In the life sciences sector, the common wisdom is that rigorous regulation has hobbled the industry and driven down revenue and profits. But research conducted by PA Consulting clearly shows that this traditional view is wide of the mark. Our research into the impact of regulatory management on corporate performance shows that companies that embrace regulation are generally more successful than their peers in terms of growth in Total Shareholder Returns. This link between compliance and financial success breaks new ground.
The strategy that has the strongest impact on financial success is not companies’ ability to avoid regulatory interventions, such as fines, but the positive attitude of senior management towards regulation.
When we examined over 200 annual reports from pharma companies, we found that senior management in high-performing pharma companies are proactively taking control of how their organisations approach regulation. These industry leaders believe that pharma companies have the opportunity to help shape the regulatory landscape by collaborating with authorities. They also believe that collaboration can increase the effectiveness and safety of their products and drive revenues, and that compliance must be firmly rooted in their corporate culture to minimise risk.
For example, perpetual outperformer NovoNordisk said: “We need to walk the talk in everything we do. There is growing regulatory scrutiny into pharmaceutical companies’ compliance… companies must be able to disclose how they – and their suppliers – live up to regulatory requirements.”
Conversely, companies that underperformed routinely focused on the negative aspects of compliance and blamed regulators for slow growth, setbacks or lack of innovation. One pharma company, for example, claimed: “We are often viewed as an easy target in attempts…to assign blame for the inevitable shortcomings of health care systems overall. At the same time, the growing expectations of industry regulators have only added to the expense and complexity of pharmaceutical R&D.”
However, we found that companies that talked most about regulation in their annual reports and other corporate documents were not necessarily the most successful performers. These companies often spent considerable energy discussing the negative impacts of regulation on their business. We believe this energy could be better directed at improving regulatory management. Developing a positive attitude to regulation, taking action to ensure the organisation is positioned for compliance and regulatory success and communicating this stance clearly is the formula for boosting financial returns.
When it comes to innovation, we found a clear link between a positive approach to managing regulation and success. The most innovative companies in the life sciences sector view innovation as both an external and internal activity, and actively look to partner with regulators throughout the process. For example, Roche was proud to announce that they are “…the partner of choice for industry input on medicines with companion diagnostics (CDx) and work directly with the FDA on shaping the regulatory landscape on CDx”.
Our research into the impact of regulatory management on corporate performance does not provide a detailed roadmap through the regulatory challenge to financial success, but it does raise important questions that highly regulated companies need to address. Regulation is here to stay and companies that position themselves to thrive within regulation – not in spite of it – have the opportunity to leapfrog more combative players.
To find out more about our expertise in life sciences and regulation, please contact us now.