PHARMA 2020: CHALLENGING BUSINESS MODELS WHICH PATH WILL YOU TAKE? - PHARMACEUTICALS AND LIFE SCIENCES - PWC
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Pharmaceuticals and Life Sciences Pharma 2020: Challenging business models Which path will you take?
Table of contents
Previous publications in this series include:
Pharmaceuticals Pharmaceuticals and Life Sciences Pharmaceuticals and Life Sciences
Pharma 2020: The vision Pharma 2020: Virtual R&D Pharma 2020: Marketing the future
Which path will you take?* Which path will you take? Which path will you take?
*connectedthinking
Pharma 2020: The vision # Pharma 2020: Virtual R&D 1
Published in June 2007, this paper This report, published in June 2008, Published in February 2009, this paper
highlights a number of issues that will explores opportunities to improve the R&D discusses the key forces reshaping the
have a major bearing on the industry by process. It proposes that new technologies pharmaceutical marketplace, including
2020. The publication outlines the changes will enable the adoption of virtual R&D; and the growing power of healthcare payers,
we believe will best help pharmaceutical by operating in a more connected world the providers and patients, and the changes
companies realise the potential the future industry, in collaboration with researchers, required to create a marketing and sales
holds to enhance the value they provide to governments, healthcare payers and model that is fit for the 21st century. These
shareholders and society alike. providers, can address the changing needs changes will enable the industry to market
of society more effectively. and sell its products more cost-effectively,
to create new opportunities and to generate
greater customer loyalty across the
healthcare spectrum.
“Pharma 2020: Challenging business models” is the fourth paper in the Pharma 2020 series on the future of the pharmaceutical industry to be
published by PricewaterhouseCoopers. This publication highlights how Pharma’s fully integrated business models may not be the best option for the
pharma industry in 2020; more creative collaboration models may be more attractive. This paper also evaluates the advantages and disadvantages of
the alternative business models and how each stands up against the challenges facing the industry.
All these publications are available to download at: www.pwc.com/pharma2020Table of contents Introduction 1 Profiting alone versus profiting together 1 Harking back to the future 2 Reading the signs 2 Broadening the value proposition and managing the value chain 4 Choosing between different collaborative models 6 • The federated model • The virtual variant of the federated model • The venture variant of the federated model • The fully diversified model Charting a successful course 12 Conclusion 13 Acknowledgements 15 References 17 Pharma 2020: Challenging business models
Table of contents
Introduction In the following pages, we shall look
What is a business model?
at the main trends dictating the need
The pharmaceutical marketplace for a more collaborative approach. We The term “business model” is used
is undergoing huge changes, as shall also evaluate the advantages and to encompass a wide range of formal
we indicated in “Pharma 2020: disadvantages of the alternative business and informal descriptions of the core
The vision”, the White Paper models and how each stands up against elements of a business. We have
PricewaterhouseCoopers* published in the challenges facing the industry. used the term in the following sense:
June 2007.1 These changes will have a “A company’s business model is the
major bearing on the kind of business means by which it makes a profit –
models pharmaceutical companies Profiting alone versus how it addresses its marketplace, the
need to employ. offerings it develops and the business
profiting together relationships it deploys to do so.”
Most Big Pharma companies have
traditionally done everything from research Big Pharma’s traditional business model
and development (R&D) through to hinges on the ability to identify promising business model collapses.3
commercialisation themselves. But we new molecules, test them in large clinical
trials and promote them with an extensive Pharma is currently undergoing just
predict that, by 2020, this model will
marketing and sales presence (see such a period of disruptive innovation.
no longer work for many organisations.
sidebar, What is a business model?). In By 2020, most medicines will be
If they are to prosper, they will need to
the predominant version of this model, a paid for on the basis of the results
improve their R&D productivity, reduce
their costs, tap the potential of the single company may employ contractors they deliver – and since many factors
emerging economies and switch from to supplement its own efforts, but it influence outcomes, this means that
selling medicines to managing outcomes seeks to generate profits on its own. In it will have to move into the health
– activities few, if any, companies can essence, it pursues what might be called management space, both to preserve
accomplish on their own. a “profit alone” path. the value of its products and to avoid
being sidelined by new players. If it is to
Even the largest pharmaceutical But, by 2020, the strategy of make groundbreaking new medicines
companies will have to collaborate with singlehandedly placing big bets on a for which governments and health
other organisations to develop effective few molecules, marketing them heavily insurers are prepared to pay premium
new medicines more economically, and turning them into blockbusters will prices, it will also have to build the
help patients manage their health and not suffice. As J.P. Garnier, former chief relationships and infrastructure required
ensure that the products and services executive of GlaxoSmithKline, recently to ensure that it can get access to the
they provide really make a difference. pointed out, it is a “business model outcomes data they collect.
