Survey: Pharma execs focus on regulation and organic growth

Friday, June 22, 2012 12:09 PM

Pharmaceutical executives say they will focus as much time and energy ahead in navigating the regulatory environment as they will on organic growth, according to a recent survey by KPMG, the U.S. audit, tax and advisory firm.

In the 2012 KPMG Pharmaceutical Outlook Survey, conducted in May 2012, 60% of 107 senior executives said regulatory and legislative pressures are the most significant barrier to their company's growth over the next year. Additionally, 50% of executives said increasing regulation and enforcement was the top concern for their company's future, edging out last year's top concern, patent expirations of key therapies and generic competition.

Furthermore, when asked on which initiative management will be spending the most time and energy in the next two years, navigating significant changes in the regulatory environment moved up three slots in this year's survey to be ranked as the top response along with investing in organic growth, including new product development.

"Pharmaceutical executives are struggling to grow revenue in the face of pricing and regulatory pressures, including fines, taxation, fees and reporting requirements," said David Blumberg, KPMG partner and pharmaceutical advisory sector leader. "This is an especially difficult business environment, with no clear single path forward. So overall, we are seeing an unusual combination of tentativeness combined with pockets of creative experimentation."

KPMG's research reports that 52% of executives said new therapies from their own research would be the biggest driver of growth, followed by therapies from a current/potential alliance partner (36%). Growth from non-U.S. markets was seen as a third source of growth (34%). Additionally, 25% cited repeal of the healthcare reform law as a potential growth driver, up from 16% a year ago.

The pharmaceutical executives said their spending priority would be organic growth. Nearly 47% of all executives said new products and services would be the top area in which they would increase spending the most over the next year, compared with 38% a year ago. This was followed by acquisition of a business (41%) and research and development (40%).

"Clearly, access to new technologies and products remain critical in today's market,” said Blumberg. “However, while M&A and expansion into new markets are still critical drivers of growth, executives aren't lining up to make major acquisitions as readily as they did last year. Again, there is a sense that they are holding back, while continuing to work on their own research portfolios."

In fact, just 27% of executives said investment is significantly under way, down from 33% a year ago and 27% today said they would wait until 2014 or beyond to make an investment. Additionally, just 13% today anticipate a 6% or more increase in capital spending compared to 23% a year ago.

Likewise, pharmaceutical executives have pushed out the timeframe in which they expect the U.S. economy to recover as more than two thirds don't see the economy recovering substantially until 2014 or later.

Despite all this, pharmaceutical executives do expect moderate revenue and sector growth, though less than a year ago. Roughly 39% of pharmaceutical executives surveyed said their company's revenue was moderately higher compared to this time last year. Additionally, 50% of pharmaceutical executives said they expected moderately higher revenue one year from now. When asked the size of the revenue increase, 50% expect an increase of 1-5%, while 31% expect an increase of 6-10%. In the 2011 survey, 53% expected gains between 1-5%, and 22% expected gains between 6-10%.

When asked how headcount would change one year from now, 265 of the executives said it would be about the same, up from 20% a year ago. Another 20% said it would decrease 1-3%, up from 15% a year ago, and 18% said it would increase 1-3%, down from 21% a year ago.

"Executives have been cutting costs and making operations more efficient for some time," said Blumberg. "Headcount appears to be stabilizing on an aggregate basis."

Pharmaceutical executives signaled a shift in expectations around mergers and acquisitions. A year ago, 37% of executives said a potential merger or acquisition would be one of the biggest drivers of revenue growth. Today, only 27% see M&A as a growth strategy. Similarly, when asked what the likelihood of their company being involved in a merger or acquisition in the next two years, 36% of executives said somewhat likely, down from 41% a year ago, while 21% said very likely, down from 32% a year ago.

When asked how their company plans to use digital/social/mobile technologies over the next year, pharmaceutical executives indicated that they planned to use it to gain customer insights (36%), as well as for customer facing applications (31%) and for recruiting and brand promotion (29%).

"There has been some uncertainty in the industry about whether it could or would embrace digital technology to interact with customers," said Blumberg. "Clearly, there is adoption going on, and executives seem to be overcoming their unease with using it in a customer facing mode."

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