ProgressionsBuilding Pharma 3.0

Global PharmaceuticalIndustry Report 2011

WelcomeTo our clients and friends:A lot has happened in the year since the launch of Progressions 2010. That report — the first in which we discussed the impact of a collection of trends we refer to as “Pharma 3.0” — detailed how the growing need to make health care sustainable, combined with the simultaneous coming of age of technologies such as health IT and mobile health applications, is transforming the very business of pharma. In Pharma 3.0, companies will succeed or fail based not on how many units of a drug they sell, but on how well their market offerings improve health outcomes.

Progressions 2010 was very well received, garnering widespread coverage in leading business media outlets across the world’s established and emerging drug markets. More important, the report elicited an unprecedented level of interest from you — our clients and friends. Pharma companies and non-traditional players, it turned out, were very interested in discussing what these developments could mean for them. Consequently, we have had many fascinating conversations with executive teams who were keen to understand the changing competitive landscape, identify opportunities and define possiblestrategic responses.

We are still actively engaging with companies on these issues, but the nature of our conversations has changed significantly over the last 12 months. A year ago, the discussions were focused on questions of “if,” “when” and “why.” Participants wanted to know whether Pharma 3.0 was real and how soon any of this could realistically be expected to play out.

Today, there is general acceptance that Pharma 3.0 deserves a strategic focus. Moreover, it is becoming increasingly clear that the emphasis on 3.0 is critical not only to sustain success in tomorrow’s outcomes-focused ecosystem but also to increase market penetration and performance in today’s challenging business environment. The opportunities that companies can seize by building success in Pharma 3.0 — solutions that extend drug life, increase patient adherence, create more effective sales and marketing and much more — are increasingly relevant for success in Pharma 2.0 as well.

The conversation has therefore shifted to “what,” “how” and “where.” What do we need to do to adaptour strategy for success in 3.0? How do we go about implementing the changes that will be needed?Where do we start? These questions are the focus of this year’s Progressions.

In Chapter 1, we describe advances in the rapidly evolving health outcomes ecosystem, and document how the pace of change has accelerated. Still, even as pharma companies are experimenting with innovative 3.0 business models at a faster clip than ever before, their 3.0 investments pale when compared with companies from other industries, which have committed to business model experimentation and innovation in the health arena in a much bigger way.

And innovation does not come from experimentation alone. It also requires organizational capabilities, supporting functionality and a rigorous process for making strategic bets on a large scale, identifying the most successful models and scaling those up for market deployment. In addition, the participants in the ecosystem will need coordinated action to realign incentives, standards and metrics around health outcomes — the subject of Chapter 2. In Chapter 3, we describe three organizational capabilities that will drive success in Pharma 3.0: connecting information; entering radical collaboration; and managing multiple business models. In Chapter 4, we discuss six supporting business functionalities that companies will either build from the ground up or significantly enhance to support their 3.0 initiatives.

To a large extent, this year’s report was informed by interviews with a sizeable number of business leaders from pharma companies, other health care firms and non-traditional players in the health outcomes ecosystem. You will gain insights from these executives through quotes, interviews, guest articles, “A closer look” sidebars and a roundtable with pharma strategy leaders.

That’s only fitting. As we worked on this year’s Progressions, it became increasingly clear that Pharma 3.0 is really about co-creation — leveraging the insights and attributes of partners with different perspectives. In many ways, form has followed content, and this year’s report is richer because of the insights we obtained from all of you — the companies on the front lines of Pharma 3.0. We also want to thank our many colleagues at Ernst & Young who contributed to this report, with particular thanks to Frank Kumli, Senior Business Analyst, andSue Lavin Jones, Senior Marketing Manager, who have worked tirelessly on this endeavor.

Ernst & Young’s worldwide organization stands ready to help you — and co-create value with you — as you navigate your way forward.

Carolyn Buck LuceGlobal Pharmaceutical Sector Leader

Gautam JaggiManaging Editor, Progressions

Contents

Chapter 1: A rapidly changing ecosystem 1

Using data to improve outcomesGianrico Farrugia, Mayo Clinic Center for Innovation 7

Managing health, holisticallyRajesh Jain, Panacea Biotec 9

Patient powerMary Baker, European Brain Council and EuropeanFederation of Neurological Associations 10

Bringing value to health careJohn Agwunobi and Sandy Kinsey, Walmart 12

Delivering valueBill Hook, UPS 15

Chapter 2: Getting to 3.0 17

Chapter 3: A road map for change 231. Connecting information 24

Perspective on connecting informationConnectivity changes everythingDon Jones, Qualcomm 26

Perspective on connecting informationBringing outcomes to patientsDon Waugh, PharmaTrust 27

2. Radical collaboration 30

Perspective on innovationOnly do what only you can doChris Thoen, Procter & Gamble 32

3. Multiple business models 33

Strategy roundtable

Building Pharma 3.0 38Dave DeMarco, Ernst & Young LLPJay Galeota, Merck & Co.Kim Park, Johnson & JohnsonKristin Peck, Pfizer Inc.

Chapter 4: Implementing change 431. Business model development 43

A closer lookThe people side of Pharma 3.0Carol Pasmore, Ernst & Young LLP 44

2. Community engagement 48

Perspective on community engagementThe power of listeningDaniel Palestrant, Sermo 50

Perspective on community engagementThe importance of being realD. Stuart Sowder, Pfizer 51

A closer lookSix key elements of effective enterprise innovationBrad Kenney, Ernst & Young LLP 53

Market access: the new frontierJoerg Reinhardt, Bayer HealthCare 54

Managing a portfolio of partnershipsJackie Hunter, Pharmivation 55

3. Information strategy 56

A closer look The cloud as competitive advantageMalcolm Postings, Ernst & Young LLP 57

Success will follow the informationAnthony Rosenberg, Novartis 58

Perspective on information strategyInformation is strategyRay Pawlicki, Biogen Idec 60

Perspective on information strategyIT of the futureMichael Hedges, Medtronic Inc. 61

4. Performance management 62

A closer look Scenario planning for 3.0Frank Broetzmann, Ernst & Young Ltd. 63

5. Capital strategy 64

Perspective on capital strategyAllocating capitalAdrian Rawcliffe, GlaxoSmithKline 65

A closer lookTax planning for Pharma 3.0Andy Brown, Ernst & Young LLP 67

6. Governance, risk and controls 69

A closer lookPrivacy regulations and risksSagi Leizerov, Ernst & Young LLP 69

A closer lookAgile operations for an agile marketKeith Forsyth, Ernst & Young Ltd. 71

Guiding principles for building Pharma 3.0 73

Index of charts 74

Acknowledgments 75

Global life sciences contacts 76

f Progressions 2011

A rapidly changing ecosystem

1

The story so farIn last year’s Progressions, we stated that the pharmaceutical industry is in the early stages of moving to a very different future: Pharma 3.0, the health outcomes ecosystem.

This shift is in fact the second major wave of change to strike the industry in recent years. For the last decade or so, pharma companies have already been reinventing their business models as the patents on some of their biggest blockbuster drugs drew close to expiration and it became clearer that existing pipelines would not be sufficient to fill the gap. As the industry moved from Pharma 1.0 (the blockbuster model) to Pharma 2.0 (today’s pharmaceutical industry), companies sought to replenish their pipelines, boost revenues and “variablize” fixed costs. They diversified away from blockbusters into portfolios of more-targeted drugs in strategic therapeutic areas, as well as into other segments such as over-the-counter (OTC) medicines, generics, animal health and consumer products. They brought increased focus and discipline to managing for the bottom line with aggressive cost-cutting measures, including standardization and outsourcing. And as emerging markets came into their

In brief• In the year since the last issue of Progressions was

published, the pace of change in the Pharma 3.0 ecosystem has accelerated, as pharma companies have expanded the number of reported 3.0 initiatives by 78%.

• The ecosystem has also grown more complex and multifaceted, as Pharma 3.0 initiatives expand across a broader array of technologies, disease categories and stages in the cycle of care. Health-related smartphone apps have boomed, the focus on diabetes has broadened to other disease categories such as oncology, and companies are developing business models that seek to improve outcomes using more holistic approaches.

• Despite the rapid increase in the number of Pharma 3.0 initiatives, pharma companies are still investing much less than non-pharma companies in 3.0 commercial model innovation. By our rough estimate, non-traditional players have publicly reported at least US$20 billion in intended investments in the health outcomes space.

• The growing pressures on health care systems are prompting payers in many markets to increase their focus on health outcomes. Even as this is changing the rules of the game for pharma companies, it is creating openings for non-traditional players.

Chapter 1

A rapidly changing ecosystemown, pharma companies expanded their geographic footprints to increase efficiencies and tap new sources of revenue. In short, Pharma 2.0 has been about moving to a cost-efficient, diversified product/market model.

Even as pharma companies have been grappling with these challenges, they are being propelled forward to the next iteration of significant change: Pharma 3.0. In Pharma 3.0, companies will succeed or fail based not just on how many units of a product they sell, but rather increasingly on their ability to improve health outcomes, with patients and payers squarely in the middle of the model. Pharma 3.0 does not supplant Pharma 2.0 as much as supplement it. Even as companies concentrate on the challenges of 3.0 (with new business models to better manage health outcomes), they will sustain focus on meeting unmet medical needs and expanding access to their products.

At its core, this transformation is being driven by two simultaneous trends: the coming to a head of health care systems’ lack of sustainability and the coming of age of several game-changing technological advances. These two trends are catalyzing each other — new technologies are providing breakthroughs to make health care more sustainable, affordable and accessible, while the tremendous pressures on the health care system are helping speed adoption, break down resistance and realign incentives around changing business models that leverage these technologies.

These trends are enabling improved health outcomes by driving behavioral change. In essence, this represents the third big leap in improving health outcomes. The first two advances —widespread adoption of hygiene and extremely effective curative medicines and devices — have delivered significant increases in the quality and length of human life. We are now poised for the third big transformation, which will come from behavioral changes, as all participants in the ecosystem — patients, physicians, payers, companies and more — revisit and realign their practices in order to improve health outcomes.

Consumers are being empowered to change their behavior by new technologies — creating what we referred to in last year’s report as a new class of “superconsumers.” Social media networks — from PatientsLikeMe to Sermo and Medscape Physician Connect — are making data on outcomes and efficacy more transparent and freeing it from the control of corporate giants. Mobile phones are enabling patients to monitor their own health as never before — using everything from apps for the latest smartphones to text-message platforms that can expand access for patients in rural areas and emerging markets.

The widespread adoption and meaningful use of electronic health records (EHRs) — being heavily encouraged in the US by incentives in the February 2009 economic stimulus package — promises to vastly increase not just the efficiency of health care but also the volume of data that can be mined to compare the efficacy of different treatments. Large integrated systems such

2 Progressions 2011

as Kaiser Healthcare and Intermountain Health have already been doing this for a while, and new entrants in the personal health record (PHR) business such as Google Health and Microsoft HealthVault could take “value mining” to an entirely new level.

Indeed, last year’s report described how the opportunities latent in these trends are spurring experimentation with new approaches and business models and attracting significant numbers of non-traditional entrants to health care — IT firms, retailers, insurers, food companies, telecommunications providers, global conglomerates and several others.

The ecosystem advances: a progress reportA year later, the picture that emerges is of an ecosystem that is rapidly expanding with more investments and initiatives than ever before. The space is becoming more complex, as non-traditional entrants continue to experiment with creative business models, and the investments in Pharma 3.0 expand across a broader array of technologies, disease categories and stages in the cycle of care.

To better track these trends, Ernst & Young has collected and analyzed the Pharma 3.0 initiatives that we have been able to identify from various sources. Our database — the first comprehensive analysis of such investments — tracks initiatives launched by pharma companies during the last five years.

By our count, about 220 Pharma 3.0 initiatives were launched by pharma companies (either alone or by partnering with other entities) between 2006 and 2010. That’s an impressive total, but it’s even more remarkable that 44% of those initiatives were launched in 2010 alone. In fact, the 97 initiatives launched in

2010 represent a 78% increase over the number of initiatives in existence as of 2009. Remarkably, practically all of the leading pharmaceutical companies are active in the Pharma 3.0 space, though a few firms — including Johnson & Johnson, Pfizer, Novartis, Merck & Co. and Roche — are leading the charge with a relatively larger share of initiatives.

Despite the rapid increase in the number of initiatives, the level of 3.0 investments by pharma companies is still far below where it needs to be. Non-pharma companies are investing much more: at least US$20 billion, by our estimate. (This is a rough estimate based on publicly disclosed information, and it excludes initiatives for which companies have not assigned a specific price tag.) “Pharma is still focused on investing in drug innovation — we’re not making the kinds of investments in Pharma 3.0 that many non-traditional entrants are making. It has been eye-opening to realize how significantly we will need to invest in transformative partnerships and the broader health care ecosystem to be relevant in 3.0,” says Kim Park of Johnson & Johnson’s Janssen Healthcare Innovation Unit.

Source: Ernst & Young.Chart shows cumulative number of initiatives by pharma companies in existence per year.

0

The number of Pharma 3.0 initiatives increased by 78% in 2010

240

200

160

120

80

40

2006 2010200920082007

“Pharma is still focused on investing in drug innovation — we’re not making the kinds of investments in Pharma 3.0 that many non-traditional entrants are making. It has been eye-opening to realize how significantly we will need to invest in transformative partnerships and the broader health care ecosystem to be relevant in 3.0.”

Kim Park, Johnson & Johnson

3

Smartphoneapps11%

mHealth(excluding

smartphone apps)5%

Educational websites20%

Social media/online communities

18%

Risk-/cost-sharing with

payers13%

Patient support programs

13%

Openinnovation

9%

Patient-controlled medical devices

5%

Other6%

There’s an app for that

The surge in pharma’s 3.0 initiatives has been led by a remarkable increase in mobile health investments, especially in smartphone apps. Between 2006 and 2009, 16% of initiatives undertaken were in the mobile health space, but in 2010 the category accounted for one out of every two new initiatives. For the most part, this has been fueled by a sharp increase in the number of health-related smartphone apps, as the category vaulted from 11% of initiatives undertaken between 2006 and 2009 to a whopping 41% of new initiatives in 2010.

To a large extent, this reflects larger economic and social trends. Growth in smartphone sales has outpaced growth in the overall mobile phone category in recent years. What makes these devices so compelling, of course, is that they are much more than mere phones. Smartphones are effectively very powerful mobile computers that are packed with sensors, continuously connected, and customizable with a wide range of apps. Across the economy, smartphone apps are reinventing the way companies interact with their customers and are empowering individuals by giving them greater control and allowing them to receive and share information in real time. Indeed, the ability of new technologies to change behaviors has led to increased efficiencies and new growth channels in numerous other

There’s an app for that: investments in smartphone apps soared in 2010

Smartphone apps41%

mHealth(excluding

smartphoneapps)

9%

Educational websites20%

Educational programs2%

Social media/online communities

9%

2006—09 2010

Source: Ernst & Young.Charts show number of pharma company initiatives by type, as identified by Ernst & Young.

Patient support programs

11%

Openinnovation

3%

Patient-controlled medicaldevices

2%

Other3%

industries (for instance, as customers became more comfortable with shopping and banking online). The smartphone revolution has tremendous potential to improve health outcomes by empowering patients in much the same way — helping create the superconsumers of Pharma 3.0.

Therefore, the flurry of activity in this space is not surprising. But it is worth noting the tremendous diversity in the types of apps that have emerged over the last year. In Progressions 2010, we highlighted LifeScan’s iPhone app that allows diabetic patients to interface wirelessly with their glucometers. In the same vein, we are seeing many more apps emerge that empower patients by giving them increased control over all aspects of disease management. In diabetes, for instance, where effective management requires a coordinated and holistic approach, it’s encouraging that new apps are helping patients manage not just their blood glucose but also other aspects of their health maintenance, such as diet and exercise. Abbott, for instance, launched a German language iPhone app, DiabetesMapp, which allows patients to map specialists nearby in order to manage a wide range of diabetes-related conditions, including diabetologists, podiatrists, psychotherapists, support groups and more. Also in the diabetes space, Merck’s iPhone app Vree for Diabetes provides patients diabetes education, blood glucose tracking, nutrition tracking, activity tracking, medical

4 Progressions 2011

tracking and progress charts. Despite its name, Vree isn’t free. Like a number of other health care apps, Merck’s offering has a price tag, a sign that the value of such information is already being recognized by the market.

The range of smartphone apps is by no means restricted to diabetes. We have identified at least 14 disease categories in which companies have launched new apps in the last year alone. These include apps that help patients keep track of vaccination schedules (Novartis’ VaxTrak), manage their hemophilia A Factor VIII infusions (Bayer’s Factor Track), locate cancer clinical trials within 150 miles (GSK’s Cancer Trials) and much more.

We noted that smartphone apps tend to empower customers. But pharma’s customer base includes more than patients, and it’s not surprising that a significant portion of new apps are aimed squarely at empowering physicians. In June 2010, Pfizer announced that it was collaborating with Epocrates to give providers a way to contact the Pfizer Medical Information Group to obtain answers to product-related questions or report adverse events. Sanofi-aventis launched AFib Educator, an iPhone app that helps health care providers explain atrial fibrillation to patients, their families and caregivers. And Japan’s Astellas has released a smartphone app that gives physicians access to criteria used to assess the need for cardiac radionuclide imaging.

In many ways, this is just an early indicator of things to come. So far, many of the health care apps that have emerged have targeted Apple’s popular iPhone. But over the last year, Google’s Android platform has emerged as the fastest-growing smartphone segment, and it seems likely we will see companies expanding their offerings to cover more platforms in the years ahead. In addition, this is about more than phones. “The

wireless revolution,” as Don Jones of Qualcomm points out in our interview with him on page 26, “is just getting started. Over the next decade, the cellular industry plans to add 50 billion mobile devices to the 5 billion in existence today — a tenfold increase. Most of these devices won’t be phones as we think of them today.” Indeed, wireless connectivity is now starting to be applied to everything from pill bottle caps to hospital beds, as the internet of computers gives way to the internet of things. (See Chapter 3 for more on this trend.)

Recognizing the growing importance of mobile technologies in the health space, the FCC and the FDA began collaborating for the first time, in 2010, to work through the challenges and ambiguities in regulating technologies that are starting to blur the line between medical device and telecommunications equipment.

Seeking unmet needs: beyond diabetes

The increasing diversity of the ecosystem is also being reflected in the diseases where pharma companies are focusing their Pharma 3.0 investments. Much of the early action in Pharma 3.0 initiatives has been in diabetes. There are good reasons for this. Type 2 diabetes represents a tremendously important disease area, where demographic trends and changing lifestyles are expected to create huge increases in patient populations in the years ahead. In addition, as a chronic disease, diabetes requires constant management, and there are significant “value leakages” where health outcomes are not improved or maintained because of factors such as lack of awareness, poor monitoring and non-compliance with treatment regimens. (For more on the value leakages in diabetes, refer to the discussion and chart on pages 45 through 48.)

Between 2006 and 2009, therefore, diabetes accounted for more initiatives than any other disease category — 24% of the total. But in 2010, the 3.0 investments of pharma companies began to diversify more into other diseases. Oncology claimed the top spot, with 15% of the year’s initiatives, while diabetes and metabolics as a group tied for second with immunoscience/inflammatory diseases (12% each). It is perhaps logical that oncology would be an attractive target as pharma companies expand their 3.0 investments into other disease areas, since oncology is the leading disease category in the drug industry’s drug R&D pipeline and is an area where there is tremendous

“ The wireless revolution is just getting started.Over the next decade, the cellular industry plans to add 50 billion mobile devices to the 5 billion in existence today — a tenfold increase. Most of these devices won’t be phones as we think of them today.”

Don Jones, Qualcomm

5

potential to improve outcomes through more targeted approaches to diagnosis, treatment, and managing quality of life and co-morbidities.

As Pharma 3.0 investments expand their presence in other disease categories, it seems inevitable that other chronic and complex conditions, such as respiratory diseases and cardiovascular conditions, will see brisk growth. Chronic and complex diseases account for about 75% of the US health care burden, a share that is only projected to grow in the decades ahead. Such diseases require continuous monitoring and care and significant coordination between patients, caregivers and health care professionals — creating significant opportunities to improve outcomes.

The holistic picture

Of course, improving outcomes in these chronic and complex conditions will require a holistic approach to patient care. It will no longer be enough for companies to limit themselves to the narrow segment of the cycle of care that they have traditionally served. Such shifts have been very visible in recent months, as pharma companies and others have adopted more holistic

approaches through disease management, coordinated care and an expansion across different stages of the cycle of care.

A striking example was provided by sanofi-aventis in September 2010, when the French firm announced that it is aiming to become the world leader in diabetes. What was truly noteworthy, though, is how the firm plans to approach this goal. Instead of focusing just on drugs, sanofi is expanding into other market offerings, including monitoring devices, insulin pumps, smartphone apps, patient-oriented services and educational programs. And the company is bringing a truly 3.0 mindset to this approach by seeking to partner widely to develop this expanded portfolio. Pierre Chancel, the head of sanofi’s diabetes division, was quoted in the press saying that the company’s aim is “to become the first and best integrated health care company in diabetes. Today there’s no integrated partner — the patient is suffering from fragmentation in care delivery.”

Sanofi soon started to deliver on its goal by announcing the upcoming launch of two blood glucose monitoring devices, BGStar and iBGStar (developed in partnership with New Hampshire-based AgaMatrix) that allow patients to better self-manage their care. Patients can use the iBGStar for on-the-go testing as well as connect it to the iPhone to get an on-screen display of results that can be communicated to doctors.

Seeking unmet needs: investments diversified across disease categories in 2010

Diabetes and metabolics

24%

Oncology18%

Neuroscience12%

Virology6%

Infectious diseases

5%

Cardiovascular5%

Immunoscience/inflammatory diseases

4%

Other27%

Diabetes and metabolics

12%

Oncology15%

Neuroscience10%

Dermatology7%

Peripheralvascular

6%

Cardiovascular5%

Other32%

Immunoscience/inflammatory diseases

12%

2006—09 2010

Source: Ernst & Young.

