavecreatedthe
perceptionthattheyputtheir
commercialgoalsabovetheinterests
ofgovernments,payors,prescribers
andpatients.
Thissituationcanbechangedaspartofa
seriesoftransformationalstepsinboth
theoperationsandcultureincludingbetter
internalandexternalcommunicationof
risksandmoreconsistentcompliance
withregulatorystandards.
Therearemanynewrelationshipsto
developwithgovernmentagenciesin
thegrowthmarkets,inadditionto
increasingcomplexityinrelationswith
governmentsandpayorsinestablished
markets.Improvingtheserelationships
canbestbeachievedbyadoptingbetter
standardsofgovernanceatalllevelsof
theindustry.
Inourvisionfor2020weseeanindustry
thatwillbesimplerforinvestorsto
understandnotbecauseitwillbe
structurallysimpler:developingnew
medicineswillbeanevermore
complexprocess.
Butbecausethegeographicallydiverse
natureofitsbusinesswillincrease
withthegrowthofEmergingMarket
inuence,thepharmaceuticalindustry
couldtakeontheappearanceofahigh
valueconsumerproductsindustrytoits
shareholders.Whetheradiversiedor
specialistbusinessmodelisbetterto
meetthe2020challengesisamuch
morecompanyspecicanalysisthat
wehavenotattemptedtocoverhere.
Wehaveidentiedvestrategiesto
acceleratethetransformationofthe
industrytomeetthem.
FiveStrategiestoAccelerate
IndustryTransformation:
1.Reassessproductstrategy
2.Investinthemarketingandsales
infrastructureof2015andbeyond
3.Acquiremoretalentandexperience
fromotherindustries
4.Useinternalrateofreturntoprioritise
andrationalisetheR&Dportfolio
5.Reviewandrevisegovernance
standards
Theindustryisrespondingpositively
toanumberofotherimportantissues,
suchasworkingwithgovernmentsand
providerstoaddresstherisingcost
ofhealthcare.
Theselectiveandfocusedapproach
thatwehavechosenmeansthatthis
paperdoesnotcovertheseother
challengesinanydetail.
With well chosen
strategies combined
with disciplined
implementation, I believe
the pharmaceutical
industry has the platform
from which to prosper
over the next 10 years.
ChrisStirling,EuropeanSectorLeader

2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

1|FuturePharma
KeyChallenges
FacingthePharmaceuticalIndustry
1.Deliveringshareholder/stakeholdervalue
2.Lowgrowthbusinessenvironment
3.R&Dproductivity
4.Risingrisksandlossoftrust
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Tobacco
Food & Beverages
Personal & Household Goods
U8li8es
STOXX Europe 600 Index
Europe Pharma
US Pharma

FuturePharma|2
Challenge1
DeliveringShareholder/
StakeholderValue
Thepharmaceuticalindustryhas
performeddisappointinglyoverthelast
tenyearsrelativetootherindustries
(Figure1).Thisistheresultofa
complexebbandowofpositiveand
negativefactorsonbothrevenues
andprotsthathasmarginallyfavoured
thenegatives.
Factorsinuencingrevenuesinclude:
Positives:
-StronggrowthinEmergingMarkets
(Figure2)
-Agingpopulations
- PriceincreasesintheUS
(Figure3)
-Inuenzapandemics
-Enduringwillingnessofpayorsto
supportdemonstrably
innovativetherapies
Negatives:
-Increasingspeedandintensityof
productcompetition(Figure4)
-Increasingrebatestogovernment
andthirdpartyprovidersintheUS
-Budgetdecitdrivenpricereductions
inEurope
Exposuretolossofrevenues
followingpatentexpiration(Figure2)
-Ferocityofearlygenericcompetition
-Higherregulatoryhurdles,leading
togreateruncertaintyandfewer
productapprovals
-Greaterrestrictions
onreimbursement
-DecliningR&Dproductivity
Figure1
RelativeSharePricePerformance
from2005
Source:Bloomberg
250
200
150
100
50
0
0
7
/
0
1
/
2
0
0
5
0
7
/
0
1
/
2
0
0
6
0
7
/
0
1
/
2
0
0
7
0
7
/
0
1
/
2
0
0
8
0
7
/
0
1
/
2
0
0
9
0
7
/
0
1
/
2
0
1
0

0
7
/
0
1
/
2
0
1
1

Key
STOXXEurope600Index
HealthCare
Utilities
FoodandBeverages
Tobacco
Personal&HouseholdGoods
EuropePharma
USPharma
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

3|FuturePharma
Challenge1
DeliveringShareholder/
StakeholderValue
Thebalanceoffactors
inuencingprotshas
contributedtomakingthe
consistentdeliveryof
shareholder/stakeholder
valuemoredifcultand
thiscontinuestobe
thecase.
Factorsinuencingprotsandearnings
Positives:
- Anindustry-widedrivetoreducecosts
andimproveefciency
- Improvedoperatingmargins
(Figure5)and
- Strongcashowgrowthfuelling
increasedcashreturnsto
shareholdersthroughincreased
dividendpay-outratiosandshare
repurchaseprogrammes(Figure6)
Negatives:
- Royaltypaymentsincreasingdueto
greatercollaborationandrisksharing
- Increasedlegalsettlementswith
plaintiffsandgovernments
- Increasedclinicaltrialdemands
- Increasedregulatory
lingrequirements
- M&Aactivitythathasadded
complexity,whilstrarelygenerating
obviouslybetterreturns
- Growingsafetyrequirements
post-approval
Figure2
EmergingMarketsaretheKey
DriversofTotalSpending
Source:IMSMarket
Prognosis;KPMG

1150
1100
1050
700
2010 Brand Patent Generic Emerging Other 2015E
750
800
850
900
950
1100
$856bn
$1081bn
119 -120
47
150
29
T
o
t
a
l

S
p
e
n
d
i
n
g

$
b
n

growth expirations Markets

2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
FuturePharma|4
Figure3
AverageAnnualPercentChangeinUSRetailPrices
forWidelyUsedBrandNamePrescriptionDrugs
Source:AARPRxWatchdogReport,August2010
9%
8%
7%
0%
1%
2%
3%
4%
5%
6%
2005 2006 2007 2008 2009
6%
6.1%
7%
7.9%
8.3%
Figure4
SpeedandIntensityofCompetition
Source:DiMasiandFaden;TuftsCenterfortheStudyofDrug
Development,Workingpaper2009;PhRMA
Percentofrst-in-classmedicineswith
acompetitorinphaseIItestingatthe
timeofapproval.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
23%
50%
71%
77%
90%
1970s 1980-1984 1985-1989 1990-1994 1995-1999
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
5|FuturePharma
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|6
Figure5
IndustryPharmaceuticalDivisionOperatingMargins
Source:KPMGestimates
AggregatepharmaceuticalindustryoperatingmarginsinUSD
33%
2005
2010
32%
29%
O
p
e
r
a
t
i
n
g

M
a
r
g
i
n

32%
32%
31%
31%
30%
30%
29%
29%
28%
28%
Figure6
PharmaceuticalIndustryPostTaxCashFlows
Source:KPMGestimates
2008 2009 2010
6
8
,
4
6
5
8
7
,
6
1
2
9
8
,
2
3
3
1
1
8
,
3
2
7
1
2
3
,
1
0
4
1
2
2
,
8
9
3
1
4
4
,
7
9
7
1
3
4
,
9
5
5

