Practitioner's Section

Pharma 3.0: delivering on health outcomes

Patrick Flochel and Frank Kumli

 

Health care spending continues to surge at rates that are, for most governments, unsustainable. As a result, a growing priority for governments today is increasing the effectiveness of their health care systems. Many countries, from the US to Europe and Japan to the emerging markets, have made health care reform a top priority.
In efforts to cut costs, pharmaceutical spending, has been a highly visible target for cost containment. This impact has been most evident in the price-cutting plans that have spread across Europe in recent months, accelerated by the sovereign debt crisis.
Yet a common ground of these reform efforts is to make these systems sustainable on the long-term by reshaping their “currency.” To accelerate change, policymakers need to move away from costs or budget considerations and turn to changes in patient or population health status, or health outcomes, as their main focus.
Beyond the short-term cost-cutting initiatives that the pharmaceutical industry is navigating with diversification strategies, the opportunity is clear for the industry to become more visible in demonstrating the value it brings to the health care system.
 
Pharma 2.0

The fundamentals of the pharmaceutical industry are strong. A steadily growing and aging world population is expanding the potential patient base, and rising incomes in emerging countries are contributing to boost the global demand for higher-quality health care.
However, industry players concur that they are facing a number of pressure points — changing market realities such as pricing and regulatory pressures, thinning drug pipelines, efficacy issues, shifting demographics, globalization and more. Such macro changes have forced pharma companies to move away from their monolithic blockbuster business model, dubbed “Pharma 1.0”, to become more innovative, collaborative, diversified, global and value-driven, – the model we call “Pharma 2.0”.
Today, most pharmaceutical companies are in the midst of their transformation to 2.0. The strategic choices underlying this transformation have been built on the individual companies’ view of the changing business environment, their core competencies and their potential competitive advantages.
The science – With more than $70 billion USD worth of drugs set to lose patent protection over the next five years, the need to reinvigorate pipelines is more pressing than ever. Pharmaceutical companies are taking a strategic approach to “the science” — therapeutic categories, organizational realignment, biotechnology and personalized medicine. They have recognized the need for new approaches to increase the quality and effectiveness of their portfolios. Efforts are made to prioritize therapeutic and disease categories, break down silos and increase collaborations with start-up companies and academia. As scientists advance to understand diseases at the molecular level, they are becoming increasingly empowered to develop treatments more specific and efficient, matched to patients’ genetic profiles with the potential of a greatly diminished risk of adverse reactions.
The customer – Customer segments in mature markets have been expanding beyond the traditional base of physicians to include a broad range of additional customers, such as governments, insurance companies, public agencies, pharmacists, hospitals and patients. To adapt to these evolving customer profiles, pharma companies are transforming their approach to brand, marketing and sales management. At the same time, they are moving from a transactional model of interaction with customers to a more systematic, customer-facing model where all levels of the organization, not just the sales force, are focused on the customer. Most companies are dismantling their large sales forces in the field, traditionally focused on physicians, and instead developing sales approaches and more specialized sales teams tailored to new customers and products.
In many cases, the industry is counting on emerging markets to extend the life of mature products as well as to develop new markets for their prescription drugs. It is targeting developing countries’ growing ranks of the middle class — a strategy that has obvious benefits in the near and long term. Here, the industry, while it is dismantling its sales infrastructure in mature markets, is rapidly building up a sales force needed for growth in what are highly physician-driven markets. Yet, an emerging markets strategy represents an enormous challenge for an industry that has focused so much of its past efforts on selling to the top of the income pyramid. International expansion demands a certain degree of finesse and a more holistic view that takes into account the dynamic environment in emerging markets. There is also a growing urgency to create a more satisfying and sustainable approach to the patients at the base of the income pyramid in the developing world.

 

