A conversation with Michael Swanick, PwC

Pharmaceutical CommercePharmaceutical Commerce - November/December 2013

PwC is one of the world’s largest professional services firms offering clients assurance, tax and advisory services. PwC operates in 158 countries with more than 184,000 people across its global network of firms. The firm’s Health Industries practice is a leading advisor to public and private organizations across the health ecosystem, including healthcare providers, pharmaceuticals, health and life sciences, payers, employers, academic institutions and non-health organizations with significant presence in the health market. A year ago, Michael Swanick, a 29-year veteran of the firm, took over the reins as the Global Leader of PwC’s pharmaceuticals and life sciences practice, heading over 5,000 professionals focused on this industry. Pharmaceutical Commerce sat down with Mr. Swanick to discuss national and international issues affecting the industry; here’s what he had to say.

1. Within the past year, you’ve taken over as Global Practice Leader in Pharmaceutical and Life Sciences at PwC, coming from a leadership role in Tax. Give us a sense of the scope of PwC practice areas now under your management, and what the past year has been like for you.

My role as global leader of the Pharmaceutical and Life Sciences Practice at PwC is a natural extension of my tax background and follows a path that in many ways reflects the evolving role of the tax and finance function throughout our industry.

I oversee overall strategy and direction for the practice, including nearly 5,000 professionals who are advising pharmaceutical, medical device and life sciences companies around the world on how to thrive in the emerging health economy. That means anticipating the direction of the market, the mix of market participants and the characteristics of tomorrow’s market leaders. As a practice, we then need to make sure we’re investing in capabilities that are relevant, not just for today, but five, 10 or more years from now. This year, we reorganized our practice and further increased investment in areas such as Big Data and analytics, transaction services, commercial strategy, and other capabilities that companies seek as they pursue growth in the new health economy.

The shift in global growth, health reform, outcomes-based health delivery and reimbursement, technology and other market forces have made a new way of doing business inevitable for pharmaceutical and life sciences companies. It’s been building for some time, but the tipping point may have come this past year at the edge of the fiscal cliff and the patent cliff, or what I call a collective “Wile E. Coyote” moment for our industry. Innovation is the only way to cross that abyss, and by that I mean innovation in virtually every part of the business from R&D to manufacturing, including supply chain and distribution, to pricing, sales and marketing. So what we’re seeing now is a real acceleration of activity, driven by health reform and the current economic and fiscal environment.

Pharmaceutical and life sciences companies are all rethinking their business models and growth strategies. Ultimately, the success of their strategic decisionmaking will be influenced by related tax implications. For multinational companies in our industry, taxes account for 10 to 40 percent of the profit and loss statement, and many business model changes, particularly concerning market access, global supply chain and increasing focus on end-user services, can result in a corresponding increase in effective tax rates.

So back to the beginning of your question, my previous role as global tax leader gives me a perspective well-suited for my current role. There was a time when tax leaders were technical experts in a compartmentalized department supporting finance. Today, both the tax and finance functions are integral and paramount to the success of long-term business planning. Some of the greatest progress I’ve seen over the past year, and expect to see more of, is a much more strategic integration of crucial functions such as finance, risk, marketing and human resources within R&D and commercial operations.

2. Let’s go back to national and international tax policy for a moment. “Obamacare” is now kicking in in the US, and in Europe the pressures on pricing of life sciences products has never been more severe. What are the tax issues that dominate in your discussions with clients?

Virtually every health system in the world—in mature and growing markets—is facing the same set of pressures: That is, the need to ensure the health and productivity of its population and how to meet the growing demand for health services while containing the burden of healthcare costs on national resources. Health reform regulations, tax policies and enforcement activities are a reflection of this universal pressure and are more pervasive and burdensome now than at any time in recent memory. Companies that don’t understand the implications of government’s need for revenue will face ever greater scrutiny from tax administrations and increasing downward pressure on their financial performance.

With big shifts in the market—growth moving from mature to growing economies, reimbursement from volume to value and a growing focus on outcomes-based delivery—the role that tax leaders play must now be broader and more strategic than in the past. To improve financial performance, it’s crucial for pharmaceutical and life sciences companies to adopt a proactive approach to tax management, integrate it across all functional areas and geographies and align it with long-term business planning. If you’re a tax leader, you should be at the table for every significant and strategic business decision that your organization makes.

The growth strategies and business model changes companies are pursuing can influence effective tax rates, make transfer pricing procedures more complicated, and potentially result in a greater disconnect between revenue and costs from a tax perspective. What keeps executives up at night is whether they have the ability to demonstrate the effectiveness of strategic decisionmaking not only to investors and financial stakeholders, but to payers, providers and patients who ultimately are the arbiters of value for the company.