Moreover, they may have to step far where you are guaranteed to lose your
outside the sector to find some of the entire book of business every 10 to In short, the rules of the game are
partners they need. 12 years”.2 shifting dramatically. And, as Michael
G. Jacobides, Associate Professor of
We believe that two principal business More importantly still, it is a business
Strategic and International Management
models – federated and fully diversified model that will no longer meet the
at the London Business School, notes,
– will emerge, as Pharma prepares for market’s needs. Management guru
when an entire “industry architecture”
the future. We also think that the current Clay Christensen has convincingly
is transformed, it is not only “who does
economic downturn will accelerate demonstrated how disruptive
what” that changes, it is also “who
the shift to these new models, both by innovations in various industries have
takes what”.4
reinforcing one of the key causal factors dismantled the prevailing business
– the pressure on healthcare payers model, by enabling new players to By 2020, no pharmaceutical
to maximise the value they get for the target the least profitable customer company will be able to “profit
money they spend – and by opening up segments and gradually move upstream alone”. It will, rather, have to “profit
new opportunities to build or buy the until they can satisfy the demands of together”, by joining forces with a
networks that will be required. every customer – at which point the old wide range of organisations, from
*‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.
Pharma 2020: Challenging business models 1academic institutions, hospitals and will be a “do or die” requirement
Apple’s core strategy of
technology providers to companies for pharmaceutical companies and
collaboration
offering compliance programmes, healthcare payers alike. It will be
London Business School Professor nutritional advice, stress management, essential for pharmaceutical companies
Michael G. Jacobides has recently physiotherapy, exercise facilities, health to develop effective new medicines
argued that successful companies do screening and other such services. and address the demands of payers
not compete in a sector; they shape increasingly well equipped to measure
the nature of a sector. They redefine what they are getting for their money;
the part of the value chain they Harking back to the and essential for payers to cope with
occupy, and keep most of the value- rapidly escalating healthcare costs.
add through the intelligent design of future
their collaboration with others in the
sector. Of course, some pharmaceutical
companies have already tried to Reading the signs
Thus collaboration is not just a tool collaborate with other organisations.
for doing the same things more Rhone-Poulenc Rorer (now part of Various forces are changing the
effectively. At its most powerful, it sanofi-aventis) created RPR Gencell, the environment in which Pharma operates
can reshape an entire market, as world’s first biotechnology network, in and the relative positions of the different
Apple has shown. Apple redefined the 1994.5 Many of the largest companies players in the healthcare arena. These
mobile music sector by outsourcing trends all point towards the need for
also established disease management
the production of the devices and much greater collaboration (see Figure 1).
programmes in the 1990s, although
accessories, while retaining control of
most of them were not very successful The global healthcare bill is soaring,
the iTunes software. In other words,
– primarily because healthcare as the population ages, new medical
it recognised that it could make
payers were sceptical about industry- needs emerge and the disease burden
money by creating and orchestrating
sponsored disease management.6 of the developing world increasingly
a network of relationships – by
So we are not suggesting that the resembles that of the developed world.
controlling, rather than owning.
differences between these early efforts Hence the fact that governments
Apple used three specific tactics and the business models that are likely and health insurers everywhere are
to change the rules of the game. It to prevail in 2020 will be completely struggling to contain their expenditure.
enhanced the mobility of the parts black and white. Nevertheless, we think The issue is further exacerbated by the
of the sector in which it has no that two key differences will apply. current economic turmoil that will put
presence, by establishing a small
First, the technological and cultural even greater financial pressure on the
set of suppliers who know that they
pre-conditions to facilitate collaboration payer community.
can be replaced at any time. It made
itself into a bottleneck, by holding are now in place. In the mid-1990s, the Healthcare payers in the industrialised
onto the music format and ensuring Internet was still in its infancy and many economies are already mandating
that files compatible with iPod can of the tools that enable collaboration did what doctors can prescribe. The
only be played on iPod devices. not exist. Today, however, such tools are British National Health Service has
And it redefined who did what, by plentiful and the wider business culture also introduced a flexible pricing
encouraging other companies to has changed dramatically. IBM, Apple, scheme under which the prices of
develop accessories rather than Amazon and their ilk have demonstrated new medicines can be lowered or
entering the accessories market the power of open platforms, lifted, depending on the outcomes
itself. This has enabled it to benefit transformed corporate attitudes they deliver.8 And US President
from the efforts of those that support towards networking and shown that it is
Barack Obama’s administration is
its architecture, without making any possible to reap much richer rewards by
moving towards opening up the US
capital commitment itself. profiting together than by profiting alone
market to much greater competition
(see sidebar, Apple’s core strategy of
from generics, as well as allowing the
collaboration).7
importation of cheaper medications
Second, by 2020, collaboration from “safe” countries.9
2 PricewaterhouseCoopersThe developing world will soon come the country’s current economic they will expect the industry to go
under equal pressure. The emerging development. However, it is hard to see “beyond the medicine” by providing
