1. Drawing on your knowledge of the PESTEL model, analyse the external environment facing the pharmaceutical industryand identify the key external factors which impact on the company. (Case Study The global pharmaceutical industry: world savior or loathed pariah?)

In August 2021, during the second year of the global COVID-19 pandemic, Johnson & Johnson (J&J) revealed that Alex Gorsky would be stepping down to be replaced by Joaquin Duato, a long-term J&J insider, as CEO of the biggest healthcare company in the world. J&J was the leading global pharmaceutical company with $50.4bn in global revenues, but about to be knocked from the top spot by Pfizer's dazzling pandemic success, while J&J's one-shot COVID-19 vaccine was beset by manufacturing issues and safety concerns. J&J scored poorly on crucial measures of innovation, rated only 10th in the industry on new product approvals and the value of its drug pipeline. Furthermore, despite its virtuous company 'Credo' and top pharma ranking in Fortune magazine's World's Most Admired Companies list, J&J was still navigating high-profile talc. lawsuits and embroiled in the deadly opioid crisis. How was Duato going to maintain the company's ethical reputation, drive successful innovation and recover industry leadership?

Industry evolution

As described in Box 1, the pharmaceutical industry is characterised by a highly risky and lengthy research and development (R&D) process, intense competition for intellectual property, stringent government regulation and powerful purchaser pressures. How has this unusual picture come about?

The origins of the modern pharmaceutical industry date from the late nineteenth century, when dyestuffs were found to have antiseptic properties. Penicillin was a major discovery, and R&D became firmly established within the sector. The market developed some unusual characteristics. Decision making was in the hands of medical practitioners whereas patients (the final consumers) and payers (governments or insurance companies) had little knowledge or influence. Consequently, medical practitioners were insensitive to price but susceptible to the efforts of sales representatives.

Two important developments occurred in the 1970s and 1980s. First, the thalidomide tragedy (an anti-emetic for morning sickness that caused birth defects) led to much tighter regulatory controls on clinical trials. Second, legislation was enacted to set a fixed period on patent protection typically 20 years. On patent expiry, rivals could launch generic medicines with exactly the same active ingredients as the original brand at a lower price. The dramatic impact of generic competitors is illustrated by Merck's top-selling asthma and allergy drug Singulair, which lost 90 per cent of US sales in just four weeks. Generics had a major impact on the industry, driving innovation and a race to market, since the time during which R&D costs could be recouped was drastically curtailed.

The pharmaceutical industry is unusual since, in many countries, it is subject to a 'monopsony' there is effectively only one powerful purchaser, the government. Governments focus on pharmaceuticals as a politically easy target in efforts to control rising healthcare expenditure, using price or reimbursement controls. Italy's government even set a spending cap and required companies to refund half the overspend, a whopping 1.4bn in 2020. The industry lacks the public or political support to resist. Not surprisingly, real drug spending per person stayed flat from 1995 to 2020 while overall health spending grew significantly.2 Far from driving the problem, pharmaceuticals were probably the most rigorously tested and productive healthcare investment, but remained by far the preferred target.

Business environment

Ageing populations create pressure on healthcare systems, since 'over-65s' consume four times as much healthcare per head as younger people. Combined with an epidemic of chronic disease linked to obesity, this created an unsustainable situation.

Box 1 The drug development process

The pharmaceutical industry has long new product lead times, with period from discovery to marketing authorisation typically taking almost 12 years (Figure 1). New product development can be divided into distinct research and development phases. The research phase produces a new chemical entity (NCE) with the desired characteristics to be an effective drug. Development encompasses all of the formulation, toxicology and clinical trial work necessary to meet stringent regulatory requirements for marketing approval.

It takes 1015 years on average for an experimental drug to travel from the lab to patients.

During all of these phases 'attrition' occurs, as promising agents fail particular hurdles, so most R&D projects never result in a marketed drug. Late-stage failures are particularly costly and not uncommon in 2021, Theravance announced the failures of izencitinib for ulcerative colitis and ampreloxetine for a rare blood pressure disorder, and planned to cut 75 per cent of its workforce. Of those drugs that reach the market, 80 per cent fail to recoup their R&D investment. The cost of developing a new drug is estimated at over $1.4bn dollars and when the costs of all the projects that do not reach fruition are considered, it becomes clear that pharmaceutical R&D is a very high stakes game indeed.

Given the enormous risks and considerable investment involved, it is not surprising that pharmaceutical companies compete fiercely to establish and retain intellectual property rights. Only by securing a patent that can be defended against imitators can the value of all this R&D be recouped.