I
n
d
u
s
t
r
y

P
o
s
t

T
a
x

C
a
s
h

F
l
o
w
s

$
b
n

160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2003 2004 2005 2006 2007
Webelievethatoverthenexttenyears
thepharmaceuticalindustrycould
delivergrowthinlinewithrealGDP
(3-5%),whichisrespectableandmerits
ahighermarketvaluethanthatoftoday.
Weseearealopportunityfor
theindustrytoredeneitselfinthe
mindsofshareholders,stakeholders,
consumersandgovernments.
Thiswillrequireashiftinhowthe
industryoperates,particularlyregarding
howitspendsitsshareholdersfunds
andhowitcommunicatesthevalueof
itsproductanddeliversitsservices.
Theindustryhastodemonstrate
thatitcandeliverbetterreturnson
investmentthaninthepastbychanging
manyaspectsofhowitoperates.
Thisislikelytobeuncomfortablebutwill
be,wesuspect,acontinuationofa
processwhichhasalreadystarted.
Novartismanagementhasmadeastep
intherightdirectionbydiscussingcash
owreturnoninvestedcapital,andhow
itplannedtoimproveitforeachdivision,
atitsNovember2010Strategy&
InnovationForum
1
.
1
http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17-
generating-nancial-returns-from-the-portfolio.pdf
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

7|FuturePharma
Challenge2
LowGrowthBusiness
Environment
Revenuegrowthmodestly
slowingin2010-2015
Thepharmaceuticalindustryisfacinga
futurewithlowergrowthprospectsthan
inthepast.IMSforecastsglobalspending
onmedicineswillreach$1.1trillionby
2015buttherevenuegrowthratewill
slowfrom6%between2005and2010
to3-6%between2010and2015.
Theimpactof$120bnofproduct
revenueslosingpatentprotectionin
majorWesternMarketsfrom2010-2015
willbelargelymatchedbyon-patent
brandgrowth,leavingEmergingMarket
growthandgenericspendingasthe
maindriversofglobalspending.PerIMS
thecombinedUSandEURshareof
spendingwillshrinkfrom61%in2005to
44%by2015andEmergingMarketswill
growfrom12%in2005to28%by2015.
Policychangesseenin2010intheUS,
Japan,EuropeandChinaareunlikelyto
bethelastmadeasgovernments
strugglewithgrowingbudgetdecits
andlookforwaystospendmore
effectivelyonhealthcare,further
pressurisinggrowth.
Majortherapeuticclassesdriving
brandgrowthbetween2010and
2015areexpectedtobeOncology
(+5-8%annuallyto$75-80bn),diabetes
(+4-7%annuallyto$43-48bn)and
autoimmunediseases(+6%tocirca
$30bn),withcontinuingifslowergrowth
forasthma/COPD(+2-5%to$41-46bn),
angiotensininhibitors(+1-4%to
$28-33bn)andplateletaggregation
inhibitors(+4-7%to$18-22bn),both
forcardiovasculardisease(Figure 7).
Biologictherapiesasaclassareamajor
growthcontributor,forecasttogrow
from$138bnin2010to$190-200bnby
2015,oranincreasefrom16%ofglobal
drugspendingto18%.
Theimpactof$120bnof
productrevenueslosing
patentprotectioninmajor
WesternMarketsfrom2011-
2015willbelargelymatched
byon-patentbrandgrowth,
leavingEmergingMarket
growthandgeneric
spendingasthemain
driversofglobalspending.
Figure7
ForecastTherapeuticClass
Growth2010-2015
Source:IMSHealth
$
b
n

50
90
70
20
30
Oncology
Asthma/COPD
Lipidlowering
Diabetes
Angiotensininhibitors
forCVdisease
60
40
80
2010 2015
2
TheGlobalUseofMedicines:OutlookThrough2015.IMSInstituteforHealthcareInformaticsMay2011
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|8
AggregateEmergingMarket
revenuesareforecasttogrow
atacompound14%between
2010and2015.
IfWesternMarketstagnation/decline
continuesandEmergingMarketgrowth
slowstoaround10%perannumthen
globalrevenueswouldgrowonaverage
4%perannumbetween2015-2020
(Figure 8).
IfthepressureonUSandEUmarket
lessenspostthepatentexpirationcliff
andlowlevelsofgrowthreturn(say
3%)thenglobalgrowthwouldbe4%
between2015and2020.
Figure8
PharmaceuticalIndustry2010to
2020byMajorGeographicMarket
Source:2010,2015IMSHealth;2020KPMGestimates
1400
1200
1000
800
600
400
200
0
2010E 2015E
$856bn
188
238
300
154
303
487
205
205
195
308 335 335
$1,081bn
C
A
G
R
5
%

C
A
G
R
4
%

$1,318bn
2020E
$
b
n

US EU EM Other
Figure9
EstimatedIndustryCostand
Marginbreakdown
Source:KPMGestimates
OperatingMarginsPeaking
andSettoDecline
Webelievethatthepharmaceutical
industrycurrentlyachievescloseto
50%pre-R&Doperatingmargins,
onaverage.
2010E
Revenues 100%
Costofsales -25%
Generalandadministrativecosts -7%
Marketing&sales -20%
R&D -16%
Operatingprot 32%
PreR&Doperatingprot 48%
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

9|FuturePharma
Challenge2
LowGrowthBusiness
Environment
Figure10
Estimated2010GeographicContributionto
GlobalPharmaceuticalSalesandProts
Source:IMSHealth;
KPMGestimates
Basedondatafromvariousindustry
sources,wehaveestimatedthe
contributionbymajorgeographic
regiontoindustrypre-R&D
operatingprot(Figure10).
Thistablehighlightsthe
lowermarginsavailable
inEmergingMarkets.
Region %2010global
revenues
Revenues
$bn
EstPre-R&D
margin
Pre-R&D
op.prot$bn
US 36% 308 65% 200
EU 24% 205 43% 88
EM 18% 154 33% 51
Other 22% 188 40% 75
Total 856 48% 415
Figure11
ChangingGeographicContribution
toGlobalPre-R&DOperatingProt
Source:2010,2015IMSHealth;
2020KPMGestimates
GrowthofEmergingMarketscould
resultinthesecountriestogether
contributingasmuchtoglobalprots
astheUSby2020(Figure11).
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
18%
12%
21%
48%
20%
21%
16%
42%
21%
30%
13%
36%
2010 2015E 2020E
US EU EM Other
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|10
Usingtheassumptionsshownin
(Figure12)weconcludethatglobal
marginswillinevitablycomeunder
pressureasthecontributionfromlower
marginEmergingMarketscontinuesto
growrapidlyrelativetothemature
WesternMarkets.Wendthatthe
pre-R&Dindustryoperatingmargin
coulddeclinefromanestimated48%
in2010to43%by2020(Figure13).
TheimportanceofEmergingMarkets
andthepressureonmarginswebelieve
meritsawholesalereviewofthe
marketingandsalesinvestmentinboth
growthmarketsandthoseindecline,
thepersonneltalentrequiredtomanage
thesebusinessesandabovealltheR&D
portfoliobeingdevelopedtosupply
appropriateproductsthatpayorswill
fundinthesedifferentmarketsover
thenext10years.
Wendthatthepre-R&D
industryoperatingmargin
coulddeclinefroman
estimated48%in2010
to43%by2020.
Figure12
AssumptionsofCompoundAnnualRevenue
GrowthandGeographicMargin2010-2020 Source:IMSHealth;KPMGestimates
2010-15
RevenueCAGR
2015Pre-R&D
op.margin
2015-20Revenue
CAGR
2020Pre-R&D
op.margin
Assumptions
US 2% 60% 0% 60%
EU 0% 38% -1% 38%
EM 14% 33% 10% 35%
Other 5% 40% 5% 40%
Global 5% 45% 4% 43%
Figure13
Pre-R&DProtMarginsPressured
duetoEmergingMarkets Source:2010,2015IMSHealth;2020KPMGestimates
Thisgureillustratestheprot
marginimpactofthegrowthof
theindustryinEmergingMarkets.
2010E 2015E
856
1081
1318
415
474
566
2020E
Pre-R&D
margin48%
Pre-R&D
margin44%
Pre-R&D
margin43%
Revenues$bn PreR&Dopprot$bn
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

