Rebuilding Trust: A Revolution in Compliance November 17, 2004

1
Rebuilding Trust A Revolution in Compliance
November 17, 2004

• Anthony Farino
• Leader, US Pharmaceutical Advisory Services Group

2
Fundamental Challenges in the Pharmaceutical
Industry

• Market dynamics and competitive pressures are
  making it necessary for pharmaceutical and health
  care products companies to examine their
  corporate strategies, to re-engineer processes,
  all with a goal of improving productivity and
  reducing costs.
• RD continues to face the challenge of increasing
  the flow of new products to a level sufficient to
  sustain targeted sales growth.
• Regulators across the globe are flexing their
  muscles through increased rule-making activity
  enforcement actions and punitive fines.
• Continued investigations into commercial
  practices, and enhanced scrutiny of clinical and
  manufacturing functions will continue to fuel
  significant change in business practices and
  required controls.
• Regulatory sanctions are now of a level that can
  threaten the very existence of companies, and
  risk and compliance departments can now make a
  significant difference to the success of a
  company, and its share price.
• Governments, large payers, and patients continue
  to raise questions about product pricing and the
  cost effectiveness of certain therapies.

3
Fundamental Challenges Exist Across the Major
Markets

• Tougher regulatory environment is impacting
  across the value chain creating increased cost of
  compliance and reputational risk
• Increasing concern over drug safety issues

• Pressure from seniors has resulted in the passing
  of the Medicare drug benefit
• Increasing use of generics and therapeutic
  substitution
• Price control concerns rising from re-importation
  from Canada

USA

• Rising patient-co-payments
• The likely introduction of a new pricing system
• An increasing tendency to refuse reimbursement
  for costly new products
• Greater separation of prescribing and dispensing

• Continuing pressure on pharmaceutical budgets
• Direct and indirect measures to control drug
  prices
• Tighter controls on reimbursement
• More sophisticated methods of monitoring
  prescribing

Major Challenges
Japan
Europe
Source IMS Health 2002, PwC WINS Analysis
4
What Others Are Saying About the Industry

• Stakeholders from almost every conceivable
  corner are leveling criticism at the industry for
  the prices of its products, for its reliance on
  the US to finance most of its research, and for
  its resistance to change ways that have long made
  it the most profitable sector in the US economy.
• - John K. Iglehart, Founding Editor, Health
  Affairs
• The prices of the top 30 brand-name drugs
  prescribed for seniors rose by 4.3 times the rate
  of inflation last year.
• Families USA
• "I do think there is a serious problem in the
  pharma industry with the business model and with
  the lack of trust and respect in the general
  public.
• - Hank McKinnel, Pfizer CEO, FT May 3, 2000

5
Questions Senior Executives are Asking

• How do we know we have achieved a compliance
  mindset throughout the organization?
• How do our governance, risk and compliance
  practices measure up against leading practices?
• How do we ensure identification and resolution of
  issues in a timely manner?
• How do we build value and efficiency from our
  investment in governance, risk and compliance?

6
Looking for Answers.Research Recently Conducted
by PwC

• PwC and Economic Intelligence Unit on Compliance
  (June 2003)
• Survey of 160 executives at international
  financial institutions, regulators and technology
  houses in US, UK, Europe and Asia and 20
  interviews
• META Group survey on behalf of PwC (October 2003)
• 135 interviews with executives and line of
  business managers at North American
  multi-nationals with revenue greater than 1
  billion
• Global CEO Survey on Risk (December 2003)
• 1391 phone interviews with CEOs around the world
  35 from companies with more than a billion in
  revenue
• PwC and Economic Intelligence Unit on Governance
  (April 2004)
• Survey of 200 executives at international
  financial institutions, regulators and technology
  houses in US, UK, Europe and Asia

7
Key Research Findings Governance

• 97 of respondents saw integrity as a source of
  competitive advantage and over half reported it
  as a source of great competitive advantage
• Clear, public codes of governance, better
  communication with more constituencies and a
  clean track record were identified as the most
  important ways companies could demonstrate a
  culture of integrity.
• The compliance function and the risk management
  function stood out as top governance-related
  areas for expanded resource allocation.

8
Key Research Results Risk

• 60 of CEOs responding report ERM is a priority
  of theirs and the boards
• 43 believe they dont have the information they
  need to manage risk on an enterprise level.
• 58 say risk is not fully integrated into
  strategic planning
• 51 say everyone in the organization does not
  understand their accountability with regard to
  risk management
• 73 say risk is not fully integrated across all
  business units and functions

9
Key Research Results Compliance

• Only 15 feel their compliance procedures are
  effective in minimizing reputational risk
• Reputational risk identified as 1 priority
• Only 25 believe they are in full compliance with
  regulations and laws
• Customers are viewed as second only to regulators
  as key drivers to adopt and implement best
  practices
• Compliance with internal risk control policies
  viewed as more effective at protecting against
  reputational damage than compliance with
  government and/or exchange rules

10
What Others are Saying about Compliance Programs
MetaGroup/PwC SurveyOctober 2003
Strategic View Operational Issues Future Trends
See governance, risk and compliance as a value driver The need for connection among governance, risk and compliance is understood and valued although operational issues exist Exposure to substantial risk through insufficient commitment to risk management Manual processes are instrumental to meet governance, risk and compliance requirements Most do not have significant real-time governance, risk and compliance capability 1/3 of regulated respondents are not even close Growing investment area, but light on cost and value measurement Investment shifting to technology Significant improvements are expected in the areas of data accuracy, quality of decision making, task redundancies, etc. Technology will be a critical governance, risk and compliance enabler Effective governance, risk and compliance can realize value in the areas of reputation and brand, employee retention and revenue
11
Integrated View of Governance, Risk Management
Compliance
12
A New Vision of Compliance An Integrated View of
Governance, Risk, and Compliance
13
Where are GRC Programs Most Vulnerable?

• Tone-at-Top/Oversight/Culture
• Corporate strategy and missions do not consider
  GRC concerns
• Culture not aligned with organizations GRC
  strategy, mission and values
• Management behavior is inconsistent with stated
  procedures
• Inability or lack of process to elevate issues to
  senior management
• Senior management is not effectively
  communicating the organizational strategy
• Understanding Cost
• Total Cost of Compliance is not known
• Compliance Functions have become costly, an in
  some instances ineffective and inefficient
• Unexpected costs are incurred as a result of
  required compliance steps
• Resources are unavailable to support compliance
  requirements
• Monitoring and Reporting
• Lack of identification of the appropriate data to
  be monitored and reported results in ineffective
  programs and cost increases
• Costs of monitoring increases without focus on
  use of technology and synergies among people and
  processes
• Quality of underlying data that is used to
  monitor is unreliable
• Inability to monitor information on a timely
  basis is key to effective program maintenance
• Accountability for monitoring is not clearly
  defined

14
Leading Practices Associated with Key Enablers
15
Concluding Thoughts Enabling the Strategic
Advantages of GRC

• Aim higher
• Drive an awareness deep into the organisations
  DNA
• Anticipate the next challenges
• Help the board to operate effectively
• Communicate with all stakeholders who affect the
  way your company performs