Charts show number of pharma company initiatives by type, as identified by Ernst & Young.

6 Progressions 2011

Pfizer’s collaboration with San Francisco-based Keas brings a holistic approach to developing online personalized care plans for patients. These plans empower patients to manage various aspects of their health in a coordinated manner, including healthy living, weight loss, smoking cessation, diabetes prevention or control, heart disease, pediatric issues and reminders for taking prescriptions or getting lab work done.

Meanwhile, Roche announced a multiyear agreement with InterComponentWare, an e-health specialist, to develop a next-generation web-based solution for diabetes management. The online platform will allow patients to securely share data and communicate with health care professionals. It will also help patients and caregivers manage diabetes more efficiently. The partners are testing the effectiveness of a diabetes risk management solution in a clinical trial involving about400 patients.

But pharma companies are by no means the only ones developing more holistic approaches for improving health outcomes. A number of non-traditional entrants — from insurance companies to pharmacy benefits managers (PBMs) and even health club chains — are coming up with creative ways to combine their strengths to address the entire cycle of care.

For instance, UnitedHealth Group, a leading US health insurer, is partnering with Walgreens and the YMCA on a diabetes management program. The program has two parts. The prevention arm uses UnitedHealth’s data to identify people at risk of developing diabetes and invite them to a free exercise and nutrition program at a local YMCA. Under the control arm, administered with Walgreens, participants who are already diabetic receive assessments and coaching sessions that cover both medical and lifestyle management.

In many ways, PBMs are well positioned to deploy coordinated approaches for improving health outcomes, and many of the biggest players have been active over the last year. Germany’s Celesio and US-based Medco announced a joint venture aimed at improving European health outcomes through integrated solutions for chronic or complex conditions. Among other things, the venture will provide payers with analytical insights into clinical issues and health care program effectiveness as well as introduce new tools and support systems to provide payers and providers with an integrated approach to serving patients.

Data, data everywhere

Approaches such as the Celesio-Medco joint venture are seeking to leverage the power of data. Indeed, data is at the center of Pharma 3.0, as the adoption of electronic health records (EHRs) and personal health records (PHRs) promises to vastly increase the volume of health data. As discussed in Chapter 3, we are also starting to see a greater variety of data types and sources, as companies are starting to track and mine data being generated in social media conversations (on sites such as Sermo and PatientsLikeMe), wireless communications and much more. “Demonstrating value will be less about the kind of study a pharmaceutical company can do on its own and more about how pharma can collect data from the entire patient experience,” says Margaret McNab, Commercial Director at UK-based Bupa Home Healthcare. “Patient-led experiential data will have more and more resonance.”

Across major markets, we are seeing continued progress toward the adoption of EHRs. In Europe, the European Commission announced that it aims to provide patients with secure access to digital health records by 2015, as part of its Digital Agenda for

7

Europe. Among other things, the agenda seeks to address issues related to data interoperability and standards and expand high-speed internet access. In the US, Kaiser Permanente reached a significant milestone when it announced that it had completed its EHR implementation and that every medical facility within its system is now participating in what is effectively the world’s largest private sector EHR system. At the Mayo Clinic, EMRs have been fully implemented since 2005 and are actively being used in very meaningful ways to improve health outcomes.(See the article by Gianrico Farrugia on this page for moreon Mayo’s approach.)

As emerging markets ramp up their health care systems to better serve the medical needs of their populations, many are investing in EHRs. For instance, China’s 2009 economic stimulus package — like that of the US — includes specific funding for electronic medical records. In November 2010, Microsoft HealthVault entered the Chinese market when it announced an agreement with iStoneSoft to develop PHRs for the city of Wuxi.

Gianrico Farrugia, MDMayo Clinic Center for Innovation

Associate Medical Director

Using data to improve outcomes

At Mayo Clinic, we have had a fully implemented, completely paperless electronic medical record (EMR) system since 2005. Everything related to a patient’s care, from physician notes and appointment schedules to laboratory and test results, is instantly available to our caregivers through more than 16,000 computer terminals on Mayo’s three main campuses in Rochester, Minnesota; Jacksonville, Florida; and Phoenix, Arizona.

Mayo is now extending the value of the EMR by using it increasingly in advanced decision-making, for individualized medicine and for population care. First, we are providing our primary care physicians with a daily dashboard on the health of the populations they serve, so that they can better assess and manage priorities with their care teams. Second, we are using the EMR to create a rules-based disease management system that helps ensure physicians are asking patients

the right questions and are personalizing treatment to individual needs. Third, the EMR is integrated in our intranet AskMayoExpert program, a platform for providers to obtain, locate and contact Mayo Clinic experts for advice on specific conditions and their treatments. Fourth, we use the EMR in integration with other data sources, such as lab and radiology reports, to issue relevant alerts, graded by urgency and communicated to physicians electronically or by phone.

The EMR is also a key part of our Enterprise Data Trust (EDT), a secure collection of data on more than 7 million patients. The EDT provides consistent data to inform a wide range of analysis, from comparative effectiveness studies and outcomes research to clinical quality improvement and genomic association. As part of the EDT, the EMR is allowing Mayo Clinic to improve health outcomes by improving quality, boosting research productivity and developing best practices.

It takes a global village

Indeed, Pharma 3.0 is every bit as relevant in emerging markets as it is in the mature markets of the West. The pressures to make health care sustainable are mounting as governments seek to expand coverage to more of their citizens. Countries that have slowed population growth within the last generation, such as China, face their own demographic time bombs (though other locations, including India and many African nations, still have very young populations). Lastly, as incomes rise, so do chronic and complex diseases such as diabetes.

But while the pressures they face may be similar, domestic pharma companies in these markets can bring different strengths and mindsets to address these challenges. For one, unlike their counterparts in the industrialized world, pharma companies in emerging markets have never been through the blockbuster model of Pharma 1.0, nor has their growth been

8 Progressions 2011

based on innovative therapeutics. Consequently, they may be less limited by traditional mindsets, structures and cultures. In addition, as Chris Tsai, CEO of Taiwan-based Bionet points out, “the conglomerate structure is far more common in many Asian markets than in the West. So, while working with ‘non-traditional’ partners may be a novel concept for Western pharma companies, it is often ‘business as usual’ for Asian conglomerates which have many different industries in the same group. Moreover, with slowing growth in many industries that Asian conglomerates have traditionally focused on, such as electronics, many are seeking faster growth in health care and life sciences.”

As a result, companies in emerging markets may be more comfortable with Pharma 3.0, and we often see some very innovative approaches being developed. India-based Panacea Biotec, for instance, describes itself not as a biotech or pharma firm, but rather a “research-based health management company.” The focus on managing health outcomes is evident throughout the firm’s operations and offerings. For instance, the firm has developed an online portal — named “Best on Health” — that allows users to share information on not just Panacea’s products, but also competing medicines, preventative measures, alternative therapies and more. (For more on Panacea’s approach to health outcomes, see the article by Rajesh Jain on page 9.)

While patients in the West are often shielded by health insurance from the true costs and consequences of their decisions, the absence of widespread health insurance in many emerging markets means that patients who are paying out of pocket are better incented to seek value. Meanwhile, customers in these markets are rapidly embracing the platforms that enable superconsumerism. Mobile phone access has grown at a very fast pace in developing countries, as companies have developed innovative business models for these markets (e.g., cheap handsets and per-second billing). China’s online population grew to 457 million in 2010 — 50% larger than the entire population of the United States. Even more noteworthy, the number accessing the internet on mobile phones in 2010 increased 30% from the previous year, to 303 million.

“ The conglomerate structure is far more common in many Asian markets than in the West. So, while working with ‘non-traditional’ partners may be a novel concept for Western pharma companies, it is often ‘business as usual’ for Asian conglomerates which have many different industries in the same group.”

Chris Tsai, Bionet

9

Rajesh Jain, PhDPanacea Biotec

Joint Managing Partner

Managing health, holistically

Panacea Biotec describes itself not as a pharmaceutical or biotech company but as a “research-based health management company.” The choice of words is intentional. We see ourselves as being not just in the business of developing drugs but rather in the business of managing health. Above all, managing health requires two things: understanding the customer and approaching health holistically.

Understanding the customerWe believe it is essential to have an understanding of the customer — not just doctors, but people in various states of disease and wellness. How do people use a doctor’s clinic, a pharmacy, a hospital or even a health website? How do doctors actually go about their practice and interact with patients? What do we know about a patient when he or she is admitted to a hospital? We believe the typical life sciences company has become too focused on a brief, transactional relationship: calling on doctors and promoting brands. Companies have lost sight of how much you can learn from spending real time with doctors and patients.

So one important aspect of our approach is for our employees to spend time at a hospital to get to know our customers and really understand their lifestyles, their preferences, and simply how they go about their days. This is how we train our employees — management, researchers, marketers — across the entire company. Everyone has the

opportunity to learn about our customers firsthand. In fact, understanding the customer is so important that it has prompted us to invest in setting up our own hospitals.

A holistic approachWe also think it is becoming increasingly important to look at health care more holistically. Treating or managing a disease or condition is not just about medication. It is also about understanding the different approaches to treatment — for example, allopathy, ayurveda, unani and yoga — along with an individual’s state of health, medical history, lifestyle, age and so on, and then figuring out if and how all these factors connect. For example, if you are doing yoga while being treated for certain diseases, your medication dose reduces over a period of time and your quality of life goes up. Once we can make connections like this, it is the totality of this information that becomes incredibly valuable and allows us to create what we call health management plans that can be tailored to the individual. We had an awakening of sorts within Panacea Biotec that this is how we need to approach health care and become truly patient-centric. We launched our website, Best on Health, with this goal in mind. This portal is designed to guide and educate patients on the various approaches to health care, disease management and, ultimately, better quality of life. The emphasis is on overall health — not just treatments and medications — and learning to connect the dots that lead to better outcomes.

10 Progressions 2011

Ernst & Young: From transparent information to new online communities, Pharma 3.0 is giving patients more power and control over their health. How are these technology-enabled solutions affecting patient associations andtheir members?

Baker: Overall, these solutions are providing abundant opportunities to partner. What patient associations need now is the language to effectively communicate their point of view to potential partners. You can’t demand to sit at the table if you don’t have the language to engage the influential people — the clinicians, academics, regulators, payers and health economists, for example — sitting next to you.

As these technologies are providing more opportunities, they are also creating more inequities. Patient advocates for the more prevalent diseases are moving ahead faster than those for some of the rarer diseases. The success of these technologies will be realized only when everyone can benefit equally from them.

Ernst & Young: How has the role of patient associations evolved, particularly as they interact with other stakeholders?

Baker: For decades, the primary role of patient organizations was to raise awareness of certain diseases and of the challenge of living with these diseases. Today, with the growing focus on health outcomes, they are beginning to see the importance of making an economic case — the cost of treating the disease versus the cost of not treating it. This requires tremendous knowledge, training and data gathering. It is emotionally difficult to put a price tag on suffering, but that is what is needed now. Moving forward, patient organizations will still need to raise awareness, but they will also need to forge partnerships and be a part of larger coalitions that can make convincing arguments.

Ernst & Young: Will the realignment of incentives in Pharma 3.0 (around health outcomes for patients) increase opportunities for you to partner creatively with others?

Baker: Yes, the new alignment will be a huge incentive for us to collaborate with other stakeholders and overcome divisions. We have historically looked at the human body through the lens of individual organs. The life sciences industry has adopted the same pattern in developing its products, as have patients in designating their diseases. These divisions, however, have not created an effective health care system. As Pharma 3.0 aligns incentives to look at health outcomes more holistically, we are beginning to see patient groups partnering to take a unified approach to disease. At the European Brain Council, for example, we are bringing together neuroscientists, seurologists, psychiatrists, neurosurgeons, pharmacologists, patient organizations and industry into a single federation to promote brain research in Europe and to improve the quality of life of those affected by brain diseases.

Ernst & Young: How eager are patients to partner with the pharma industry? Are partnerships between patient groups and pharma companies truly achievable?

Baker: Society’s trust in the industry is low, and media has played a role here reinforcing a certain line of thinking which is not really balanced. The media has tended to portray the industry as a greedy “fat cat,” delivering more to its shareholders than to patients. This is a dangerous perception, because when patients get to the pivotal moment of diagnosis, they need to understand what treatments are available to them. That requires being more engaged than ever with the pharma industry, with clinicians and with patient groups, who are fellow travelers in navigating their illness.

I truly believe that pharma companies are beginning to see that their customers are not the doctors, but the patients. This is a good change, and a long time coming. It bodes well for the industry being a better partner in the health ecosystem of the future.

Mary BakerEuropean Brain Council

PresidentEuropean Federation of Neurological Associations

President

Patient power

11

Growing pressures — and opportunitiesThe pressures propelling the move to Pharma 3.0 continue to build. In March 2010, President Obama signed the Patient Protection and Affordable Care Act, also known as the US health care reform bill. While the new law enacts the most substantial changes that the US health care market has seen in decades — and provides millions of previously uninsured individuals access to health insurance coverage — it is still uncertain how much it will help lower health care costs in the long run. To the extent that costs do not meaningfully decline — even as the system seeks to provide coverage to more individuals — the need for increased efficiency will only intensify.

Those pressures have become very visible in many major drug markets, where governments are responding to budgetary pressures by clamping down on drug prices — and are using health outcomes-based criteria to decide where to cut. Germany’s Pharmaceutical Market Bill, passed by parliament in November 2010, permits pharma companies to freely price newly launched patent-protected drugs for only the first year, during which they have to negotiate prices with health insurance funds based on cost-effectiveness criteria. In Italy — which passed a similar law a few years ago — the Government Medicines Agency announced in July 2010 that the prices of several oncology drugs will be reduced in 2011, based on data showing them to be less effective than drug makers claimed at the time of launch. In France, the Government’s 2011 budget plans to save €560 million from reduced spending on drugs, primarily by targeting drugs of lower therapeutic value. And in Japan, a new pricing mechanism introduced in April 2010 will largely exempt newer, more innovative products from price cuts.

Some of the biggest changes, though, may be under way in the UK, where the Government announced that it intends to replace the current pricing mechanism with a new “value-based pricing” scheme for new branded drugs starting in 2014. While the details are still being worked out, the Government intends to measure value based on criteria such as patient benefits, unmet needs, therapeutic innovation and benefit to society as a whole — all of which sounds a lot like Pharma 3.0.

It’s also significant that the planned overhaul of the UK’s National Health Service (NHS) is very patient-centric. Indeed, the Government has announced that it plans to create a patient-led NHS focusing on health outcomes through measures such as:

• Making clinical decision-makers more responsive to patients

• Driving up standards of care, eliminating waste and improving outcomes

• Engaging patients in decision-making and providing more choice

The growing pressures from payers can create challenges and opportunities for pharmaceutical firms. “Pharma companies can no longer limit themselves to passively satisfying regulatory

12 Progressions 2011

Ernst & Young: What opportunities do you see for Walmart in health care and in the growing focus on health outcomes?

Agwunobi: As the focus on health outcomes increases, everybody in the system — from payers to patients — is seeking better value for money. Unfortunately, the industry lacks companies whose core mission is to lower the cost of health care, which creates a clear opportunity for us. We want to be the first, but we’d love others to follow.

Kinsey: Improving access to health care is also important to our strategy. We haven’t quite tapped into Walmart’s immense network and global clout to piece together the synergies that we think are there — the same way we have with our other businesses — to “globalize” health care and make it both accessible and affordable. Of course, health care systems in different countries bring unique challenges. But we’re looking at how to stay within the country-specific laws and regulations and still leverage the abilities of Walmart and its suppliers to drive cost savings and access.

Agwunobi: There are some core themes here. First, we’re only in it if we can offer lower costs. Second, we only target businesses where we can develop the scale needed to lower costs. It would be great if we can figure out a way for the health care system itself to save money. That’s where the future should be. It’s what governments and payers across the world are wrestling with: how do we make health care more affordable and sustainable even while increasing access?

Ernst & Young: Describe your pharmacy business.

Agwunobi: We’ve lowered the price on more than 300 popular medications to simplify pricing and make them affordable to anyone — no membership or insurance plan is required. And now we’re taking this successful approach beyond our stores. One way is by partnering with employers, such as Caterpillar, which has asked us to be the provider of discount medications to its 100,000 employees and retirees. We’re also exploring ways to reduce the cost of pharmacy insurance plans and have developed a Medicare Part D program with Humana that may have the lowest-priced premiums in the US.

Kinsey: Our in-store health care clinics are doing very well and we will accelerate their growth in 2011. They provide

easy access to low-risk, low-cost primary care services. Simple touches, such as posting prices for services, can give patients more awareness of and control over costs. Hospitals benefit by using our in-store space, which is much more economical than space at a hospital. They also benefit by giving their practitioners better access to patients — we’ve got 140 million customers who walk in our doors every week — as well as more opportunities for patient monitoring so they can improve treatments and health outcomes.

Ernst & Young: What can health care companies learn from your approach to customer centricity?

Agwunobi: Our focus has always been on the consumer or patient. We’re just doing things more creatively now. For example, to compensate for both the tough economy and the ever-increasing cost of health care, customers have been gravitating toward self-treatment — buying more toothpaste for sensitive gums to try to control gum pain or using an interactive machine that can determine the kind of orthotic you should buy — so we have been adjusting our store offerings to meet this new informed and empowered customer.

Kinsey: Along with the trend toward self-treatment, patients want to be better informed. Yet doctors have less and less time. So websites such as WebMD are growing in popularity. Walmart is exploring website opportunities, online and in the store, to build communities around an illness to connect treatment to outcome more holistically. We’re also looking at “needs states.” One example is a store we’re piloting in Florida dedicated to improving the health of the older customer through its collective offerings — the products sold as well as ease of use of our services. For example, the pharmacy, vision and hearing aid centers are easily accessible at the front of the store.

Ernst & Young: How else is Walmart helping improve health outcomes?

Agwunobi: We can have a significant impact by showing how important adherence is in health outcomes and how powerful cost is to adherence. Quite a few studies show that when you lower the price of a tobacco cessation product, for example, more people quit smoking. Likewise, when you increase the price of cigarettes, less people smoke. In the same way, for

Sandy KinseyWalmart

Vice President, Pharmacy Merchandising,

Health and Wellness

John AgwunobiWalmart

Senior Vice President and President, Health and Wellness

Bringing value to health care

13

chronic diseases such as high blood pressure, when you lower the medication cost, people are far more likely to adhere to their treatment plan — leading to fewer complications and hospitalizations, and saving the system money.

Kinsey: Improving outcomes will require empowering patients with better education and making them more accountable for making the right health care choices. We should consider the role we can play as health care coaches, giving patients the tools to understand and manage their health.

Ernst & Young: How does this all play out with insurance?

Agwunobi: Patients who don’t have insurance often avoid health care if they can’t afford it. I recently spoke with an uninsured customer who had been getting free prescriptions from a local clinic. But Walmart’s four-dollar prescription price was so affordable that she decided to get her prescriptions at Walmart instead. Since she could afford to pay four dollars, she preferred the convenience of using Walmart. And this is better for the system, because having some price burden creates incentives for the right behaviors.

Kinsey: Absolutely. The key is greater transparency on the true costs of providing health care. Due to the way that insurance is set up, people who have health insurance are shielded from the information and price signals that would allow for more optimal decision-making. From the simplest antibiotic to something as complicated as open heart surgery, people don’t understand the costs and how money flows through the system. We think if there is more transparency in health care costs, people will make better, cost-effective health care decisions.

Ernst & Young: Who do you see yourself partnering with to improve the cost of health care?

Agwunobi: Partnerships with pharma will continue to be important. For example, we’d like to work with pharma companies and governments on how to make many drugs that must currently be prescribed available without a prescription. We also propose expanding another class of drugs — between prescription and nonprescription products — that pharmacists can dispense without a prescription at a lower cost.

We’ll also continue partnering with manufacturers and suppliers to improve overall pricing and price transparency. We want the patient and the physician to be able to choose the best treatment at the best price. We announced a partnership with Eli Lilly & Company earlier this year that allows Walmart to reduce the price of Humulin insulin to $24.88, more than a 50% reduction from the average retail price available in the market. This price is available to everyone, and in some cases, is less than what people with insurance are currently paying with their copays.

Kinsey: There is also a lot of potential cost savings in the area of diagnostics. When administered by a doctor or hospital, diagnostic testing can be expensive and, for some, unaffordable. By partnering with diagnostic companies, we can explore giving consumers access to simple, affordable screening tests — like those for strep throat or influenza A. This would enable more consumers to make better, prompter health decisions about whether an illness is contagious or whether they need to see a doctor.

And we should not leave out partnerships with prescribers — the physicians, nurse practitioners, and dentists of the world — for their insights from the front line on how to reduce the cost of health care without reducing quality.

Ernst & Young: The new health outcomes ecosystem will require the ability to manage a network of dissimilar players to develop new offerings. What can pharma learn from the way Walmart manages its complex network?

Agwunobi: Health care should not overlook the role the customer can play in the network. They may be surprised at how much the customer is willing to manage and take on — especially when it’s packaged properly. For health care, this could mean coordinating care, building their own networks of providers and compiling their own data. The potential savings for the health care system could be enormous.

There also needs to be more partnering at all levels and segments of the health care industry — among the traditional and non-traditional players in health care, as well as among governments, providers, suppliers, prescribers, etc. And a one-size-fits-all approach will not be successful — they have to be willing to customize based on the type of community and the goals of the partnerships. We need to look to those partnerships as a way to drive our goals for the future.

14 Progressions 2011

requirements,” says Panos Kanavos, Senior Lecturer in International Health Policy at the London School of Economics. “They have to proactively engage with payers and regulators — and do so early in the R&D process, when they first start to design their clinical trial programs.”

But the pressures on the system are also providing huge openings for non-traditional entrants. For instance, John Agwunobi, Health and Wellness President at Walmart, points out that “as the focus on health outcomes increases, everybody in the system — from payers to patients — is seeking better value for money. Unfortunately, the industry lacks companies whose core mission is to lower the cost of health care, which creates a clear opportunity for us.” As our interview with John and his colleague, Sandy Kinsey, on pages 12-13, demonstrates, Walmart has already brought innovative new business models to its pharmacies and stores and sees opportunities around the world in the pressures building in the health care system.