The industry is subjected to rigorous regulatory scrutiny. Government agencies such as the Food and Drug Administration (FDA) in the USA thoroughly examine all data to support the purity, stability, safety, efficacy and tolerability of a new agent, which typically takes 12 months. Obtaining marketing approval is no longer the end of the road, as further hurdles must be overcome in demonstrating the value of the new drug to justify price and/or reimbursement to cost-conscious payers. After the withdrawal of Vioxx, Merck was accused of ignoring problems during product development, and publishing misleading scientific results. As a consequence, the FDA introduced Risk Evaluation and Mitigation Strategies (REMS) costly additional programmes to monitor and ensure drug safety after product approval. Soon, one-third of new drug approvals involved REMS.

In response to these pressures, government and private payers (such as insurance companies) use various tools to control pharmaceutical spending (Table 1). Some focus on the manufacturer and distributor, others on the prescriber and patient. Controls are designed to reward genuine advances price and/or reimbursement levels are based on perceived innovation and superior effectiveness.

In countries with supply-side controls, negotiating price or reimbursement can take up to a year. In those with demand-side controls, market penetration is delayed while negotiating with bodies such as the National Institute for Clinical Excellence (NICE) in the UK. NICE typifies a general trend towards evidence-based medicine, where payers require objective evidence of cost-effectiveness to justify funding. The impact of NICE decisions reverberate far beyond the UK, as countries collaborate internationally on value assessments. Where new drugs are approved for funding, this is increasingly in the context of patient selection and treatment guidelines, so use is carefully controlled and prescribers have limited decision-making power.

Switching to generics is one way to cut drug expenditure, for example 'e-prescribing', where physicians are presented with recommended options. Payers have largely succeeded in establishing generic drugs as first line treatments for common chronic diseases such as hypertension, osteoporosis, asthma and depression, with patented drugs only used if those are ineffective.

The industry adopted a number of strategic responses to these challenges. Pharmacoeconomicevaluations demonstrate the added value offered by improved efficacy, safety, tolerability or ease of use. For example, a study of the cost of diabetes the fastest-growing chronic disease in the world found that 60 per cent was driven by hospitalisations, which could often be avoided by correct outpatient use of medicines. Disease management initiatives focus on healthcare system goals, offering a broad-based service to improve disease outcomes, positioning pharmaceuticals as part of the solution.

Payers value 'real world evidence', i.e., how drugs perform in real populations rather than the artificial populations studied in trials. As 'big data' gathered in real-world healthcare settings became more prevalent and robust, it shed light on the use, benefits and risks of medicines, helping guide reimbursement decisions and 'pay for performance' deals. For example, Novartis offered top US insurers Cigna and Aetna discounts on heart drug Entresto if it did not reduce congestive heart failure hospitalisations and, in China, Pfizer will reimburse a third of Ibrance costs if a patient's breast cancer progresses within four months.

One challenge with real-world evidence is that counterfeit products are a growing problem, putting patient safety and lives at risk. Pain medications laced with powerful and harmful fentanyl were linked to a surge in opioid deaths in 12 US states. Selling more than $200 billion per year, counterfeit pharmaceuticals are the most lucrative sector of the global trade in illegally copied goods and were exacerbated by the pandemic in March 2020 alone, Europol seized four million packages in Operation Pangea. The World Health Organisation estimates that 1 in 10 medical products circulating in developing countries are substandard or fake.4 Counterfeit antimalarials and antibiotics cause at least 72,000 children to die of pneumonia and 116,000 people to die of malaria each year, and drive emergence of dangerous drug resistant pathogens. Drug manufacturers and distributors are forced to invest in countermeasures, such as traceability and authentication technologies.

Government price controls create another challenge for the industry in the form of 'parallel trade'. The principle of free movement of goods across the EU mean that distributors are free to source drugs in low-price markets and ship them to high-price markets, pocketing the difference. EU parallel trade was estimated at 5.8bn in 2019, with the highest penetration in Denmark where it accounted for a quarter of pharmacy sales.

Industry sectors

Prescription-only or ethical drugs contribute about 90 per cent of the $1.3 trillion global pharmaceutical market by value and about 50 per cent by volume. Ethical products divide into conventional pharmaceuticals and more complex biotherapeutic agents and vaccines (see Box 2). The other 10 per cent of the market comprises over the counter (OTC) medicines, which may be purchased without prescription. Both ethical and OTC medicines may be patented or generic.