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The offer – Services represent an area where pharmaceutical companies — with 99% of revenues tied up in products — are notably absent today. Interestingly, the evolution of nearly all product-based industries shows us that the best way to create loyal, long-term relationships and critical feedback loops with customers is through services and improvements in the customer experience. And pharmaceutical companies are in an ideal position to participate in the entire value proposition for better health as we will see later in this article.
The people – The pharmaceutical industry is constantly fine-tuning its approach and dedicating a wealth of resources – in money and time – to the discovery, development and lifecycle management of products. But the industry is still in its infancy when it comes to applying the same level of strategic focus to the discovery, development and lifecycle management of people. While all recognize that innovation comes from innovative people, not products, companies have not yet fully executed on the potential to transform themselves by transforming the way they recruit, train, mentor and advance the staggeringly diverse workforce of the 21st century.
The organization – The focus on the customer is driving decisions around “the organization.” After years of building complex businesses with large bureaucracies, the industry strives to build and manage businesses nimble enough to meet global demands. The debate about centralizing versus decentralizing certain business functions has been joined by a parallel discussion on aggregating versus disaggregating company assets and business units. On both fronts, speed, nimbleness and agility are winning out. Industry leaders once known for consolidating assets to form large divisions are now carving out smaller business units to serve each market. This is enabling them to make decisions faster, a key attribute of a successful global business.
The value created – The industry is increasingly realizing the need to focus on “financial strategy” as a means of creating value and managing for risk-adjusted return, not just revenue. One area of progress is in the realm of cost management. For years, many companies relied on instant cost-cutting campaigns that paid little attention to, and in some cases jeopardized, long-term growth plans. Today’s finance directors are taking a more strategic and sustainable approach by aiming to create a long-lasting cost advantage within the industry. Outsourcing and shared services are becoming the norm, and they are generating significant cost savings. While most directors admit that they have a long way to go to “grow lean,” this new emphasis on efficiency initiatives that contribute to long-term profit growth represents a notable shift in thinking. The focus is now turning to building the systems, tools, metrics, processes and reports that can provide a more sophisticated approach to capital allocation.

Pharma 3.0

As the industry is in the midst of this Pharma 2.0 journey, new and sweeping trends have emerged that are again transforming the business environment. Changing incentives are reshaping the health care ecosystem with an emerging need to deliver a sustainable value proposition centered on health outcomes. This shift will require the industry to revisit its business model with a move towards Pharma 3.0 -- business models focused on health outcomes. Pharma 1.0 and Pharma 2.0 were focused on developing and marketing drugs; Pharma 3.0 is a reconfiguration of the model with a focus on health outcomes where the traditional product – a drug – is only one part of pharma’s value proposition.

 

 

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Health outcomes

The primary agents of change are the payor- and the government-led reform initiatives underway in most major markets, from the US and Europe to emerging markets. A common theme throughout these initiatives is creating more efficient systems by focusing on health outcomes. In this context, systems will reward stakeholders for the perceived value delivered to the system, with price cuts and rebates applied on most existing treatments and value-based approaches for innovative drugs.
Health information technology is further enabling and accelerating an outcomes-driven industry. The digitalization of health data, electronic health records and associated eHealth platforms offers the promise of enhancing efficiency, increasing safety and reducing costs. Mobile health technologies provide live and real-time access to digital health information, supporting diagnosis and monitoring, as well as driving compliance in medication. Social media platforms are enabling patients to share health information. The convergence of social media and health information provides the benefit of empowering patients in health literacy. People are empowered to improve their health as they can access and understand information that in the past was available only to their healthcare providers.
This tremendous expansion of availability of health data will empower payors to make better decisions as reform initiatives drive value-based choices and outcomes-based pricing and reimbursement.
The same transformation is happening on the patient’s side. Traditional patients are becoming “superconsumers,” capable of making real, value-based decisions based on their health outcomes.

 

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Non-traditional players

This emerging ecosystem is attracting many new, non-traditional players, from e-health and mobile health firms to consumer electronics companies, large retailers to medical technology firms and information aggregators. These companies are rushing in to fill the gaps and capitalize on the potential returns of an outcomes-centered world.
In Ernst & Young’s latest Progressions report, we surveyed business development and innovation leaders and found overwhelming agreement that these new entrants will play an increasingly important role in the health outcomes ecosystem. Looking at total responses across all categories of potential entrants, 92% of the respondents said it was likely that new entrants will enter the ecosystem. Analyzing the categories, the most likely entrants (as well as the most potentially highly disruptive) are e-health/m-health and new medical technologies companies.

Delivering on health outcomes

Delivering on health outcomes will require the pharma industry to engage in the cycle of care around the patient, from predisposition testing, prevention, diagnosis and therapy to patient monitoring. The industry’s 2.0 business model is not equipped to deliver on such a value proposition. To do so, the pharmaceutical industry will need to collaborate with non-traditional players, bundling business models in symbiotic interaction. It will require also co-creating value for key stakeholders, from patients, payors and governments to business partners.
In the Pharma 3.0 business model, pharma companies seeking to deliver health status improvements need to reach new patients by tackling underserved markets, meet unmet medical needs and do a better job of serving existing patients by managing patient outcomes. As such, companies planning to develop new business models for Pharma 3.0 will need to build their models around some combination of three core value propositions:
1. Managing patient outcomes. Outcomes management could include, for example, fostering compliance through patient engagement, engaging in health care delivery either directly or by enabling a more targeted delivery through patient population stratification. Leading-edge examples include the partnership between Novartis and Proteus Biomedical, a Californian start-up, for developing a “smart-pill” technology. When one of these pills is taken, it sends wireless signals through the body to another chip worn as a skin patch. That, in turn, can upload data to a smart-phone or send it to a doctor through the internet. It ensures that the patient is taking their medication at the right time, a critical factor in successful treatments.
In another approach, Bayer Diabetes Care introduced DIDGET, a blood glucose meter for children with diabetes that connects directly to Nintendo gaming systems. The DIDGET meter is designed to help young patients manage their diabetes by rewarding them for building consistent blood glucose testing habits and meeting personalized glucose target ranges. Bayer’s DIDGET meter reinforces consistent testing by awarding points that kids can use to unlock new game levels.