In another interview accompanying this article, Bill Hook of UPS describes a number of innovative approaches his company is taking to help pharma companies in the drive to increase efficiency and boost outcomes, from “direct” distribution models that eliminate wholesalers and give pharma companies more insights into patients’ needs and buying habits to risk- and cost-sharing partnerships.

Meanwhile, General Electric — a company that knows a thing or two about efficiency — sees opportunities in health care’s waste and inefficiency. In a June 2010 interview with the Financial Times, John Dineen, head of GE Healthcare, announced that the company’s Performance Solutions division plans to bring

its legendary management practices to health care. “I am an industrial guy and when I hear cost problems, quality problems ... I get excited,” said Dineen. “That spells opportunity.”

Seizing opportunitiesThe health outcomes ecosystem is creating tremendous opportunities for pharma companies as well as for a growing cohort of non-traditional entrants. Seizing these opportunities will involve innovating new business models, often by collaborating in radically different ways with very dissimilar partners. It will require new competencies and supporting business functionalities.

But to get to Pharma 3.0, the various actors in the ecosystem will also need to address certain underlying challenges — aligning incentives, developing standards, defining metrics and changing mindsets. Pharma companies will face challenges of their own in articulating why they should be partners of choice in the new ecosystem. These challenges are the focus of Chapter 2.

“ As the focus on health outcomes increases, everybody in the system — from payers to patients — is seeking better value for money. Unfortunately, the industry lacks companies whose core mission is to lower the cost of health care, which creates a clear opportunity for us.”

John Agwunobi, Walmart

15

Ernst & Young: What initiatives is UPS undertaking in the health care arena? What new opportunities do you see emerging from the recently enacted US health care reform law?

Hook: Health care reform has accelerated pricing pressures. As a result, pharma companies are streamlining their organizations and outsourcing activities in areas such as manufacturing, supply chain and clinical research. Some are experimenting with new business models that can help deliver better clinical and financial outcomes.

This creates opportunities for UPS. We have been working with pharma companies to help them increase the efficiency of their global supply chains. To do so, we’ve developed deep, collaborative relationships that enable both parties to learn from one another and pool our strengths and capabilities. This has allowed us to tailor our solutions to better align with the needs of our customers — and ultimately with the needs of their customers (patients and providers) as well. In this environment, we are tailoring our solutions to different companies’ needs — some are looking for the lowest transaction price, while others want to collaboratively revamp their supply chains.

Ernst & Young: What potential opportunities might Pharma 3.0 create for UPS?

Hook: Pharma companies are increasingly focused on health outcomes and are teaming with non-traditional players to better drive connectivity and share information. We’re working with our clients around these efforts by bringing creative approaches that best meet their needs.

For instance, one of our client’s diabetes practice is focusing on better aligning the needs of their patients and clinicians around outcomes-driven solutions. In this case, we moved the company’s

supply chain to a “direct” model that allows the company to see how people are accessing care and better understand their buying habits. UPS employed pharmacy staff to help the client directly provide information and advice to patients on health and lifestyle — empowering those patients to make educated decisions.

In some cases, we’ve even moved from our traditional fee-for-service, procurement-oriented mindset to a risk/reward-sharing approach. This has required investing significantly in our ability to measure and track the value that different partners add, either through financial or efficiency standards. We are calculating performance metrics that we haven’t measured before, and are deploying methodologies quite different fromthe traditional ones we’ve used in the past.

Ernst & Young: What value proposition does UPS offer pharma companies in the 3.0 ecosystem?

Hook: We have a broad and diverse portfolio of supply chain capabilities, ranging from general package delivery to pharmaceutical-dedicated distribution centers. In fact, if you were to walk through any of our facilities, you would seemultiple distribution models in action.

But what truly sets us apart is our willingness to partner deeply with our customers. We recognize that Pharma 3.0’s value-driven environment requires us to go beyond our traditional boundary lines. For example, we are continually seeking out and investing in cutting-edge health care supply chain approaches for our customers and partners. To enter collaborative relationships with us, pharma executives want to know that we will add value and push their efforts forward.

Bill HookUPS

Vice President, Global Strategy, Healthcare Logistics

Delivering value

16 Progressions 2011

Getting to 3.0

17

We’ve devoted a good deal of ink (both in last year’s Progressions and, to a lesser extent, in Chapter 1 of this year’s report) to describing the health outcomes ecosystem that is emerging before our eyes. We’ve shared a vision of where these trends are heading, and painted a picture of what the future could look like.

But for many pharma company executives, even as that vision looks increasingly real (thanks to escalating pressures on the existing business model and the rapid emergence of non-traditional entrants and disruptive new technologies), it may simultaneously appear impossibly far because of substantial challenges that stand in the industry’s way.

Disrupting the value networkOne major challenge to “getting to 3.0” is that the interests of stakeholders are deeply entrenched in the existing health care system, with siloed incentives that are aligned to health care as it exists today, rather than a genuine outcomes-focused ecosystem.

Prof. Clayton Christensen’s concept of “disruptive value networks” is relevant here. In his recent bestseller, The Innovator’s Prescription, Christensen provides the following definition:

“A value network is the context within which a firm establishes its business model, and how it works with suppliers and channel partners or distributors so that together they can respond profitably to the common needs of a class of customers. The business models of each of the firms in a value network tend to be consistent with those of other firms in the system … shaping

In brief• Getting to the Pharma 3.0 ecosystem will not be easy. The

patent cliff, anemic growth and stock price pressures have pharma executives locked into delivering tangible results for the next two years. Despite their best intentions, all the stakeholders, including pharma, are entrenched in the existing ecosystem with incentives, metrics, standards and mindsets that are not truly aligned to Pharma 3.0.

• Pharma companies have not yet made the case that they could be partners of choice in the new ecosystem. This will involve:

• Clearly articulating their strengths

• Addressing perceived conflicts of interest

• Taking action to build trust

Chapter 2

Getting to 3.0

the rewards and threats they expect to experience through disruptive and sustaining innovations.”

Christensen is referring, in short, to how the pieces of the puzzle fit together: the business models of different players and the system of rewards and incentives they provide for each other. He argues that unless new business models and simplifying technologies are accompanied by the simultaneous emergence of a disruptive value network, they will just be subsumed by the existing value network. For instance, he points out that Sony’s invention of solid-state radios and televisions would not have easily disrupted the vacuum-tube-based products of RCA, Zenith and others without the simultaneous emergence of discount retailers such as Walmart and K-Mart, which had a business model and system of incentives that was much better aligned with Sony’s offerings (lower price points and less dependence on aftermarket service).

It’s not hard to see how this applies to today’s health care ecosystem. Indeed, the reason that US health care reform has been so complex and challenging is that it’s not happening in a vacuum; rather, reform measures must occur within the existing, and highly complex, value network. An isolated change to one part of the value network inevitably produces winners and losers, and so every proposed legislative change has had to be accompanied by simultaneous changes in other parts of the ecosystem to try to maintain the balance. In effect, health care reform has been a complicated and delicate balancing act that attempts to simultaneously move everyone in the ecosystem to a new value network. Concurrent alignment of all the puzzle pieces is extremely difficult. In fact, last year’s US health care reform legislation was primarily insurance reform, while health care reform legislation in China has focused primarily on hospital reform. Disruptive value networks tend to evolve rather than appear in a big bang.

The preceding discussion might seem to suggest that the emergence of an outcomes-based ecosystem is inevitable. In fact, the only thing we can say with certainty is that the growing pressures on the system will inevitably lead to dramatic changes. This could happen the right way, through a system that truly measures and rewards health outcomes. But it could also happen the wrong way. Instead of rewarding players based on the outcomes they deliver, payers could attempt to cut costs by simply instituting price caps or other constraints — with possibly drastic impacts for drug companies and innovation. Disruptive

One major challenge to “getting to 3.0” is that the interests of stakeholders are deeply entrenched in the existing health care system, with siloed incentives that are aligned to health care as it exists today, rather than a genuine outcomes-focused ecosystem.

18 Progressions 2011

and challenging as it is, Pharma 3.0 is the better approach for pharma companies and, indeed, for society as a whole. But it is by no means inevitable. Getting there will require a fundamental disruption of the existing value network. And this, in turn, will require new incentives, metrics, standards and mindsets.

Metrics. Realigning incentives in Pharma 3.0 will involve identifying and implementing the right metrics so that players are truly rewarded based on their ability to improve health outcomes. These metrics will be holistic, measuring value across the system, disregarding silos and using measures that have appropriately long time horizons. They will assign imputed economic values to negative and positive externalities in order to provide the right price signals. They will require an appropriate baseline against which interventions are compared.

To reach agreement on metrics, the participants in the ecosystem will need to deal with some difficult dilemmas and trade-offs. How much should payers pay for an intervention that extends life by a few weeks or months? How much is it worth to improve the quality of patient’s life, even if there is no extension in the length of life itself? These are not easy questions — there may be no right answers — and they can pit the cold reality of life-and-death decisions and budget implications against basic societal values. But they will need to be addressed.

Standards. Since much of the innovation in Pharma 3.0 will be in uncharted territory, unambiguous standards will need to be set in concert with the different participants in the ecosystem. The lack of clarity is already visible in some areas where companies are pushing the envelope with innovative new approaches. In new communication channels such as social media and mobile apps, for instance, regulators are still considering how to respond. But the uncertainty creates a disincentive for pharma companies to invest in these technologies (and presumably delays the realization of improved health outcomes that might result from such investments).

There is a similar lack of clarity in areas such as value mining. “In Pharma 3.0, it will be critical to establish new and improved standards for data analysis,” says Mervyn Turner, Chief Strategy Officer at Merck & Co. “There is a huge difference between ‘gold-standard,’ double-blinded, placebo-controlled clinical trials and studies based on reported marketplace outcomes or ad hoc comparative data analyses. If there is going to be wide-scale metadata analysis, how are those studies to be conducted? What standards will we establish for data mining? The FDA is very aware of these issues, and pharma companies — as well as payers and others — need to be part of the conversation.”

As payers grow increasingly influential in the health outcomes ecosystem, it will be important not just for companies to proactively communicate with them, but also for payers and regulators to talk with each other. The standards by which regulators and payers evaluate treatments may not always be aligned, increasing cost, complexity and uncertainty for pharma companies.

To reach agreement on metrics, the participants in the ecosystem will need to deal with some difficult dilemmas and trade-offs. These are not easy questions — there may be no right answers — and they can pit the cold reality of life-and-death decisions and budget implications against basic societal values. But they will need to be addressed.

19

Lastly, there will be a tremendous need for standards in EHRs, where data interoperability is critical for ensuring that information can be aggregated in a widespread manner. The field is currently characterized by several competing platforms, and it is not even clear whether an EHR or PHR platform will ultimately dominate. The lingering uncertainty can lead to inefficient uses of resources and slow market uptake (as it has in other situations where multiple technology platforms battled it out for a prolonged period, such as VHS vs. Betamax or the more recent contest between HD-DVD and Blu-ray).

Cultures and mindsets. Disrupting the value network will require not just changes in the incentives, rewards and standards that govern how players interact with each other. It will require changes in the ways pharma companies operate, both internally as well as in their interactions with other players in the ecosystem. Without key changes in their mindsets, cultures and incentives, it is unlikely that these firms will be able to engage with other stakeholders in ways that will align interests and allow for true codevelopment and co-creation. In the words of Rady Johnson, SVP and Assistant General Counsel at Pfizer: “Pharma will not succeed in the outcomes business unless it is trusted, transparent and credible. While innovative science is the core of what we do, we must continue our efforts to demonstrate with all stakeholders that this is the case, that the science is truly first. We must continue to be complete and objective with all the information we provide, while evolving from a ‘push’ only model — where we just pushed out information in every medium — to also embrace a ‘pull’ model, where we listen to our customers and respond to their needs. Today’s environment seems to demand this capability and technology can enable it.”

It is not surprising that the subject of new mindsets and cultures comes up repeatedly in Chapter 4, where we discuss the business processes that companies will use for operationalizing their 3.0 strategies. This is something that cuts across organizations, and the devil will be in getting the details right.

Initiating disruption. Clearly, disrupting value networks as complex as the Rube-Goldberg health care systems of most major markets is no mean feat. It won’t happen by itself, and it will be far from easy to make it happen, given the entrenched, often contradictory interests of existing stakeholders (witness the hostile debate over health care reform in the US).

One way to make it happen, of course, is through collaboration and joint action. New incentives, metrics and standards should be developed jointly by payers, regulators and other stakeholders across the ecosystem to ensure that the incentives work for everyone and measure and reward the right behaviors. On a smaller scale, disruptive value networks can also be formed within collaborations and partnerships where different actors come together to solve specific challenges in Pharma 3.0.

“In Pharma 3.0, it will be critical to establish new and improved standards for data analysis. There is a huge difference between ‘gold-standard,’ double-blinded, placebo-controlled clinical trials and studies based on reported marketplace outcomes or ad hoc comparative data analyses. If there is going to be wide-scale metadata analysis, how are those studies to be conducted? What standards will we establish for data mining? The FDA is very aware of these issues, and pharma companies — as well as payers and others — need to be part of the conversation.”

Mervyn Turner, Merck & Co.

But this also implies the need for aggregators. Indeed, Christensen devotes a considerable section of his book to discussing why the ecosystem will need entities that have the heft and credibility to play a central role in organizing the disruptive value network. He identifies a number of organizations that could play this role, and it’s worth noting that pharma companies do not make the list.

This takes us to a second big challenge for pharma companies: making the case that they are qualified to play a central role in the new ecosystem.

Why pharma?Business ecosystems — like their counterparts in nature — simply require a sustainable balance of give-and-take between their denizens. They don’t necessarily need for someone to be in control. In the health outcomes ecosystem of Pharma 3.0, however, it is becoming increasingly apparent that the participants would benefit tremendously by having one or more organizations serve as critical nodes — helping to shape the conversation, connect dots and more.

It’s striking, however, that pharma companies are not often considered for these aggregator roles. We have sometimes used a diagram of Microsoft’s HealthVault — which includes a wide array of ecosystem participants while omitting pharma — to illustrate that the industry isn’t always included when other players envision health information flows in the future ecosystem.

In fact, the aggregator issue is just one example of a larger challenge: convincing potential partners about the unique value that pharma companies can provide in terms of insights on outcomes. Pharma companies are often viewed with skepticism, because of both their diminished reputations and the perception of potential conflicts of interest.

20 Progressions 2011

Yet we think that pharma companies are uniquely positioned to deliver value in the new ecosystem, and they should increase their attractiveness as potential partners in three key ways:

Articulating strengths. First and foremost, pharma companies have unparalleled knowledge about the products they have developed, including related information such as efficacy, drug interactions and adverse effects. As several of their most successful products become subject to generic competition, we will see even greater market demand for these offerings (in terms of volume if not value). This greater market penetration will, in turn, lead to an increased need for specific and relevant information about these treatments. And the companies with the deepest understanding of these products are the innovator firms that have spent decades developing them in labs and supporting them in the marketplace — not generics firms that have only started selling them very recently.

In addition, pharma companies have a deep understanding of the cycle of care, which will be critical in the new patient-centric ecosystem. With their extensive expertise conducting clinical trials (which are, after all, experiments to validate well-defined health outcomes), they are well positioned to help develop relevant metrics for measuring health outcomes in 3.0 as well as to monitor performance to validate the achievement of

those outcomes.

Lastly, pharma companies have an extensive understanding of information that is important for improving health outcomes, such as knowledge of disease states and familiarity with navigating regulatory pathways and gaining payer acceptance. These strengths could be very valuable to non-traditional entrants and other partners that aren’t as familiar withthese aspects.

It is important, however, for pharma companies to recognize that they may have a limited window of opportunity. Today’s non-traditional entrants, though unfamiliar with the health care business, could prove to be quick learners, and the advantages that pharma companies have because of their domain knowledge could shrink in a few years.

Addressing conflicts of interest. To build trust as potential partners, pharma will also need to address perceptions that it has conflicts of interest precluding it from being an unbiased partner or aggregator. One potential source of conflict — that a pharma company would have reason to favor its own products over those of competitors — can be partially addressed through contractual terms that do not seek exclusivity for any company’s products (though this itself requires a change in mindset from the way pharma companies have traditionally operated). Some companies are also starting to pave the way through their early interactions on social media sites, where they are making a point of sharing information about their products in an unbiased way — regardless of whether the information speaks well of their products.

To some extent, the process of expansion into new business models in Pharma 3.0 will itself help alleviate perceptions of conflict. For instance, one potential conflict — that pharma would favor brand-name drugs over generics, even though generic substitution would save the system money — is already somewhat diminished by the fact that several pharma companies have expanded into generics themselves as part of their diversification in 2.0. Another commonly held fear — that pharmaceutical firms are likely to favor interventions involving treatment rather than those involving prevention — could similarly be diminished if companies were to expand into new agreements and offerings that grow their sources of revenue beyond drugs.

Taking action to build trust. A major reason it is sometimes challenging for pharma companies to demonstrate their attractiveness as partners in the new ecosystem is the reputation and perceived intent of the industry, which has plummeted in recent years. The good news, however, is that companies can rebuild that trust by engaging with the communities of 3.0 in ways that are transparent and unbiased and demonstrate their intent to improve outcomes across the ecosystem. (For a deeper discussion of engagement in 3.0, see the “Community engagement” section of Chapter 4.)

Many of pharma’s existing initiatives, policies and ways of

“Pharma will not succeed in the outcomes business unless it is trusted, transparent and credible. While innovative science is the core of what we do, we must continue our efforts to demonstrate with all stakeholders that this is the case, that the science is truly first. We must continue to be complete and objective with all the information we provide, while evolving from a ‘push’ only model — where we just pushed out information in every medium — to also embrace a ‘pull’ model, where we listen to our customers and respond to their needs. Today’s environment seems to demand this capability and technology can enable it.”

Rady Johnson, Pfizer

Clearly, disrupting value networks as complex as the Rube-Goldberg health care systems of most major markets is no mean feat. It won’t happen by itself, and it will be far from easy to make it happen, given the entrenched, often contradictory interests of existing stakeholders.

21

operation are often antithetical to the objectives of Pharma 3.0. As a result, pharma companies can be slow to act, are sometimes reluctant to bring their assets to the table and often have opaque and lengthy decision-making processes. A key part of “taking action” will therefore be realigning internal incentives and processes and committing to act in ways that demonstrate new approaches and mindsets for co-creating valuewith partners.

The next chaptersWe ended last year’s Progressions with four guiding principles for pharma companies:

• Define your Pharma 3.0 brand.

• Co-create value with partners and patients.

• Experiment. Think small. Fail fast.

• Prepare for success.

In many ways, this year’s report — and the remaining chapters in particular — expand on these principles. As discussed in Chapter 1, companies are indeed attempting to define their brands and competitive strengths within the new ecosystem

It is important, however, for pharma companies to recognize that they may have a limited window of opportunity. Today’s non-traditional entrants, though unfamiliar with the health care business, could prove to be quick learners, and the advantages that pharma companies have because of their domain knowledge could shrink in a few years.

NEED IMAGE

as they experiment at a faster pace with increasingly diverse business models. Now, it is time to follow through on the other three guiding principles, by developing the new organizational capabilities and enhanced business functionalities to support business model innovation. These aspects are discussed in the next chapters of this report.

22 Progressions 2011

A road map for change

23

Success in Pharma 3.0 will require three core competencies: connecting information, entering radical collaborations and managing multiple business models.

In this chapter, we analyze these three core competencies to understand why they are so critical and identify the gaps that

In brief• In Pharma 3.0, companies will need organizational

capabilities in three critical areas where they currently lack sufficient strengths, skills and scale:

• Connecting information for competitive advantage. Information is the currency of Pharma 3.0, and success will involve extracting insights by connecting information from disparate sources. This challenge is being compounded by vast increases in data generation, the interlinking of sensor-equipped and context-aware devices, the dynamic nature of knowledge networks, and increasingly closed systems.

• Radical collaboration to drive business model innovation. Companies will require a core competency in building and scaling new business models that leverage

each other’s assets and attributes to drive value for patients, payers, partners and shareholders.

• Operating multiple business models. Given the promise of Pharma 3.0 — improving health outcomes for a wide spectrum of patient demographics and health care systems — a customer-centric strategy will involve building, resourcing and operating a portfolio of multiple business models that make up the “extraprise” of the future.

• To succeed, companies will need to actively intervene to accelerate transformation and build necessary capabilities and processes. To do this, they will create a learning model that can expand to a driving model for transformational change, with adequate resources and organization-wide efforts.

Chapter 3

A road map for change

Business model development: systematically experimenting with new models

Community engagement: engaging to add personalized value and build trust

Information strategy: empowering IT to guide 3.0 strategy

Performance management: measuring and communicating 3.0 value drivers

Capital strategy: adapting the capital agenda for Pharma 3.0 initiatives

Governance, risk and controls: embracing (and managing) risk in 3.0 initiatives

Pharma 3.0

Connectinginformation

Extracting value out of large volumes of data from diverse, unfamiliar sources

Radical collaboration

Innovative collaborationswith non-traditional partners to co-create value for each other and the system

Multiple business models

Building and managing a portfolio of innovation models

Three core competenciesfor success inPharma 3.0

Businessprocessesthat should be created orenhanced

companies will fill to develop strengths in these areas. (To build these competencies and operationalize their Pharma 3.0 strategies, companies will also develop new or significantly enhanced business processes for various aspects of their operations. These processes are identified in the chart belowand are the focus of Chapter 4.)

Building Pharma 3.0

Source: Ernst & Young.

24 Progressions 2011

1. Connecting informationIf the currency of Pharma 1.0 was years of patent life, and the currency of Pharma 2.0 is operating efficiencies, then the currency of the health outcomes ecosystem is information. Improving health outcomes, of course, will involve identifying the interventions and practices that deliver the biggest improvements — and that will require lots and lots of data.