Box 2 Biotherapeutics the next generation

Biotherapeutics or 'biologics' are large molecules that behave like natural substances, such as proteins and monoclonal antibodies. Discovery and design of biologics entails optimising specificity, affinity, and making molecules as human as possible to avoid provoking an immune response. Biologics are typically given by injection and treat specialist conditions such as cancer and rheumatoid arthritis. Superior specificity to small molecules avoids unexpected 'off target' side effects and increases success rate from Phase 1 to launch from 7 per cent to 12 per cent. Because of their benefits and use in high unmet need diseases, biologics are generally priced higher than small molecules.

Initially associated with biotechs, biologics became mainstream contributing over $300bn in 2020, and 5 of the 10 top-selling brands. In addition to lower attrition and superior pricing, biologics faced less risk from generics. Sophisticated capabilities to develop and manufacture a complex biosimilarproduct take substantial investment. However, Sandoz led the way, scoring the first US biosimilar approval in 2015. The lure of stealing sales from blockbuster biologics attracted non-traditional players such as Celltrion and Samsung and biosimilars now reach 50 per cent penetration within 12 months. With annual savings estimated at $100bn per year by 2025, global leaders like Abbvie were braced for impact.

2017 was a landmark year for the novel modalities of cell and gene therapy, so-called Next Generation Biotherapeutics. Two Chimeric Antigen Receptor T-cell (CAR-T) therapies, Kymriah from Novartis and Yescarta from Kite Pharma, were approved: patients' white blood cells (T-cells) are removed, genetically altered to target cancer cells, and put back to fight disease with impressive efficacy. And Luxturna from Spark Therapeutics became the first FDA-approved gene therapy for a rare retinal disorder. Gene therapies had been around for decades, but safety, delivery and efficacy hurdles had hindered progress, despite the lure of delivering lifelong cure.

Global pharmaceutical companies were completely unprepared for such a dramatic shift in the innovation landscape and lacked R&D expertise. CAR-T companies were swiftly acquired by cash-rich players Kite by Gilead and Juno by Celgene, while Roche acquired Spark. J&J partnered with Legend Biotech on CAR-T for multiple myeloma, launched a dedicated Cell Therapy Center and collaborated with Fate Therapeutics to develop 'off the shelf' products based on healthy donor cells. The company adopted a more cautious approach to gene therapy, focusing on retinal disorders through deals with MeiraGTx and Hemera.

As well as R&D capability gaps, companies must grapple with fundamental business model implications. Such new treatments stretch the definition of a 'drug'. Cell therapy treatments engineered individually for each patient are more of a service than a product, while delivering cures from a one-off gene therapy treatment challenges pricing paradigms. Luxturna sold only $326mn in 2020 and, if each patient is treated only once, then gene therapies may combine limited sales potential with dramatically increased cost of goods.

While the jury is out on the business benefits of pursuing cell and gene therapies, the global pandemic clearly validated another novel modality: mRNA vaccines were fast to develop, easy to manufacture and delivered impressive efficacy, adding up to an amazing business proposition.

The typical cost structure of ethical pharmaceutical companies comprises manufacturing of goods (25 per cent), research and development (1624 per cent), administration (10 per cent), and pharmacovigilance, medical education, marketing and sales (25 per cent). The key strategic capabilities of these companies are R&D, medical education, marketing and sales. Pressure on margins created an incentive to restructure manufacturing, rationalising and relocating production sites and outsourcing to contract manufacturing organisations (CMOs).

Manufacturing and distribution efficiency is key for generics manufacturers, whose operating margins are far below ethical companies'. US generics prices collapsed in the 1990s, driving a shakeout to determine cost leadership. The speed and aggression of generic attacks on branded products increased sharply and generics accounted for 80 per cent of prescriptions by 2014. Economies of scale, including finance to support complex patent disputes, proved decisive and the sector consolidated. Prices collapsed and players in the $329bn generics market faced substantial pressure. The squeeze on margins even caused shortages of essential medicines in the USA, leading a group of hospitals to set up a not-for-profit generics company called Civica Rx in 2018. More sophisticated companies were, however, able to tap the bonanza resulting from patent expiries on blockbuster biologics (see Box 2) and launch biosimilars, driving forecast sector growth to a healthy 7.5 per cent out to 2025.

A new type of industry player appeared in the 1980s small biotechnology start-ups backed by venture capital firms (VCs) to exploit the opportunities created by molecular biology and genetic engineering. Although initially associated with biologics (Box 2), biotechs now pursue a huge variety of core capabilities, creating an extraordinarily diverse and innovative sector. The value of this diversity was powerfully demonstrated during the global coronavirus pandemic. BioNTech and Moderna's disruptive technology was considered risky by large pharmas, but regulators and governments happily embraced mRNA vaccines that delivered excellent efficacy against a deadly virus at 'warp speed'. Moderna started the first COVID-19 vaccine clinical trial only 63 days after receiving the viral sequence.