11|FuturePharma
Challenge3
R&DProductivity
Overthepastdecadethe
numberofapplicationsfor
approvalofnewmedical
entitiesbeingmadeto
FDAhasaveraged30per
year.However,in2010only
23applicationswereled,
thesecondlowestnumber
inadecade(Figure14).
PoorR&Dproductivity
Thenumberofnewmedicalentities
(excludinglineextensions)being
approvedintheUShasnotshown
anytrendchange(Figure15)over
thepastdecade.Itishardtocorrelate
applicationnumberswithapprovals
becauseofthedifferenceinapproval
times.FDAdataindicatesthatbetween
January2006andOctober200961%
ofnewmedicalentityapplications
wereapproved.Comparativedatafor
theequivalentEuropeanauthority,
theEMEA,indicates68%were
approvedinthesameperiod
3
.
2011islookingalotbetterthan2010
andcouldbeanaboveaverageyear.
Sofarthisyear(through7
th
July)20
newmedicineshavebeenapproved
comparedwith21inthewholeof2010
4
.
Thislookslikethepatternof2005and
2009beingrepeated.Thereisnobasis
toassumetheoverallnumberof
approvalsisonalongtermuptrend.
Figure14
NumberofApplicationsfor
NewMedicalEntitiestoFDA
Source:FDA
40
35
30
25
20
15
10
5
0
N
u
m
b
e
r

o
f

a
p
p
l
i
c
a
t
i
o
n
s

f
o
r

n
e
w

m
e
d
i
c
a
l

e
n
t
i
t
i
e
s

t
o

F
D
A

b
y

y
e
a
r

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
3
http://www.fda.gov/downloads/AboutFDA/CentersOfces/CDER/UCM192786.pdf
4
http://www.rstwordpharma.com/node/886309
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|12
R&Dproductivitybasedon
numbersofapprovalsrelative
toR&Dspendingisworsening.
R&Dspendinghas,however,been
climbinginexorably,runningata
compoundannualgrowthrateof10%
1999-2007,althoughtherehasbeena
signicantslowdownsince2007(CAGR
1%).Thesecalculationsarebasedon
dataformembercompaniesofthe
PharmaceuticalManufacturers
AssociationofAmericaandtherefore
understateglobalR&Dspending.
R&Dproductivitybasedonnumbers
ofapprovalsrelativetoR&Dspending
isworsening.
LookingatR&Dproductivityanotherway,
theindustrysuccessrateinbringinga
drugfromresearchtomarketwasjust
4%between2005and2009
5
.Thisis
clearlyanunsustainablylowrate.
Figure15
NewMedicalEntityApprovalsand
AnnualR&DSpending1999-2010
Source:PhRMAandFDA
40
N
u
m
b
e
r

o
f

n
e
w

U
S

d
r
u
g

a
p
p
r
o
v
a
l
35
30
25
20
15
10
5
0
55,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Newdrugapprovals R&Dspent
50,000
45,000
40,000
35,000
30,000
25,000
20,000
A
n
n
u
a
l

U
S

I
n
d
u
s
t
r
y

s
p
e
n
t

5
LindaMartinKMR,BernsteinR&DConference2011,citedinRoche1H2011resultspresentation
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

13|FuturePharma
Challenge3
R&DProductivity
R&Dreturnshave
nearlyhalvedover
thelast10years.
ReturnonR&Dfalling
Wehavemadeanillustrativecalculation
ofthepost-taxreturnonR&Dspending
over15years(Figure16).
Thesteadydeclineoverthepast20years
isnosurprise,butitillustratestheneedto
addresstheexpectationsoffuturereturns
fromcurrentspendingbothfromapeak
salesperspectiveandfromacostof
marketingandsalessupportpointofview.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|14
Figure16
IllustrativePostTaxReturn
onR&DExpenditure
Source:PhRMAdata;KPMGestimates
20%
18%
P
o
s
t

T
a
x

r
e
t
u
r
n

o
n

R
&
D

e
x
p
e
n
d
i
t
u
r
e
16%
14%
12%
10%
8%
6%
4%
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7

1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0

2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

15|FuturePharma
Challenge3
R&DProductivity
Apredictabledeliveryof
newdrugsoveramulti-year
periodisthemostlikely
meansforcompaniesto
captureanelementoftheir
pipelinevalueintheir
marketcapitalisation.
R&DProductivity
IneffectivelyAssessed
Industryfocusesonnumbersofprojects
inR&D,notreturns,norforecasts
Corporatepresentationofthevalueof
R&Dtendstofocusonnumbersof
productcandidatesindevelopment.
Mentionofhowmuchwasspentrarely
featuresprominentlyintheannualreport
toshareholdersandwecouldndonly
onecompany,GlaxoSmithKline,among
theindustrymajorsthathighlightsits
targetreturnonR&Dspending.
Phrasesthatindustryparticipantsuseto
describetheirR&Dpipelinesinclude:
strongest
one of the best
one of the most innovative
strongest and most productive
uniquely broad
peer-leading
Thesubjectivenatureofthese
descriptionsisnotunreasonable.Thereis
littlenumericalbasisforcomparisonwith
othercompanieswhoseneedsforfuture
growthmaybesmallerorgreater.The
recenthistoryoftheindustrywould
suggestthathubrisistobeavoidedatall
costs.Thepointisthatthesecomments
andthedetailedexplanationsofthe
individualdevelopmentprojectsgiveno
informationaboutwhythecompanies
believethatspendingontheseprojects
willgiveshareholdersareturngreater
thanthecostofcapitalforthecompany.
Orputanotherway,whytheseprojects
willresultinareversalofthelong-term
trendillustratedinFigure16.
Webelievethatthereislittleornovalue
beingascribedtopipelines,basedon
currentmarketcapitalisationsandthe
cashowvalueofonmarketdrugs.
Somevalueshouldbeallocated,
althoughnottoomuchgiventhe
inherentunpredictabilityofmedical
research.Apredictabledeliveryofnew
drugsoveramulti-yearperiodisthemost
likelymeansforcompaniestocapture
anelementoftheirpipelinevaluein
theirmarketcapitalisation.However,
intheshorterterm,expositionofan
understandableassessmentofthe
returnsthathavebeenachievedand
indicationsofwhythefuturereturns
willbebetterwouldalsohelp.
Asystematicexplanationofwhyproduct
candidatesfailedorwhyproductshadto
bewithdrawnfromthemarketandwhat
waslearntfromthesefailureswouldhelp
showthattheR&Dprocessismore
consideredthaninthepastandthatpast
mistakesarenotbeingrepeated.
Somemeasureofscienticqualityis
alsoneeded.Thebestscienceisnot
alwaysconductedinlarge-capitalisation
pharmaceuticalcompaniesasillustrated
bytheindustryseekingnewwaysto
partnerwithacademia
6
.
6
2March2011|Nature471,17-18(2011
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|16
Challenge4
RisingRisksand
LossofTrust
Stayingclosetogovernment
thinkingwillbecriticalto
securingacontinuingstrong
positionintheindustry.
Risingscienticrisk
Intheinformationageitisreasonableto
assumethateveryoneknowseverything,
andthereforethatcompetitorsmaybe
workingonsimilarbiologicaltargetswith
similarchemicalorbiologicalentities.In
therecentpastthespeedwithwhich
severalcompanieshavesimultaneously
developednewchemicalentitiesis
testamenttothis.Weseeitaskeyto
understandtheendgameatthestart:
integrateinformationonwhatvaluea
newdrugornewdrugclasscouldbring
andtheattitudeofthosethatwillpayfor
themedicineasearlyaspossibleintothe
developmentprocess.
Wewereverysurprisedtondthatonly
5/13(38%)ofmajorcompaniesincludea
Boardcommitteewithanexplicitmandate
toprovideassurancetotheBoardabout
thequality,competitivenessandintegrity
of the Companys R&D/scientifc
activities.Thiswouldseemanessential
checkandbalanceonthepathtogreater
rigouronagreeingR&Dexpendituregiven
theimportanceofinnovation.
Risingpoliticalrisk
PoliticalriskintheUSandtheEuropean
Communityiswellunderstoodandwill
be part of all companies planning
process.Thereareprobablyno
expectationsthatpressurefrom
governmentstoreducethecostof
medicinesandoftreatingchronic
diseaseisgoingtoreduce.Theindustry
iscashgenerativeandrelativelycash
rich.Workingwithgovernmentsto
promoteinnovation,whileachieving
adequatecommercialreturns,will
beimportant.
Wethinkthatasystematicapproach
tothechangingnatureofgovernment
policyinEmergingMarketsiskeyto
reducinglong-termpoliticalrisk.Ina
majorityofEmergingMarkets,the
consumerpaysforprescription
medicines,butgovernmentsinuence
thepricepaidtovaryingdegrees.
Stayingclosetogovernmentthinking
willbecriticaltosecuringacontinuing
strongpositioninthesemarkets.
Risinglegalrisk
Inspiteofextensiveriskmanagement
inputtoBoardauditcommittees,there
hasbeenariseinthenumberof
settlementsforviolationsofavarietyof
lawsasexempliedbydatafromtheUS
overthepasttwentyyearswithavery
rapidrisesince2003(Figure17,Figure18).
Theindustryneedsto
reversethesetrendstobegin
towinbackcondenceand
trustfromconsumersand
governmentsalike.
Thisisnosmalltask.
Wesupposethattherateofincreasein
thesesettlementscouldbeviewedby
someasapositive,becausethedecks
arebeingclearedandhistoriclong
runninglitigationriskisbeingreduced.
Weseethisasstretchingthepoint.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