economies will experience the most how the plan will not entail a substantial prophylactics and healthcare packages
rapid growth in demand for medicines increase in China’s healthcare costs.10 designed to help patients manage their
over the next 11 years, but many (if not health. Moreover, patients will play a
all) of them will struggle to fund this Healthcare payers in both the much bigger role in determining how
demand. The Chinese government has, developed and developing worlds are they are treated, as the money they
for example, undertaken to introduce also beginning to measure outcomes spend on medicines likewise rises
a universal healthcare system with a much more carefully and to emphasise and the Internet gives them access to
level of cover that does not exceed the importance of prevention. By 2020, more information. Armed with insights
Figure 1: The key trends now emerging and their implications for Pharma
Trends
Market trends Health and healthcare trends Scientific and technological trends
• Patients are becoming better informed • The burden of – and bill for – chronic • R&D is becoming more virtualised
• Patients are picking up a bigger share disease is soaring • The research base is shifting to Asia
of the bill • Healthcare payers are establishing • Remote monitoring is improving rapidly
• Demand for personalised medicine is treatment protocols
increasing • Pay-for-performance is on the rise
• Patients want cures, not treatments • The boundaries between different forms
• The emerging markets are becoming of care are blurring
more important • Financial constraints on payers are
increasing
Implications
Pharma will need to go “beyond the R&D will need to go beyond the lab The Pharma and healthcare value chains
medicine” will become much more intertwined
• Pharma will be paid for outcomes, • Pharma will need access to outcomes • Pharma will have to work more closely
not products data with the regulators
• Outcomes data will drive healthcare • Pharma will have to work with • Pharma will have to collaborate with
policy technology vendors to virtualise R&D payers and providers to perform
• Prevention will gain a higher healthcare • Pharma will need a wider, more continuous trials
profile multi-disciplinary skills base • Pharma will have to collaborate with
• Pharma will need to offer “medicine- • Pharma will need to expand its numerous service providers to deliver
plus” packages of care presence in Asia packages of care
• Pharma will have to adopt more flexible • Pharma will need to demonstrate “real”
pricing strategies value-for-money
Business models based on collaboration
Source: PricewaterhouseCoopers
Pharma 2020: Challenging business models 3gleaned from educational websites, a monumental collaborative effort far
Emerging collaborative networks
discussion groups and blogs, they will exceeding that required to complete the
Several pharmaceutical firms not only want better, safer medicines, Human Genome Project.13
have already begun to use more they will also want a range of satellite
The economic case for change is
collaborative models. One such services they can tailor to their
clear. The decline of revenue growth
instance is Lilly, which is currently individual needs.
and margins result in reduced
transforming itself from a traditional
If Pharma is to accommodate these shareholder returns which will force
fully integrated pharmaceutical
changes in the marketplace, it will have pharmaceutical companies to adapt.
company into a fully integrated
to collaborate much more extensively There is a compelling case for increased
pharmaceutical network, so that it can
– as it will, indeed, to capitalise on collaboration. Delivering drug therapies
draw on a wide range of resources
some of the scientific and technological to payers and patients in a 2020 world
beyond its own walls. Lilly hopes that
trends that are now emerging. The will require new skills, technologies and
teaming up with other organisations
research base is shifting, for example. channels - the infrastructure required will
to create virtual R&D programmes
Non-OECD economies accounted for be uneconomic for anyone, other than
will enable it to get better access to
18.4% of the world’s R&D in 2005, up the largest players, to build internally.
innovation, reduce its costs, manage
from 11.7% in 1996. The number of
risks more effectively and enhance To sum up, the key social, economic
its productivity. For example, the patents filed by Asian researchers also
and technological changes currently
Chorus Project is a virtual organisation increased significantly over the same
taking place in the pharmaceutical and
to take molecules quickly to Proof period, albeit from low levels.11 So the
industry will have to forge much closer healthcare arena will all necessitate the
of Concept. Lilly also uses external development of multinational, multi-
networks comprising third parties such links with the most reputable centres of
scientific excellence in these countries. disciplinary networks drawing on a
as Piramal Life Sciences, Hutchison much wider range of skills than Pharma
MediPharma, Suven Life Sciences for Meanwhile, new technologies are alone can provide. The constraints
the development of molecules. providing new sources of knowledge. that previously hindered organisations
Swiss biopharmaceutical development Home surveillance systems, portable from collaborating over distance are
specialist Debiopharm has pioneered a devices and implants, linked to online simultaneously evaporating – paving the
more radical approach. The company and wireless networks, will facilitate way for the use of new business models
in-licenses promising new candidates the monitoring of patients on a real- (see sidebar, Emerging collaborative
from academic institutes and biotech time basis outside a clinical setting. networks).14 In the next sections, we shall
companies, develops them and then But if Pharma is to get access to the look at the implications of broadening the
out-licences them to Big Pharma. outcomes data remote monitoring value proposition, the various models that
Debiopharm’s successes include three generates, it will have to collaborate exist and the different opportunities and
products with combined global sales with the hospitals and clinics that risks they present.
of more than US$2.6 billion in 2007. capture this information.