Because of long product development cycles and high attrition, most biotechs take years to reach profitability, if ever. VCs gain return on risky, long-term biotech investments through acquisitions by larger companies, or public listing via IPOs. VC investment doubled every two years from 2017 as scientific breakthroughs reignited belief in the sector, reaching $36bn across USA and Europe in 2021, which also saw a record 92 IPO exits. This tremendous resilience was attributed to innovation and the 'halo effect' of saving lives in the pandemic.

Over the Counter (OTC) medicines are bought by consumers without a prescription. The global OTC market was worth $130bn in 2020. Consumer brand loyalty provides defence against generic competition and prolongs the product life cycle. OTC sales are boosted by innovation, promotion of self-medication and expansion of distribution channels, with online channels contributing over 25 per cent. Consumer marketing skills are key, especially with companies such as Danone and Nestl capitalising on consumer interest in personal well-being by making health claims for so-called nutraceuticals. J&J was the biggest player in the sector with well-known brands like Tylenol contributing to its Consumer Health business, alongside beauty and wellness brands such as Neutrogena.

Another important sector is vaccines, a key industry growth driver super-charged by the pandemic. Prophylactic vaccines provide lifelong protection against serious diseases and save an estimated $7$20 healthcare dollars per dollar spent on vaccines. The huge value of vaccines was definitively proven against COVID-19: by November 2021, the WHO estimated it had saved at least half a million lives in Europe alone. Incredible cross-sector collaboration, willingness to adopt novel technologies and dramatically accelerate development and regulatory review delivered highly effective vaccines at unprecedented speed.

Vaccines have higher development success rates and lower risk of generic entry than conventional medicines, while offering blockbuster sales potential. The sector was highly concentrated with just four global players accounting for 80 per cent of sales until that balance of power was upended by the pandemic. New entrants such as AstraZeneca and Moderna shone, while long-term incumbents Sanofi Pasteur and GlaxoSmithKline failed to deliver. COVID-19 vaccines were forecast to add at least $157bn in sales from 2021 to 2025 to a sector with baseline sales of $33bn in 2019.

Entry barriers for conventional vaccines were high, with specialised skills required in manufacturing, conducting large and complex clinical trials and managing surveillance programmes. Based on viral vector technology, J&J's one-shot COVID-19 vaccine encountered manufacturing setbacks and safety issues. Nevertheless, it appealed to developing countries lacking logistics for multidose vaccines and was forecast to deliver $6.7bn in sales from 2021 to 2027.

Key markets

The majority of pharmaceutical sales originate in North America, China, Japan, Europe and Brazil, with 10 key countries contributing two-thirds of the global market. Pharmaceutical volume use is strongly aligned with GDP growth, while use of high-priced branded medicines is concentrated in developed countries. The USA is by far the largest market $528bn in 2020 contributing 42 per cent of global sales. US growth averaged 4.2 per cent from 201620, driven by new product launches. Indeed, the USA remains critical to launch success: for new drugs launched during 20152020, nearly 65 per cent of sales were from the USA, and only 17.5 per cent from the top five EU markets.

Following regulatory changes in 1997, direct-to-consumer (DTC) advertising transformed the US marketplace and fuelled growth. However, companies' costs for providing family healthcare benefits to employees reached $16,000 by 2020, with employees contributing a further $5,300, and had long outpaced wages. Private payers asked consumers for increasing deductibles and co-payments and implemented other cost-control measures. Medicare reforms extended drug coverage for the elderly, and boosted government pricing leverage as the largest direct purchaser of medicines. President Obama's controversial Patient Protection and Affordable Care Act significantly increased health insurance and Medicaid coverage, as well as a focus on value for money.

Box 3 US Dominance under threat

A number of factors contributed to industry globalisation. Chief is the international convergence of medical science and practice thanks to modern communications technology and exchange. Well-funded US universities and hospitals generally lead their fields, while US journals and scientific congresses provide the most prestigious platforms for new discoveries.

Leading corporations have globalised, with presence in all significant markets. Production sites have a global mandate and are selected by worldwide screening. R&D is sourced from best place worldwide, which often means the USA. Strong US market growth gave US companies a springboard in achieving global ambitions and, in 2020, they occupied 5 of the top 10 slots (Table 2).

Biotechnology companies are 'born global': from their inception they draw upon a global pool of collaborators and investors, rather than growing from small domestic beginnings. Once again, the US dominates: publicly traded biotechs employ over four times more people in the USA than the EU, with a similar ratio for R&D spend. US biotechs also secure the majority of venture capital investment.