17|FuturePharma
Challenge4
RisingRisksand
LossofTrust
Figure17
NumberofPharmaceuticalIndustrySettlements
withUSStateandFederalGovernment1991-2010
Source:PublicCitizen
1
9
9
1

1
9
9
2

1
9
9
3

1
9
9
4

1
9
9
5

1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

40
35
30
25
20
15
10
5
0
Thevalueofthesesettlementshasalsorisendramaticallyoverthepastdecade.
Figure18
ValueofPharmaceuticalSettlementswith
USStateandFederalGovernment1991-2010
Source:PublicCitizen
1
9
9
1

1
9
9
2

1
9
9
3

1
9
9
4

1
9
9
5

1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

4000
4500
$
b
n

5000
3500
3000
2500
2000
1500
1000
10 22 1 0 10 7 4 3 100
500
0
404
889
549
967
999
1067
3976
1441 1445
4405
3517
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|18
Risingpersonnelrisk
Thechangingnatureofthegrowthdrivers
withinthepharmaceuticalindustryand
theculturalshiftinhowtheindustry
spendsmoneysuggesttousthatthere
isrisingpersonnelrisk.Riskbecause
thebestqualiedstaffmaybetempted
bycompetitors,orbyopportunities
forcareerdevelopment.Riskbecause
thewrongstaffmayberetainingkey
managementpositionsfortoolong.
Riskbecauseseniormanagementhas
notaskedthehardquestionsofits
employeesfrequentlyenough.Itcould
bearguedthatBoardsofDirectorsand
executivemanagementshouldputin
placeplanstoincreasethediversity
ofseniortalenttomatchtheevolving
needsoftheglobalhealthcaremarket.
Inadditionareviewofmanagement
structureswouldalsoseemessential
tothegrowingimportanceofEmerging
Marketsnotonlyasgrowthdrivers,but
alsoasimportantsourcesofscientic
andmedicalresearchtalent.
LossofTrust
Pharmaceuticalcompanieshave
createdtheperceptionthattheyput
theircommercialgoalsabovethe
interestsofgovernments,payors,
prescribersandpatientsandlostthetrust
ofthesestakeholders.Investorstoo
remainscepticalofthelongerterm
outlookinthewakeofserialR&Dpipeline
disappointments.Justiedornot,the
pharmaceuticalindustryfacesasceptical
audienceregardingtheintegrityof
itscommercialoperations.Golden
parachutesthatrewardexecutivesin
spiteofpoorperformanceexacerbatethe
situation.Fines,courtcasesandproduct
withdrawalsareallprevalentandserve
to draw attention to the industrys
weaknesses.Thissituationcanbe
changedaspartofaseriesof
transformationalstepsinboththe
operationsandcultureincludingbetter
internalandexternalcommunicationof
corporatepriorities,corporate
responsibilitiesandoftherisksthatthe
companyispreparedtotakeandwhy.
Stakeholdersneeda
clearunderstandingof
theriskproletowhich
theyareexposedeitheras
employees,shareholders
orboth.
Therearemanynewrelationshipsto
developwithgovernmentagenciesinthe
growthmarkets,inadditiontoincreasing
complexityinrelationswithgovernments
andpayorsinestablishedmarkets.
Improvingtheserelationshipsand
avoidingthecreationofnewriskscan
bestbeachievedbyadoptingbetter
standardsofgovernanceatalllevels
oftheindustry.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
119| 9|FFut utur urePhar ePharma ma
AVisionofthe
Pharmaceutical
Industryin
2020and
Beyond
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|20
AVisionofthePharmaceutical
Industryin2020andBeyond
Companiesthatcan
demonstratethevaluetheir
products(andservices)
bringtopatientswillbe
abletoaccessbroadpatient
populationsinbothWestern
andEmergingMarkets.
Havinglaidoutsomeofthekey
challengesthatwebelievetheindustry
isfacing,weoutlineavisionofhowthe
industrymightlookin2020andbeyond.
Webelievethattobesuccessfulinten
years time, companies will need to be
differentfromtodayinthewaythatthey
areorganisedandoperate.(Fig.19)
Companiesthatcandemonstratethe
valuetheirproducts(andservices)bring
topatientswillbeabletoaccessbroad
patientpopulationsinbothWesternand
EmergingMarkets.Scalewillstillbe
importantbutmarketingmusclealone
willnotbesufcient.
Companieswiththecouragetoprice
accordingtoabilitytopayandnotsolely
weddedtoaglobalhighWesternbased
pricewillreapthevolumebenets,asfor
exampleGlaxoSmithKlinehasreported
followinganEmergingMarketpricecut
foranti-allergymedicationAvamys.
7
Inaddition,thepharmaceuticalindustry
hasasignicantopportunitytoplayan
importantroleinthebroaderhealthcare
ecosystemasthepressuresto
reducecost,improvequality,and
increaseaccesstocareimpactnearlyall
countries healthcare systems. Payment
forhealthcareproductsandservices,
whichhashistoricallybeenbasedon
unitorepisode,isexpectedtomoveto
aneweconomicsystemthatrewards
demonstrablybetterhealthoutcomes
andlowercosts.Inthisscenario,the
interestsofthepharmaceuticalindustry
wouldconvergewiththoseofhealthcare
providersandpayersinincreasingly
integrateddeliveryandnancing
models.Givenpharmaceutical
companies deep knowledge of testing
andmeasuringqualityoutcomesand
relatedcosts,theindustrycanplaya
signicantroleintheevolving,broader
healthcareenterprise.
Figure19
FutureIndustrialSuccessFactors Source:KPMGestimate
Basesofcompetitiveadvantagetoday Basesofcompetitiveadvantagein2020
Development resources, sales and marketing scale Valueofproductsandservices,distributionstrength
Global high prices, restricting access Pricingbasedonabilitytopaydrivingvolumeuplift
Multiple competitors in major therapeutic areas,
scale permitting success
Fewercompetitorsinabroaderrangeofdiseases
Multi-billion dollar drug revenues covering high xed costs Moreproductswithlowerrevenuesandlowercosts
End to end operational capabilities for self-sufciency strategy
Signicantoutsourcingofoperationssuchasmanufacturing
andsupportfunctions
Acquisitions of technologies and products to augment
product pipeline
Greatercollaborationwithacademia,biotechandpeers
Focus on mature Western Markets FocusonEmergingMarkets
7
http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

