Pharma sector leadership losing sector diversity, reports DHR International
The pharmaceutical industry’s use of directors from outside of the sector has fallen substantially over the last five years, raising concern that some pharmaceutical companies may not have the right blend of skills at board level to overcome the challenges facing the industry, says DHR International.
Research shows that the proportion of executive directors recruited from outside the industry on the main boards of UK-listed pharmaceutical companies has fallen from 40% in 2010 to 26% in 2015. Executive board members with no pharmaceutical or biotech experience in Europe are similarly low, at 23% in 2015.
DHR International believes that this shift towards ‘inward’ focused leadership at some pharmaceutical companies may make it harder for companies to overcome challenges facing the industry as they find it harder to adapt best practice from other sectors.
Alin Popescu, partner at DHR International and member of the European Life Sciences Practice, commented, “By not bringing in as much external talent as they used to do pharmaceutical companies inadvertently risk becoming more resistant to change.”
Recent research from Deloitte found returns on R&D in the pharmaceutical sector fell from 10.1% in 2010 to 4.2% in 2015.
The models and processes used in the sector have in some ways remained fundamentally unchanged since the advent of modern medicine, with some in the pharmaceutical industry viewing any signs of change as a temporary and undesirable disruption to ‘business as usual’.
With data analysis at the heart of R&D, DHR International states that the pharmaceutical industry is being encouraged to look at how other sectors - from banking to retail - have embraced ‘big data’ to stimulate innovation and increase returns on investment.
Healthcare customers are scrutinising the value of medicines and demanding more efficient and cost effective results; in addition to greater ‘real-world’ evidence to support a product’s advantages.
The semi-conductor and aerospace sectors have faced similar scrutiny, the company reports, and have responded with robust and advanced quality systems to enable products to meet customer demands. For example, the semiconductor industry has moved towards a model of building in ‘manufacturability’ from the very earliest stages of R&D, by increasing the use of standardisation wherever possible. The semiconductor industry has also broadly adopted a ‘built-in’ approach to quality assurance, resulting in lower variability of products than is generally achievable with a traditional ‘inspection-based’ approach.
When faced with the competition of generics, there continues to be concern that some pharmaceutical companies retain too high a cost base. Issues such as overstocking or understocking inventory, low product turnover rates and lengthy manufacturing lead times may lead to significant supply chain costs – negatively impacting profitability.
The FMCG sector is often held up as good example of how to manage a global supply chain and reduce costs through vendor managed inventory and serialisation systems. These are key practices which pharmaceutical companies are beginning to adopt to improve efficiency.
DHR International states that boards with a greater diversity of background and experience can be better positioned to apply their knowledge to new and existing challenges faced within their sector.
Popescu added, “The decline of sector diversity among the pharmaceutical industry’s main board executive directors does seem to run counter-intuitive to the needs of an industry facing a new set of challenges.
“Leaning towards proven performers in the sector is certainly attractive in uncertain times. However, given the nature of the issues facing the pharma industry, leaders with backgrounds in other areas – FMCG being a great example – may be able to better leverage their experience, having faced similar challenges elsewhere.
“A lot of leaders from the FMCG sector have experience of achieving substantial cost reductions in recent years by completely overhauling their supply chain models. Pharmaceutical companies could well derive significant benefit from that skill set.
“The same applies when hiring for compliance roles, currently a critical area for pharmaceutical companies. Hiring an individual with experience in an already heavily regulated industry with a longer compliance tradition, such as financial services, could be advisable.
“Those companies forward-thinking enough to look beyond their immediate competitors for their next generation of executive leadership may well be the ones that emerge from this period of uncertainty with more robust business models.”