US pre-eminence in biomedical research is, however, under threat from Asia. The Chinese Government declared its intention to become a leader in the field and poured money into new universities and science parks, so the number of Chinese graduates in natural sciences overtook the USA by 2004. Routine research services were already often outsourced to China, but as US returnees and home-grown talent sought more impactful projects, and with vast amounts of money available for investment, a fully integrated innovation ecosystem emerged. A striking signal of the future threat was FDA approval of Brukinsa in 2019, a fast-follower of highly novel US-developed molecules, discovered and developed by Beigene Ltd, followed in 2021 by its first FDA biologics submission.

Under President Trump, USChinese relations soured. The USA pursued high-profile legal cases against scientists accused of industrial espionage. Many countries increased scrutiny on the source of overseas investment, pushing financial flows back to Asia, while the Chinese Government clamped down on overseas stock market listings. Given the importance of China's pharmaceutical market to US firms and vice versa, it will be interesting watch how the opposing forces of globalisation and protectionism play out.

Gilead's 2014 introduction of Sovaldi for hepatitis C virus (HCV) put pricing firmly in the spotlight. HCV is a devastating condition causing cancer, liver transplant and early death. Sovaldi eradicated the virus rapidly and cost-effectiveness was indisputable. However, asking $84,000 for 12 weeks' treatment of a largely asymptomatic condition gave payers 'sticker shock'. Outrage over drug pricing strengthened when Turing Pharmaceuticals, sole supplier of old drug Daraprim for a complication of AIDS, hiked the price by 5000 per cent. The Trump administration insisted that prices were mentioned in DTC advertising, while President Biden attempted to introduce European style pricing controls. With discounts and rebates eroding a third of invoiced sales value and net price declines each year, annual US market growth to 2025 is predicted to be historically slow at only 03 per cent.5

Japan posted sales of $88bn in 2020. The Japanese operating environment was historically quite distinct in medical practice, regulatory requirements, the lack of generics, and the approach to sales and marketing. Not surprisingly, domestic companies still dominate the market. Stagnation caused falling tax revenues, while the cost of treating the world's most rapidly ageing population rose, driving stringent price controls and zero annual market growth from 201620, with actual decline expected to 2025.

The European pharmaceutical market, in which the top five countries contributed only $183bn or 14 per cent of global sales in 2020, is highly fragmented and driven by governments' forever-changing cost containment plans. Volatility was exacerbated when 'Brexit' forced the European Medicines Agency to relocate from London to Amsterdam. Although the UK population is 80 per cent that of Germany, its pharmaceutical market is only half the size, illustrating the strong impact of NICE decisions on reimbursement and access. Thanks to payer pressures, European market annual growth is expected to stay below 5 per cent out to 2025.

Top-tier emerging markets constituted nearly a quarter of the global market by 2020 and are predicted to grow at 710 per cent per year to 2025, led by China, Brazil, Russia and India. With its growing GDP and huge population, China overtook Japan as the second largest market behind the USA, posting sales of $134bn in 2020. Regulatory reforms aligning China with global standards support further growth.

In addition to high net worth individuals who can afford the most innovative treatments, middle class populations in emerging markets are growing more rapidly than at any time in history. The key challenge is to adapt to these countries' varied needs and environments. Some companies built their strategy on premium-priced generics, offering the reassurance of a known brand and reliable manufacturer, so-called 'branded generics'. However, this approach was vulnerable to local generic competition and reference pricing reforms. Other companies expanded access to innovative medicines. For example, Roche supplied Herceptin free of charge to Chinese breast cancer patients after they had paid for a threshold number of months and fostered health insurance schemes.

Innovation

Pharmaceutical companies' key contribution to medical progress is the ability to turn fundamental research findings into proven innovative treatments that are widely available and accessible. Companies with consistently high levels of R&D spending and productivity became industry leaders. For this reason, stock market valuations place as much importance on the R&D pipeline (i.e., the products in development) as on marketed products.

The holy grail of pharmaceutical R&D is the blockbuster. Blockbuster drugs are genuine advances that achieve rapid, deep market penetration. Because of their superlative market performance, blockbusters determine the fortunes of individual companies. Gilead leapt into the top rank of global pharma companies thanks to Sovaldi, which beat all records by selling $2.3bn in its first quarter. J&J's four best-selling drugs contributed 22 per cent of 2020 revenue with three in the global top 10.

