4.4.1 Demonstration of Use
Having established the practicality of using the Design Principles to populate a PMF in general, there remains the task to apply it to the pharmaceutical sector and demonstrate that the results are superior to less systematic methods. The application of the Design Principles to the pharmaceutical sector is considered below and the resulting PMF presented in the following section.
4.4.2 Scope and Structure
Stakeholders
The following stakeholders were identified:
– The shareholders or owner of the company, who are concerned with financial performance. Earnings per Share is of prime interest and is linked to share price through the Price Earnings ratio for the sector.
– The customer stakeholders are unusually complex with different customers having different priorities, for example national health authorities and hospitals will be relatively more cost-conscious, whereas the patient and physicians will be concerned about the efficacy of the formulation. Notwithstanding the structural complexity of the stakeholders, satisfaction however can be measured by market share in particular therapeutic categories, reflecting the efficacy of the treatment and its affordability, although loss of share can occur through lapse of patents, allowing low-cost competition to erode market share, or the existence of product substitutes in therapeutic categories that themselves may not be patent-protected.
– The employees are natural stakeholders but are a diverse group with some groups such as research workers being crucial. The turnover of this group is of special interest, as is the value-added per employee in total (the difference in revenue and costs excluding payroll), to understand the average financial contribution of each employee.
– Society is a key stakeholder for the pharmaceutical industry with a need for a supply of new and better formulations and also expectations that dangerous formulations will not be released. This stakeholder is represented by the regulatory authorities (e.g. the Food and Drug Administration in the USA) who serve adverse reports and notices when society is judged to be at risk.
Four internal and external stakeholders have therefore been identified, to which is added Process. Although not a stakeholder in its own right, process efficiency is a necessary condition for satisfaction of the other stakeholders and all stakeholders will have an interest in it.
Leading Measures
The R&D process is an obvious source of leading measures and it might be thought that a patent with a 30-year life is also a potential candidate for a measure, given the legal protection against imitation. However, the number of patents was not used because of criticisms in the academic literature, including the pharmaceutical R&D literature, of the usefulness of this measure. To amplify, DeCarolis & Deeds (1999) established the lack of correlation between patents and a firm’s performance and identified patent citations as an alternative. However, the counterintuitive results in DeCarolis (2003) regarding the negative correlation between technical competence and Market-to-Book Value raises questions over the use of citation analysis, so this variant of
patent analysis was not used, especially given the criticism of citation analysis by Meyer (2001).
Given the rejection of patents as a measure, the measurement of outputs therefore focuses on the number of compounds that have passed the hurdle of approval by the regulatory authorities.
Risk
The decisions of the regulatory authorities also represent major risks to the company and merit measurement; fortunately adverse reports on products and facilities are publicised.
There is also a further negative factor that requires recognition, namely litigation. Major pharmaceutical companies are usually engaged in large litigation suits and of these some are opportunistic.
4.4.3 Resources and Barriers
Differences
The primary differentiation for a research-based pharmaceutical company is current and future product portfolio, the latter being represented by its R&D pipeline.
The benefit of the current portfolio is visible through the ROS and market share and the latter can be seen as a measure of competence in marketing. Regarding production facilities, the role of this tangible resource is to ensure continuity of supply.
VRIN, Link to Value & Intangibles
The previous discussion on focusing on differences between the firms highlights the importance of seeking measures that focus on the current and future product portfolio, as evidenced by ROS and the R&D pipeline respectively. Measures in these areas already pass the tests on VRIN, establishing a link to value and give full recognition to intangibles, as do any measures related to research employees, for example retention measures. However production facilities are usually not rare and production can be outsourced; manufacturing competence is expressed as the avoidance of regulatory censure while ensuring continuity of supply.
Barriers
The prime isolating mechanism for a research-based pharmaceutical company is the patent. However these have a fixed life (30 years) so the barrier to imitation erodes with time. Products can also be grouped into therapeutic categories that address particular medical conditions; the specificity of the action of a drug is an isolating mechanism because a drug does not compete against drugs as a whole, but only against those that treat the same condition.
4.4.4 Processes and Positions
Deployment and Dynamic Links
For the pharmaceutical sector, key processes include:
Discovering new drugs (i.e. New Chemical Entities) that successfully pass through preclinical development.
Rapidly and successfully progressing them through the clinical trials process to maximise the useful patent life. This depends on the avoidance of unnecessary delay in communication with regulatory authorities.
Communicating with and satisfying regulatory agencies.
Marketing the drugs in as many markets as possible and identifying as many indications of a drug for different medical conditions as possible. These topics have largely been addressed in the preceding discussion except for the dynamic aspect: the avoidance of regulatory delay while a compound is in the R&D pipeline and the need to address not only the number of drugs produced but also the number of clinical trials for multiple indications. Both these additional factors need to be addressed by the PMF.
Static Positions
The static position of a company in a market is best observed by its revenue in general and by its market share in therapeutic categories specifically. However, the prime concern of the industry is the erosion of a static position by patent expiry.
4.4.5 Efficiency
Benchmarking
Regarding efficiency ratios, the prime concern in the industry is availability of funds to invest in R&D with R&D as a proportion of sales being seen as a prime metric of a firm’s commitment to the future. Consequently ROS to fund the expenditure on R&D is seen as the key financial metric.