3. There seems to be an upswing in M&A activity lately; what are the trends to watch for in this regard?

There’s no question that there’s been robust deal activity involving mergers, acquisitions and alliances within the pharmaceutical and life sciences market, in part because of readily available financing, strong corporate balance sheets and an improvement in the equity markets. While the number of deals was down in the first half of 2013 compared to the previous year, we’re seeing deal values climb even among mid-tier players. Rising deal values reflects a dwindling supply of assets and growing competition among companies that are rebalancing their product portfolios and seeking long-term growth through both geographic expansion and product innovation.

We think that deal activity will continue to increase in the near term, and there are several trends we are keeping an eye on. One is a shift in the mix of buyers. Financial buyers are still in the game, but corporate buyers are taking the lead in their quest for business synergies through M&A while private and institutional investors are fueling an uptick in spinoffs, divestitures and IPOs. Also, it’s important to note that there is a lot more activity happening in the market than what’s reported in league tables and deals books. It’s coming in the form of alliances, joint ventures, partnerships and other collaborative agreements among industry participants and requires just as much focus in the areas of due diligence, planning and integration as do large-scale deals.

4. PwC Pharma/Life Sciences, like its clients, has put an emphasis on globalization in the past few years, and everyone is tracking what is going on in China closely. For clients looking to strengthen their international footing, what are the tasks they are calling on PwC to assist with?

Global growth and long-term financial performance is no longer a matter of winning the race for access to the biggest markets with the most products. We’ve seen the disappointing results of conventional, one-size-fits-all growth strategies that have led to a lopsided geographic mix of profits. Based on population size alone, China, India and other markets in the early stages of economic and social development represent enormous growth potential for pharmaceutical and life sciences companies. But the health market in Shanghai is very different than the one that exists in less affluent, rural areas of China, and thus requires different strategies for gaining market access and achieving profitable growth.

Sustainable growth and financial performance going forward requires a more targeted approach. Companies are narrowing their focus on core strengths and markets and tailoring strategies on a market by market basis.

The first most difficult challenge multinationals face is having an accurate understanding of the market, both the opportunities and the challenges that come with it from a number of perspectives, including: The need for a customized market strategy, risk and compliance requirements tailored to the local realities, and the best approach to distribution and sales. We help our clients engage with local and national governments and market participants. We help them seek the right partners, pursue product innovation, build sales and build supply chain and distributions networks that fit with local needs and resources. And we help them develop appropriate economic models and operational structures that will support those models. Ultimately, our clients look to us for the experience, perspective and connections PwC has that comes from a global network of firms with a deep bench of health industry professionals in 158 countries.

5. Both nationally and internationally, physician payments and other financial inducements with customers have put the life sciences industry in the spotlight, and not in a good way. What is to be expected in the next few months as the US Sunshine Act, the Foreign Corrupt Practices Act and laws outside the US are applied?

In very short order, pharmaceutical and life sciences companies have to implement solutions to meet reporting requirements and reconcile differences across different foreign jurisdictions. It’s a process that begins with understanding the applicability of the law, an assessment of current capabilities, data aggregation, reporting and, potentially, dispute resolution. In the US, the bar for compliance with transparency requirements has risen to new heights with the implementation of the Sunshine Act Final Rule. In addition to increased reporting complexity, we are seeing an increasingly assertive enforcement environment, especially internationally.

Obviously, high-profile enforcement actions send a loud and clear message to the industry that non-compliance carries significant financial and reputational risk—as well as the possibility of legal worries for individuals. We have been advising clients to reassess the role of risk and compliance in their organizations, and many CEOs are putting risk management at the forefront of their C-suite agenda. In the long term, compliance can’t be viewed as a one-off internal project. Organizations need to conduct initial and ongoing risk and compliance assessments, including evaluating interrelationships with all their affiliates, business divisions, joint ventures and strategic partners. As the demand for transparency grows, quality reviews and risk controls will be a business differentiator for companies savvy enough to have robust processes in place, and one that not only helps protect the integrity of an organization but can be a valuable competitive advantage as well.

6. Looking back on your career in life sciences, what stands out as key accomplishments or turning points in your work? And, what are the goals or objectives you are focused on for the near future?

In my 30 years in the pharmaceutical and life sciences business, I’ve seen the best and worst of times—the days of monopolistic pricing, annual double-digit growth, the launch every year of another new blockbuster. The market has changed dramatically and so has the industry. Some have said that the golden age is over for pharma and life sciences companies. I think they’re all wrong. Yes, there are challenges. The industry’s reputation, size and market cap have all diminished, but I am convinced that pharma and life sciences can reinvent itself and re-emerge as one of the most dominant, profitable and value-adding industries in the world. The health system is looking more critically at value, demanding better evidence of innovation and effectiveness. We have a deeper understanding of disease and are seeing world-class innovation from scientists, researchers and companies bringing new, best-in-class products to market. R&D and regulatory processes are beginning to catch up with the pace of scientific and technological advancement.

Health is fundamental to human productivity and the world economy. That’s why it’s on the agenda of every government leader and CEO in virtually every industry.

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