Focusing on blockbusters exposes an already high-stakes industry to even greater levels of risk. When the cardiovascular safety risks of Vioxx emerged, and Merck withdrew the brand from the market, the company lost $2.5bn in sales, a quarter of its stock market value, and faced the prospect of numerous liability suits. Blockbusters hugely exacerbate the impact of patent expiries, creating a so-called 'patent cliff'. Companies were projected to lose nearly $166bn in sales by 2025 due to the combined impact of generic erosion and biosimilars.

Unfortunately, R&D productivity has declined and development times lengthened. The average cost to develop a new drug was estimated at $1.4bn6 in 2014 after growing at double the rate of inflation for 20 years. Building blockbusters is even more costly: clinical trials in numerous tumour types for immuno-oncology biologics Keytruda and Opdivo totalled over $10bn each. Attrition increased as companies put higher hurdles in place to address payer needs for meaningful clinical benefit, and post-approval programs required by regulators added further cost.

Employing thousands of in-house scientists to develop drug candidates from scratch was a billion-dollar gamble that simply wasn't delivering. Companies endeavoured to become both creative and efficient. Strategic outsourcing to contract research organisations (CROs) reduced fixed costs and leveraged lower cost geographies. They narrowed areas of therapeutic focus and, recognising that biotherapeutics had a lower attrition rate, acquired biologics capabilities. Companies began to tap into artificial intelligence to boost R&D productivity: Sanofi's $5bn deal with Ex-Scientia is designed to integrate patient, disease and clinical data into early R&D decision making.

Partnering with biotechs, so-called 'external innovation', became a crucial contributor to company pipelines, although with few real jewels available the cost of deals spiralled. Companies also created corporate venture funds to invest in exciting biotechs and spot opportunities early. J&J pursued a unique model, establishing J&J Development Centers tasked with investing and deal-making in 'hotspots' with strong biotech ecosystems such as the US West coast, Boston, London and Asia.

An intriguing response to environmental change was pioneered by Roche, which positioned itself as operating a 'personalised healthcare' model. Roche was the global leader in diagnostics and its strategy was to offer value through targeting treatments to the right patients. This appealed to regulators and payers, who endorsed the linkage of high-priced drugs such as Alecensa for lung cancer with tailored diagnostics. Investing in discovery and development of tests added cost and complexity, but offered the chance to reduce attrition, build unique competencies and secure rapid market uptake. Most of the Roche pipeline was being developed with companion diagnostics.

There are encouraging signs that industry's focus on meaningful clinical benefit, together with the FDA's explicit support for 'breakthrough' drugs, is finally delivering improved R&D productivity: a record 61 new active substances were approved in 2021.

The COVID-19 pandemic boosted adoption of digital channels to manage health. By the Spring of 2020, 40 per cent of Americans with a chronic health condition had used telehealth and only 2 per cent were unwilling to do video consultations in future.7 Despite valid data privacy concerns, consumers also embraced mHealth apps, driving market value to over $40bn in 2020. Pear Therapeutics' mobile app reSET for substance addiction was the first prescription digital therapeutic, approved based on clinical trial data that permitted therapeutic claims. Most large companies established digital partnering and innovation capabilities. J&J tapped Microsoft to build a cloud-connected software ecosystem linking up its myriad connected medical devices and services, leveraging artificial intelligence and machine learning to create a 'best-in-class, unified platform'.

While other industries analyse huge data sets to generate and exploit highly personalised consumer insights, pharma was slow to harness the power of 'big data'. Electronic health records theoretically offer immense potential to better understand diseases, streamline workflows, reduce human error and improve outcomes. However, even simple tests were not standardised between hospitals, and inter-operability of medical records systems was poor. Data privacy also needed to be addressed, for example via blockchain. Healthcare digitisation gained a huge boost from the pandemic and it finally looked as though the immense promise might be fulfilled.

Sales & marketing

Historically, sales and marketing capability was important to competitive advantage. A company that developed a strong global franchise with its customers could maximise return on its products and was in a good position to attract the best in-licensing candidates.

The traditional focus of drug marketing was the personal detail in which a sales representative (rep) discussed the merits of a drug in a face-to-face meeting with a doctor and provided free samples. Promotion is subject to industry self-regulation. For example, in the UK, reps have to pass an examination testing medical knowledge. In some countries, government regulatory agencies check that promotional claims are consistent with the data.

There were important differences in the marketing of 'primary care' and 'specialist' products. Office-based general practitioners generally prescribe primary care products, whereas treatment with specialist products is typically initiated in hospitals. Sales volume, marketing spend and skills required differed for the two segments. Product-led 'muscle marketing' was key in the primary care sector, while specialist products involved more cost-effective targeted relationship marketing.