Most of the collaborative models that Technological advances will likewise
currently exist are limited to R&D. But enable the virtualisation of large parts Broadening the value
of the R&D process, as we explained in
it is easy to envisage various other
“Pharma 2020: Virtual R&D”.12 Some of
proposition and
permutations, including networks
focusing on different therapeutic the leading pharmaceutical companies managing the value chain
areas and covering everything from are already exploring the potential of
R&D through to sales and marketing; semantic technologies and computer- Pharma currently creates value by
networks focusing on different aided molecule design. Various developing new medicines (and a
enabling technologies, such as academic institutes and bioinformatics relatively limited number of diagnostics).
genomics, proteomics and stem cell firms are also building computer models Collaborating much more closely with
research; and networks focusing of different organs and cells, with the the key stakeholders in the healthcare
on the management of outcomes in ultimate aim of creating a “virtual man”. sector will enable the industry both
specific patient segments. But developing such a model will require to expand its remit and to align its
4 PricewaterhouseCoopersvalue chain more closely with those of on getting access to the patients whom a more dynamic relationship with
healthcare payers and providers. providers serve and income from the healthcare payers and providers. So,
payers who fund those providers. Yet too, will building the networks required
As we indicated in more detail in
the relationship between the different to deliver healthcare packages that
“Pharma 2020: Marketing the future”,
players is often quite antagonistic and, encompass a wide range of products
the value chains of the three parties
while they continue to clash, they are and services from numerous different
are heavily interdependent. The value
struggling to retain their respective suppliers. This will ultimately result in
payers generate depends on the
goals.15 the convergence of the separate, linear
policies and practices of the providers
value chains that exist today and the
they use. The value providers generate If Pharma broadens its value
emergence of a single, circular value
depends on the revenues payers raise proposition, it can begin to close the
chain (see Figure 2).
and the medicines Pharma makes. And gap. Creating feedback loops to capture
the value Pharma generates depends outcomes data will help it to establish
Figure 2: By 2020, the pharmaceutical, payer and provider value chains will be much more closely intertwined
Practice g
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Source: PricewaterhouseCoopers
Pharma 2020: Challenging business models 5Choosing between models are not mutually exclusive. A technology suppliers, data analysis
fully diversified company might choose firms and lifestyle service providers
different collaborative to use a federated model for certain based in numerous countries. They
models aspects of its business, and vice versa. might also include business units from
But we think that the federated model within the company itself, which it
One vital question remains, however; will ultimately dominate, primarily places at “arm’s length” (see Figure 4).
namely, what sort of model should because it is quicker and more
companies use to effect these changes? economical to implement. The various participants have a mutual
We believe that two principal models goal – such as the management of
– federated and fully diversified – will outcomes in a given patient population.
emerge. We have also identified two
The federated model They also share funding, data, access
variants of the federated model. In the In the federated approach, a company to patients and back-office services,
virtual version, a company outsources creates a network of separate and this interdependence is the
most or all of its activities; in the entities with a common supporting glue that holds them together. They
venture version, it manages a portfolio infrastructure. These might include are rewarded for their efforts using
of investments (see Figure 3). The two universities, hospitals, clinics, measures like increased life expectancy
Figure 3: The different business models
Collaborative: Federated Model Owned: Fully Diversified Model
• Network of separate entities • Network of entities owned by one
parent company
• Based on shared goals & infrastructure
• Based on provision of internally integrated
• Draws on in-house and/or external assets
product-service mix
• Combines size with flexibility
• Spreads risk across business units
Virtual Variant Venture Variant
• Network of contractors • Portfolio of investments
• Activities coordinated by one company • Based on sharing of intellectual property/
acting as hub capital growth
• Operates on project-by-project basis • Stimulates entrepreneurialism & innovation
• Fee-for-service financial structure • Spreads risk across portfolio
Source: PricewaterhouseCoopers
6 PricewaterhouseCoopersor quality-adjusted life years. And each Figure 4: The federated model
is rewarded in a manner that reflects
the evidence base for the contribution it
has made (see sidebar, How should the ogy Data
hnol
cake be sliced?).16 Tec pliers Analy
sts
Su p
The federated model provides a Ph
y
framework for creating integrated cs ers C
ur
sio ntr
fa i
nu er
packages of products and services, and
th es
Ma Gen
ct
e
er
thus diversifying beyond a company’s
ap
y
core offering. It also combines the
benefits of nimbleness and size. It
e
would enable each player to build a
e
Complianc
Hospita
Call Centr
specific area of expertise, establish a
competitive advantage as a result of
Federation
ls
that expertise and sell its products,
knowledge or skills, leaving activities
that are better performed by others to
its partners within the federation.