Since delivering on the promise of health outcomes will inevitably require data, companies’ success or failure will be determined by this information. In Pharma 3.0, value will increasingly migrate from the product (the pill or device) to information about the product (its ability to improve health outcomes), paralleling similar shifts in numerous industries from banking and finance to retail trade. As Kim Park, Partner at Johnson & Johnson’s Janssen Healthcare Innovation, puts it, “In Pharma 3.0, the role of the product (the pill) could become very narrow. If companies believe they can sustain double-digit growth by continuing what has been done, putting more pills into the marketplace, that’s a short-sighted view of where health care is headed.”

This growing pool of data will be generated across the ecosystem through multiple new channels, such as electronic health records, social media, online communities, wireless devices and smartphones, meaning that no single entity will own or control all of the data about any company, product, disease state or patient behavior.

Drivers

In many ways, these shifts in the use of information in the health care ecosystem parallel larger changes occurring in the broader global economy. Understanding the context for these shifts, as well as how they are being handled by other sectors, will help articulate the challenges that pharma companies will face.

Big data. We are in the early stages of the era of “big data.” In the last few years, we have witnessed exponential increases in the quantity of data being created. Walmart generates more than a million consumer transactions every hour. Google stores and analyzes 34,000 internet searches per second. From retail giants to social networks and climate

The challenge of big data is being compounded by the rapid advance of the next iteration of connectivity — “the internet of things” — a world in which everyday objects are empowered with sensors and wirelessly interconnected.

research institutes, organizations are now collecting data that is measured not in gigabytes or terabytes, but in petabytes. (A petabyte is 1 million gigabytes — about a thousand times the size of the entire printed collection of the US Library of Congress.)

These trends are already starting to play out in the pharma industry. In December 2010, for instance, Switzerland-based Roche reported that the company is drowning in data, with the quantity of information generated doubling every 15 months. Interestingly, this includes not just data from internal R&D functions but also a rapidly expanding pool of information stemming from partner companies, potential collaborators and alliance proposals — the very sorts of external relationships and data sources that are set to grow dramatically in Pharma 3.0.

The internet of things. The challenge of big data is being compounded by the rapid advance of the next iteration of connectivity — “the internet of things” — a world in which everyday objects are empowered with sensors and wirelessly interconnected. As sensors, actuators, accelerometers, GPS systems and RFID tags rapidly become more and more commonplace, they are connecting everything from cars to mobile phones to entire supply chains and smart utility grids. Increasingly, many of these objects are not just connected; they are also context aware with real-time data on users’ characteristics, preferences and geographic locations — allowing new generations of applications to provide information that is specific, actionable and vastly more useful. Smartphone apps enable impulse buyers to scan a bar code and immediately search for better deals nearby. Google Goggles, a beta-version application by the Mountain View-based internet giant, allows users to search for information using cell-phone photos of landmarks, local businesses and other common objects.

But what makes this trend even more powerful (and simultaneously more challenging from an information management perspective) is that these devices are not just providing information; they are also generating data in real time. Rental car companies now use on-board GPS systems to track the location and speed of rented vehicles. And when a devastating earthquake hit China’s Sichuan province in May 2008, tweets on the microblogging service Twitter broke the news before it was reported by mainstream media channels.

“ In Pharma 3.0, the role of the product (the pill) could become very narrow. If companies believe they can sustain double-digit growth by continuing what has been done, putting more pills into the marketplace, that’s a short-sighted view of where health care is headed.” Kim Park, Johnson & Johnson

25

Once again, we are seeing these trends play out in health care as well. Not surprisingly, some of the earliest movers are in the IT and medtech arenas, where devices and diagnostics that are wirelessly connected and context-aware promise quantum improvements in health outcomes. “The cellular network is the most pervasive public utility in the world, with far more availability than running water or electricity,” says Don Jones, Vice President, Business Development, Health & Life Sciences at Qualcomm. “Today, the power of that connectivity is fundamentally changing the practice of health care. It is collapsing time and space, by enabling faster and better diagnosis, titration, patient self-management and monitoring.” As detailed in our interview with Don on page 26, Qualcomm is leveraging its deep expertise in wireless connectivity to partner with a host of companies around everything from “smart bandages” to innovative diagnostics. Meanwhile, a number of companies, including Cisco, Medtronic and Philips, are experimenting with “hospitals of the future” in different locations. Among other things, these facilities will include improvements such as wireless transmission of patient vital signs from an ambulance to the hospital, as well as “smart beds” that can communicate real-time patient data to the hospital’s EMR system and alert caregivers about adverse events. (For more on Medtronic’s Hospital of the Future initiative, refer to the interview with Michael Hedges on page 61.)

For pharma companies, some of the biggest benefits from this trend will likely stem from improved compliance. Novartis, for instance, is working with California-based Proteus Biomedical’s technology to develop microchip-embedded “smart pills” that can wirelessly transmit data to a patch worn by the patient and from there to a smartphone or a doctor’s computer. Meanwhile, Toronto-based PharmaTrust is developing a device called MedHome that can dispense the right medications to patients in their homes while also communicating with providers and caregivers about a patient’s compliance with a treatment regimen. (For more on PharmaTrust, see the interview with Don Waugh on page 27.)

Closed gardens. Ironically, even as we are generating vast volumes of data and expanding the reach of the information age to sensor-equipped objects, information is also becoming isolated within closed systems. The point is eloquently made in an August 2010 article in Wired magazine, “The Web is Dead. Long Live the Internet.” As the authors point out, the World

“The cellular network is the most pervasive public utility in the world, with far more availability than running water or electricity. Today, the power of that connectivity is fundamentally changing the practice of health care. It is collapsing time and space, by enabling faster and better diagnosis, titration, patient self-management and monitoring.” Don Jones, Qualcomm

“ Five years from now, the CEO of a pharma company should be uncomfortable if the CIO is not present at a key strategy meeting. That’s how important IT needs to be for pharma strategy.”

Werner Boeing, Roche

26 Progressions 2011

Connectivity changes everythingPerspective on connecting information

Don JonesQualcomm

Vice President, Business Development, Health & Life Sciences

At Qualcomm, we don’t make end products for consumers, but we make those products better by getting them connected. As an innovator, designer and seller of wireless technologies for all forms of mobile devices, we bring connectivity. Qualcomm is a very horizontal player. We license technologies to our own competitors and we partner widely — with big companies and small firms across a spectrum of industries — wherever improved connectivity is likely to add value.

Connectivity changes everythingAnd improved connectivity, it turns out, adds lots of value. The cellular network is the most pervasive public utility in the world, with far more availability than running water or electricity.

Today, the power of that connectivity is fundamentally changing the practice of health care. It is collapsing time and space, by enabling faster and better diagnosis, medication therapy, titration, patient self-management and monitoring.

The examples are everywhere. Internet-connected pill bottle caps made by Vitality, a Cambridge, Mass., start-up, increase compliance and even allow patients to refill their prescriptions with the push of a button on the cap’s underside. Connected blood glucose meters keep track of how often patients are testing, remind them when they are likely to need supplies, and can handle reordering from the device itself. We are partnering with Hughes Telematics to develop bracelets, watches and pendants that are embedded with sensors for altitude, location and relative motion, to alert caregivers when an elderly patient has fallen down. Beyond these wearable devices, the next generation will be peel-and-stick disposable biosensors — what we call the “smart Band-Aid” space — to track heart rate, ECG or other common vital signs. And we are working on ultra-low-power radio technologies for these peel-and-stick sensors that will enable them to be produced at fairly low cost in printed form and still last for days on end.

One of the challenges associated with these advances is that most health IT systems were not designed to receive, hold and analyze streaming physiological data from devices. In response,

we are working on a platform technology that enables various manufacturers to access one another, collaborate and interact with one another’s devices, and create mix-and-match scenarios that are most advantageous for their business models.

OutlookFive years ago, pharma companies were gathering information about these new technologies, but not taking action. Three years ago, we started to see some movement. But in the last year, things have really heated up, with a spate of deals and investments. Still, pharma is significantly behind the medical device industry in thinking about connectivity and using its power for product and business model innovation.

Regulating these new technologies is complex and uncharted territory for regulators and companies alike. We don’t always know what questions to ask or what standards to apply. In a hospital, for instance, the acceptable margin of error for blood glucose measurements might be ±4%, but that standard was developed for blood samples that are drawn periodically and sent to a central laboratory. Now imagine a continuous test, which provides a steady stream of data around the clock. If the margin of error for this data is ±8%–10%, is the lower accuracy compensated for by the fact that we now have much more real-time data with which to identify upward and downward trends? Today, neither the FDA nor the industry knows the answer. But the agency has started reaching out to industry, and the FDA and the FCC are working together, for the first time in history, to address these challenges.

We will need to answer these questions, because the wireless revolution is just getting started. Over the next decade, the cellular industry plans to add 50 billion mobile devices to the 5 billion in existence today — a tenfold increase. Most of these devices won’t be phones as we think of them today. Wireless connectivity is rapidly becoming ubiquitous — and bringing huge benefits to consumers and patients everywhere.

27

Bringing outcomes to patientsPerspective on connecting information

Don WaughPharmaTrust

Co-Founder and Chief Executive Officer

At PharmaTrust,1 we are developing new technologies that are at the forefront of improving health outcomes, by improving efficiency, expanding access and empowering patients to better manage their health care.

Our first product, the PharmaTrust MedCentre, is a medication dispensing and management system that uses state-of-the-art remote and scanning technologies and looks something like an automated teller machine (ATM). By inserting a prescription into the MedCentre, patients are able to speak live with a pharmacist via videoconferencing. The pharmacist gathers relevant medical information, provides detailed counseling and dispenses the medicines immediately.

This system improves health outcomes in two key ways. First, it allows pharmacists to focus on patient counseling rather than clerical and administrative tasks. According to one estimate, the average pharmacist currently spends only about 18% of his or her time on patient care — the rest is spent on routine tasks such as counting pills and labeling bottles. Just as ATMs have freed up bank tellers to provide higher-value-added financial services as account representatives, the MedCentre system can allow pharmacists to focus on counseling patients and providing other health care services.

Second, the MedCentre can expand access to health care. The system can give patients access to medicines 24 hours a day at convenient locations. Today, ATMs are ubiquitous, allowing customers to access cash or transfer funds at grocery stores or sports stadiums. In much the same way, the MedCentre can provide access to prescriptions and pharmacist counseling at locations that are more convenient for patients — clinics, emergency rooms, job sites, etc. Our system brings medicine to patients rather than making patients go to medicine.

A second product, the MedHome, is a personal in-home device that dispenses unit doses to patients at pre-set times and provides patient monitoring and reminders to ensure patient health and safety. Using a multi-dose packaging technology, we can deliver to a patient’s residence a cassette spool with a month’s worth of medications. The cassette is deposited into the MedHome device, which can also download medication schedules, allowing patients to be reminded when it’s time for them to take their medicines. Caregivers or health care professionals can be notified when the medicines are dispensed and alerted if the patient fails to take the medications. The device can also allow patients to immediately connect with a pharmacist, physician, caregiver or emergency responder at the touch of a button.

This product improves health outcomes by boosting compliance with treatment regimens (10% of emergency room visits are due to non-compliance). The MedHome allows patients to take control of their treatments and live more independent lives (23% of patients who are in long-term care or institutionalized are there because they can’t manage their medicines).

Pharma companies are very important stakeholders in the care of patients and have a critical role to play as health care systems become increasingly focused on outcomes. Today, pharma companies have a wealth of information on their drugs, interactions, side effects and much more. New technologies such as ours can allow that valuable information to be delivered when it is most relevant — at the point of dispensing — to educate patients and help them better manage their health.

1”PharmaTrust” is a registered trademark of PCAS Patient Care Automation Services Inc.

28 Progressions 2011

Wide Web is just one of many platforms that exist for transporting information on the internet. As a platform, it has only been around since the mid-1990s (during which time it has largely replaced other protocols such as FTP and Telnet for transporting data). But as more and more information is being transmitted via iPhone apps and Kindles rather than web browsers, this open web is increasingly being walled off into what the authors refer to as closed gardens. This, in turn, means that the comparative advantage of today’s leading search engines — crawling a large, open web to make sense of all the information generated on it — becomes increasingly challenged.

The same pattern is visible in the burgeoning health outcomes ecosystem. Social media pioneers such as Sermo and Medscape Physician Connect are building troves of valuable data from interactions among their members, but in each case the information is contained within the company’s platform. Patients are similarly producing huge volumes of real-time data as they use wireless devices and diagnostics — but that data is also being aggregated in closed, proprietary systems by companies (typically the manufacturers of these products).

Discussions of electronic medical records almost invariably highlight the importance of data interoperability: the benefits from the digitization of patient records will only be realized if data from different systems are compatible with each other. The trends discussed here, however, suggest that the interoperability challenge will apply to more than electronic health records. Even as the players in Pharma 3.0 are starting to produce vast volumes of outcomes-related data, the data has diverse forms and is being generated in proprietary, walled communities. In the absence of common, interoperable standards, there will be a need to negotiate access to, collect and analyze different kinds of data from various sources.

While value in the future will be determined by data, data alone is not the answer. Instead, value will come from developing insightful solutions with the data.

Implications

The trends discussed above will have several implications and challenges for pharma companies.

Capability gaps. In the 3.0 ecosystem, pharmaceutical companies will enter a new business: the world of information. While firms have been expanding into other lines of business in Pharma 2.0 — such as generics and animal health — these activities were much closer to pharma’s core competency in novel drugs. The business of information, on the other hand, is a radical departure from drug development, requiring people with different competencies and skills.

For instance, 3.0 will involve vast increases in the sheer quantity of data generated across the ecosystem. But this data will not be more of the same — it will be “more of the unfamiliar.” Companies will face far greater diversity in the types of data (various health-record platforms, social-media conversations, wireless-device biometric information, etc.) and sources of data (since information will be generated by the gamut of traditional and non-traditional players in the health outcomes ecosystem).

This tremendously diverse and hugely expanded universe of data will test the analytical capabilities of pharma companies. Indeed, it is likely that many firms will end up significantly boosting their skills to track, filter, store and analyze this information. Pharmaceutical firms are very skilled in certain kinds of statistical analysis because of their deep expertise in drug R&D (primarily hypothesis testing using rigorous statistical analysis on samples that are small relative to the volumes of data in Pharma 3.0). But understanding and extracting value from the data of Pharma 3.0 will require entirely different approaches. Instead of analyzing well-defined samples, it will involve managing radically larger populations of information. Rather than hypothesis testing, much of the analysis will occur through data mining. And it will likely require capabilities for tracking multimedia and other online content. (For more on these implications, see the “Information strategy” section in Chapter 4.)

Aggregators needed. Since the data of Pharma 3.0 will exist in many locations scattered throughout the ecosystem and in diverse formats and platforms, the value of this information will only be truly unlocked when the data is aggregated using a common language. And since the web crawlers and algorithms of today’s internet giants are less potent in an internet of closed gardens, Pharma 3.0 will need entities that can act as content aggregators — organizations that can turn data into insights for a specific purpose. These entities will negotiate access to closed gardens, translate disparate information into a common language and provide valuable analysis and insights. Pharma companies could aim to play this role, but they may have a limited window of opportunity, since their competitive advantages today (knowledge of disease states, drug efficacies, etc.) may not be there in five years, as non-traditional entrants and integrated health systems acquire knowledge about the health outcomes. They will also

“In the future of Pharma 3.0, data will not be contained in any single company’s central servers — it will be distributed across the ecosystem, often in semantically inconsistent formats. So real-time analytics and integration will be vital. Thoughtful algorithms are a big part of the future, both to make sense of the data and to execute actions derived from these analyses.”

Diego Miralles, Johnson & Johnson

29

need to make the case for why they should be entrusted with this role. (For a deeper discussion on this aspect, see the “Why pharma?” section in Chapter 2.)

Insightful solutions. While value in the future will be determined by data, data alone is not the answer. Instead, value will come from developing insightful solutions with the data. This precept has been amply demonstrated by numerous companies in other industries that have successfully monetized customer data. Companies such as Amazon and Netflix, for instance, have been collecting data on customer purchases and rentals for some time. But the real value of that data has come from being able to analyze it to make suggestions for customers based on correlations between their selections and those of other users. The boom in online advertising on sites such as Google and Facebook has been driven by the ability to analyze customer data — search engine queries on Google, and “likes,” interests and conversation topics on Facebook — to target advertisements to the users who are most likely to be receptive to them.

It’s interesting to note that Google has an initiative under way called the Data Liberation Front with the stated “singular goal” of “mak[ing] it easier for users to move their data in and out of Google products.” For all its vaunted strengths in data, Google apparently sees its competitive advantage not so much in owning information, as in the robustness of its algorithms to extract insights. Some in the pharma industry are already starting to see a similar truth at play in their sector. For instance, Diego Miralles, Head of Janssen Healthcare Innovation at Johnson & Johnson, argues that “in the future of Pharma 3.0, data will not be contained in any single company’s central servers — it will be distributed across the ecosystem, often in semantically inconsistent formats. So real-time analytics and integration will be vital. Thoughtful algorithms are a big part of the future, both to make sense of the data and to execute actions derived from these analyses.”

The health care arena got a hard lesson once before in the value of unanalyzed data. Recall the experience of bioinformatics stocks. Around the turn of the millennium, as the sequencing of the human genome was nearing completion and media coverage of the topic escalated, there was a stock market bubble in the shares of bioinformatics companies. It did not take long, however, for investors to realize that data itself can be a relatively low-margin, rapidly commoditized business. The bubble burst, and many erstwhile bioinformatics companies had to reinvent themselves as product companies to survive.

The message — whether for biotech companies a decade ago or for the wide range of contenders in today’s emerging health outcomes ecosystem — is that value lies not so much in selling data, as in providing solutions built on specific, actionable insights gleaned from that data. Success in Pharma 3.0 will come from the ability to provide insight-enabled interventions at key points in the cycle of care. It will require the right information (relevant and actionable, not overburdened by legal jargon) at the right time (to inform key decision points in the cycle of care).

Pfizer, for instance, has been one of the early leaders in pharma on this front. The company was the first pharmaceutical firm to partner with social media pioneer Sermo, and added an “Ask Pfizer” button on discussion threads that provided relevant, actionable answers in a very timely manner. The company is also working with Epocrates to provide similar information on mobile devices. (For more, see the interview with Stuart Sowder onpage 51.)

Information as strategy. Information technology is at the very core of Pharma 3.0. It is a key catalyst enabling the transition to the health outcomes ecosystem. Therefore, more than any other function within pharma, IT needs to be approached in a fundamentally different way. Companies will need an approach to IT that is more about informing and driving 3.0 strategy than about supporting operations — a functionality we refer to as “information strategy.” Today, IT is a support function — essentially overhead — at most pharma companies. The reality, though, is that it’s not a support function at Google Health, and it’s not overhead at Microsoft HealthVault — much less at the host of new tech startups entering this space. For pharma companies to approach this correctly, information strategy will be embedded in or very closely tied to business units and corporate strategy. “Five yearsfrom now, the CEO of a pharma company should be

Value lies not so much in selling data, as in providing solutions built on specific, actionable insights gleaned from that data. Success in Pharma 3.0 will come from the ability to provide insight-enabled interventions at key points in the cycle of care.

30 Progressions 2011

uncomfortable if the CIO is not present at a key strategy meeting,” says Werner Boeing, Roche’s CIO of Roche Diagnostics. “That’s how important IT needs to be for pharma strategy.” (For more on this issue, refer to the “Information strategy” section in Chapter 4.)

2. Radical collaborationSuccess in Pharma 3.0 will come from an entirely different approach to innovation. It will no longer be about just developing new drugs and devices — innovation will extend to the development of entirely new business models and market offerings that improve health outcomes for patients. No single entity will have the full complement of skills, expertise and insights required to develop the innovative outcomes-based solutions demanded by Pharma 3.0. As a result, the externalization of drug R&D that has been under way in Pharma 2.0 will be taken to an entirely new level in Pharma 3.0, as companies collaborate across the value chain with very diverse and different entities to develop these new offerings. And the process of partnering and innovating will be increasingly open, with new mindsets and approaches for jointly creating and demonstrating value throughout the cycle of care.

The winners in Pharma 3.0 will be those that are best able to bring disruptive change to the delivery of health care. Disruptive innovation typically happens in industries that are broken (too expensive or inefficient), when assets and technologies (many of which are already in existence) combine in new configurations to deliver value more efficiently. All of these conditions exist in today’s health care industry. The system is indeed broken, with the cost of health care rapidly becoming unsustainable across major markets. The focus on outcomes is providing the catalyst for disruptive innovation and giving non-traditional players an opening. Over the years, these entities have made huge investments in developing their own technologies, expertise and knowledge. Even the “superconsumer” patients of Pharma 3.0 have made significant investments in their own personal smart technologies. The opportunity now lies in the ability to combine these existing assets — drugs, pharmaceutical know-how, smartphones, data and more — into new business models and market offerings. Doing so will improve outcomes and increase returns on existing investment for all players as they tap each other’s assets. And doing so will also clearly require radical collaboration.

The resources of pharma companies have been under increasing pressure for some time now. As many of their most successful products lose patent protection, companies have already been looking for ways to increase the efficiency of their operations. In Pharma 2.0, this has manifested itself in greater externalization of R&D, as companies have sought efficiencies by working

more extensively and closely with third parties. In Pharma 3.0, the same imperatives will be applied to the innovation of new business models. To develop new offerings efficiently, companies will increasingly leverage the investments others have made — from the platforms of IT companies to the networks of mobile telephony players and more. And in the customer-centric world of 3.0, pharma companies will also benefit by leveraging the expertise of entities that can actively engage with customers in more open ways.

As with the information age, this is a revolution that is coming somewhat belatedly to pharma, and leading companies in other sectors have been successfully deploying these principles to develop new business models for some time. In doing so, they have been partnering in creative ways with a host of other companies and stakeholders.