21|FuturePharma
AVisionofthePharmaceutical
Industryin2020andBeyond
Historically,companieshavefaced
competitionataneverincreasingpace
becausemarketshavesustained
multipleproductswithlittleor
nodifferentiation(Figure20).
Weseethistrendslowlyreversingbecause
oftheneedtofocusR&Dspendingonthe
mostdifferentiatedproducts.Thegrowth
ofbiopharmaceuticalsisalsolikelytohave
animpactonthenumberofcompetitors
perdisease.Newbiologicaltargetsare
beingidentiedforlesscommonbut
debilitatingorlifethreateningdiseasefor
whichnotreatmentsexist,includingrare
diseases.Intheseareasweexpect
fewercompetitors.
Figure20
CompetingMedicines
RaceforApproval Source:TuftsCenterfortheStudyofDrugDevelopment;PhRMA
M
e
d
i
a
n

n
u
m
b
e
r

o
f

y
e
a
r
s

12
10
8
6
4
2
0
1970s 1980s
1990s
Theaveragetimeamedicineistheonlydrugavailableinits
therapeuticclasshasdeclineddramaticallyfrommorethan
10yearsinthe1970stolessthan2yearsby1998
Wethinkthatby2020therewillbemore
productssellinglessonaveragethan
todayasaresultofmoretargeted
therapiesandthegenericisationofmany
ofthemajorprimarycaretherapeutic
areas.Butnewproductsshouldhave
betterreturnsoncapitalthankstomore
efcientdevelopmentspending,fewer
failuresandmuchlowerlevelsof
marketingandsalesinvestment.
Thescarcityofnewproductopportunities
hasdrivenupthepricetoin-license
developmentstagecompounds.Butthe
problemisthatthefailurerateshavebeen
risingforalllatestagecompoundsand
arehigherforin-licensedcompounds
thanforin-houseprojects.
Accordingtoarecentreportfromthe
CentreforMedicinesResearchthere
were55phaseIIIdrugterminations
during2008-2010,morethandoublethe
numberofterminationsduring2005
2007;andinadditionthenumberofdrugs
enteringphaseIIIclinicaltrialsfellby55
percentin2010
8
.Weseeagrowingtrend
forlargepharmaceuticalcompaniesto
bypassthesmallbiotechsandforge
collaborationsdirectlywithacademia.We
seeleanerorganisationswithnetworks
ofacademiccollaborationsandsmall
companypartnershipsfuellingthe
researchprocessandmorefocused
developmentorganisationsusing
genomicprolingallowingsmallerclinical
trialstobeconductedwithmorepower
andatlowercost.Companiondiagnostic
testswillbemuchmorecommonand
willbeintegraltodevelopment,market
accessandpenetration.Morerisk
sharingwithotherindustryparticipants
shouldhelpimproveresearch
productivity.ThecreationofViiV
HealthcarebyGlaxoSmithKlineandPzer
shouldprovidebothcompanieswitha
betteroutcomefortheirHIVtherapies
thaneithergoingitaloneandisagood
exampleofhowtoretainintellectual
capitalontheonehandandaccessa
commercialplatformfordevelopment
assetsontheother.Companieswillneed
tomaximisethereturnondifferentiated
researchskillsandavoidlosing
intellectualcapital.
8
CMR2011PharmaceuticalR&DFactbook
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FuturePharma|22
Apredictabledeliveryof
newdrugsoveramulti-year
periodisthemostlikely
meansforcompaniesto
captureanelementoftheir
pipelinevalueintheir
marketcapitalisation.
Companiesintheindustryhavealready
startedunpicking,tovariousdegrees,
theirlong-establishednetworkofinternal
capabilitiesthatwasbuiltupduring
theheadydaysoffreepricingand
lesscompetition.Weseethistrend
accelerating,withthepotentialfor
signicantportionsofnotjustprimary
manufacturingbeingoutsourced.Itis
ofnotethatthemarketstowhichmany
capabilitiesarebeingoutsourcedarethe
verysameEmergingMarketsthatare
drivingindustrygrowth.
EmergingMarketswillbethedrivers
ofindustrygrowthandsuccessful
companiesbeyond2020willhavedeep
localrelationshipsincludingsignicant
investmentsinR&Dfacilities,aswellas
thealreadygrowingmanufacturing
investmentsinthesekeymarkets.
Webelievethatthereisasignicant
opportunityforcreatingshareholdervalue
byrebalancingtheriskthatshareholders
perceivetheyaretakingwithmore
predictablerewardsfrombetter
organisedandgovernedcompanies.
Returnsneedtobemorepredictable,
andwiththeoptionalupsidefrom
serendipitousdiscoveriesnotbased
ontheneedtobecreativetoorder.
Shareholdersneedtoseeanexplanation
ofthereturnsonhistoricR&Dspending
andthecriteriaforfuturereturnsto
believethatR&Dspendingisworthwhile.
Boardsofdirectorsneedtobelievethis
evenmoreandsooner.
Successfulcompaniesin2020could
pursueeitheradiversiedoraspecialist
businessmodel;thekeywillbeto
maximise the individual companys
strengths,toimproveinternalprocesses
and to understand if the companys
productofferingandfutureproduct
offeringdeliversustainablevalueto
itscustomers.
Cleararticulationofthestrategybothto
accessEmergingMarketgrowthwhile
notmissingopportunitiesinmature
marketswillbeneededtopersuade
shareholdersthatcompanieshave
movedonfromtheoldpharmamodel.
Trustneedstoberestored.Visibility
andhonestywillbekeytoachieve
this.Simpler,lesscomplexbusinesses
willmakethiseasier.
Figure21
PotentialSuccessFactorsin
CreatingShareholderValue
Source:KPMGestimates
Basesofcompetitiveadvantageinthepast/today Basesofcompetitiveadvantagein2020
SerendipityandscaledrivereturnsfromR&D Morepredictabilityandefciencydrivereturns
NumberofR&Dprojectsthebasisforastrongpipeline
PortfoliowithrangeofIRRforecastsbasedon
historictrackrecord
Emphasisonearningspersharegrowth Emphasisonvolume/revenuegrowth
Inadequatearticulationofsystemicrisk Riskbettergovernedandmanaged
Unintendedcomplexity Transparentandsimplerbusinessmodeleasiertounderstand
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23|FuturePharma
AVisionofthePharmaceutical
Industryin2020andBeyond
Scienticandmedicalresearchis
unpredictableandserendipitous
discoverywillcontinuetooccur.
However,thecompetitivenatureofthe
businessnow(likelytobeevenmore
soby2020)meansthatinourviewa
greaterelementofpredictabilityneeds
to be introduced to regain investors
condenceinthevaluethesectorcan
deliver.Showregularandsteady
growth.Minimisebusinesssurprises.
R&Din2020willbeamuchmore
numericallydrivenprocessthantoday.
Wecannotseeanywaytojustifythe
spendingneededwithoutbetter
measuresofthehistoricreturnon
capitalbasedonIRR.Theseedsofa
newapproacharebeingsown,for
exampleatPzer
9
andNovartis
10
.
ThedominanceofEmergingMarket
economiesby2020couldresultina
shiftbacktovolumegrowthasakey
measureofperformance,withearnings
growthfollowing.Improvingefciency
istherightstrategybutuntilitis
accompaniedbysustainablerevenue
growth,itisnotlikelytoseethe
industrys valuation expand, all other
factorsinthestockmarketbeingequal.
Whilereturningcashtoshareholders
throughsharerepurchaseorenhanced
dividendsisapositiveuseofexcess
freecashow,itisnotlikelytobe
rewardedbyahighvaluation.
Wethinksuccessful
companiesin2020willhave
amoredynamicapproachto
riskreporting,withgreater
disclosureofpotentialand
actualrisk.Theindustrywill
beperceivedtobebetter
governedasaconsequence.
Lastly,weseeanindustryin2020
thatwillbesimplerforinvestorsto
understandnotbecauseitwillbe
structurallysimpler;developingnew
medicineswillbeanevermorecomplex
process.Butbecausethegeographically
diversenatureofitsbusinesswill
increasewiththegrowthofEmerging
Marketinuence,thepharmaceutical
industrycouldtakeontheappearance
ofahighvalueconsumerproducts
industrytoitsshareholders.
9
http://www.pzer.com/les/investors/presentations/barclays_capital_031711.pdf
10
http://www.novartis.com/downloads/investors/presentations-events/pipeline-update/2010/2010-11-17-changing-
the-practice-of-medicine.pdf
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
FFut utur urePhar ePharma ma|24 |24
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
25|FuturePharma
5
Strategiesto
Acceleratethe
Transformationof
thePharmaceutical
Industryby2020
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