Man ntres
We men
cs
Ce
age
More importantly still, the federated
nin
igh
model might encourage greater
Cli
t t
cross-fertilisation and deliver bigger
improvements in performance, without Fi
forfeiting any flexibility. The stronger tn s
es tie
members of the network could help
s Clu ersi
bs i v
Pharmaceutical Un
the weaker ones to improve – since
federations have an incentive to perform Company
well as a whole – but they could also
replace any participant that persistently
underperforms. Source: PricewaterhouseCoopers
How should the cake be sliced? much? Various studies have established better collaboratively it is essential to
some parameters. They show, for define upfront measurable components
It may sometimes be hard to measure
instance, that high-frequency exercise of delivery and value.
the value different participants have
can improve the cardio-respiratory
created for two reasons. First, the Defining the value provided by each
parties in any collaboration typically fitness of patients with heart disease
player in the federation will then inform
value the contributions they have by at least 10% – and that, in turn,
how each party should be rewarded -
made more highly than those of their can reduce the mortality rate by 15%.
this will be a combination of theoretical
partners. This is a problem that can We believe that many more studies
analysis and monitoring of outcomes
be solved with watertight contracts, to evaluate the effectiveness of non-
and benefits to the patient. Clearly
robust performance indicators, good pharmacological interventions will be
to avoid the risk of litigation or the
governance and a proper audit trail. conducted in future, as healthcare
constraints of exclusivity, the federation
Second, assessing the impact of payers everywhere focus more heavily
needs to be underpinned by mutual
different forms of intervention can be on preventative measures.
trust between all parties. However, there
very difficult indeed.
This approach is essentially a more are several examples of where this has
Medicines, diet and exercise all play complex variant of the co-development worked effectively such as a franchising
a role in managing cardiovascular and co-distribution agreements we have model where the value of a brand is
disease, for example, but precisely how today. In order for companies to work measured and rewarded.
Pharma 2020: Challenging business models 7Table of contents
The virtual variant of the federated Figure 5: The virtual variant of the federated model
model
In the virtual variant of the federated
model most or all of a company’s g Dis
tu rin t rib
operations are outsourced and the
fac ut
company itself acts as a management nu io
a
hub, coordinating the activities of
n
M
its partners (see Figure 5). Several
industries have already adopted
some aspects of this model. The
semiconductor industry typically
outsources its manufacturing in
order to concentrate on product
development, for example, and a
number of companies in the medical
devices sector are now following suit.17
Management
ting
Hub
ent
Similarly, strategic outsourcing of
Marke
design and manufacture to suppliers
pm
has redefined manufacturing functions
velo
within industries such as aerospace,
&
les
De
computing and electronics.
Sa
Most large pharmaceutical companies
also use external contractors to
supplement their in-house resources,
but very few firms have gone any
further (see sidebar, Shire’s virtual
vision).18 There are very good reasons Research
why pharmaceutical companies should
outsource their R&D, manufacturing
and promotional activities where third
party alliances can provide a wider
Source: PricewaterhouseCoopers
range of opportunities, specialist
skills and market access. A pharma
company can then focus on the value
adding functions where they can Shire’s virtual vision
leverage on their relationships, scale Shire Pharmaceuticals is the epitome of a virtual company. It outsources almost
and market knowledge – i.e., project everything, from discovery to medical monitoring to data management to
management, business development, statistics to medical writing. With the exception of its genetic therapy division,
regulatory affairs, intellectual property every product it develops has been purchased from an outside source, via
management and the formation of good in-licensing or acquisition.
relationships with key opinion leaders
8 PricewaterhouseCoopersand healthcare providers. study, a company that performs certain spread them across a number of areas
preclinical development activities in- in order to minimise its risk. At the end
The virtual variant of the federated
house can expect to pay more than of the investment period, it might either
model has other advantages, too. It
double what it would pay if it completely claim the intellectual property that has
would enable companies to reduce
their initial capital outlay, convert outsourced these activities to a third been generated or out-license it to a
some of their fixed costs into variable party.19 But a shortage of top-class third party. Alternatively, the originating
costs, utilise their resources more service providers or experts in particular company (or companies) might retain
efficiently and become more flexible. areas such as biological manufacturing the intellectual property, commercialise
Equally important, it might help the could drive prices up. it and pay the sponsoring company a
industry leaders to expand into new return on its investment (see Figure 6).
product/service areas or geographic The venture variant of the GlaxoSmithKline has used a version
markets without resorting to further federated model of the venture structure for many
mega-mergers (and thus facing the years. SR One, its evergreen fund,
huge challenges associated with The venture variant of the federated
was established in 1985 and has
integrating two formerly separate model entails investing in a portfolio of
now invested more than US$500m in
entities) or succumbing to the corporate companies in return for a share of the
some 30 private and public biotech
bureaucracy that so often strangles intellectual assets and/or capital growth
companies focusing on drug discovery,
innovation. they generate, rather than outsourcing
development and delivery.20 Other
specific tasks. Special purpose vehicles
However, the virtual variant also comes Big Pharma companies, such as
are sometimes used to manage such
with some significant drawbacks. Novartis and Pfizer, have also set up
investments, because they offer several
The balance of power might shift to corporate venture capital funds,21
advantages in terms of risk sharing and
suppliers, as it has done to a certain and AstraZeneca spun off part of its
intellectual property protection.
extent in the automotive industry, gastrointestinal research operation
where a number of Tier 1 suppliers A pharmaceutical company might into a new company backed by a
now manage their own supply chains. choose to concentrate its investments consortium of private equity firms.22
Alternatively, a major supplier might in a particular therapeutic area or US investment bank Goldman Sachs
get into financial difficulties and start
offering an inferior service or even Figure 6: The venture variant of the federated model
default on its obligations altogether.