The accompanying article by Chris Thoen of Procter & Gamble (on page 32) describes the approach that radically innovative firm has taken. P&G successfully reinvented itself as an organization that uses open innovation for the majority of its product and commercial innovation activity, and the mantra Thoen cites — “only do what only we can do”— is a powerful statement of how firms need to focus on their core strengths while partnering with others for everything else. The firm uses an approach that is similar to the “commercial trials” methodology we described in Progressions 2010. It is worth noting, however, that P&G puts customers at the center of this approach, refining pilots and prototypes with customer input.

The internet is taking radical collaboration to a whole new level through trends such as crowdsourcing. In Pharma 2.0, companies typically entered “bilateral,” one-on-one deals. In Pharma 3.0, deals will often be multilateral, as companies will need the diverse capabilities of multiple players to develop new offerings. But crowdsourcing takes multilateral transactions several steps further, by moving from the few to the crowd. Cisco, for instance, uses its I-Prize competition to tap ideas from a wide range of participants in an open innovation process.In recent years, we have seen such platforms being applied to drug R&D in pharma, for instance through Lilly’s PD2 initiative, which allows outside researchers to submit compounds to the company free of charge for screening (the researchers retain all rights if Lilly is not interested in further development of the molecule). More recently, we are seeing pharma companies using Sermo to crowdsource market research through quick-turnaround doctor surveys. (For more on this, refer to the interview with Daniel Palestrant on page 50.) In the world of Pharma 3.0, where companies will be squeezed even further to do more with less and leverage the strengths of a wide pool of players, such technologies could become increasingly important.

31

Much of open innovation in pharma has so far been applied to drug R&D — and even there in relatively low-risk areas such as precompetitive spaces (e.g., Enlight) and neglected diseases (e.g., GSK’s neglected diseases initiative). In Pharma 3.0, we will see open innovation also in the development of new commercial business models. Currently, while pharma companies spend more than US$60 billion a year on drug R&D, their expenditures on Pharma 3.0 commercial model innovation are miniscule by comparison. We believe this will change. A rigorous process for business model development (discussed in detail in Chapter 4) will become a key driver of success. Companies will develop large portfolios of business model experiments — commercial trials — much like today’s drug-development portfolios. They will have processes for rigorous experimentation with those portfolios, as well as for scaling up the most successful experiments over time. And they will become active learners, increasingly willing to build value by sharing strengths with other players in the ecosystem, rather than safeguarding and walling off those assets.

Implications

New approaches to sharing. Radical collaboration will involve very different approaches to intellectual property. Protecting IP has historically been a primary value driver in the pharma business. But as the drivers of value shift toward health outcomes in Pharma 3.0, it will be imperative for pharma companies to learn how to contribute assets and IP into new models that they do not entirely control. Sharing information and co-creating business models based on what you know, versus what you make, will be a cultural challenge for pharma. Active learning about other industries’ changing business models so that you know how your assets and attributes can be most relevant — an “outside-in” approach to business model innovation — will also be a key requirement.

Community engagement. In Pharma 3.0, a key driver of success will be the ability to engage with customers and developers in fundamentally different ways within new sets of communities. Much of what is happening in 3.0 is occurring within communities such as social media platforms and other online communities.

In these communities, the lines between developers and customers will often blur, for instance as physicians act not just as customers but also as co-creators that provide market insight for pharma companies. In addition, participants have very different norms and expectations in communities, where participants are expected to add value, share openly and co-create. As a result, pharma companies will have entirely new rules of engagement. Building trust will become critical in these spaces, particularly when companies are seeking to play a leading role. Listening will become more important than pitching. Sharing unbiased information — even if it shows a company’s offerings in an unfavorable light — will be vital for building credibility. It is even conceivable that engaging openly and honestly in communities will involve touting the value of competitors’ products! (These implications are discussed in considerable detail in the “Community engagement” section of Chapter 4.)

P&G successfully reinvented itself as an organization that uses open innovation for the majority of its product and commercial innovation activity, and the mantra P&G’s Thoen cites — “only do what only we can do”— is a powerful statement of how firms need to focus on their core strengths while partnering with others for everything else.

32 Progressions 2011

Only do what only you can doPerspective on innovation

Chris ThoenProcter & Gamble

Managing Director,Global Open Innovation Office,Global Business Development

In 2000, Procter & Gamble was at a crossroads. R&D productivity had flattened, and it was becoming apparent that our invent-it-ourselves model could not sustain historic growth levels. Our CEO at the time, A.J. Lafley, set a bold new goal: 50% of our innovations would come from outside the company. Ten years later, we’ve exceeded that goal and have delivered a series of truly breakthrough innovations through open innovation — or Connect + Develop, as we’ve come to call it at P&G. Our approach has been guided by three key principles and processes we have established to operationalize these principles.

Be customer-centric. The first principle — indeed, the inevitable starting point for all successful innovation — is customer-centricity. Before attempting to fill customers’ unmet needs, a company must have a solid understanding of what those needs really are.

Consequently, we have developed processes for piloting and iterative development. Once we define an innovation in concept, we quickly develop a prototype and test it with customers. This allows us to develop numerous options, learn early in the process through iteration, and fail quickly whenever needed. After defining the core of a new innovation, we work to get the broader organization aligned around it and assign adequate resources.

This requires striking a fine balance. In some situations — particularly with disruptive innovations where no offering currently exists — it is a challenge to give consumers something tangible to react to. On the other hand, a prototype can’t look too complete, lest consumers view it as a finished product and shy away from providing deep feedback.

Only do what only you can do. To maintain our focus and leverage the strengths of others, we first identify the value that our organization is uniquely able to provide. When we see opportunities where an external partner can work faster and more efficiently and brings a greater depth of experience, we work to build a mutually beneficial partnership.

To optimally manage our network of alliances, we have people with diverse capabilities who can live and work within our partners’ ecosystems, because participating in their culture and “speaking their language” helps build confidence. We often bring partners together to learn from each other. Even when P&G is not an immediate beneficiary of the interaction, we gain

because our partners become more creative and — we hope — more likely to bring their best new ideas to P&G first.

Keep learning. An innovative company has to be a learning organization. For us this meant setting audacious goals (which I define as targets that half the company considers achievable and the other half considers impossible!) Since setting audacious goals inevitably requires failing, a learning organization needs to establish a culture where failing is acceptable — as long as it happens quickly and cheaply and one learns from the failures.

This requires robust information management processes, especially at big companies, to allow you to search for information on similar initiatives you have undertaken in the past and not waste resources on “reinventing wheels.” But there are challenges to doing this well. Much valuable information is generated through email, but privacy concerns constrain companies’ ability to make this information searchable. Legacy systems and processes have a momentum that is hard to break. And with the expansion in external information because of social media, companies are challenged both to quickly tap into the information being generated by others and to “filter the truth from the hype.”

We have used these principles to innovate not just new offerings but new business models, such as our expansion into franchising. By studying our customers, we realized that there was an opportunity to expand into services, where people pay for an experience rather than just a product. We decided to focus on service opportunities that were adjacent to areas where we already have brand equity, which led us to Tide Dry Cleaners and Mr. Clean Car Washes. We soon realized that a franchisee-franchiser model would be ideal, but we had no experience in franchising. So, following the “only do what only we can do” principle, we partnered with a company that has such experience.

Our open innovation strategy has resulted in more than 1,000 active agreements with external parties. But the approach is also applicable to other companies grappling with the challenges that confronted us a decade ago — unsustainable R&D investments with dwindling productivity. Opening your doors to external innovation can open the way to new sources of growth.

33

3. Multiple business modelsThe business model of the pharma industry has been changing in recent years, as the industry has gone from Pharma 1.0 to 2.0 — and it will change even further as it moves to Pharma 3.0. In the transition from 1.0 to 2.0, we saw the industry moving from one business model to several, as companies developed radically different strategies to address a multitude of often-divergent challenges. Among other things, companies made strategic decisions about their product portfolios (diversifying into new offerings even as they exited areas that they considered less strategic), markets (often expanding into emerging markets and examining new ways to serve underserved patient populations), scientific approaches and price points. In Pharma 3.0, the divergence of business models will go into overdrive as companies attempt to do several things at once. As they build entirely new lines of business and offerings around creative new approaches to improving health outcomes, this will inevitably involve a proliferation of business models. These new business models being developed in Pharma 3.0 will be customer-centric, solution-focused and financially different and will live alongside the product-oriented models of Pharma 2.0.

In collaborating with non-traditional partners — which may have very different backgrounds, regulatory regimes and approaches to everything from R&D to marketing — pharma

firms will succeed by figuring out how to fit into the business models of others. It may often require them to immerse themselves in these different environments, to truly appreciate the different perspectives and business approaches of their partners. As Chris Thoen points out in the article on the facing page, “to optimally manage our network of alliances, we have people with diverse capabilities who can live and work within our partners’ ecosystems, because participating in their culture and ‘speaking their language’ helps build confidence.”

The need for a multiplicity of business models will be amplified by the increasing relative importance of payers as key customers of pharma companies. Since payers are a very heterogeneous customer group, with different regulatory regimes, constraints and needs in different markets, companies will inevitably develop multiple models to address these differences. Meanwhile, the explosion in new technologies and channels for creating value and improving outcomes — ranging from online communities to mobile health to value mining with digital health data — will lead to experimentation with new business models in many of these channels. As a result, many new interventions will emerge to close “value leakages” where health outcomes are not being optimally improved. (The concept of value leakages is discussed in considerable detail in the “Business model development” section in Chapter 4.)

Even in these early days of Pharma 3.0, the diversity of business models in the ecosystem is remarkable. Analysis by Ernst & Young identified approximately 220 distinct market offerings in the health outcomes space, which are variations of different business models.

From one to many: the divergence of business models

To understand how business models have been evolving in the pharma industry, we need first to define the term. We use the

“ To optimally manage our network of alliances, we have people with diverse capabilities who can live and work within our partners’ ecosystems, because participating in their culture and ‘speaking their language’ helps build confidence.”

Chris Thoen, Procter & Gamble

34 Progressions 2011

These new business models will also allow companies to unbundle what they know from what they make. And this is where some of the biggest opportunities for the pharmaceutical industry might lie.

term “business model” to refer to the ways in which a company organizes its tangible and intangible assets to create value, deliver value and capture value.

In Pharma 1.0, the industry largely had one way of doing business: the ubiquitous blockbuster model. Companies created value through drug R&D and delivered value by marketing extensively to their customers with blockbusters — mostly in primary care. They were able to capture value from this exchange because of strong patent protection combined with a moderately flexible pricing environment and general acceptance of their offerings by payers.

In Pharma 2.0, we are seeing divergence of that unitary model. As companies have grappled with the looming inevitability of their patent cliffs and anemic pipelines, they have responded in different ways, including expanding their product and pipeline portfolios through acquisitions, reducing infrastructure, and diversifying into new medicines, geographies and health care opportunities. They are seeking to deliver value and top-line growth through more than just novel drugs — their expanding portfolios often include generics, consumer health products, vaccines, devices/diagnostics and more. And, as top-line growth has slowed and margins have come under pressure, capturing value has also required boosting the bottom line by harnessing operating efficiencies and transforming the ways in which business is done and organized. Capturing value in Pharma 2.0 is not just about what products are sold, but about how products are sold, priced, manufactured and reported — i.e., business process transformation — through various combinations of outsourcing, standardization, organizational de-layering and restructuring.

The imperative to develop multiple business models will

become all the more acute in Pharma 3.0. The driver of value is changing to health outcomes, and the focus is moving from product efficacy to patient health, payer budgets and the customer experience. As a result, companies will find themselves in the solutions business, and business models will incorporate services, customized insights and solutions.

These new business models will also allow companies to unbundle what they know from what they make. And this is where some of the biggest opportunities for the pharmaceutical industry might lie. In today’s business models, all knowledge created in the value chain, from R&D through to pharmacovigilance, is priced in the pill. In an ecosystem that increasingly rewards stakeholders for delivering health outcomes, however, it will become possible for pharma companies to unbundle and monetize this knowledge into services and solutions. The profit models for these services and solutions will vary greatly and be different from the current profit models for pills and devices.

Developing these new models for creating, delivering and capturing value will involve decisions about how to best invest the tangible and intangible assets of pharma companies. This will include mechanisms for making capital allocation decisions across commercial trials as well as more traditional endeavors. But this is about more than allocating financial capital. To nurture a range of business models, pharma companies will effectively

35

function as investors as well as operators — contributing not just money but also expertise, domain knowledge and other assets to a range of projects both internal and with a variety of partners. (For a deeper discussion of this aspect, refer to the “Capital strategy” section in Chapter 4.)

A critical component of this will be managing a portfolio of partners for competitive advantage, at various times investing in the long-term potential of some relationships, actively partnering with some around specific challenges, and bringing together others that have complementary needs and strengths. (For more on this aspect, refer to the “Community engagement” section in Chapter 4.)

Above all, developing multiple business models requires a systematic and rigorous approach rather than ad hoc experimentation. “Innovation isn’t just about throwing a great idea on the table and hoping it goes somewhere,” says Pfizer’s Executive Vice President for Worldwide Business Development and Innovation, Kristin Peck. “It’s about real rigor — looking at all the research, deciding how to efficiently prove concepts, and knowing what to do with what you learn.” Successful companies will follow a well-defined process for business model development (discussed in detail in the “Business model development” section of Chapter 4). Just as clinical trials were the means for creating value and developing new products, companies will use commercial trials to develop pilots and experiments around new commercial offerings and new business models.

Putting your money where your future isThis is difficult stuff. The profitability and sustainability of the Pharma 2.0 model is facing a crisis that demands disruptive change. But disruptive change — particularly at a time of great macro changes and pressures — tends to come not from innovative new products as much as from offers that are “better, cheaper, faster” and provide much greater access due to their affordability or value. Our experience is that companies that are successful at transformational and disruptive change often take an innovation journey that starts with a supervisory change model, where they are conducting and monitoring external trends while also initiating a few scattered pilots under the supervision of part-time task forces, each focused on a specific transformation trend.

“Innovation isn’t just about throwing a great idea on the table and hoping it goes somewhere. It’s about real rigor — looking at all the research, deciding how to efficiently prove concepts, and knowing what to do with what you learn.”

Kristin Peck, Pfizer Inc.

36 Progressions 2011

As the future gains traction with leadership — at the rational, political and emotional levels — innovative companies transition to a learning model, where the responsibility for figuring out how to succeed is assigned to a full-time team. This innovation team is typically responsible for: creating the transformation road map; building a portfolio of early wins, strategic initiatives and critical partnerships; and identifying best practices and lessons learned. In essence, the team serves as a new kind of “CoE” — a center of excellence, enthusiasm and energy for colleagues — that encourages business units to experiment with targeted initiatives.

But to truly take on disruptive change, pharma companies need a response that is enterprise-wide and comprehensive — a driving model. Under such an approach, this becomes a major priority in the firm’s strategy and cuts across the entire organization, much like GE’s Ecomagination and Healthymagination initiatives. Every business unit is tasked with figuring out how it will incorporate the essence of the strategy to accelerate its growth. Companies build entirely new business functionalities or significantly improve existing ones — the topic of discussion in Chapter 4 — to conduct activities that will be critical, such as business model innovation and community engagement.

So far, no pharma company has come close to prioritizing and investing in Pharma 3.0 at the driving-model level. Most pharma companies are currently in the supervisory model or the early stages of the learning model. This is all the more remarkable when you consider how much non-pharma companies have already committed to Pharma 3.0 initiatives — more than US$20 billion by our count. (This is a rough estimate that excludes numerous initiatives for which companies have not disclosed investment amounts, but it is still evident that the amounts being committed by other players dwarf by many multiples the resources that pharma companies have dedicated to Pharma 3.0.) At the same time, pharma companies have much more at stake, since this is an issue that’s closer — and hence more potentially disruptive — to their core business than to the core businesses of many non-traditional entrants. The focus on health outcomes is not a minor trend occurring in a couple of far-flung outposts — it affects every aspect of health care and cuts across the entire health ecosystem. It demands a proportionate response from

“Pharma 3.0 is really about understanding how technology is changing and how everything ultimately ties to outcomes. Those two trends affect every job function, cut across the entire organization and will drive fundamentally different ways of doing things.”

Jay Galeota, Merck & Co.

companies looking to sustain success in this new future.

The question, of course, is how companies will get to a driving model. As we have noted before, the challenges of Pharma 3.0 will not replace those of Pharma 2.0 as much as add to them. The business units that are neck deep in Pharma 2.0 issues cannot be expected to give Pharma 3.0 the attention it deserves. As Pharma 3.0 pilots compete with 2.0 initiatives for scarce resources, it is only natural that they will often lose out to priorities that are more pressing and immediate.

As such, we don’t expect that pharma companies will make the transition overnight. Instead, the focus on Pharma 3.0 will grow in tandem with the commercial trials that companies conduct. The success of these commercial trials will demonstrate the market relevance and commercial viability of 3.0 offerings — making it easier to make the business case and command internal resources. Strong partners will also create pull that will help accelerate the change.

Early leaders today are making 3.0 a sufficient priority in the learning model, by ensuring that the innovation teams are staffed with talented workers and reporting to an appropriately high level in the organization while leadership communicates the importance of the team’s mission.

Focusing on functionalitiesIn this chapter, we have discussed how Pharma 3.0 will involve building three core organizational capabilities: connecting information for competitive advantage, radical collaboration to drive business model innovation, and operating multiple business models. And in the preceding section, we have detailed how it will require overcoming key obstacles by: investing at an appropriate level; aligning incentives, metrics, standards and mindsets; and articulating why pharma companies are partners of choice.

But getting to 3.0 will take more than that. As Jay Galeota, Merck’s Senior Vice President, Strategy and Business Development, Global Human Health, puts it, “Pharma 3.0 is really about understanding how technology is changing and how everything ultimately ties to outcomes. Those two trends

To truly take on disruptive change, pharma companies need a response that is enterprise-wide and comprehensive — a driving model. Under such an approach, this becomes a major priority in the firm’s strategy and cuts across the entire organization, much like GE’s Ecomagination and Healthymagination initiatives.

37

affect every job function, cut across the entire organization and will drive fundamentally different ways of doing things.” Indeed, at the end of the day, companies’ Pharma 3.0 strategies will succeed or fail in the details of what thousands of people across their organizations do every day — because the changes we have discussed here will inevitably affect processes and functions throughout the organization. In some

cases, new functionalities will be needed, while in others, existing ones will be approached in very different ways. These functionalities — which we have alluded to at many points throughout this chapter — are the focus of the rest of this report. They will also need to be the focus of pharma companies as they operationalize their 3.0 strategies.

38 Progressions 2011

As discussed in Chapter 3, success in the outcomes-driven world of Pharma 3.0 will come from three core competencies: connecting information, radical collaboration and operating multiple business models. Where are pharma companies today in their approach to these competencies? What initiatives are they undertaking, and what challenges do they see ahead?

To get answers to some of these questions, we recently talked with senior strategists from three leading global pharmaceutical companies: Jay Galeota (Merck), Kim Park (Johnson & Johnson) and Kristin Peck (Pfizer). Here are excerpts from those conversations, featuring Dave DeMarco, Ernst & Young’s Pharmaceutical Leader for the Northeast US in the role of moderator.

Ernst & Young: What challenges will companies face in extracting insights from the vast pools of data generated in Pharma 3.0? How can these challenges be addressed?

Park: I don’t believe the pharmaceutical industry fully grasps how quickly this surge of information is changing the health care landscape. It’s like a tornado — people see it coming, they know it will hit, but not everyone realizes that only a few will thrive after the storm passes. How we synthesize the wealth of inputs — from disease information to treatment responses to genetic and behavioral profiles — and then translate that into offerings that add value to customers is essential. In Pharma 3.0, the role of the product (the pill) could become very narrow. If companies believe they can sustain double-digit growth by continuing what has been done, putting more pills into the marketplace, that’s a short-sighted view of where health care is headed.

Today, pharma companies do not have the capabilities to process health data in ways that make it meaningful and compelling to the intended audience — patients, physicians, payers or others. Some think it is the role of the IT team, but IT doesn’t see that as their reason for being — their focus is on advancing adoption of technology tools as opposed to synthesizing data in meaningful ways. Perhaps other groups — research and development, health economics or outcomes research, for instance — that are used to collecting data and analyzing it could address this challenge. But with many new players in health care, such as Google, already well established in processing and managing information, we need to step back and ask when we might be better off partnering with these companies versus building our own internal capabilities.

Strategy roundtable

Building Pharma 3.0

Jay GaleotaMerck & Co.Senior Vice President, Strategy and Business Development, GlobalHuman Health

Kim ParkJohnson & JohnsonPartner, JanssenHealthcare Innovation

Kristin PeckPfizer Inc.EVP Worldwide Business Development and Innovation

“Today, pharma companies do not have the capabilities to process health data in ways that make it meaningful and compelling to the intended audience — whether that is patients, physicians, payersor others.”

Dave DeMarco, PhDErnst & Young LLPPrincipal and Northeast US Pharmaceutical Leader

39

Galeota: Technology advancements — such as wirelesscommunications and active and passive sensors — are rapidlyexpanding not just the volume of data but also the sourcesand types of data. The challenge for us is how we make thisdiverse data useful, and we’ll continue to make progress as webetter understand the breadth of variables that influence healthoutcomes. The most important thing is what you actually dowith the data. It’s one thing to have interesting information,but it’s the insights that are important to guide smarter, betterdecisions on health outcomes.

Peck: Many companies have a vested interest in keeping their information in silos — not just because of its value as intellectual property, but because they think they can use it to define the world and make whatever business case they want within the comfort of their silos. But information is most valuable when data from multiple sources — pharma, providers, retailers, wireless communications, internet services — is connected, allowing us to better understand the factors that affect health and make better decisions on improving health outcomes. It’s not for Pfizer or even the pharmaceutical industry to define what information to use and how to shape it into conclusions on health outcomes. Instead, this needs to be a collaborative effort.

Ernst & Young: How will pharma companies need to partner “radically” with others to innovate new offerings for Pharma 3.0?

Park: This is one of the biggest opportunities, and we are just starting to see it. While there might still be a place for pharma companies that develop very specialized products or that can reduce costs to compete with generics, there will be a new category of companies where the label “pharma” may no longer apply. These will be companies exploring multiple business models through non-traditional partnerships with companies

that are new to health care, such as Cisco, Verizon, Vodafone, Google, Microsoft and others. Developing multiple new business models and offerings based on non-traditional partnerships will require a different and creative approach to collaboration.

