HBS 6: What makes financial management unique in Healthcare Industries?

The sixth public talk in the Health, Business and Society series was successfully held at ESSEC Asia-Pacific on 10^th December. Focusing on the topic of “What makes Financial Management unique in Healthcare Industries?”, the public talk provided an enlightening perspective of how the nature of the healthcare industries gives rise to unique ways in which financial management is carried out.

The public talk was moderated by Dr. Allen Lai, Director of the Institute of Health Economics and Management Asia-Pacific and Programme Director of the MSc in Management of Health Industries. Panelists for the session were: Ms. Olivia Filanowski, Regional Controlling Manager India, Asia & Australia, Sanofi Pasteur, Mr. Milan Paleja, Chief Financial Officer, Asia Cluster, Novartis Pharma AG, as well as Prof. Peng Xu, Assistant Professor of the Finance Department at ESSEC Business School.

Dr. Allen Lai opened the session with a poll to the audience about whether they thought that financial management is unique in healthcare industries. Dr. Lai gave a short introduction to ESSEC Business School, the Institute of Health Economics and Management, and spoke about the series of Health, Business and Society public talks, which have provided a platform for tripartite dialogue on pertinent issues in the healthcare industries.

Prof. Peng Xu, Assistant Professor of the Finance Department at ESSEC, spoke about capital budgeting, capital structure, and mergers and acquisitions (M&As), a popular topic in the pharmaceutical industries. Capital budgeting comes into play when financial managers decide on which projects they should invest in. Prof. Xu discussed how financial managers often use discounted cash flow to identify and make a forecast of the cash flow. Scenario analysis is also used by managers to have a better idea of different situations which could arise in the course of the project execution.

Proceeding to the topic of M&As, Prof. Xu outlined some positive outcomes of M&As, including:

• Creation of synergy
• Gaining market share
• Leveraging on Economies of Scale
• Promoting coordination between R&D departments
• Increasing growth potential

The question of whether M&As really bring value was discussed. Pertaining to M&A in the pharmaceutical industry in particular, Prof. Xu shared data from McKinsey, which showed that M&As for pharmaceutical companies seem to have a return above the industry average. However, even within the pharmaceutical industry, there is a debate as to whether M&As are truly beneficial.

Prof. Xu also spoke about why there are many mergers and acquisitions in the pharmaceutical industries even though there are many downsides to M&As. She explained that in the overall environment gives a lot of pressure, and pharmaceutical companies often have to deal with issues such as patent expiries and growing in emerging markets and M&A as a structure change may be a way to cope with challenges faced by pharmaceutical companies. However, the long run effect of M&As is hard to tell.

Following this, Mr. Milan Paleja, Chief Financial Officer, Asia Cluster, Novartis Pharma AG, took the stage to speak about financial management in the healthcare industries. Speaking about what is unique and different in the healthcare industries, Mr. Paleja explained that the cost of innovation, the life cycle of the product, the unique nature of the customer, payer and consumer, compliance matters as well as the type of market. To Mr. Paleja, “It is important for any successful pharmaceutical company to carry out investment in innovation,” The complex nature of the customer, payer and consumers in the pharmaceutical industry make it such that pharmaceutical companies are not in a position to communicate directly with the customer, and they constantly have three pathways: a sales force, Key Account Management and Market Access.

Mr. Paleja explained that in the pharmaceutical industries, the customer is the doctor while the consumer is the patient, creating a situation in which they are unable to reach out to the consumer directly, but must always keep them in mind at every stage of product development. In the pharmaceutical industries, there are different market such as the fully reimbursed market and the semi-reimbursed market, and Mr. Paleja emphasised that the different markets must be kept in mind while decisions on financial management and allocation are made.

The last presentation was delivered by Ms. Olivia Filanowski, Head of Regional Controlling for Asia at Sanofi Pasteur. Ms. Filanowski spoke more about the specificities of vaccines, and how they can imply or affect a specific method of financial management. Ms. Filanowski explained that vaccines are unique compared to the rest of the healthcare products due to several factors:

• Vaccines are used mainly for prevention as opposed to treatment, and are used for healthy people
• Vaccines are biological products made from living microorganisms
• Vaccines are essential in the eradication of diseases and to prevent their resurgence, but prevention is not considered as a primary need
• In terms of R&D and production, processes are much more complex and difficulties might constantly be encountered

Ms. Filanowski highlighted that the life cycle for development of vaccines might take up to 20 years. For the R&D stage which could span from 9-14 years, a huge level of investment is often needed, depending on the company. Financial managers would put in place decision trees to ensure there is enough to finance all the different stages and outcomes, and emphasised that it is important to be able to plan ahead. 

A panel discussion ensued after presentations by the three panelists. During the panel session, they addressed questions related to how the characteristics of viruses could bring an additional risks for vaccines and how this risk could be managed by Financial Managers, how companies cater for outbreaks while striking a balance with being pracmatic while carrying out research.

Issues such as the trend towards outsourcing research as well as companies waiting for products to go off-patent and capitalising on Economies of Scale in this situation were also discussed.

As a conclusion, Dr. Allen Lai added that financial management in the healthcare industries often constitutes high risk and uncertainty in terms of the return on investment, and products often entail long term investments.

The sixth public talk in the Health, Business and Society series provided an engaging platform for discussion and exchange between representatives from both the public and private sector on the topic of financial management in the healthcare industries.