FuturePharma|26
Strategy1
ReassessProductStrategy
Thedriverofindustrygrowthis
EmergingMarkets.Whilethese
marketsarecurrentlybeingdrivenby
thegrowthofclassicprimarycare
productsformajordiseasesthevery
therapeuticcategoriesthatarebeing
genericisedinWesternMarkets,this
situationisunlikelytopersist.Thereis
thereforeastrategicdilemmabecause
mostcompaniesdonotpossessan
idealEmergingMarketsportfolio.
Towhatextentshouldinvestmentin
todays needs be made versus the longer
term?Becauseinthelongerterm,the
keyEmergingMarketconsumersand
governmentswillwantaccessto
theverybestmedicines,butitisalmost
inconceivablethattheywillbeprepared
orabletopaythepricescurrentlypaidin
theUSoreveninEurope.Thevolumes
andthereforethecostswouldsimplybe
toohigh.Therecouldbetwiceasmany
peoplewithincomeabove$10,000in
thetop13EmergingMarketscompared
withtheUSandEUcombined
11
.
Therecentvolumeincreasesreportedby
somecompaniesforproductsforwhich
priceshavebeensubstantiallyreduced
indicateinourviewthepaththeindustry
mustpursueinthelongtermalthough
balancingtheneedforaffordableprices
withtheriskofcommoditisation.Value
deliverymustbedemonstrable.
Productsmusttake
intoaccounttheneeds
ofconsumersin
EmergingMarkets.
EmergingMarketsofferlargelyblank
slates;thecontinuingapplicationofan
adaptedoldWesternmodelofthedrug
industry,whichiscurrentlyongoing,will
missasignicantopportunitytoredraw
howtheindustryinteractswithpatients
andgovernments.
Thereisanargumentforfocusing
businessstrategyondeliveringhigh
valuemodernmedicinestoEmerging
Marketsatmuchlowerpricesthanhave
beenacceptedinWesternMarkets.
Thiswouldunderpinarootandbranch
reassessmentofthecostsofbringing
thesemedicinestomarket,themarketing
andsalessupportrequiredandtherisk
ofcounterfeitingandparalleltrade.
Thisshoulddrivestrategyinclinical
development,locationoftrials,
marketingplans,salesinfrastructure
andmanufacturinginvestment.The
opportunityforbiologictherapies
forcancerforinstanceisverylarge,
providingtherightpricingstrategy
canbedeveloped
12
.
EmergingMarketgovernmentsare
movingrapidlytoincreasemedical
consumerspending.Theestablished
brandedgenericEmergingMarkets
growthroutecouldrunoutofsteamas
genericsbecomecommoditised.This
suggeststhateverypossibleopportunity
todriveconsumer/OTCbusinessin
EmergingMarketsshouldbeexploredin
additiontoafocusonspeedtomarket,
loweringthecostsofdevelopment
andefcientdeliveryofappropriate,
differentiatedqualityprescriptionproducts.
11
http://www.gsk.com/investors/presentations/2011/Abbas-Hussain-10March2011.pdf
12
http://www.roche.com/investors/ir_agenda.htm?tab=2SanfordBernsteinConference1stJune2011,p10
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27|FuturePharma
Strategy2
InvestintheMarketingand
SalesInfrastructureof2015
andBeyond
Acceleratethemodernisationofselling
andmarketinginmaturemarkets
Newtechnologyhascomerelatively
slowlytothepharmaceuticalindustry.
Nowthechallengeforthepharmaceutical
industryistobalanceinnovationand
creativityinitsuseofnewtechnology
againstperceivedvalueandthecostof
creation.Thekeyismappingthenew
technologyopportunitywiththebusiness
inasustainableandupdatableway.
Integratingexibletechnologiessuchas
QRbarcodesasameansfordoctorsto
communicatewiththeindustryusing
smartphonesisoneexampleofhowa
technologyinvestmentcouldmakea
salesforcemoreefcient.Itprovides
amorerapidandexibleresponse
mechanismforaphysiciantocontact
thepharmaceuticalcompanythan
simplytickingaboxorevenllingin
anonlineform.
Partnershipwithtechnologycompanies
couldbearoutetomorerapid
integrationofmoderntechnology
platforms.Potentiallypartnershipwith
consumercompaniesmightalsoreveal
opportunitiesforgreaterefciency.
Manycompanieshavestartedtoaddress
theneedtoreducemarketingandsales
infrastructureinmaturemarketsoftheUS
andWesternEurope.However,wethink
thepaceofchangecouldbeaccelerated
andmaybeakeycomponentof
preservingmarginsinthefaceof
increasingpressureonprice.New
technology,suchastheiPad,isenabling
greaterefciencyaccordingtoseveral
companiesincludingNovartis
13
and
Otsuka
14
.PzerlaunchedaniPhoneapp
toencouragedoctorstosendquestions
directlytothecompany
15
andAstraZeneca
hasaniPhone,iTouchandiPadappto
helpeducatehealthcareprofessionals
withgenetictestingforlungcancer
16
.
AstraZenecaalsorecentlylaunchedalive
click-to-chatfunctiononitsUSCrestor
andNexiumconsumerwebsites
17
.
Thebasisforassessingmarketing
andsaleseffectivenessneedsto
beaddressed.
Weseecommunicationofevolving
corporatestrategyinthefaceofthe
rapidlychangingindustryasessential.
Thisisnostraightforwardorsimpletask
andmeritsamajorcommitmentfrom
executivemanagement.
Focusonthelongerterm
inEmergingMarkets
EmergingMarketsarenotgoingto
replicatethedevelopmentofthe
westernpharmaceuticalmarketsofthe
last25yearsbutwilltakenewpaths
denedbythepressuresfromlarge
populations,rapidgrowthofboth
personalandnationalwealthand
alsotheclearneedforindividualsand
governmentstobalancespendingon
healthcarewithmultipleotherdemands.
Businessleadershipinkeygrowth
EmergingMarketsneedstodevelopaplan
forinvestmentinthemarketsthatthese
keycountrieswillbecome,notthosethat
theyaretoday.Merelyaddingmoreand
moresalesrepsonthegroundina
traditionalmodeldoesnotseeman
appropriatestrategyforthefuture.Itcould
bevalidtobuildapresencebutthepace
ofchangeissuchthatplansshouldbe
regularlyreviewedandrealigned.
13
http://www.pharmalot.com/2011/03/novartis-the-ipad-35000-more-visits-to-docs/
14
http://www.bloomberg.com/news/2010-06-08/ipads-to-help-otsuka-pharmaceutical-sales-force-market-drugs-
to-doctors.html
15
http://www.pharmalot.com/2010/06/one-more-way-to-minimize-the-sales-rep/
16
http://www.astrazeneca.co.uk/Media/latest-press-releases/2010/FIRST_IAPP_TO_HELP_EDUCATE_HPa_ON_
EGFR_GENETIC_TESTING?itemId=12167029
17
http://astrazeneca-us.com/about-astrazeneca-us/newsroom/all/12379170?itemId=12379170
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FuturePharma|28
ThediversenatureofEmergingMarkets
meritsacarefulrenementofinvestment
strategy;whileBrazil,Russia,India,
China,MexicoandTurkeymaycontribute
halfofEmergingMarketsales,dozens
ofothersmallermarketsmakeupthe
otherhalf.
Onerecentexampleoftheneedtoplan
forchangecanbefoundinChina.An
importantelementofthehistoricgrowth
experiencedbymostinternational
companieshascomefrombranded
generics, where the manufacturers
nameisaproxyforhighquality.Branded
genericshaveenjoyedhigherprices
(referredtoasseparatepricing)thanlocal
equivalentsthatarelimitedtoalower
maximumprice(knownasgeneral
pricing).Anewpricelistissuedin
November2010reducedseparatepricing
onnearly50drugsoutof200onthe
EssentialDrugList.Itisbelievedthat
separatepricingcouldbereducedor
eliminatedacrosstheboardoverthe
next4years.
Atthesametimethereislikelytobea
governmentpushtoincreaseuseof
OTCdrugssoldatretailpharmacies.
Thesemovesbygovernmentwillvery
likelyresultinmaterialchangesinthe
Chinesemarketandwillneeddifferent
infrastructurefrom2011tomaximise
longtermreturns.
Acceleratedevelopmentand
integrationofsocialmedia
andmobile-healthpolicy
Thepharmaceuticalindustryhaslagged
othermajorindustriesinitsuseofsocial
media.Atfacevaluethisisunderstandable
giventhehighlevelsofregulatory
scrutinyimposedonallaspectsofthe
industrys interaction with patients,
prescribersandpayors.
Since2009therehasbeenasignicant
investmentinsocialmedia.
Fromasurveyofthewebsitesofthe13
companiesthatwedeneasthelarge
capitalisationpharmaceuticalindustry,
15%haveablog,54%areonFacebook
and77%arenowonTwitter.
Howeveritisclearthatthereisan
opportunitynotonlytoleadthe
regulatorsandhelpdevelopregulatory
policybut,forinternalplanningpurposes,
beingpreparedtousesocialmedia
mightbeakeycompetitiveadvantage
inmanymarkets.
ForinstanceEmergingMarket
penetrationofsocialmediauseishigher
thaninWesternmarkets,withover
70%ofthepopulationofthePhilippines
andMalaysiaforexampleasactive
onlineusers.
Figure22
SocialmediausebyFortune
100Companiesin2009
Source:Burson-Marsteller:SocialMediaUseby
Fortune100Companies29thJuly2009
Industry
Percentagewith
ablog
Percentageon
Facebook
Percentageon
Twitter
Telecommunications 75% 100% 100%
Computer,ofce
equipment
67% 100% 67%
Specialtyretailer 50% 50% 100%
Foodanddrugstores 17% 33% 50%
Pharmaceuticals 33% 0% 33%
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29|FuturePharma
Strategy2 Strategy2
InvestintheMarketingand
SalesInfrastructurefor2015
andBeyond
Figure23
GlobalSocialNetworkPenetration
SourceGlobalWebIndex
P
h
i
l
i
p
p
i
n
e
s
I
n
d
o
n
e
s
i
a
M
a
l
a
y
s
i
a
B
r
a
z
i
l
R
u
s
s
i
a