The term 'high compression marketing' was coined to describe near-simultaneous global launches of primary care brands, with global branding and heavy investment in promotion. The aim was to create a rapid take-off curve and maximise return. In the USA, an important marketing tool was DTC advertising, where spending reached $6.6bn in 2020. DTC was costly because of the vast target audience and expensive television advertising, but profitable. Well-informed patients asked for drugs by brand name, creating a powerful 'pull' strategy.

Sales-force size was historically a key competitive attribute. However, as pipelines shifted to high unmet need diseases treated by specialists, the era of lavish launches and massive sales-forces ended. Modern blockbusters, such as immune-oncology drugs Keytruda and Opdivo, are specialty care products with lower volumes compensated by very high prices. Remarkably, by 2025, speciality care products were forecast to contribute 60 per cent of all developed market sales. Selling became a more complex process with multiple stakeholders interested in cost-effectiveness as well as clinical arguments, requiring new skills. With commercial firepower no longer so critical, specialty players were able to launch drugs themselves. COVID-19 mRNA vaccines provide an interesting contrast: BioNTech partnered with Pfizer, which recorded over $33bn in 2021 sales, whereas Moderna went it alone and still raked in a mind-boggling $19bn without a big pharma partner.

Roche undertook a patient-centric commercial transformation, inspired by learnings from rare diseases. Agile teams look at how to best deliver care, examine supply chains and resources, connect dots in healthcare systems, and provide guidance on reimbursement, activities conventionally divided across sales, medical affairs and market access. Traditional KPIs reach, frequency, unaided awareness, intention to prescribe were discarded and Roche learned from footwear retailer Zappos and airline JetBlue how truly customer-centric enterprises evaluate performance: feedback on the company as a partner its responsiveness, values, trustworthiness and delivery of meaningful solutions. During the pandemic, Roche launched a global home-delivery model and partnered with a start-up providing physiotherapy virtually. A shift away from 'tell and sell' to 'listen and learn', partnering with the community to tackle issues together.

Corporate social responsibility

Today's EU citizens can expect to live up to 30 years longer than they did a century ago. Much of this can be attributed to pharmaceutical innovation. For example, EU deaths from AIDS fell by 85 per cent between 2006 and 2020. And it is no exaggeration to say the industry's vaccines saved millions of lives in the pandemic. Few other industries have done as much for the well-being of mankind. Furthermore, at a global level, the industry has the highest ratio of R&D to net sales, funds a fifth of all industrial R&D investment, and makes a significant contribution to skilled employment.8 So, how has an industry that delivers all these benefits acquired such a tarnished image and become an easy target for government intervention?

Pharmaceuticals have the characteristics of a 'public good' i.e., expensive to produce but inexpensive to reproduce. The manufacturing cost of drugs is often tiny compared with the cost of R&D that led to the discovery. Setting prices that attempt to recoup R&D therefore look like corporate greed in comparison with the very low prices charged for generics. This was exacerbated as sales volumes dwindled and prices spiralled. Challengers like Checkpoint Therapeutics capitalised on negative perceptions of high-priced biologics, developing fast followers at a fraction of the R&D cost by piggybacking on the originator's learnings to enable lower-priced alternatives. Although payers claimed to want to reward risky innovation, such players were now seen as heroes.

Some companies damage the industry's overall reputation. Most egregious is the deadly opioid abuse and addiction crisis in the USA, in which Purdue Pharma and other players downplayed the addictive properties of drugs such as Oxycontin and actively encouraged excessive prescribing, allegedly resulting in over 500,000 deaths. J&J became embroiled and was part of a $26 billion settlement to resolve thousands of lawsuits with state attorneys. J&J also set aside nearly $4 billion in reserves for some 25,000 lawsuits alleging its talcum powder was contaminated with asbestos, causing mesothelioma and ovarian cancer.

Another blow was the FDA's 2021 approval of Biogen's Aduhelm for Alzheimer's Disease. The FDA granted broad approval despite equivocal data and a negative vote from its expert Advisory Committee. Uproar ensued at the $56,000 annual price tag and perceived suborning of the FDA by industry. Hospitals barred entry to Biogen reps and the Centers for Medicare and Medicaid Services, responsible for health coverage of over 100 million people, refused to fund the drug outside clinical trials.

The industry also faces condemnation of its response to the enormous unmet need in developing countries. Although effective drugs and vaccines exist for many diseases affecting millions, often their cost is beyond the means of the people who need them. It is argued that companies could reallocate R&D efforts in favour of tropical diseases, sell low-priced essential drugs and provide technology transfer. The Access to Medicines index ranks companies on their ability to make drugs more available, affordable, accessible and acceptable in 106 low- to middle-income countries. J&J ranked third in 2021 and was recognised for supplying 500,000 doses of an investigational Ebola vaccine to quell an outbreak in Africa.