 

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2. Expanding access to health care in underserved markets, in developing countries and in more mature markets for uninsured patient populations. Examples of collaborations to expand access include partnerships between pharmaceutical companies, governments and/or non-profit organization. For example, Roche joined forces with Novo Nordisk and the World Diabetes Foundation (WDF) in a program called “Changing Diabetes in Children” for humanitarian activities in emerging economies.
In their "SMS for Life" initiative, Novartis, IBM, Vodafone and the Roll Back Malaria Partnership have developed a combination of mobile phones, short messaging service technologies and intuitive websites to track and manage the supply of anti-malaria drugs in remote areas of Tanzania.
3. Meeting unmet medical needs, in complex indications such as oncology or immunology as well as in underserved therapeutic fields such as malaria, dengue fever and orphan diseases. A leading-edge example demonstrates that these initiatives are not reserved to big pharma. MondoBiotech, a Swiss-based innovative company focusing on neglected diseases, has entered a partnership with 23andme, a personal genetics company invested in by Google, Inc. and others, to advance genetic research for patients with rare diseases. MondoBiotech is sponsoring the enrollment of patients with rare diseases to the platform, in exchange for access to the genetic data for research.
The industry is witnessing a surge of initiatives between the private and public sectors aimed at meeting unmet medical needs in the field of neglected diseases. The Medicines for Malaria Venture brings together multiple public and private partners, with the aim of discovering, developing and delivering new affordable anti-malaria drugs.
The pharmaceutical industry is also increasingly collaborating with peers, in “pre-competitive partnerships” such as Enlight Biosciences, which includes several pharma multinationals, focusing on developing transformational enabling technologies with an impact on the drug discovery process. Also, in the Innovative Medicines Initiative, Roche and Novartis are collaborating to develop solutions for overcoming the research bottlenecks in the drug development process.

 

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Business model innovation

In our discussions with pharmaceutical executives about evolving business models, we find that they understand and embrace the promise of Pharma 3.0 , yet change continues to be difficult.
Three main challenges have emerged in our conversations:
1. The current business model is working. It is still delivering high margins and solid growth in its current configuration and is forecasted to continue to do so in the short or mid-term.
2. The industry will need to explore uncharted territories to develop business models around health outcomes. Companies will need to develop partnerships with players from other industries, which are beyond their current “comfort zone.” Developing a partnership with a technology player, for example, holds the potential for deal-breaking clashes over different goals, operating principles and cultures.
3. Pharma companies will need to adapt to the pace of a swiftly changing ecosystem. The industry‘s product development lifecycle is notoriously long. In the new ecosystem, the business environment is rapidly evolving, as new technologies appear almost daily.
We believe that business model innovation should be supported by commercial trials, with the five following principles:
1. Pilots. Once a company has identified a strategic area in which it wants to focus, the next step is to identify different ways in which it can play in that space and to test those in early pilot versions.
2. Rapid prototyping. Succeeding in the future will require more than seizing opportunities; it will mean ending failing experiments and leveraging lessons learned through rapid prototyping. This will require new cultural mindsets and a different “tone at the top” — one that provides incentives for speed, flexibility and experimentation.
3. Open innovation. Delivering new outcome-based products and services in the Pharma 3.0 ecosystem will require combinations of competencies that no individual firm possesses. Companies will need to bring an outside-in, open approach.
4. Flexible control. Alliance structures will need to be sufficiently well defined to maintain the focus of the collaboration but flexible enough to allow for quick response to new challenges and opportunities.
5. Portfolio management. Companies will need to look across their alliance portfolios so that partners can learn from each other, identify synergies and increase the overall value they deliver.