I
n
d
i
a
S
i
n
g
a
p
o
r
e
P
o
l
a
n
d
M
e
x
i
c
o
H
o
n
g

K
o
n
g

U
S

C
a
n
a
d
a
C
h
i
n
a
A
u
s
t
r
a
l
i
a

N
e
t
h
e
r
l
a
n
d
s
U
K

I
t
a
l
y
S
p
a
i
n
F
r
a
n
c
e
G
e
r
m
a
n
y

S
o
u
t
h

K
o
r
e
a
J
a
p
a
n

G
l
o
b
a
l

A
v
e
r
a
g
e

80%
70%
60%
50%
40%
30%
20%
10%
0%
%

A
c
t
i
v
e

o
n
l
i
n
e

u
s
e
r
s

Therisingpowerofpatientgroupsin
thedataagewillcontinueatpace.If
thepastveyearshasseentheindustry
focusonregulatoryandreimbursement
outcomesthenthenextveyearsshould
seeagreateremphasisonhowto
improvetheoutcomeforpatients. The
spreadofsocialmediauseseems
certaintobegivingpatientgroupsa
greatervoiceandempowering
individuals,withapotentialimpactat
alllevelsofhealthcareprovisionand
delivery. Theuseofsocialmediaoffers
theindustryaroutetorestoringtrust
withpatientsfromitscurrentlowebb
18
.
Theindustryneedsonlytolookback
inhistoryatthepowerexertedby
organisedpatientgroups(e.g.inthe
fast-trackingoftherstAIDSdrugs).
Patientgroupsarebecomingmore
organised,betterinformed,and
connectingacrossbordersusingsocial
media.Greaterinteractionwithsuch
groupsinastructuredwayshould
benetallaspectsofthepharmaceutical
developmentprocessandthesafeand
appropriateuseofmedicines
oncemarketed.
18
Financial Times 12th March 2010, Patients groups distrust big pharma
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Strategy3
FuturePharma|30
AcquiremoreTalentand
ExperiencefromotherIndustries
Thegrowthmarketsofthefuturelook
morelikeconsumerbranddrivenmarkets
thanthetraditionalpharmaceutical
marketsofthe20thcentury.Thisbegs
thequestionofwhatleadershiptalentwill
berequiredtocapturetheopportunities
presentedbythesenewmarketswhile
maximisingthemostefcientreturns
frommatureWesternMarkets.
Ourresearchindicatesthatinaggregate
lessthan20%ofexecutiveteam
memberswithintheindustryhave
comefromoutsidethepharmaceutical
industrywithinthelast5years,withina
rangeof0%-50%.Themostcommon
rolenowlledbyindividualswith
industrialexperiencefromoutsidethe
pharmaceuticalsectoristhatofchief
nancialofcer.Theimpactofthe
attendantfreshthinkinghasbeenvisible
onhowindividualcompaniesspend
shareholderfundsandthescaleand
speedofefciencyprogrammes.
Morediversityoftalent
throughoutanygiven
organisationshouldenhance
andstrengthenthebusiness.
Thiscouldcoverallmajorbusinessareas.
Manufacturingandadministrationare
areasinwhichnewtalenthasbeen
recruitedbysomecompaniesbutthe
needforgreaterurgencyispressing.
EveninR&Dtherehavebeensomevery
successfulhiresofhighlyskilledacademic
researcherstoleaddrugdiscovery.
Webelievethatsenior
managementintheindustry
shouldactivelyseektalent
andexperiencefromoutside
thetraditionalgroupof
pharmaceuticalcompetitors.
However,itcouldbearguedthatlooking
forfreshapproachestokeyaccount
managementinthechangingworldof
marketingandsalesisthebusiness
activitywiththegreatestneed,giventhe
shiftingnatureofbothtraditionalWestern
andEmergingMarkets.Inparticular
regionalandcountrymanagementwould
benetfromhavingexperiencefrom
othersectors,asopposedtojustfrom
thepharmaceuticalindustry.Withtheold
salesrepcallingondoctormodelnow
beinggraduallyconsignedtohistory,we
believethattheindustryshouldlookto
importkeyaccountmanagement
techniquesfromothersectors,
notablyintheconsumerspace.
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of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