The industry was blamed for stark contrasts in access to life-saving COVID-19 vaccines, with only 5 per cent of people in low income countries fully vaccinated by January 2022. Companies were accused of profiteering because they did not provide intellectual property on recipes and processes free of charge. AstraZeneca declared its vaccine a not-for-profit endeavour for 'the duration of the pandemic', supplying billions of doses to the developing world, but gained remarkably little reputational benefit for itself or the industry.

Industry mergers and acquisitions

The pharmaceutical market is fragmented, with very large numbers of domestic and regional companies, but historically consolidated at the global level. The top 10 companies held 34 per cent of the market in 2020, a marked drop from 44 per cent in 2011, signalling the growing might of mid-size specialty players. Table 2 shows how the industry responded to patent cliffs and declining productivity with waves of mergers and acquisitions aimed at combining pipelines and eliminating duplicated costs. Mega-mergers resulted in the formation of Novartis, Sanofi, AstraZeneca and GlaxoSmithKline. The $63bn acquisition of Allergan catapulted Abbvie from eighth to fourth place, with revenue growth of nearly 40 per cent in 2020, while Bristol-Myers Squibb entered the leader board by acquiring Celgene.

Another rationale for M&A was to acquire global commercial reach. The acquisitions of Nycomed and later Shire transformed Takeda from a Japanese player to a top 10 global company. Companies also used M&A to access growth segments such as biologics, vaccines and rare diseases through bolt-on acquisitions. J&J's $30bn acquisition of Actelion in 2017 was the largest in its history, adding an attractive new speciality care franchise in pulmonary arterial hypertension.

Buying exciting R&D assets could also drive future growth. Alongside the IPO market, so-called 'trade sales' offered a crucial way for venture capitalists to recover the cash invested in early stage biotechs. Those with the best programmes could command remarkable prices, as hungry big pharmas, Japanese companies seeking to globalise and newly rich speciality players all entered the fray. Public companies were targets too: when Gilead placed its $11bn bet on essentially a one-drug company with its purchase of Pharmasset in late 2011, there were concerns that it had massively overpaid, but the deal was vindicated when Gilead posted the highest US sales of any company in 2014.

What next?

At the start of 2022, the global pharmaceutical industry faced its most dynamic outlook in decades. As scale no longer played a critical commercial role, and size undermined crucial R&D productivity, industry giants were losing ground to mid-sized specialty players. Investment in biotechs was strong, thanks to a combination of scientific breakthroughs and regulatory support for meaningful advances. The innovation storm encompassing cell and gene therapy, genomics and gene editing, artificial intelligence and 'big data' was gaining momentum. And there was a looming threat from China, which was seeking to supplant the USA as the engine of industry innovation. Meanwhile, with innovative pharmaceuticals used in ever lower volumes at ever higher prices, becoming akin to a luxury good, pricing remained a focus of public debate, putting the whole industry model at risk. Despite literally saving the world in the pandemic, and the associated mass education in science and development, the industry still suffered from a tarnished reputation and grievous lack of trust. Pandemic windfalls were viewed as profiteering rather than deserved rewards, and the industry received much of the blame for global inequities in access to life-saving vaccines.

Duato's first moves

Duato faced three key challenges: innovation, ongoing liability lawsuits and regaining industry leadership. On the innovation front, J&J had increased R&D investment by $1bn over each of the last two years and made forays into cell and gene therapy. In November 2021, the company announced the planned divestment of its $15bn Consumer Health business, the biggest shake-up in its 135-year history. Brands such as Tylenol, Listerine and Nutragena were considered strong enough to be spun off into a new company with a different name. Departing CEO Alex Gorsky saw limited synergies with prescription pharmaceuticals 'we think these have evolved as fundamentally different businesses' and the value unlocked, plus opportunity to shed talc liability, easily compensated for loss of diversification. Speaking at the JP Morgan Healthcare Conference in January 2022, Duato hinted at the future direction: Bolt-on acquisitions. 'We prefer small to medium-size deals in which we can apply more of our own capabilities on the science, the commercial and the manufacturing sides,' he said. 'And that's how we have been able to build 25 billion-dollar platform businesses between medtech and pharma. That's our secret sauce.' J&J was uniquely capable of leveraging the convergence of drugs and devices into complex added value products that could provide a strong fortress against generic competition.