Futurama

How will the reality of 2006 stack up against the forecasts?

Of the three principal stakeholder groups in the biopharma industry, each will have a somewhat different perspective on 2005.

For patients, customers and the general public, the events which stand out are the apocalyptic predictions of an avian flu pandemic and concerns over the provision of vaccines, and the exchange of opinions over the prescribing of Herceptin for early-stage breast cancer.

For shareholders and investors, 2005 proved to be highly profitable, after a lean couple of years, driven by better than expected earnings from industry leaders, such as Pfizer, GlaxoSmithKline (GSK) and Amgen.

For employees, it was a year of recovery after the nadir of 2004-5, with activity levels significantly up, while the old perennials of needing to improve R&D productivity, cost containment pressures and generic competition remained.

Hank McKinnell, CEO of Pfizer, commented on the state of the pharmaceutical industry at a recent meeting: We face a serious paradox. The potential for [medical] breakthroughs has never been better, but the operating environment has never been more difficult.

Survey Demographics
Against this backdrop, the Harten Group's fourth annual survey aims to shed some light on executives' views of the issues currently facing the pharmaceutical and biotechnology industries in 2006. It also compares the forecast for 2005 with the reality, as perceived by the participants.

We surveyed more than 530 executives in pharma and biotech companies, split three-to-one respectively, in December 2005. All participants are in executive positions, distributed over four generic job categories:

• CEOs, MDs and general managers (4 per cent)

• Medical - clinical research and medical information (62 per cent)

• Commercial - business development, marketing and licensing (23 per cent)

• Other - including operations (11 per cent).

The survey invited participants to identify their top five issues facing the industry in 2006 from a list of 20 (with the option of identifying additional ones). They were also asked to list the most important issues in 2005 retrospectively, which provided an opportunity to compare the previous year's prediction with reality; past surveys have thrown up a surprising degree
of variance between predictions and outcomes.

Prediction vs reality 2005
Figure 1 (right) compares the 10 most frequently cited issues for 2005. The same two issues were still foremost in the participants' minds as in 2004: cost containment and the industry's image in the eyes of its customers.

Not only did they remain the top two, but also the forecasts of their continued importance proved to be accurate, as seen by their actual 2005 rankings. Establishing the price of new products (aka the fourth hurdle) and constant downward pressure on health costs, plus the postcode prescribing lottery have ensured that this issue continued to be near the top of executives' agendas.

In relation to the industry's image, the Oscar-nominated film The Constant Gardener raised difficult ethical issues relating to the provision of, and research standards for, treatments for common diseases of the developing world, especially malaria, TB and HIV.

On the positive side, the establishment of clinical trial registries, in which study results are made available and independently certified, is an initiative aimed at rebuilding public trust after revelations of non-disclosure of negative results in the past. However, it does add yet another step in the long and costly process of getting new medicines to market.

Notably, the two issues in 2005 that proved to be of less importance than expected (based on predictions in 2004), were maintaining growth targets and maximising R&D productivity. The strong financial performance of the industry through 2005 suggests that companies had less difficulty achieving their targets than in the previous few years.

There is little that is new to say about the obdurate R&D productivity challenge, but if anything the hurdles only get higher year-on-year in line with increasing regulatory scrutiny.

Overall, the 2005 survey shows considerably less volatility than 2004, suggesting either that respondents were in touch more closely with the 'pulse' of the industry, or that the year contained fewer surprises.

Prediction challenges
In the 2004 survey, the four reasons given for experienced observers making unreliable forecasts were: overconfidence in the rightness of one's own judgement, underestimating risks, re-enforcement bias and an 'anchorage' to fixed views, regardless of the evidence.

One example, which was highlighted as such in the 2005 survey, is the challenge of implementing the European Clinical Trials Directive.

The 2004 survey was the first to include it, after it was identified in 2003 as a potential issue. Indeed, the 2004 survey revealed that some 47 per cent of respondents cited it as having been an issue during the year. Contrary to this direct experience, however, the prediction for 2005 was that implementation of the EU Clinical Trials Directive would be a non-issue. While the 2005 results show that it still occupies a fair amount of management attention, the 2006 forecast for it repeats that made for 2005, with executives expecting it once more to be something of a non-issue.

It looks like a case of there being a preconceived, or 'anchored', management view that implementing the Directive should not be difficult. Evidence that it is challenging is either being ignored, perceived as a temporary phenomenon or misunderstood (ie, failure to adequately assess the risk).

Time will tell whether the actual experience of 2006 will underline this disconnect in executives' minds between the predicted and actual significance of the Directive.

Current issues
Predictions for 2006 (figure 2, right) look to be quite similar to the 2005 actuals, with the same issues dominating - cost containment, hitting growth targets and industry image.

In terms of their relative importance to the 2005 actuals, cost containment is unchanged, while the need to maintain growth targets has increased by 10 percentage points and anxiety over the industry's image has reduced by the same amount.

Identifying licensing opportunities is a well-established route to raising revenues, and so is linked to maintaining growth. Likewise, the threat of generic competition is linked to patent expiry, which becomes even more urgent with the enactment last October of the EU Pharmaceutical Directive, allowing the filing and approval in the EU of generics before the expiry of the IP protection on the reference product.

Biotech issues
With regard to the top five ranked issues for both pharma and biotech, healthcare cost containment and maintaining growth targets are the only two to appear in the top five listing over the last four years.

Identifying licensing opportunities remains the only ever-present biotech issue, for well-understood reasons. Quite why maximising returns on R&D has dropped off the biotech scale for the first time is unclear, but it may be linked to better access to venture capital funding (how long before a nascent biotech appears on BBC Two's Dragons' Den?)

A good year to come
The impression created in the survey of 2005 is that it was a less challenging year in reality than perhaps had been feared.

Beyond the survey data, there are several anecdotal reasons to be optimistic for 2006. The level of M&A activity is forecast to rise significantly, whether through licensing deals, strategic equity exchanges or the straightforward acquisition of innovative early-stage products that fit into an acquirer's portfolio.

The emergence of recruitment as a top five issue for the pharma industry suggests that the sector may be anticipating a growth phase. There are several major products going off patent, yet the forerunners of the next generation will be coming to market throughout 2006 and 2007.

The influence of increasingly informed patients (as in the Herceptin prescribing case) and offshoring (aka outsourcing) might gain prominence in 2006, as major companies relocate some back-office functions to lower cost environments.

It will also be interesting to see how much executive time implementing the European Clinical Trials Directive actually occupies over this year.

Next year's survey will examine the extent to which these subjective judgements are borne out by events. In the meantime, we can only hope that my cautious optimism for the industry is proved correct and not blown off course by events.

Perhaps, having made myself a hostage to fortune, I'll have no more success at prediction than previous years' participants!

The Author
Tim Ewbank is a consulting partner at interim management and permanent recruitment specialist, the Harten Group