5 steps life sciences companies can take now to build resiliency

Life sciences executives focus on cost containment and agility in the face of economic and legislative challenges.

In brief

• Life sciences leaders who act now to build financial resiliency will be better prepared to handle economic and market disruptions.
• Success requires understanding what drives commercial excellence, including therapeutics, operational inefficiencies and digital technologies.
• EY-Parthenon teams can help companies maximize cash flow and unlock resources for organic capital expenditure investments and inorganic acquisitions.
  

The impending expiration of biologic patents valued at more than $350b,¹combined with the high cost of capital and economic uncertainty, has resulted in an urgent need for life sciences companies to build financial resiliency. While the biopharma industry is traditionally more resistant than other industries to recessions and macroeconomic trends, the next few years could be challenging.

Many life sciences executives find themselves in uncharted territory with no prior playbook to guide them forward. However, according to a recent EY-Parthenon analysis, life sciences companies with better cash management were 19% more resilient than their low-performing peers. Proactively building financial resiliency now can help executives navigate the uncertain times ahead with healthier financial strength to mitigate business risks.

Five key elements of financial resiliency

Rather than focus on near-term cost takeout initiatives, life sciences leaders can lean on the financial resiliency levers below to increase short-term performance and fund strategic investments, such as digital- and data-driven technologies, that drive operational excellence and deliver sustained improvements.

1. Focus on revenue reliability

2. Build healthy cost structures

3. Streamline operating models

4. Increase capital efficiency

5. Take a people-centric approach to workforce and culture

1. Focus on revenue reliability

To help ensure revenue growth and predictability, life sciences companies need to focus on sales force effectiveness, optimizing research and development (R&D) efficiency, encouraging innovation and aligning marketing strategies with consistent pricing. These strategies have the potential to unlock growth in key areas, enhance sales and operations, and improve revenue generation.

To achieve these goals, life sciences companies need to equip their sales teams with the right tools, training and strategies to effectively promote their products to health care professionals. Streamlining R&D processes and advancing innovation preservation efforts can also enhance revenue predictability.

Pricing pressures, regulatory changes and market dynamics can all make pricing less predictable. To help ensure revenue predictability, life sciences companies can adopt several strategies. First, they need to establish robust market research and analysis capabilities to gain insights into market trends, competitive landscapes and customer needs. This information helps companies develop pricing strategies, launch targeted marketing campaigns and make informed decisions about resource allocation. Second, leveraging advanced data analytics and AI helps companies identify patterns, forecast demand, and optimize sales and marketing efforts. Third, focusing on high-growth therapeutic areas will help promote growth.

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2. Build healthy cost structures

Enhancing the cost structure is another crucial step for building financial resiliency. The increased cost of capital and continuous pressures on selling, general and administrative (SG&A) expenses means that life sciences companies must focus on improving cost position. Companies have the potential to achieve this with investments in automation and AI to streamline operations and enhance decision-making.

Supply chain and logistics challenges and subsequent costs can be addressed through operational excellence, nearshoring while leveraging government incentives and by exploring strategic sourcing. Leveraging product rationalization and plant network optimization can further enhance cost-efficiency.

In addition to the major considerations in the cost structure of life sciences companies, such as buy vs. make decisions and procurement, there are also often-overlooked opportunities for continuous improvement and smaller-scale changes that can increase capacity without significant capital expenditures.

For example, operational excellence can contribute to capacity expansion. In the case of one generic pharmaceutical client, adjustments to cleaning procedures, improvements in setup and changeover processes, and equipment downtime reductions through troubleshooting led to a 42% expansion in capacity on a key product. By addressing these smaller, continuous improvement areas, the company was able to boost its operations and increase its output.

Scheduling plays a crucial role in capacity expansion as well. A pharmaceutical packager faced oversubscription on its biotech line. We assisted the company in implementing scheduling and operations excellence strategies. The company was able to meet all customer targets and enhance its production schedule by rearranging validations and qualifications to allow some production runs, and by running some operations in parallel. Proper scheduling is often a significant source of value in life sciences operations excellence.

In addition to these examples, there are other important factors to consider in improving the cost structure. Ensuring that all necessary steps are completed before the start of a product manufacturing run is essential to avoid delays and disruptions. Carefully evaluating the items included in the Bill of Materials (BOM) is also critical. Including unnecessary items, such as consumables, on the BOM can lead to losses and complications in change controls if a modification is required. Furthermore, making appropriate adjustments to batch sizes can have a substantial impact on capacity and the manufacturing cost of individual drug products.