But such risks can often be managed
by using multiple suppliers, wherever
possible.
Out-licensing/In-licensing Pharmaceutical
Some pharmaceutical companies company
ph
ent
arm
Re ceut
might also see their earnings diluted, aym
tur ica
a
p
alty
n o l co
since every participant in the value Ro
y
t
en
f IP m
tm
chain would expect a return for the
es
Third party
to pany
Inv
services it provides. Theoretically, this
should not happen, since specialist
contractors typically have lower
Out-licensing Growth Generation of IP
costs than integrated pharmaceutical company IP
companies. Indeed, according to one
Return of IP to growth company
Source: PricewaterhouseCoopers
Pharma 2020: Challenging business models 9Portfolio of pills trends which might stimulate greater
innovation.
Goldman Sachs has funded a The structure of the deal gives a
new “research pool” into which majority 85% stake to GSK and 15% Similarly, it would provide incentives for
pharmaceutical companies could traditional contract service providers to
to Pfizer with an increase of Pfizer’s
place a range of experimental make strategic, long-term investments –
stake to 24.5% if all milestones are
as Lonza did, when it collaborated with
medicines in a single therapeutic area reached. The new firm, with a current
Genentech to build a manufacturing
in early-stage Phase I and II trials. revenue of £1.6 billion has a portfolio plant in Singapore.27 And it would
External experts, including scientists, of 11 products and a drug-discovery enable pharmaceutical companies to
chemists and clinical research pipeline of 17. R&D services will be explore numerous new avenues of R&D,
organisations, would work alongside
contracted directly from GSK and or expand their global manufacturing
scientists from the originating
Pfizer to develop these drugs with and marketing capacity, without
companies. The bank argues that this
investment from the new firm. In investing too heavily in any one project.
approach would reduce the costs
return, the new firm will have exclusive However, venture structures are not
and bureaucracy associated with Big
Pharma. It might also allow competing rights of first negotiation with respect without their challenges. For a start,
companies working on similar drugs to HIV drugs developed by the two the skills involved in managing a
to pool their resources, rather than pharma majors. The rationale for the portfolio of holdings are very different
duplicating each other’s efforts. venture is that the new firm will be from those involved in assessing and
more sustainable and broader as a pursuing potential research leads, as
In April 2009, GSK and Pfizer is the timeframe venture capitalists
combined venture and that there are
announced that they intend to use to realise a return. So Big Pharma
synergies on the commercial side.
combine resources to set up a new would need to recruit people with the
spin off firm dedicated to the HIV. necessary expertise and manage any
conflicting objectives very carefully.
has already dipped a toe in the water So what might the venture variant
Moreover, any company that operated
with its own venture fund (see sidebar, deliver, if it were implemented on a
a large corporate venture capital fund
Portfolio of pills).23 much larger scale and extended to
alongside its own research portfolio
Nevertheless, all these initiatives other parts of the value chain? It would
would have to consider the financial
are very small; between 2003 and alleviate the funding challenges in the
implications very carefully. R&D
September 2006, corporate venture biotech sector, where companies often
expenditure is typically recorded on a
capitalists invested just over US$1.5 struggle to raise a second or third company’s profit and loss statement,
billion in the US life sciences sector,24 round of financing because venture for example, whereas investments are
a fraction of the estimated US$11- capitalists want to exit before they can registered on the balance sheet and
15 billion the member companies of commercialise their products. These subject to annual impairment reviews.
the Pharmaceutical Research and challenges have been exacerbated by This has an impact on how companies
Manufacturers of America spent on the credit crunch and are likely to get are taxed and on how they are valued
discovery in 2006 alone.25 Most such even worse in the current economic by the stock markets. Similarly, if
ventures are also confined to research, recession.26 It would also allow a company’s risk profile increases
although the same approach could be promising start-ups to capitalise on because it has less control over research
applied to development, manufacturing, Big Pharma’s experience without being that is conducted outside its own walls,
distribution, and marketing and sales. stifled by a Big Pharma culture – both its cost of capital will increase.
10 PricewaterhouseCoopersThe fully diversified model of HealthMedia, a web-based “health with the potential to act as a bulwark
coach”.30 against generic competition. Like
The fully diversified model is one in
the federated model, it also provides
which a company expands from its A number of other companies are now
a means of moving into outcomes
core business into the provision of following suit. Novartis has spent nearly
US$25 billion beefing up its vaccines, management by offering combined
related products and services, such
generics and eye-care products product-service packages and playing
as diagnostics and devices, generics,
operations over the past three years, to the growing political emphasis on
nutraceuticals and health management
for example.31 Roche is drawing on prevention rather than treatment.