Galeota: Care delivery is an integrated ecosystem of which pharmaceuticals is a component. If we continue to think of the elements of care delivery as separate silos, where pharma is only concerned about the pharma component, we miss the opportunity to leverage strengths from across the ecosystem to drive better patient outcomes. So new types of partnerships are emerging, driven by the need for different kinds of competencies that can take innovation beyond the pill to the health outcome. That said, I do believe that we’ll continue to see 2.0-type collaborations too, and consolidation as well, since Pharma 3.0 adds on to 2.0 rather than replaces it.

Peck: Disruptive innovation has to be a key part of how we do business and partner. By experimenting with multiple models, I may learn something from one model that I can apply to another, or may learn that different models work for different challenges. But you need to take multiple paths to figure that out, venturing into quite radical collaborations. I think many people were surprised when we invested in Keas. Why would we invest in another company’s online care platform that competes with Pfizer’s platform? Well, we’re investing because we can’t expect that all our cardiovascular patients will just go toPfizer.com to manage their cholesterol — in Pharma 3.0, they may well decide to go somewhere else. Such investments help us understand which patients will use personal data, the waysin which they use it, how much control they want over their data, how they want to engage with us, and what kinds of information we can get back to learn more about how we enhance our products and services.

Ernst & Young: What skills and capabilities do pharma companies need for developing multiple business models?

Park: Speed will be essential because of the first-mover advantage. Historically, pharma companies have had long development cycles and exclusivity in the market. We will need to learn from the IT and software industries. A chief technology officer at a non-pharmaceutical company told us they have an internal benchmark to introduce new offerings every six weeks. Six weeks? Drug development takes over a decade! In

“ The most important thing is what you actually do with the data. It’s one thing to have interesting information, but it’s the insights that are important to guide smarter, better decisions on health outcomes.”

40 Progressions 2011

an industry where we’ve relied on 17 to 20 years of exclusivity, it will require a very different mindset to successfully exploit the first-mover advantage.

Pharma is still focused on investing in drug innovation — we’re not making the kinds of investments in Pharma 3.0 that many non-traditional entrants are making. It has been eye-opening to realize how significantly we will need to invest in transformative partnerships and the broader health care ecosystem to be relevant in 3.0.

Galeota: Traditionally, pharmaceutical innovation has focused on the molecule more than on innovation beyond the molecule.But in Pharma 3.0, the molecule will no longer be alone at the center of what we do — instead, the patient and health outcomes will also become the center. The pill itself will be only part of the solution. Payers are looking beyond pills for the desired outcomes that they and society are willing to pay for. To demonstrate the true value of the innovations that come out of our labs, we need to build greater competencies in understanding, capturing and analyzing other factors that influence care and outcomes. These variables — such as other interventions, quality of care, psychographics, demographics, environment and geography — will be harder to identify, quantify and correlate and will vary considerably depending on the disease state and desired health outcome. But the overall shift is to focus on the outcome, versus the novelty of the intervention.

Ernst & Young: What job functions will be most affected by Pharma 3.0?

Park: Pharma’s success to date has not required radically new business model development. So, it is hard to say if we already have the skills needed — or if we could develop them — or if it truly requires a different type of person. Where will the expertise come from to collaborate in new ways with external partners, deriving value for each of the players and for the health care market? There needs to be a job function that goes beyond business development to business model development.

There also needs to be a job function that oversees the portfolio of partnerships and business models and makes strategic decisions on how to improve that portfolio. This is not to be confused with alliance management, which is focused on managing one-to-one agreements.

At the same time, a lot of job functions are changing. For example, we need to develop new ways to approach IP in deals — moving away from our dependence on market exclusivity for a fixed period of time. What if IP is limited to a much shorter period of time or doesn’t exist at all so that success depends on first-mover advantage? It creates challenges, and pharmaceutical business development teams may not be ready to jump into this new world.

The finance function will need to explore entirely new guidelines and processes to evaluate new business models, partnerships and health outcomes. I don’t think finance departments have begun seriously addressing the new requirements for these very different business models.

Peck: We’re going to need to create general managers who can look across the business, figure out what they can learn, and then apply it more broadly and share those things back. We’re doing this in R&D and it has worked well. Our salesforce model has also radically changed over the last few years to include regional business units under the supervision of someone in sort of a regional general manager/CEO role.

We’re also training our leaders throughout the organization on the kind of mindset that is needed to help us build the new business models — someone who can take calculated risks and be able to make clear go/no-go decisions. What are the pilots I’m

“ A chief technology officer at a non-pharmaceutical company told us they have an internal benchmark to introduce new offerings every six weeks. Six weeks? Drug development takes over a decade!”

“Most information technology organizations within pharma are still in the 2.0 world — internally focused on the efficient operation of their systems. In 3.0, they will instead need to become critical business partners, helping to drive the business by getting insights from information.”

41

going to run, what is success in this pilot, when would I stop the pilot, and when would I scale up my pilot? It’s not all about ideas, it’s about turning ideas into solutions that customers value and want to pay for.

Galeota: To me, Pharma 3.0 is really about understanding emerging health care technology and optimizing the way different components of care ultimately tie to health and outcomes. These two trends affect every job function, cut across the entire organization and will drive fundamentally different ways of doing things. It will become essential for many job functions to understand the data that’s out there, its importance, and how to link data across business partners to arrive at the insights required to better meet the needs of patients, caregivers and payers. This will enable more informed business decisions around new opportunities to create value. Pharma is now in the information business, and it is part of everyone’s job function.

“ We’re also training our leaders throughout the organization on the kind of mindset that is needed to help us build the new business models — someone who can take calculated risks andbe able to make clear go/no-go decisions. It’s not all about ideas, it’s about turning ideas into solutions that customers value and want topay for.”

“ Pharma is now in the information business, and it is part of everyone’s job function.”

42 Progressions 2011

Implementing change

43

IntroductionTo build the organizational capabilities identified in the previous chapter, pharmaceutical companies will need to develop supporting business processes. In some cases, this will involve modifying existing processes in response to new challenges and risks. More significantly, however, companies will fashion entirely new processes and employ skill sets that may not currently exist with the necessary scale within the organization. We have identified such functionalities with new titles, to emphasize that they involve not incremental changes to existing functions but rather the creation — from the ground up — of radically new processes and approaches. The choice of titles is not trivial. As Vijay Govindarajan and Chris Trimble point out in The Other Side of Innovation: “a title is more than just a label. … A new title encourages people to

In briefSuccess in the new ecosystem will require six critical business processes. In some cases, existing functions will be enhanced,while others functions will be created from the ground up:• Business model innovation. This will allow companies to

develop business models in a structured and collaborative way, with large-scale experimentation and processes for identifying successful models and scaling them up.

• Community engagement. In Pharma 3.0, companies will engage meaningfully with stakeholders by co-creating in open ways, building trust and managing portfolios of relationships.

• Information strategy. IT will develop new capabilities for extracting insights from the increased flow of data in 3.0. Instead of being a support function, it will be integral to 3.0 corporate strategy.

• Performance management. Driver-based performance management will provide insight into the new health-outcome-based drivers of 3.0, as well as tie together strategic decisions, resource allocation and performance targets.

• Capital strategy. Companies will need to invest more to fund 3.0, but they will also need to invest differently — with new approaches to raising, investing, preserving and optimizing capital.

• Governance, risk and controls. Firms will need to recalibrate their approach to risk to recognize a changing risk/reward equation, and will need a robust risk-management approach for the increased exposure and new risks from radical collaborations and new business models.

Chapter 4

Implementing change

rethink their roles and responsibilities from scratch and make an explicit effort to explain their roles to others.”

In this chapter, we have identified six business processes that are critical enablers of Pharma 3.0 enterprise capabilities:

• A formal, well-resourced and rigorous process for business model development does not exist in today’s pharma industry and will need to be created.

• Companies will go beyond today’s sales and marketing and market access functions with a more comprehensive approach to community engagement. Similarly, information technology (IT) as it currently exists will be supplemented by a new dimension — information strategy. In both cases, these new functionalities will ideally be embedded throughout the organization.

• Three existing processes that should be significantly enhanced are: performance management; capital strategy; and governance, risk and controls (GRC).

We are not necessarily advocating for these functionalities to be housed in new support functions. In fact, we are intentionally agnostic on the issue. There is no one right answer to the question of how companies should organize themselves in Pharma 3.0 — witness the often dissimilar structures they have adopted in Pharma 2.0. More than the precise shape of the organizational chart, what matters is that companies have teams that are responsible for the functionalities outlined here, and that these teams are empowered with the right resources, skill sets and incentives.

1. Business model developmentIn Pharma 1.0 and 2.0, commercial growth has been fueled by two key functions: drug research and development (R&D, the internal engine for developing new products) and business development (BD, for the acquisition of promising molecules, products and companies). While these functions will remain critical in the future, they will no longer be sufficient for ensuring commercial growth. As discussed in Chapter 2, companies will develop multiple outcomes-focused offerings (with corresponding changes in business models) in Pharma 3.0. What was once a push approach (an “if-you-build-drugs-customers-will-come” mindset) will be replaced by a push-and-pull process, where companies design new market offerings based on experiments that are guided by the needs of customers and the assets of

“A title is more than just a label. A new title encourages people to rethink their roles and responsibilities from scratch and make an explicit effort to explain their roles to others.”

Vijay Govindarajan and Chris TrimbleThe Other Side of Innovation

44 Progressions 2011

partners. Innovative partnering with non-traditional players will allow partners to leverage each other’s capital — including technological, human, financial, relational and infrastructural resources. All of this will require an entirely new business process: business model development. It will be “outside-in” innovation.

Business model development as a core competency does not exist in today’s pharma companies. To tap new sources of revenue, extend the life of existing products and boost operating efficiencies in 2.0, companies have been expanding somewhat into new lines of business, with corresponding adjustments in business models. However, this has largely been an ad hoc

process. It has not involved business model development as we describe it here: a rigorous and collaborative process of large-scale experimentation in new models around new value propositions, with methodologies for identifying the most successful approaches and scaling them up over time — much like drug R&D for developing new products.

Different skills, incentives and mindsets

Business model development is not business development by another name. It will not be enough for companies to simply apply existing BD processes to the development of 3.0 business models. Indeed, many of the ways in which BD groups have traditionally operated — such as buying products and companies that fit into their existing business models, integrating assets and processes into the acquired entity, and being extremely cautious about guarding intellectual property — are antithetical to business model development as described here.

Business model development is not business development by another name. It will not be enough for companies to simply apply existing BD processes to the development of 3.0 business models.

A closer look

The people side of Pharma 3.0

Like most other aspects of the business landscape, the organization is changing quickly. As the operating models that govern our clients’ decisions evolve and expand to meet the demands of their markets, they often require capabilities beyond the individual organization. Therefore, the approach toward governing the path to success must also evolve from a solo entity to a multiplayer perspective.

Yet, despite the major changes required by Pharma 3.0, some key truths remain. Efficient program and change management can drive the crucial connections both within and outside the boundaries of a project, a business unit, an organizational entity or — in the case of the extended enterprise — the nontraditional business partners in next-generation alliances. Here are three key “people and organization principles” to keep in mind as you extend the boundaries of strategic collaboration beyond your “firewall”:

1) Focus on explicit behaviors, not cultural issues. Many of the players in this new landscape come from remarkably different industries, and are justifiably proud of the cultures and reputations they’ve built up in the market. An effective partnership model steers clear of addressing tacit issues such as culture, and instead focuses on driving toward agreement on a set of behaviors to enable outcomes that are tied to the vision and goals of the project.

2) Build a flexible but clear operating model that spans the partners involved. The most effective operating models create a clear governance structure to optimize organizational decisions and performance. Operating models are trickier when two or more companies are in play; therefore, agreement on key role boundaries and intersections, process handoffs and ultimate responsibilities with respect to the tough issues (governance, veto power, budgets, change management, etc.) must be discussed and finalized up front in a manner that builds trust between partners.

3) Close the loop quickly with tailored change interventions. The earlier potential challenges or resistance to effective collaboration is acknowledged and addressed, the better. The alliance team must develop a comprehensive view of the stakeholders from across the partner organizations, and equip and engage change leadership to drive points of extraprise alignment. Communications must be multichannel and multimedia (and often multiplatform) and should create consistency of message while being tailored to fit the medium/messaging expectations of the stakeholders. And finally, the intellectual capital generated from both successes and mistakes must be captured and readied for reuse — after all, in a fast-changing and challenging environment such as life sciences now faces, it is the “extended learning organization“ that will have the adaptability needed to survive and succeed on this challenging change journey.

Carol PasmoreErnst & Young LLP

45

As such, business model development will require entirely new incentives, capabilities, metrics and mindsets. It will be critical for companies to give the teams responsible a distinct charter and the appropriate incentives to reward the right behaviors: radical collaboration (including with non-traditional players), experimentation, flexibility, permission to share intellectual property and co-create value with partners, and the latitude to fail early and often. As part of this changing mindset, companies will also need to willingly accept non-exclusive arrangements.

In addition to having the appropriate incentives, the teams responsible for business model development will also need specific skill sets. This includes cross-border knowledge of health care systems and increasingly important customer segments, such as payers and patient advocacy groups. They will need a solid understanding of important technology trends, regulatory requirements and legal aspects — not just in the drug industry, but also in other sectors where pharma companies might increasingly be partnering. (Indeed, we are already seeing some pharma companies beginning to recruit from sectors such as technology and health insurance, to better understand their future partners.) Customer centricity — including the perspectives of both payers and patients — will be a key determinant of success. And, as always, strengths in strategy and financial rigor will be valuable.

Putting the pieces together

Given that much of this is uncharted territory, with tremendous uncertainty around which offerings and models will work, a successful process will include experimentation, “fail-fast” mechanisms and the ability to scale up successful models. And since success in Pharma 3.0 will demand focus on health outcomes in a customer-centric manner, companies would benefit by incorporating an important concept: that of thevalue pathway.

Putting the pieces together, the process of developing new business models might proceed as follows:

• Mapping the value pathway. A logical starting point would be to map the value pathway for a specific market segment. The term “value pathway” here refers to a representation of the increases (or decreases) in value along each step of a process or pathway. One could map the value pathway for any number of different pharma company internal processes (e.g., the clinical trials process for the development of a pipeline candidate or the supply chain for the manufacturing and distribution of a marketed product). But in Pharma 3.0, where the focus is improving health outcomes with the patient at the center, the most relevant pathway to focus on is the journey patients take with respect to a specific disease. For instance, consider diabetes, a disease that, as discussed earlier, has attracted much of the early focus in Pharma 3.0. To map the diabetic patient value pathway, companies will identify the

different disease stages into which a patient could fall (e.g., potentially at risk, confirmed to be at risk, pre-diabetic, onset of various other long-term complications, diabetic patient and uncontrolled diabetes). In the accompanying chart, which shows a (much simplified) value pathway for diabetes, these disease stages are shown as white ovals. The next step would be to identify the existing interventions at each disease stage (e.g., screening to diagnose disease, diet and exercise regimens for prevention and control, various therapeutic interventions, methods to increase drug compliance, and different ways of monitoring outcomes and guiding treatment). These interventions, which can be thought of as “value increases” since they improve health outcomes, are identified in green in the chart.

• Identifying value leakages. The value pathway map can now be used to identify “value leakages,” or places where health outcomes are suboptimal due to failures in the current system. Examples of failures that result in value leakages — such as lack of education, inability to access health care and factors contributing to patients’ failure to comply with treatment regimens — are shown in red in the chart. Each of these value leakages represents a potential area of opportunity where new solutions could address the underlying failure and improve outcomes.

• Solutions and partners. The next step (shown in yellow in the chart) would be to identify new solutions that could potentially address these value leakages, as well as potential partners with the assets and attributes to help develop these solutions. In Pharma 3.0, choosing the right partners could be as critical as identifying strategic therapeutic categories has been in Pharma 2.0. Business model development requires potential partners to jointly envision possible business model permutations based on their assets and attributes and develop guiding principles for co-creating value. The right partners can create multiple opportunities by leveraging their knowledge and networks.

• Strategic fit. Once potential solutions and partners have been identified, companies will decide where to invest. This will involve considering whether opportunities leverage existing strengths, are in market segments that are strategically important vis-à-vis other enterprise imperatives, or have early-mover or network-effect advantages. Risks, reputation and resources need to be fully vetted at this stage.

• Commercial trials. Investing in the areas identified would best be done through a commercial trials process. This process, which has been discussed in considerable depth in Progressions 2010, essentially involves making small initial investments in the form of pilots and prototypes (i.e., Phase 1 commercial trials), identifying the most successful models over time and scaling these up, and killing off the experiments that do not succeed.

46 Progressions 2011

The value pathway: a simplified example for diabetes

Source: Ernst & YoungGreen arrows and boxes represent current value additions (improved health outcomes). Red boxes and arrows represent current value leakages. Yellow boxes represent intervention opportunities, where new approaches and business models could address the current value leakages and improve health outcomes.

Intervention opportunities• Education• Awareness programs• Annual checkup at offices and schools• Use of IT to assess diabetes risk• Peer-to-peer exchange of experience• Sense of community• Financial support• Emerging markets (awareness)

Intervention opportunities• Integrated diabetes management

through cohesive groups• Education on co-morbidities and

their management• Data management platforms/software• EHRs• Counseling, emotional support

from support group• Access schemes• R&D collaborations to develop

novel therapies/devices

Value leakages• Lack of awareness and literacy• Social stigma of disease• Psychological issues• Cost burden• Negligence• Addiction

Value leakages

Value leakages• Lack of coordinated care• Discordance with specialists• Reduction of quality of life• Complexity of disease, comorbidities• Lack of insurance and burden of out-of-pocket costs• Impaired family dynamics

• Social media platforms• Online disease communities• Educational websites• Smartphone applications• Access schemes

5.7mundiagnosedin US

Undiagnoseddiabetes is often higherthan 50%

Intervention opportunities• Reminders• Guidance on managing side effects• Innovative drugs (smart insulins)• Innovative DDD• Regular dietary/exercise coaching• Innovative monitoring

(non- or minimally invasive)• Continuous glucose monitoring• Platform for concordance between

HCP, patient and health plan

• SMS, e-health• Website for concordance

between HCP, patient and�health plan

• Wireless pump devices, sensors

• Partnership with retailers• Apps for food intake

management, monitoring and data management

• Website for preparing patients to have intelligent conversations with physicians

Dyslipidemiamanagement

Painmanagement

Nephropathymanagement

Eye caremanagement

Lipidprofiling

Neuropathyscreening

Nephropathyscreening

Retinal screeningprogram

Lifestyle management

Blood pressuremonitoring

Drug treatment

Preventive care

First-line treatment

(OAD)

Second-line treatment (OAD +

basal insulin)

Third-line treatment

(insulin, analogs)

Regularglucose

monitoring

Lifestylemanagement

Management ofhypertension

Long-termcomplicationmanagement

Population

Diagnostic�tests

Screening and glycemic test

Glycemiccontrol

CVD(Heart disease)

Nephropathy(Kidney damage)

Retinopathy(Eye damage)

Neuropathy(Peripheral

nerve damage)

Neuropathic�pain, ulcers, amputation

Proliferative retinopathy,

blindness

Nephropathy,kidney failure

Diabetic patient

Riskconfirmed

Population at risk285m worldwide

Uncontrolleddiabetes

CVD,heart attack,

stroke

CVD,heart attack,

stroke

Pre-diabetes

Non-adherence to :1. Drug treatment• Oral drugs • Injections

Side effectsBurden of complex treatmentPain of injections

Lack of motivation

Lack of time and motivation

Pricking painBurden of frequentmonitoring, datamanagement

2. Lifestyle management• Sound mental makeup• Dietary control• Exercise

3. Self-monitoring• Glucose level• Blood pressure

4. Physician visits

47

Intervention opportunities• Education• Awareness programs• Annual checkup at offices and schools• Use of IT to assess diabetes risk• Peer-to-peer exchange of experience• Sense of community• Financial support• Emerging markets (awareness)

Intervention opportunities• Integrated diabetes management

through cohesive groups• Education on co-morbidities and

their management• Data management platforms/software• EHRs• Counseling, emotional support

from support group• Access schemes• R&D collaborations to develop

novel therapies/devices

Value leakages• Lack of awareness and literacy• Social stigma of disease• Psychological issues• Cost burden• Negligence• Addiction

Value leakages

Value leakages• Lack of coordinated care• Discordance with specialists• Reduction of quality of life• Complexity of disease, comorbidities• Lack of insurance and burden of out-of-pocket costs• Impaired family dynamics

• Social media platforms• Online disease communities• Educational websites• Smartphone applications• Access schemes

5.7mundiagnosedin US

Undiagnoseddiabetes is often higherthan 50%

Intervention opportunities• Reminders• Guidance on managing side effects• Innovative drugs (smart insulins)• Innovative DDD• Regular dietary/exercise coaching• Innovative monitoring

(non- or minimally invasive)• Continuous glucose monitoring• Platform for concordance between

HCP, patient and health plan

• SMS, e-health• Website for concordance

between HCP, patient and�health plan

• Wireless pump devices, sensors

• Partnership with retailers• Apps for food intake

management, monitoring and data management

• Website for preparing patients to have intelligent conversations with physicians

Dyslipidemiamanagement

Painmanagement

Nephropathymanagement

Eye caremanagement

Lipidprofiling

Neuropathyscreening

Nephropathyscreening

Retinal screeningprogram

Lifestyle management

Blood pressuremonitoring

Drug treatment

Preventive care

First-line treatment

(OAD)

Second-line treatment (OAD +

basal insulin)

Third-line treatment

(insulin, analogs)

Regularglucose

monitoring

Lifestylemanagement

Management ofhypertension

Long-termcomplicationmanagement

Population

Diagnostic�tests

Screening and glycemic test

Glycemiccontrol

CVD(Heart disease)

Nephropathy(Kidney damage)

Retinopathy(Eye damage)

Neuropathy(Peripheral

nerve damage)

Neuropathic�pain, ulcers, amputation

Proliferative retinopathy,

blindness

Nephropathy,kidney failure

Diabetic patient

Riskconfirmed

Population at risk285m worldwide

Uncontrolleddiabetes

CVD,heart attack,

stroke

CVD,heart attack,

stroke

Pre-diabetes

Non-adherence to :1. Drug treatment• Oral drugs • Injections

Side effectsBurden of complex treatmentPain of injections

Lack of motivation

Lack of time and motivation

Pricking painBurden of frequentmonitoring, datamanagement

2. Lifestyle management• Sound mental makeup• Dietary control• Exercise

3. Self-monitoring• Glucose level• Blood pressure

4. Physician visits

48 Progressions 2011

• Metrics and monitoring. To monitor progress during the commercial trials process and identify the most successful experiments, companies will develop metrics and monitor performance. Picking the right metrics should ideally be done in conjunction with collaborators, since it is vital that the measures align the interests of all partners. (This is discussed in greater depth in the “Performance management”section on page 62.)