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3. Streamline operating models

Life sciences companies can periodically review their operating models to ensure that they are appropriate for current conditions. An effective operating model provides a framework for streamlined processes, cost optimization and agility, allowing companies to quickly adapt to market changes and disruptions. Adopting an asset-light strategy, leveraging shared services, redesigning the workforce for agility and embracing digital operations are crucial to improving manufacturing capabilities, thus increasing margins and return on invested capital.

A recent EY-Parthenon analysis of Fortune 50 companies suggests that the most successful free cash flow (FCF) transformation focused on three key themes: organizational simplification, asset light and digital enablement. For example, a global biopharmaceutical company adopted a cost synergy realization program following a megadeal and instituted a restructuring program to streamline its go-to-market operating model, which led to an FCF revenue increase of 6%, and outperformed the market index by 47%.

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4. Increase capital efficiency

Capital efficiency is of utmost importance as life sciences companies need far greater cash reserves than companies in other sectors. These reserves fund up-front investments in long-range R&D projects, regulatory compliance and manufacturing capabilities.

A recent EY-Parthenon analysis of Capital IQ data reveals that life sciences companies with strong cash management programs were 16% more likely to prevent downturns in the first place due to the indirect benefits of a cash-conscious culture. Leaders in cash management were 28% better at mitigating initial shocks due to having additional liquidity as a buffer to impacted operations and 9% better at recovering. Furthermore, companies with better cash management were 19% more resilient than their low-performing peers.

Companies can enhance capital efficiency by adopting strong cash management principles, conducting capital expenditure planning and instituting prudent debt management practices. A recent EY-Parthenon analysis shows that companies that excel in cash performance are better equipped to manage risk, absorb shortfalls and demonstrate overall resiliency.

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5. Take a people-centric approach to workforce and culture

The workforce plays a crucial role in building overall financial resiliency for organizations. A comprehensive EY and University of Oxford Saïd Business School study involving executives from 23 countries uncovered key factors that determine the success or failure of transformation initiatives.

The study, which examined companies and organizations across 16 sectors worldwide, revealed that putting people at the center of transformation efforts, alongside technology and process improvements, significantly enhances transformation success rates from 27% to 72%, a 2.6x increase. Conversely, failing to address the human aspects and treating change as a mere workstream often leads to underperformance.

To address workforce-related challenges and ensure a successful transformation, life sciences companies can leverage three primary levers:

1. Taking a data-driven, analytical approach to workforce issues: Instead of setting arbitrary workforce reduction goals and resorting to widespread layoffs, successful organizations analyze the influence and impact of individual employees as an input into workforce decisions. This approach helps identify which employees should be retained, taking into account their unique contributions and strength of their network, regardless of their level within the organization.
2. Rethinking rewards programs: Companies often overlook the true value that employees place on various benefits. By understanding the cost-benefit ratio and aligning benefits with employee preferences, organizations can optimize their rewards programs. This approach attracts and retains employees while reducing unnecessary spending on less valued benefits.
3. Re-evaluating work processes, locations and roles: A thorough review of end-to-end processes allows companies to reimagine work in light of digital disruption. This can allow organizations to identify the most efficient locations for specific tasks and determine how technology, such as AI, can support workers. The future workforce will see a shift toward offloading labor-intensive tasks to technology, elevating employees to more strategic roles. This transformation will require developing new skills and expertise and offer employees exciting opportunities for professional growth.

A prime example of technology enabling new ways of working is the EY Smart Reviewer tool, which harnesses the power of AI and machine learning algorithms to automate key activities in the review of promotional materials for life sciences companies. This tool accelerates and optimizes the review process and fundamentally changes the role of the reviewer by:

• Increasing speed: Automation handles repetitive tasks, while experienced reviewers focus on critical items that require human judgment and expertise.
• Reducing costs: By freeing up high-value workers, organizations can save on internal and external resources. Additionally, avoiding fines through improved compliance further reduces financial burdens.
• Improving compliance: The tool enables increased objectivity and consistency in the review process, minimizing risks and enhancing overall compliance with regulations.

By embracing the power of data, aligning benefits with employee preferences, and re-evaluating work processes and roles, organizations can navigate workforce-related challenges and drive successful transformations. Placing people at the heart of these efforts empowers companies to build financial resiliency while fostering a motivated and engaged workforce that is ready to thrive in the evolving landscape of business.

Conclusion

Navigating the current environment will be difficult and complex. To improve financial resilience, the path forward will require a multifaceted approach. Life sciences companies should focus on five key areas to improve financial resiliency: revenue predictability, optimizing cost structures, streamlining operating models, increasing capital efficiency and workforce issues. Those that act quickly can help position themselves for sustained growth, navigate uncertainties and thrive in the evolving life sciences industry.

Ben Shirley, Thomas Morabito, Eric Hulbert and Harish Kumar from Ernst & Young LLP also contributed to this article.