31|FuturePharma
Strategy4
UseInternalRateofReturnto
PrioritiseandRationalisethe
R&DPortfolio
Researchspendingistheminorpartof
industryR&Dinvestment(circa30%).
Itshouldbereviewedforhowandwhy
spendingistakingplacebutalso
scrutinisedastowhoisdoingthe
spendingi.e.thequalityoftheindividuals
leadingtheprojects.
Thisscrutiny,whichcouldbealongthelines
ofisthisbestbiology/bestmolecule/best
targetandarethesethebestpeople,begs
thequestionofhowdoyouknowthatyou
havethebestofanything?
Patentapplicationsled,scienticpapers
published(andtheproportioninthe
prestigiousjournals,suchasNatureand
Science),andthenumberoftimes
scientistsworkinginresearchhavebeen
citedbytheirpeersallspringtomindas
potentialmeasuresofquality.Assessment
byanindependentpanelofexpertsisa
furtherpossibility.
Developmentspendingandthepost
launchinvestmentneededtodeliver
acceptablereturnsisthebigissue.
Webelieveallcompaniesshouldhavea
standardisedapproachtobeabletoshow
onanongoingbasiswhatinternalrateof
return(IRR)hasbeenachievedonpast
investmentandaninternalperspective
onwhatrangeofreturnsisforecastfrom
thecurrentinvestments,andwhat
assumptionsareusedintheseprojections.
Suchanalysesshouldalsoincludeoff
balancesheetfundingthroughpartnerships
andminorityinvestmentinthirdparty
companies(typicallydevelopment
stagebiotechnologycompanies).
WebelievethistypeofIRRbased
informationcouldtransformthe
investmentdecisionsrecommendedby
seniormanagementintheindustryand
signedoffbyBoardsofDirectors.
Ifmoreefcientdevelopmentcanbe
achieved,andmarketingandsales
practicesaremodernised,lowerpeak
revenuenumberswillstillpermitinternal
rates of return well above the industrys
costofcapital.
Thereisalsoaneedtobeclear
aboutthetruecostofcapital
foranyindividualcompany.
Itishardtobelievethateverylatestage
portfoliointheindustryisoptimalandthat
noneoftheprojectscarriesapotentially
marginalornegativereturn.We
recommendre-evaluationofthevalue
propositionofallphaseII,phaseIIIand
registrationassetsonanIRRbasis.
Thisreviewshouldincludeadetailed
reviewoftheassumptionsthat
supporteddevelopmentofthese
assets.Considerationcouldbegiven
towhethertheforecastreturnscould
beimprovedbypartnershipsor
co-marketingarrangements.
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FuturePharma|32
Wethinkthatthemostsuccessful
companieshavecomplemented
theirscienticagendawithbusiness
performancemanagementgoals
andanintegratedapproachtoR&D
Finance.R&DFinanceiskeytoreducing
operationalobstaclesthatslowthe
progressofproductcandidatesto
marketbytimelyanalysisandnancial
reviewthroughtheintroductionofearly
warningindicatorsandgo/nogo
checkpointsbasedonnancial
analysisandevaluation.
WealsorecommendthefollowingactionsaspartoftheR&Dreview:
Set up an R&D team with the express role of working out how to beat
the companys key innovative compounds - an internal fast follower team
Assess whether the compounds with the highest potential return are
optimallyfundedtobringthemtomarketasrapidlyaspossiblewiththe
bestpossiblelabel
Consider introducing an external perspective to this process
Host an internal R&D day for all R&D employees worldwide to showcase
theirresearchtoeachotheranddrivehigherlevelsofcollaboration
Clearly articulate policy on collaborations with academia, biotechnology
companiesandsmallerpharmaceuticalcompaniesaswellaswithpeers
Look for ways to maintain a return on the intellectual capital built up during
periodsofsuccessinanygiventherapeuticarea.Toooftencompanies
discardthisintellectualcapitaloncepatentshaveexpired
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33|FuturePharma
Strategy5
ReviewandRevise
GovernanceStandards
Changeshouldstartatthetop.Itcould
bearguedthattheindustryisstill
perceivedpoorlybyconsumersand
somepartsofgovernment.Theaim
shouldbetoreviseandimproveBoard
governancestandardstonotonly
ahigherlevelthananyindustry
competitor,buttothebestpractice
levelsseeninanyindustry.
Companiesneedtoconductaroot
andbranchreviewofgovernanceand
enterpriseriskmanagementacrossthe
entirevaluechaintounderstandbetter
theactivities,appreciatetheimpact
fromspeedofchangeandthe
increasingpressuresoneachlinkof
thechainfromearlyresearchand
development,throughlatestage
development,manufacturingtosales
andmarketing.
Weseeusingaspecialistapproachas
thebestwaytodealwiththesenew
risks,wherebypersonnelareemployed
inspecialistrisk/governanceroles,
togetherwithathree-stepapproach:
1.Internalindependentchecksand
balanceswherepeoplerevieweach
stageandhaveareportingline
outside of that areas particular
verticalwithdirectaccessto
C-Suiteexecutives.
2.Givepowerandcredenceto
internalauditgroupsandfocus
ontheiroutputs.
3.Usecompletelyindependentand
externalexpertswhoarealliedwith
ethics,riskandgovernanceasanal
checkandbalanceforeachelement
ofthevaluechain.
Weexpectallcompanies
inthesectorwillhavein
placerobustandmodern
employeeappraisal
systems.Wethinka
thoroughreviewofall
seniormanagementjob
descriptionsshouldbea
componentofthereview
oftheproductportfolio
andtheinvestmentin
marketingandsales
supportdescribedearlier.
Changingelementsofthevaluechainwhereweseethesenew
pressuresinclude:
Increased (volume and value of) research collaborations to source innovation
New social media use leading to exponential growth in data collection
andstorage
Changing IT landscapes (e.g. cloud computing)
Doing business in Emerging Markets (e.g. competitive landscape, the way
thingsaredonearoundhere,anti-briberyandcorruption,intermediaryrisk)
Regulators all gaining teeth regulators tend to regulate rules are not going to
getanyeasiergoingforward
Increasing use of third parties (e.g. CROs in late stage development, CMOs
inmanufacturing,ITorganisations)
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
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FuturePharma|34
Change
shouldstart
atthetop.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network
of independent member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
PHARMACEUTICALS
FuturePharma
FiveStrategiestoAccelerate
theTransformationofthe
PharmaceuticalIndustryby2020
kpmg.co.uk

Contactus
EuropeanSectorLeader
ChrisStirling
KPMGintheUK
T:+442073118512
E:chris.stirling@kpmg.co.uk
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KPMGinBelgium
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KPMGinFrance
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VirLakshman
KPMGinGermany
Wirtschaftsprufungsgesellschaft
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JohanBode
KPMGinItaly
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KPMGintheNetherlands
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BjornFlink
KPMGinSweden
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KPMGinSwitzerland
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E:ewillems@kpmg.com
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GlobalChair
EdGiniat
KPMGintheUS
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FrankMattei
KPMGintheUS
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E:fmattei@kpmg.com
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NorbertMeyring
KPMGinChina
T:+862122122707
E:norbert.meyring@kpmg.com
kpmg.co.uk
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isaccurateasofthedateitisreceivedorthatitwillcontinuetobeaccurateinthefuture.Nooneshouldactonsuchinformation
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