2. Community engagementAt its core, much of what happens in Pharma 3.0 will occur in communities — both crafted and organic. Social media and open innovation, for instance, are about engaging with others in communities. This will have some significant implications for pharma companies:

Blurring lines. In Pharma 3.0, the once sharp divisions between customers, business partners and competitors will become increasingly blurred — even as the universe of players expands — requiring pharma companies to rethink the ways in which they approach their key stakeholders.

New rules. Operating in communities will require new approaches and mindsets. Underlying this will be a bedrock foundation of trust. This will be needed not to score public-relations points, or even because it’s the “right thing to do.” Instead, the focus on trust will have to happen because, in the world of 3.0, communities will demand it. Indeed, the guiding principal will be: “It’s not about you.” Instead, community engagement will require an “other-centered” way of doing business, as described below.

Communities and networks

So far, we have used the word “networks” to refer to the ways in which diverse players will come together in the health outcomes ecosystem. For this section, we are introducing another term: communities. While the two words may sound similar — and do, in fact, overlap to some extent — there is a real and relevant distinction between them. A network is simply a set of interconnected actors, but a community is much more. Participants in a community share what psychologists call a sense of community, defined by psychologist Seymour Sarason as “the perception of similarity to others, an acknowledged interdependence with others, a willingness to maintain this interdependence by giving to or doing for others what one expects from them, and the feeling that one is part of a larger dependable and stable structure.”

This sense of community is, in turn, manifested in the expectations that participants have for one another. In essence, communities are able to harness what behavioral economists such as Dan Ariely refer to as “social norms” rather than the “market norms” that govern most interactions in the business world. When people operate under market norms, they expect to exchange value based on prices, wages and contracts, whereas under social norms there is no expectation of a direct quid pro quo. So while Microsoft’s ecosystem of suppliers and developers is a network, the army of volunteer programmers that codes, reviews and updates the open-source operating system Linux is a community. Encyclopaedia Britannica’s paid experts, writers and editors operate under market norms, but the legions of mostly invisible individuals who keep Wikipedia running — without any expectation of reward or recognition — do so because the website’s sense of community taps into their social norms.

49

Why is this relevant? Well, it turns out that social media platforms are typically communities that are governed by social norms rather than market norms. Because social norms apply, participants expect that they (and everybody else in the community) are there to add value, share openly and co-create. They expect others to demonstrate openness and transparency rather than the naked pursuit of self-promotion and reward. It is important to point out that the scarcity of market norms does not mean that companies cannot make money in the communities of 3.0. But it does mean that, in order to do so, they first have to engage in meaningful ways and build a foundation of trust.

Extracting value and undifferentiated selling

Historically, the universe of entities that pharma companies interacted with could be divided roughly into two distinct groups. The first group (let’s call them “developers”) were organizations with which companies partnered to develop products. This has included biotech companies, CROs, CMOs and university researchers. Much of the interaction with this group has been managed by business development functions, and the mindset and approach has been to safeguard assets and extract value. Through alliances with developers, pharma companies have sought to fill their pipelines while protecting IP and transferring risk. In recent years, as the industry moved to Pharma 2.0, we have seen some creative approaches to partnering (see the “Capital strategy” section below for more details), but the overall mindset and approach has not changed much.

The second group of key constituents (“customers”) are the entities that purchase the products that pharma companies bring to market. In Pharma 1.0, pharma’s primary customers have been the providers who prescribe drugs, with secondary focus on payers (who pay for them) and patients (who ultimately consume and benefit from them). The interactions have been handled by sales and marketing functions, which focused on the efficacy of the product and the brand of the developer, but often used an approach and mindset of undifferentiated selling. Many of these sales channels, including sales reps and direct-to-consumer advertising, became less and less effective over time.

This began to change somewhat in Pharma 2.0. Faced with an increasingly inefficient, costly and sometimes risky sales model, companies have made deep cuts in their sales forces. To rebuild their tarnished reputations, they have increased their focus on efforts such as educational programs for doctors and potential patients, corporate social responsibility (CSR) schemes, and initiatives to expand access to indigent and underserved populations. However, these functionalities and activities are still not a core part of the business. So even as companies are expanding traditional sales and marketing channels in emerging markets, they are opting for “less of the same” in the developed markets by scaling back their dependence on the traditional model in these locations.

We are starting to see some evidence of change toward a Pharma 3.0 approach. In July 2010, for instance, GlaxoSmithKline announced that it will no longer pay bonuses to its US sales reps based on their achievement of sales targets. Instead, the company is initiating a new incentives program that rewards reps based “primarily on the service they deliver to customers.” The company intends to measure this based on customer feedback on whether reps adhere to “values of transparency, integrity, respect and patient-focus” (emphasis added). But examples such as this are still merely about applying 3.0 incentives to the 2.0 business model. It’s a start, but it doesn’t go far enough.

Engaging consumer-creators

In Pharma 3.0, the line between customers and developers becomes blurred. Everybody will become a potential co-creator as constituents partner in new and creative ways to develop innovative solutions around health outcomes. Yesterday’s customers will be replaced with a new type of partner: the consumer-creator. Through social media platforms, online communities, alliances, partnerships and joint ventures, players will come together to solve specific challenges, wearing different hats at different times.

Companies in other industries have been co-creating with their customers for a while. The addition of features that permit customers to review products (and permit their peers to vote on the most helpful reviews) has allowed numerous websites — from Amazon to Zappos — to transform their customers into product research co-creators. Intuit’s TurboTax Live Community, launched in 2007, applies the same principle to customer service, by supplementing the traditional, unidirectional customer-service model with a very well-received website that allows customers to respond to each other’s questions. Meanwhile, LEGO’s Digital Designer software platform allows customers to create their own LEGO models; these are then shared for other customers to download, and the company even adds the most popular designs to its mass-produced product offerings.

Such approaches are starting to appear in the health outcomes ecosystem as well. We are already seeing physicians providing marketing input to pharma companies on Sermo. We are seeing

Yesterday’s customers will be replaced with a new type of partner: the consumer-creator. Through social media platforms, online communities, alliances, partnerships and joint ventures, players will come together to solve specific challenges, wearing different hats at different times.

50 Progressions 2011

Daniel Palestrant, MDSermo

Founder and CEO

Ernst & Young: What is your business model and how has it evolved?

Palestrant: We have an online physician community (one in five US physicians are members) as well as about 400 life sciences clients, including 10 of the 12 largest pharmas. Surprisingly, the heaviest users are not younger (intuitively more tech-savvy) physicians, but older doctors. Busier physicians appear more inclined to use the efficiencies of social media.

We don’t charge the doctors or advertise to them, but our life sciences clients can interact with physicians through six products that fall roughly into three categories. One is Observe, where our clients can look at what physicians are saying on a particular topic, using the Client Center dashboard that allows them to be alerted on relevant activity in the community. The second category is Research, which has a quantitative survey product and a qualitative channels product. The third category is Promote, where clients can participate in discussions, either through guest experts or unbranded “grand rounds” presentations.

We’ve seen a rapid explosion in quantitative research. Interestingly, the pharma users are typically not market research or business intelligence units, but rather brand teams. And they are not conducting big, complex market research engagements, but what I call “point-and-shoot market research.” A brand team might be curious about what cardiologists with a certain prescribing pattern are thinking about a particular issue. Under the old model, they would call in the business intelligence team, who would put out an RFP, hire consultants and — 90 days and US$200,000 later — come back with a hefty 200-slide PowerPoint presentation. With Sermo, they can instead pose survey questions to the community within minutes and get real, actionable data in about 72 hours. After they get answers to some simple questions, they can choose to probe deeper with a panel, or scale up to a 1,000-physician survey — all at a fraction of the cost of other types of market research.

Ernst & Young: Is this the forefront of the new Pharma 3.0 sales and marketing model — where it’s about transparency, listening and real-time learning?

Palestrant: Absolutely. Over the last 20 to 25 years, the industry has followed the perspectives of key opinion leaders — often from academia. Sermo is now revealing that these academically oriented key opinion leaders don’t necessarily represent the thoughts of the in-the-trenches physicians. And so brand teams are using social media to cut costs and interact directly with these physicians.

Pharma brand teams are even crowdsourcing aspects of their strategies. For a product launch, a team might set up eight parallel panels with physicians who have different specialties or demographics and ask them how they would market this to their peers. They have been getting very actionable feedback at a fraction of the cost of using more conventional means.

Ernst & Young: How have your relationships with pharma been perceived by your physician community?

Palestrant: They have been well received, because we have established some guiding principles. The first is transparency. We are completely up front with physicians about our business model and interactions. The second is privacy — we safeguard individual physicians’ identities from pharma clients. The third is recognizing value. We provide (modest) compensation to physicians for participating in surveys or panels.

Ernst & Young: What about pharma companies? What guiding principles and new mindsets will they need to succeed in communities such as Sermo?

Palestrant: That’s a great question. Social media constitutes a cultural shift for organizations, where they need to listen, not just talk. That isn’t easy for most manufacturers, for a couple of reasons. First, as large organizations, they aren’t used to such immediate and transparent feedback from customers. Second, there are legal and regulatory challenges, such as uncertainty about adverse event reporting requirements.

Unfortunately, we are approaching the adverse events issue backwards. First, some of the fears are overblown. To date, Sermo has several million comments and fewer than 12 reports of potential adverse events. Second, the current approach completely misses the real opportunity. The FDA, by its own reckoning, can follow up on less than 3% of reported potential adverse events. Instead of using social media as yet another mechanism for feeding potential adverse events into a system that everybody recognizes is already broken, they could use it for what it is really good at: distinguishing signal from noise. If we took reported events and asked the community whether other doctors have seen similar issues, we could quickly and cheaply figure out which incidents are isolated outliers and which ones represent a broader pattern.

In the five years since Sermo was established, I’ve been surprised by some of the creative ways in which people are getting value from the community. But the opportunities are tremendous, and I suspect we’ll see a lot more ahead.

The power of listeningPerspective on community engagement

51

Ernst & Young: The transition to Pharma 3.0 involves enormous increases in the volume of information produced and shared across the ecosystem. What opportunities and challenges does that create?

Sowder: The big opportunity is to get relevant, complete information to physicians, patients and caregivers at the point of care so that they can make good decisions.

This will require some changes on our part. Pharma has historically guarded information for competitive and regulatory reasons — leading to perceptions that we only share the rosy news. While I can assure you that’s not the case, it’s imperative that we attack any potential negative perception head on. For pharma to be relevant in the new health ecosystem, we have to be willing to do more with the information we have, because IT companies, e-health players and others are already doing so. To be fair, our industry is at somewhat of a disadvantage, because the regulatory requirements on publicizing information were not written at a time when people were blogging, texting and getting information in real time. While pharmaceutical companies will face stricter scrutiny, we have the opportunity to demonstrate that we can be a valued source of reliable and credible information about our products. To succeed, we’ll need to overcome challenges — both internal and external — every step of the way and ensure we gain trust.

Ernst & Young: What initiatives do you have under way to focus on these opportunities?

Sowder: We’re creating a state-of-the-art, fully disclosed warehouse of information that’s extremely customer-oriented so we can quickly match a person asking a question with the right expert and information channel (e.g., email, phone or website). We are also experimenting with emerging players such as Sermo and Epocrates to develop tools that allow health providers to communicate with Pfizer in real time on questions that we are best equipped to answer. Our work with Epocrates allows physicians and pharmacists to interact with Pfizer through their PDAs right at the point of care.

We were the first pharma company to work with Sermo’s online physician community, and it really opened our eyes to the importance of being real. Doctors wanted responses to questions that were succinct, specific, complete and objective. We followed suit in order to meet their demands. The response from the HCPs was terrific and we earned high marks for our objectivity, responsiveness and overall medical professionalism.

One of our biggest successes on Sermo was when we added an “Ask Pfizer” button that appeared on discussion threads related to our products. When physicians clicked on that button, they were informed that they were leaving the Sermo space and entering a chat with a Pfizer medical representative. “Ask Pfizer” is ideal for questions that are technical and need a more validated answer. We responded (usually within the same day) with not just a concise answer, but also supporting information about data sources and underlying studies. This has been extremely popular — 97% of people using the service believed it to be highly scientific and credible. We no longer offer the service through Sermo but offer a similar service through Epocrates where Medical Information professionals are available to answer questions through a link.

Ernst & Young: What changes in skill sets and capabilities will engaging and communicating in Pharma 3.0 require?

Sowder: First and foremost, it requires an understanding of customer needs. In addition, one needs a deep understanding of our products, the new IT interfaces and the legal and regulatory environment in which we operate. And then, we need people who can communicate all of that well. Customers are looking for concise answers rather than the details about how we came to those answers. This is a big shift for medical people who tend to be thorough and cautious. Ultimately, if we are going to be viewed as a leading source of information in the medical space, we have to meet customers where they are with the information they need when they need it.

D. Stuart SowderPfizer Inc.

Vice President, External Medical Communications

The importance of being real Perspective on community engagement

52 Progressions 2011

collaborations between pharma firms and payers such as NICE to inform clinical trial design. Patient advocacy networks are becoming increasingly involved in guiding the development of new products in different ways. And, of course, as discussed in Chapter 1, non-traditional entrants into the expanding ecosystem are bringing new opportunities for partnering.

At the same time, there will be key shifts in the universe of customers, as payers and patients become increasingly empowered and engaged. Success in Pharma 3.0 will require customer centricity, but the universe of customers is itself expanding and the consumers of new solutions will also at times be co-creators who help develop them. The bottom line is that pharma companies will no longer be able to approach their constituents in the ways of 2.0 (extracting value from developers, and undifferentiated selling to customers). In the communities of 3.0 — where everybody is a potential co-creator — brand loyalty will instead be increasingly driven by the customer experience.

Companies across different industries have already realized that new platforms and communities demand fundamentally different approaches to functions such as marketing. Listening becomes more important than pitching. Providing true, personalized value becomes critical to establishing credibility. Trust becomes vital in models where market share is built through word-of-mouth testimonials and personal experience rather than undifferentiated sales messages. The title of a recent business bestseller (by Scott Stratten) sums it up very well: UnMarketing: Stop Marketing. Start Engaging.

As discussed earlier, a major reason for these changes is that collaborative communities often have different expectations. Such changing expectations will be a major factor for pharma companies to consider as the role of constituents changes. Consider how different the relationship with physicians is when the mode of interaction is social networks rather than pitches by sales reps — what was once a one-way, customer-seller interaction gives way to a genuine give-and-take where doctors are both consumers and producers of insights and value. An undifferentiated pitch may have been tolerable in a five-minute hallway conversation in a doctor’s office. But — as evidenced here in our interviews with Pfizer’s Stuart Sowder and Sermo’s Daniel Palestrant — anything remotely resembling an overt or aggressive sales pitch will be unacceptable in the social norm-driven communities of Pharma 3.0.

Engaging non-traditional partners

Pharma 3.0 will require equally significant changes in the approaches to managing relationships with co-developers. So far, these relationships have largely been handled by alliance management functions, which have typically constructed them as one-on-one contractual arrangements, usually with the

pharma company firmly in the lead. There has been little in the way of a holistic approach to managing and engaging with a network of external relationships and alliances.

The future will require a very different approach. Just as Pharma 3.0 will replace yesterday’s customers with tomorrow’s consumer-creators, it will create significant shifts in the universe of companies with which pharma firms partner to develop new offerings. What was once a fairly limited set of business partners will become a much larger ecosystem of non-traditional entrants, and pharmaceutical firms will collaborate with these organizations in radically different ways. (For more on this, see the section on “Radical collaboration” in Chapter 3.)

Many of the principles of engagement that will be needed for dealing with customers will also be needed here. Instead of being the preordained lead partner firmly in control of alliances, pharmaceutical companies will be members of networks and communities where participants are on a more even footing. As such, the challenge will be to become a highly valued node in the network, in order to attract partners and co-creators and nurture the network. Engaging with others and actively adding insights could help companies do just that. Since many of the participants will be new and relatively unfamiliar with the health outcomes ecosystem, companies that take an early lead in this role could build trust, cement their competitive advantage and foster a following.

This will involve a holistic approach to engagement — essentially managing these relationships as a portfolio of vital interests. This portfolio will extend not just to the pool of active alliances and current partners, but also to the universe of potential partners, since new channels such as online networks and crowdsourcing initiatives will bring pharma companies into close interaction with a wide range of entities with similar interests. Companies will foster relationships across this network, much as they might manage a portfolio of potential leads in a therapeutic category. This could include, as appropriate, sharing information, exploring common interests, collaborating on specific challenges with different entities, exploring new channels and helping connect dots to bring members of the network together (even when the pharma company is not an immediate beneficiary).

Clearly, a robust knowledge management process will be a critical component of this. Pharma companies will need to be able to track information about their collaborations (not just active ones, but also ones that have failed) as well as the capabilities and needs of different entities. Being able to analyze this data to extract insights (e.g., lessons learned from similar experiments in the past, potential synergies between entities with compatible needs and capabilities) will give pharma companies a competitive advantage as well as help in building trust when that information is shared with others.

53

A closer look

Six key elements of effective enterprise innovation

Life sciences firms are not unique in facing down an innovation imperative. High-growth firms across industry sectors are trying to preserve the spark of innovation that fueled their rise, while established firms are trying to rekindle the innovative spirit that gained them market position in the past. In the pharmaceutical world, this means rekindling core product innovation as well as innovating around the commercial model.

The good news for today’s enterprise leaders is twofold: one, there exists significant and untapped talent and entrepreneurial drive within their large, global workforces; and two, new tactics from management science and tools from IT vendors are emerging that can identify and motivate these internal entrepreneurs — or, “intrapreneurs” — and direct their activities toward solving business problems and achieving strategic goals. Increasing employee engagement by enabling everyone to be “inventors” and “scientists” could be the the “secret sauce” to the innovation challenge facing many companies.

On-the-ground research by Ernst & Young with past winners of our Entrepreneur Of The Year program, as well as on client projects, has illuminated the following six key actions that are necessary to design and deploy a successful intrapreneurship program.

1. Make a formal commitment of resourcesEmployees recognize organizational priorities not through communication campaigns, but by observing what is budgeted for and rewarded by both company leadership and their direct managers. Setting a formal process involves dedicating sufficient resources (including time) to starting up your internal start-ups, building a bench of suitable innovation sponsors, and communicating what success looks like and how it will be rewarded — and then following through early and often. Keep in mind that innovative new models will need time to develop before being measured against ROI hurdle rates employed in the mature part of the business. However, think about how much you have already invested in your human capital. Imagine the ROI if you could increase your return by 1% on the capital invested in them.

2. Unleash the full diversity of your workforceResearch shows that diverse groups outperform homogeneous groups, especially where creativity and innovation are concerned. Any initiative should include employees with both quantitative and qualitative strengths from different functional areas within the organization. Similarly, a successful program leverages employees of long tenure, internal credibility and strong organizational ties, but it also needs new employees with fresh perspectives who can challenge existing assumptions. Thinking hard at the outset about the right mix of people and

competencies will give your program the best chances of achieving early success and sustainability over time.

3. Use communities as your enterprise operating system With perhaps tens of thousands of potentially engaged intrapreneurs ready to give input, the sheer amount of signals can create noise, or a “black hole” effect where intrapreneurs feel that their contributions are going unnoticed. A network of community managers can ensure appropriate feedback is given quickly. It can also function as a network of talent scouts, connecting people to each other, to ideas and to sponsors for funding. Trends both inside and outside organizations are pointing to community management as an essential competency — in which case training and recognition for community managers is an essential component of an enterprise-scale program.

4. Leverage both “push” and “pull” crowdsourcing models A billion-dollar brainflash may happen at any time, so your intrapreneurship program should always be open for business to enable intrapreneurs to “push” new ideas into the system. A “pull” model should also be used, where communities of innovators are directed toward solving specific challenges using time-bound, decentralized “innovation contests.” Both models have their strengths and must be designed into the intrapreneurship program for it to flourish.

5. Use collaborative technology to foster connectionsA well-designed collaboration platform can knit geographically dispersed colleagues into high-performing teams for the purpose of sharing and building upon each other’s ideas. Note that with multiple contributors, you may need a process that guards against “feature creep,” in which the technology is overdeveloped at the expense of the needs of the people and processes that will rely on it.

6. Be prepared to manage and mitigate resistanceA culture of innovation is, at its root, a culture of failure without fear. Seeding success by learning to reward failure often and publicly is critical to motivating internal talent to risk their social and career capital in your program. Line managers who have already climbed the hierarchy might be put off by the idea of encouraging “outside the org chart” thinking and a move toward a more meritocratic, mobility-based organizational model. A mix of team and individual recognition programs can mitigate this resistance, and engagement of respected voices across the organization can even turn resisters into champions.

These actions can be adapted to fit the strategic needs of the business. And taken in total, they can produce a high-performing and adaptive network of engaged intrapreneurial communities.

Brad KenneyErnst & Young LLP

54 Progressions 2011

Dr. Joerg ReinhardtBayer HealthCare

CEO

Ernst & Young: What Pharma 3.0 initiatives are you undertaking?