Execution

It is far from clear which players will thrive and which will fail to capitalize on the new health outcomes ecosystem. But much of the answer will lie in the ability to execute and manage creative collaborations and transactions. To succeed, companies will need to assemble capabilities they don’t currently have to build products and services that don’t yet exist. In some cases, this might be done through acquiring companies or assets, but in most situations, we expect firms to enter alliances in which they will join assets and capabilities to co-develop new offerings.
Pharma 3.0 represents a significant shift from Pharma 2.0’s “contractual” collaborative approach, where pharma companies have been in the driver’s seat in managing collaborations with business partners and controlling and commercializing most of the value creation. In Pharma 3.0, companies will need to do a better job of fitting into the changing business models of other key players in the ecosystem. They will need to step outside the familiar and relinquish control – seamlessly combining capabilities, resources, channels and customer relationships with those of their business partners.
The life sciences industry has become quite proficient at executing traditional research and development collaborations with peers or biotechs. Partnering with non-traditional players from other industries - including technology, insurance, internet services, food and retailing – may require assimilating a host of differences in operations and cultures. 
Inter-industry collaborations will face challenges at every stage of the process. Our survey of business development leaders at major pharmaceutical companies and non-traditional entrants canvassed the opinion of the key executives most likely to be at the forefront of these changes. Their self-assessments reveal surprisingly wide-spread capability gaps in areas that will become increasingly important for the Pharma 3.0 ecosystem.
The scatter plot below summarizes the responses to two questions: “what will be more challenging?” and “how well are you prepared?
Along the left axis we graph the portion of respondents who believe each execution element will be more challenging for non-traditional collaborations. Across all deal-related functions, an average of 50% of respondents expects deals to become more challenging.
The tasks expected to be especially challenging reflect the unique nature of the journey ahead. Since it is fundamentally about developing new business models, it is not surprising that corporate and deal strategy as well as offer and market positioning are near the top of the list (with 75% and 64%, respectively, of respondents saying these functions will become more challenging).
Most expect the same of due diligence and valuation and modeling (75% each). Reflecting the critical roles of data security and intellectual property, 62% of respondents, for each category, expect challenges to increase. The same is true for change management and talent.
The bottom axis in the scatter plot provides the responses to the second question, which asked executives to rate how prepared they were to address each challenge. The greatest gap between the level of challenge and the degrees of preparedness is in valuation and modeling, where 75% of respondents think the issue will become more challenging. Other issues with large preparedness gaps have a high degree of overlap with the list of most challenging issues. These include talent, offer and market positioning, reputation, due diligence, change management and data security and privacy.

 

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Guiding principles for Pharma 3.0

Regardless of which strategic alternative is chosen, the ultimate competitive advantage will come through a company’s ability to execute its plan for delivering health outcomes.
Transformation is an evolutionary process. Each business model fuels the next, and subsequent models draw from the strengths of their predecessors. Pharma 1.0 has been and is still today a highly successful model that has driven the industry’s growth, producing margins unmatched by other sectors. Pharma 2.0 has helped the industry change its approach to customers, alleviating some of today’s pressures and laying the ground for Pharma 3.0 and a collaborative, outcomes-centered perspective.
Depending on each company’s strategy, these models may co-exist at different times. A company may continue to be rooted in innovation around its product and market growth while morphing gradually into new way of doing business.
As companies begin to embrace the changing ecosystem with strategies to derive new growth, we propose four guiding principles to successfully capture the Pharma 3.0 opportunity.

1. Define your Pharma 3.0 brand.

The ecosystem is becoming more complex, incentives are changing, and nontraditional players are entering the market. To define your brand in the new environment, ask yourself these questions:

  • Are your front-line executives focused on these trends?
  • How will these changes impact your business?
  • What is your strategic focus, and what will be your competitive advantage in this more complex reality?


2. Co-create value with partners and patients.

More than ever, firms will need to combine unique assets and attributes to build relevant offerings for the healthy outcomes ecosystem.

  • How open is your (business model) innovation?
  • Are you focused on being a partner of choice for nontraditional players?
  • What is your network strategy to become a critical player by intentionally co-creating value for partners and patients?


3. Experiment. Think small. Fail fast.

There is no single right answer. Companies will develop solutions by experimenting with large numbers of “commercial trials” — and culling those that don’t work.

  • How well does your organization encourage experimentation and “outside-in” learning (and accept failure as an inevitable by-product?)
  • How much are you investing in business model innovation (versus product innovation?)
  • How rigorous is your pipeline of commercial trials for business model innovation?


4. Prepare for success.

Our survey and interviews indicate that pharma companies aren’t fully prepared for the challenges that these creative new alliances will bring.

  • What gaps do you have in your skill sets and capabilities, and what are you doing to fill them?
  • How are you monitoring and addressing the new and heightened risks in Pharma 3.0 deals?
  • Have you identified and empowered a leader for business model innovation?


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Note: this article contains excerpts from the Ernst & Young Global Pharmaceutical Reports, Executing for success: powering new business models and Pharma 3.0

 



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