(see Figure 7). Johnson & Johnson
is Pharma’s leading exponent of this its expertise in molecular diagnostics In addition to these advantages, it might
approach. It is now the world’s largest to develop a consumer product test offer opportunities both to develop more
consumer health company, following for measuring indoor allergens.32 And powerful brands and to acquire a better
the US$16.6 billion acquisition of GlaxoSmithKline has announced plans corporate image. Numerous studies
Pfizer’s over-the-counter business to “diversify and de-risk” by focusing show the extent to which Pharma’s
in December 2006.28 It is also the more heavily on vaccines, consumer reputation has declined over the past
third-largest biologics and sixth- health and the emerging markets.33 decade.34 Supplementing its products with
largest pharmaceutical company, has The fully diversified model has several “wellness” services might help a company
an extensive medical devices and merits, not least the fact that it enables to create a more positive impression,
diagnostics operation,29 and recently companies to reduce their reliance on although it would have to handle its
started building a wellness and blockbuster medicines and spread their relations with the regulators, healthcare
prevention platform, with the purchase risk by moving into other market spaces providers and patients very carefully.
Figure 7: The fully diversified model
Ethical Diagnostics Consumer Health
Generics
Pharmaceuticals & Devices Health Management
Mass-Market • Molecular testing • Branded generics • Over-the-counter • Patient education
• Primary-care • Clinical biomarkers • Commodity generics medicines
• Delivery and drug
products (including • Consumer administration
• Medical devices • Super-generics
patches, inhalants diagnostics services
and controlled-release • Follow-on biologicals
• Nutraceuticals • Monitoring and
implants)
counselling
• Poly-pills
• Physiotherapy
Specialised-Market • Nutritional advice
• Biologicals • Wellness
• Orphan drugs management
• Vaccines
Source: PricewaterhouseCoopers
Pharma 2020: Challenging business models 11Table of contents
However, the fully diversified model has participants in the network is also likely coalitions to create a fully federated
drawbacks, too. It requires a substantial to be relatively limited. In a heavily network of long-term partners (see
investment in new equipment, premises regulated industry such as Pharma, any Figure 8). Taking incremental steps
and personnel, as well as major cultural diminution of managerial control has will not only help them to identify the
changes, since the provision of products serious implications. So it is crucial to organisations with which they can work
is very different from the provision of establish clear goals and guidelines for most effectively, but also give them
services. It might also create new risks the governance and funding of such time to establish the technological
by distracting management’s attention arrangements, and for the division of infrastructure that is essential to
from the core business – and even any intellectual assets they generate, manage the interfaces between two or
alienate investors, who often prefer to before signing on the dotted line. more different parties.
spread risk themselves.
Disrupting the existing order can Most companies will also have to recruit
have a major impact on a company’s or train people with new skills. They will,
short-term performance, too. When for example, need researchers who can
Charting a successful GlaxoSmithKline established its Centres understand commercial imperatives;
course of Excellence for Drug Discovery, financial analysts who can assess
the upheavals the R&D function was different investment opportunities with
Clearly, the business model, or models, experiencing affected its pipeline for at the discipline of venture capitalists;
a company chooses will depend on least 18 months.35 senior executives who can negotiate
its individual circumstances, including and oversee alliances; supply chain
We think that many companies which
the particular challenges it faces, the managers who can supervise large
choose the federated model will
expertise it possesses and the markets networks of service providers; and
therefore adopt a progressive approach.
in which it wants to operate. A company health economists who can measure the
They will start with opportunistic
that focuses exclusively on ethical value of the contributions the respective
alliances; use the most successful
pharmaceuticals might find it harder parties make. Those that choose to enter
alliances as building blocks to create
to diversify than one that is already the health management space directly
more strategic, longer-lasting coalitions;
experienced in managing multiple will also have to hire physiotherapists,
and, finally, use the most successful
areas of activity, for example. Moreover,
federations typically place greater Figure 8: The path to federation is likely to be gradual
demands on senior management than
conventional organisational hierarchies.
Opportunistic Strategic Full
Creating and supervising a cross- Alliances Coalitions Federation
border, cross-disciplinary network
of external relationships can be very • Ad-hoc • Extended alliances • Extended coalitions
time-consuming – and it is often • Short-term • Medium-term • Long-term
more difficult to identify, monitor and • Two parties • Three or more parties • Many parties
manage risks. The various parties may
• One-to-one relationship • One-to-many • Many-to-many
have different cultural characteristics,
• Partial alignment relationship relationship
different ways of communicating and
different expectations, some of which • Closer alignment • Complete alignment
may change over time. An individual
manager’s authority over the other Source: PricewaterhouseCoopers
12 PricewaterhouseCoopersdieticians, counsellors and numerous for many years – and to profit very a clear economic rationale for greater
other people with skills that were successfully, as its track record in collaboration (See sidebar, Show me
formerly outside Pharma’s domain. rewarding shareholders shows. The the money).
top companies saw their market
Finding people with the appropriate Moreover, many companies will need to
value soar 85-fold between 1985 and
expertise will not be easy. Many move fast. As the healthcare landscape
2000.36 But this model is now under
companies will therefore have to adopt huge pressure and, by 2020, it will changes and scientific expertise
new talent management strategies, as not work. If the industry is to improve becomes less important than the ability
well as ensuring that the performance its performance in the lab, reduce its to manage networks, the scope for
measures and incentive systems they costs, serve the emerging markets competition from new entrants will
use support the behaviour they want to more effectively and make the transition increase. Several non-pharmaceutical
encourage. from producing medicines to managing companies have already entered the
outcomes – as healthcare payers, arena. Vodafone has, for example,
providers and patients are increasingly joined forces with Spanish telemedicine
Conclusion demanding – it will have to collaborate provider Medicronic Salud and device
with other organisations, both inside manufacturer Aerotel Medical Systems
Pharma’s fully integrated business and outside the sector. It simply cannot to offer a wireless home monitoring
model enabled it to profit alone do everything itself. In addition there is service.37 Similarly, British insurance
Show me the money
There is plenty of evidence pointing to big opportunities for savings to be made through early intervention and tighter
management of patients and treatments. The federated model will make these savings more systematic and predictable,
rewarding participants based on the value that they create. Aligning risk and incentives appropriately is key to realising these
benefits. For example:
• A study by the RAND Corporation estimated the financial savings from having 100% participation in disease management
programmes for four diseases (asthma, chronic obstructive pulmonary disease, diabetes and congestive heart failure) in
the US. They estimate the net savings to the health system to be $28bn (around 2% of total US health expenditure), with
additional benefits to the economy in terms of work days saved.38
• Britain’s Audit Commission examined the scale of adverse events in UK hospitals. They found that 10.8% of patients on
medical wards experience an adverse event, 46% of which are preventable. One third of the adverse events lead to greater
morbidity or death and cost the UK’s NHS £1.1bn a year.39
• The five most costly conditions collectively account for 32.7% of overall healthcare expenditure. As we highlighted in
“Pharma 2020: The vision”, improving patient compliance with enhanced treatment regimes by collaborating with other
support services is a key enabler to drive the healthcare bill down. Further, some commentators have suggested giving
patients financial incentives to improve compliance.40
• In 2009, Cisco Systems reported healthcare cost savings of $2.6m from a programme of on-site medical clinics covering 6,000
employees supported by integrated healthcare technology systems, chronic disease management, and health coaching.41
Pharma 2020: Challenging business models 13giant Prudential is collaborating with Commission shows, for example, that
Key questions for senior
Virgin Active Health Club to offer a annual spending on the treatment of
management
critical illness policy that provides diabetes ranges from less than £8 to
• What is our current business subsidised gym membership and over £30 (US$11.9-US$44.6) per head.43
model? Does it play sufficiently to rewards people who exercise regularly But differences in the prevalence of
our strengths? by reducing their premiums.42 If the diabetes account for only 8% of this
leading pharmaceutical companies variation – and higher expenditure does
• What kind of company do we
cannot change their business models not result in fewer emergency hospital
want our company to be?
rapidly, such firms may ultimately admissions.44
• Will our current business model feature more prominently on the
To date, Pharma has focused on the
enable us to expand into healthcare scene than they themselves.
profits it can earn from the estimated
new markets – be these new
The transition will not be easy, for 10-15% of the health budget that goes
products, services or countries
collaborative business models are on medicines.45 Yet there are many
– and satisfy the expectations of
far more complex than the integrated opportunities to generate revenues
our customers in 2020? If not,
model that has previously prevailed. by improving the way on which the
what sort of business model will
Moreover, no one model will suit every remaining 85-90% is spent. It is these
we need?
company. Each will need to assess opportunities the industry will need to
• What is the size of the gap and its position, options and future course address in the brave new world of 2020.
how can we reduce it as rapidly in light of its individual strengths and
as possible? needs (see sidebar, Key questions for
senior management).
• Do we have a clear picture of the
opportunities and risks entailed However, the prospects for any
by each of the alternatives pharmaceutical company that can make
available to us? the switch are very promising. The
potential for reallocating resources to
• Do we have a plan in place that
deliver better outcomes and maximise
will enable us to move forward
the effectiveness of expenditure
quickly, while maximising the
on healthcare is considerable in
opportunities and minimising the
most healthcare systems. Research
risks?
recently completed by Britain’s Audit
14 PricewaterhouseCoopersAcknowledgements We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report. We would also like to express our appreciation for the input we received from clients and our particular gratitude to the following external experts who so generously donated their time and effort to the project; Adrian Rawcliffe, Senior Vice President Worldwide Business Development, GlaxoSmithKline Plc. Dr Dennis B Gillings, Chairman of the Board and Founder, Quintiles Transnational Corp. Dr Genghis Lloyd-Harris, Partner, Abingworth Gino Santini, Senior Vice President, Corporate Strategy and Policy, Eli Lilly and Co. John Fowler, Head of Healthcare Investment Banking Team in Europe, Deustche Bank AG Dr John Murphy, European Pharmaceuticals Analyst, Goldman Sachs Group, Inc. Laurent Massuyeau, Head of Business Development, Addex Pharmaceuticals Ltd. Professor Michael Jacobides, London Business School Dr Vincent Mutel, Chief Executive Officer, Addex Pharmaceuticals Ltd. The views expressed herein are personal and do not reflect the views of the organisations represented by the individuals concerned. Pharma 2020: Challenging business models 15
Table of contents
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