Reinhardt: We have several customer-centric initiatives focused on physicians, patients and payers, including the well-known collaboration between Bayer Diabetes Care and Nintendo. In the area of market access, we are testing several approaches. We are engaging with payers at earlier stages in development. We’re also partnering with patient groups that advocate focusing on outcomes to meet patients’ medical needs. Lastly, we’re developing novel contracting approaches for engaging with payers, as well as exploring partnerships around interpreting and generating “real-world” post-marketing data.

Ernst & Young: What challenges and opportunities do you see related to managing data in Pharma 3.0?

Reinhardt: Information will drive success. As health care systems increasingly reward firms for improving health, data on the performance of our products will influence pricing and reimbursement decisions. And since these data are being collected by our customers (payers and providers), we will need to partner closely with them.

Innovative approaches such as outcomes-based pricing and reimbursement arrangements — as well as requests from payers for renegotiations after product launch — will require new partnering arrangements to bring these data pools together and should facilitate the creation of more real-life performance data.

In Pharma 3.0, market access becomes the new frontier, and we will need to address questions such as: What business models can we build around outcomes? How do we partner to create, collect and interpret data? What entities can we work with around other opportunities, such as boosting outcomes by improving awareness or compliance?

Ernst & Young: How will the ways in which pharma companies collaborate with others need to change in Pharma 3.0?

Reinhardt: We need to expand the (open) innovation paradigm to our interaction with all customers. And we should be thinking about this not just post-launch, but also pre-launch (prior to

proof of concept). Payers’ perspectives should be integrated into development at earlier stages to assure that payer-relevant outcomes are added to the development plans. This will require higher investments for demonstrating these outcomes as well as new models for earlier customer engagement.

But this is new territory for our industry. While we have very well-defined processes and standards for demonstrating product efficacy, safety and tolerability, payers are focused on other metrics: cost/benefit and effectiveness. In addition, their expectations are extremely fragmented, with varying practices across countries and regions. The industry is partnering with payers, but we are in early and experimental stages.

Ernst & Young: How will skills and capabilities need to change in Pharma 3.0?

Reinhardt: As we move from focusing on physicians to engaging with all our customers — patients, physicians and payers — we will need new solutions and approaches (because, for instance, payers’ demand for value for money differs from the needs of physicians). This has changed and will continue to change business model development, as well as the valuation of new assets. As we define — and realign ourselves around — payer-centric metrics and deliverables across the value chain, this will affect job functions throughout the enterprise, from R&D to business development to marketing.

To coordinate our customer-focused approach, Bayer created a Market Access Function in 2009. This function is tasked with developing best practices for market access across all functions and driving the articulation of the value proposition and the development of market-access-centric innovation.

Changing behaviors will be a key challenge. How do we align incentives and performance indicators internally to reflect changing market conditions? How can early-stage incentives be linked to goals five years down the road? And at the end of the day, how do we encourage our customer-facing teams to truly engage with payers and key accounts in an outcomes-driven ecosystem?

Market access: the new frontier

55

Ernst & Young: How will pharma companies need to approach the challenge of developing new business models for Pharma 3.0?

Hunter: Building new business models requires commitment at all levels of the organization. The strategy should include principles that guide how everyone will engage, both internally and externally. Success will require adequate resources and capital investments, and building the case for these resources and investments will be a key challenge.

This will also require profound cultural shifts. Pharma must move toward a culture of sharing information. The view that information is power and therefore success comes from not sharing it cannot be allowed to prevail. Unfortunately there are still many people in pharma who have yet to see the value this shift will bring in terms of increasing access to innovation and pipeline sustainability.

Ernst & Young: External alliances and relationships will be a key part of business model innovation. How will pharma companies approach these relationships?

Hunter: Business model innovation requires a strategic approach that emphasizes relationships and partnerships. For this, companies need a clearly articulated, coherent strategy across all businesses to manage networks and innovation.

Networks of traditional and non-traditional partnerships need to be managed as a portfolio rather than as individual tactical partnerships. These new partnerships will likely bring benefits that are intangible and non-traditional and thus recognized only when viewed in light of the full portfolio.

There will be a fundamental shift in the way partnerships are evaluated and valued, not only for pharma but also for other stakeholders in the ecosystem. The Innovative Medicines Initiative, for example, uses a model in which companies provide in-kind contributions rather than money. This drives different behaviors. It’s no longer only about the deal. Companies have got to engage.

To implement this strategic, portfolio approach, companies need people with broader technical knowledge as well as business savvy, negotiating skills and strong people skills for building relationships. Pharma firms will have to dedicate some of their best people to managing relationships and provide the right incentives to encourage collaborative behaviors. Firms will also need to invest in the infrastructure that’s required to enable people to find out who is connected to whom internally and externally. Connections made externally need to be disseminated across the organization rather than just owned by one portion of the organization.

Jackie Hunter Pharmivation

CEO

Managing a portfolio of partnerships

56 Progressions 2011

Community engagement in practice

As important as managing therapeutic brands is to Pharma 2.0, in 3.0 equal weight will be given to managing and engaging key communities, including:

• Medical communication. The magic bullet is being able to become a trusted provider of information to health care providers at the point of care — the right information, in the right quantity, at the right time.

• Social media. Communities of doctors and patients are democratizing the flow of information and enabling the superconsumers of tomorrow. Pharma will need to get more actively engaged to be part of the conversation.

• Patients and patient organizations. The focus on outcomes puts patients and their organizations in a “sweet spot.”

This will require a diverse set of skills and mindsets. Engaging customers will require specialized knowledge about the pharma company’s offerings, as well as legal and regulatory aspects (since pharma companies’ communications about drugs are regulated by the FDA, which has not yet provided complete clarity on the rules governing social media) combined with the critical ability to quickly communicate information that is relevant, succinct and easily comprehensible.

But companies will have to strike a fine balance in this area, since there are also considerable risks involved. While there has been little regulatory guidance so far on how pharma can communicate in some of these new channels, conversations in them can often occur in real time, and in more widespread and decentralized ways.

As a result, it is critical to establish policies and guidelines — not just to encourage good engagement practices such as openness and transparency, but also to mitigate the risks involved. “The rapid global proliferation of social networking and handheld communication devices have reduced information flow from weeks and days via traditional media to minutes and seconds on channels like Twitter or Facebook,” says John Carroll, Vice President, Corporate Audit and Assurance Services at Merck. “The content is instant and potentially irreversible. Therefore, it becomes very important to provide the right guidance to our people about good practices and appropriate behaviors. Merck continues to see the unique value of social networks as one of many tools to engage consumers and other stakeholders in health care. We have implemented some programs based on existing FDA guidance, and we look forward to being able to engage in social networks more broadly when FDA puts forward more specific guidance in this area.” Each company will need to determine where it is comfortable with respect to the risk/reward tradeoff and set guidelines accordingly. Not surprisingly, we have been seeing some firms do exactly that, as pharma companies have started to roll out social media guidelines over the last year.

3. Information strategyIt is no exaggeration to say that the strategic management of information is at the very core of Pharma 3.0. While the other functions discussed in this chapter are being affected by Pharma 3.0, information technology is different — it is not just impacted by 3.0, but is also one of the key drivers propelling the move to the new ecosystem in the first place. Just as information about money became more important than money itself and transformed the banking industry into the financial services industry, information strategy will move to the “front of the house” instead of the back office for the life sciences industry. As discussed in the previous chapter, a key feature of the health outcomes ecosystem is the vast increase in new kinds of data, often generated on new platforms that are being created and controlled by a range of non-pharma companies. To harness the information-related opportunities and challenges of the new ecosystem, companies will need to:

• Sustain the traditional IT function’s focus on efficiencies

• Build an entirely new functionality — information strategy (IS) — to help guide strategy development and connect the dots between IT, strategy and the business units’ growth strategies

• Over time, develop new capabilities within IT to support Pharma 3.0

Sustaining the focus on IT efficiencies

So far, IT has largely been a support function. As pharma companies have looked to tap efficiencies and “variablize” fixed costs in response to the challenges of Pharma 2.0, their IT departments have been occupied with efficiency-related initiatives such as the global deployment of ERP systems and master data management initiatives. In the wake of major acquisitions and mega-mergers, IT functions have been wringing out costs by removing redundancies, harmonizing systems and moving some capabilities to shared and offshored service centers. And with the rise of cloud-computing capabilities, IT departments have been examining which functions they

“The rapid global proliferation of social networking and handheld communication devices have reduced information flow from weeks and days via traditional media to minutes and seconds on channels like Twitter or Facebook. The content is instant and potentially irreversible. Therefore, it becomes very important to provide the right guidance to our people about good practices and appropriate behaviors.”

John Carroll, Merck & Co.

57

want to retain in-house as core competencies and which ones have become sufficiently commoditized to just be purchased externally. (For more on cloud computing, refer to the “A closer look” article by Malcolm Postings on this page.)

Given the size of these efficiency initiatives, it is not very surprising that our conversations with IT professionals reveal that the opportunities and challenges of Pharma 3.0 are in their minds but not on the front burner. We expect this to continue for the time being. With revenue streams dwindling and pressure from payers and investors increasing, measures to boost efficiencies are critical, and IT will continue to play animportant role.

Building information strategy

The new information strategy functionality will be deeply enmeshed in designing the Pharma 3.0 strategy. It will not be sufficient for IS to support strategies and initiatives after they have been decided upon — instead, IS will play an integral role in driving strategy, by informing and co-creating initiatives for 3.0. Much of business model innovation in Pharma 3.0 will be centered around new technology platforms, networks and sources of data.

This will require a different set of skills and capabilities from those that currently exist in IT departments. In addition to having the obligatory knowledge about emerging technologies

A closer look

The cloud as competitive advantage

The adoption of cloud computing is accelerating within the pharmaceutical industry. Cloud computing can be broadly defined as information technology services such as the provisioning of software, data and storage resources, that are accessible over the internet in an on-demand, metered-by-use fashion and that are provisioned by an infrastructure serving multiple client organizations. In Pharma 3.0, the cloud computing opportunity will extend beyond cost savings and efficiency considerations with an opportunity to be leveraged as a competitive advantage.

In the context of cost containment and efficiency, which is currently a high priority within the pharmaceutical industry, cloud computing provides an opportunity for both cost savings and variablization of cost. This is driven from higher utilization of third-party assets, which moves a fixed capital cost base (for example, a license or asset) into an increasingly variable-based (or operational-based) cost consumption model. From an efficiency perspective, the use of cloud services provides a more simple value proposition that is easier and faster to deploy, arguably at lower cost. Cloud computing is also rapidly scalable and offers access to current and maintained systems, but with the potential drawback of reduced possibilities for customization. A move to cloud computing requires the standardization and harmonization of business processes which can also drive cost savings.

With data becoming an increasingly important asset within the Pharma 3.0 ecosystem, companies have the potential to position themselves as information service providers for a specific part of the ecosystem. Understanding, mapping and modeling the end-to-end value pathway within the 3.0 ecosystem into a business

architecture will create opportunities for companies to identify where to play, understand and quantify potential business cases and related risk implications, and support the development of a road map for transformation. There is opportunity to build these reference business architectures for information-rich scenarios that can be served by cloud-based models such as enterprise services, software as a service and industry as a service. In these innovative models, companies will leverage their own information for competitive advantage by allowing access to certain components of their data as an information service to support these new scenarios. “Industry as a service” might be the business model of the future for pharma companies in certain therapeutic categories such as diabetes, where a holistic and data-enabled approach to the patient has the potential to tremendously improve health outcomes.

However, as the underlying IT assets become increasingly virtualized, risk management and compliance become paramount. In a cloud environment, there is a need to focus on considerations around data location and ownership, as well as aspects related to investigations (where can I access the data when I need it?). Questions on security and privacy of data will be at the forefront in a Pharma 3.0 world as companies move to more patient-centric sales models. On the operational side, virtual assets will imply increased focus on business continuity and resiliency. The procurement and management of cloud services will require new approaches, and providers will need to be assessed for their volatility, viability, portability, reliability, quality and predictability of service. End-to-end service-level agreements will be necessary, and there are a myriad of more technical integration factors to be considered as well.

Malcolm PostingsErnst & Young LLP

58 Progressions 2011

Anthony Rosenberg Novartis

Global Head of Business Development & Licensing, Novartis Pharma

Ernst & Young: How is Novartis adapting to Pharma 3.0?

Rosenberg: Pharma 3.0 is a priority, and we’re actively thinking and working on it. Interestingly, much of the drive is coming from our clinical development functions, in addition to our commercial teams.

In moving from a product-centric to a customer-centric approach, the question everyone will need to answer is: “who will make money in Pharma 3.0, and how?” The answer, I think, is that success in Pharma 3.0 will follow the information. The companies that are best able to leverage information are the ones that will thrive. For example, in our investment in the Proteus “smart pill” technology — which embeds pills with microchips that can communicate information to patients and providers — the money will be in the data the pill generates as opposed to the product itself.

That said, there are challenges in moving to this information-centric world. Analyzing, understanding and then communicating information is a complex task that will require additional resources and capabilities. A bigger challenge is that we don’t yet have the right incentives in place. At the moment, no one is really paying for this information. The real conundrum is that unitary budgeting does not exist in any drug markets, even in the most advanced systems in the US and Europe. It may be that some small-scale experiments in emerging markets offer real possibilities.

Our primary objective is to direct the right drug to the right patient, at the right time, to achieve the right outcome. As a key step, we recently set up a molecular diagnostics unit. It has the responsibility of developing companion diagnostics for our own compounds and, also, of generating stand-alone diagnostics that predict, diagnose and monitor diseases and therapies.

Ernst & Young: How are you approaching alliances in this changing environment?

Rosenberg: We are looking at innovative ways of engaging payers. One good example is the NICE/Lucentis reimbursement scheme. With innovative new technologies, the number of ideas

and options for collaboration are increasing exponentially. I think we’ll see more open innovation through alliances where we’ll offer partners our strengths and assets (broadly defined) if they work with us on a new market offering in an open collaboration. Alliances with academia may be the best suited to this approach.

The challenge in codeveloping new offerings is to avoid jamming innovations into a brand strategy, whereby the brand dictates that we have to own these innovations exclusively. Using again the example of Proteus technology, this needs to be adopted on a wide basis for credibility purposes and therefore we have exclusivity for some therapeutic categories only.

Ernst & Young: Where should the functions of business model development and network management reside in Pharma 3.0? What skill sets and capabilities will be most critical?

Rosenberg: In my opinion, these functions should reside at corporate headquarters through a center of excellence model with plenty of funding for experimentation. Strategic information management will be the key skill set. Pharma companies may need to set up spin-offs or separate operating divisions to conduct this function, as managing information strategically requires different capabilities outside the realm of today’s pharma companies. At Novartis, the intellectual property (IP) and legal framework for information technology are entirely different from what we’re used to. What we will need to move away from is the idea of IP protection for only “solid composition of matter.” In Pharma 3.0, we’ll be looking more at protection for algorithms and the know-how of obtaining data as opposed to just one molecule where we’d have complete IP protection.

Ernst & Young: How far along is the industry on the path to Pharma 3.0?

Rosenberg: I think our industry is still too comfortable. We have not yet felt the “pain point” that will cause us to radically change our game. However, the impending patent challenges and reimbursement pressures might accelerate the shift toPharma 3.0.

Success will follow the information

59

and information platforms in the health care arena, IS professionals will have a solid educational background in the business of pharmaceuticals — and, more important, the business of health care. At Medtronic, for instance, many IT professionals are required to spend five days each year embedded in health care settings, to give them a hands-on understanding of the provision of health care in a real-world setting. (For more on Medtronic’s approach, see the article by Michael Hedges on page 61.) This builds on trends we are already seeing with the standardization of enabling functions in Pharma 2.0, as customer relationship management (CRM) approaches have emerged as more value-added for their internal customers. IS professionals will take this to the next level as they team with business units to create outcomes-centric initiatives.

As with the other functions discussed here, we are agnostic about how this function will be structured within a given organization. Some pharma companies may choose to create entirely new functional teams for IS, while others might prefer to embed this functionality into their existing structures. At Biogen Idec, for instance, the company has appointed several people to a new position, Business Information Manager (BIM), each functioning as a mini-CIO for the business unit in which he or she is embedded. (For more on the BIM role as well as Biogen Idec’s approach to IT transformation, see the article by Ray Pawlicki on the following page.)

New IT capabilities for Pharma 3.0

Over time, the traditional IT function will likely expand into new activities and develop new capabilities for the outcomes-focused solutions of 3.0. Examples include:

• Making information produced within the organization (and ultimately across the extraprise) digital and searchable

• Data mining or value mining (the use of data mining to demonstrate the relative value of products)

• Data interoperability and integrating information from different companies

• Tracking information from different media and platforms (e.g., video, instant message chats)

• Industry information services delivering network value insight

• Enhanced analytics, knowledge management and decision support to facilitate performance management (see “Performance management” section below)

• Ensuring privacy and security of data across the extraprise

In some cases, we are already seeing companies recruiting significant numbers of data modeling professionals — a likely indicator of the importance that new kinds of data analysis will have in the future. Many of the capabilities listed above can be developed over time, as experiments in commercial trials are scaled up. Companies will decide which of these capabilities are developed in-house (IS will help inform this) and which ones are best handled by leveraging the strengths of others. IS will serve as the interface between strategy and IT to develop these supporting capabilities.

60 Progressions 2011

Ray PawlickiBiogen Idec

Chief Information Officer

Information technology (IT) is becoming increasingly important in today’s pharmaceutical industry. Many aspects of the pharma business are becoming heavily dependent on IT for future growth. On the commercial side, for instance, we’ve been talking about electronic medical records (EMRs) for a decade and a half, but they are now real and generating lots of data — at least in hospital systems and large practices.

This makes it increasingly possible to do things we couldn’t do in the past, not just because of EMRs, but also because of other innovative technologies on the public internet and elsewhere. In the past, it might have taken a year of post-launch market research for a drug company to figure out that physicians have a major concern about safety issues. Today, one can instead mine EMRs within a hospital system for safety signals or generate patient/physician sentiment from the internet as soon as one month after launch — allowing firms to change direction very quickly.

These shifts are dramatically changing the role of the IT organization within drug companies. At leading-edge organizations that truly leverage the new information being generated across the ecosystem, IT needs to be at the table along with other business units (BUs) when new strategies are developed. In the world of Pharma 3.0, there will no longer be an IT strategy per se — IT will instead be an inseparable part of business strategy. Information is strategy.

The journey Like all transformations, this will involve a journey for most drug companies, because IT functions will need different skill sets and different ways of operating. Biogen Idec — which, as a biotech company, has some advantages in being smaller and more nimble than the typical big pharma enterprise — is in the middle of this journey.

The IT transformation journey parallels the industry’s overall shift to Pharma 3.0. As companies have shifted to Pharma 2.0, the overall emphasis on efficiency has brought greater pressure

on IT organizations to boost operating efficiencies. Similarly, as the industry now moves to an outcomes-focused, Pharma 3.0 ecosystem, IT organizations need to enable that transition. Indeed, to be part of the strategic conversation, IT first needs to deliver on efficiencies. The CEO or Head of Commercial won’t want to discuss creative new solutions if the basics aren’t working efficiently.

With this in mind, we embarked on a three-year program to reinvent IT. We first got IT’s house in order — making IT more efficient, with standardized processes. We then worked with the business functions to boost their efficiencies via strategic projects. With this foundation, we are now poised to start making IT a true strategic asset for the organization.

As a key part of this transformation, we created a new role early on: the Business Information Manager (BIM). BIMs are embedded in different BUs and function as mini-CIOs for each BU. They are responsible not for building or executing an IT strategy, but rather for executing and enabling the business strategy of each BU. In doing so, IT-related initiatives will inevitably emerge to help drive the business, but they will do so within the context of the BU’s strategy.

BIMs require a unique combination of skills. They are not the device-implementation specialists of traditional IT organizations — the ones we turn to when our BlackBerrys aren’t working. Instead, they need to function as leaders (and part-time evangelists) who can really convince the BUs to be more open to the possibilities of information-driven approaches. Our BIMs have typically spent the vast majority of their careers in IT, but they have also spent a good deal of time in BUs such as sales and marketing to build their appreciation for business aspects and challenges. And of course, they need that often-intangible quality of leadership.

Other drug companies might blaze different paths for IT transformation, but the final destination is the same for all of us. To be relevant and competitive in Pharma 3.0, we will need to ensure that the power of information is a core part of corporate strategy.

Information is strategyPerspective on information strategy

61

Michael HedgesMedtronic Inc.

Vice President and Chief Information Officer

At Medtronic, information technology is critical to our mission. Every four seconds a Medtronic product saves or substantially improves the life of someone somewhere in the world. By the end of this decade, we’re aiming to make it every second. IT is critical in actively illuminating opportunities for us to find the solutions to make our objective a reality and simultaneously make a huge difference for people with chronic diseases. Since chronic diseases are the largest source of costs to the health care system, IT solutions have an important role in making the entire health care delivery cycle more efficient and effective.

At Medtronic, IT is integral to innovation, the lifeblood of our company. We have created an innovation team — a group of IT, technology and health care specialists — focused on developing our Hospital of the Future initiative. Through this initiative, we are partnering with several companies, such as Cisco and Microsoft, and inviting customers to collaborate with us so that we can address their future needs today. We use everything from telepresence to advanced inventory tracking to help customers visualize the concepts and to increase understanding of how our products and business models will positively change the way health care is delivered in the future.

Another major area of IT innovation for Medtronic is mobile health (mHealth). With our focus on complex diseases such as diabetes, we are about to unveil an array of mHealth solutions focused at the patient and the physician. Through mobile technologies, patients will be able to order their supplies from Medtronic from anywhere, anytime, and physicians will be able to review patient information and make necessary therapy changes. In the future, we foresee a highly connected world where patients, caregivers and physicians interact through their mobile devices, allowing patients to take timely actions to better manage their own health. Such solutions have great potential to provide safety for patients and peace of mind for their families.

For health care professionals, mHealth solutions lead to effective and efficient patient management, ensure safety and compliance, and improve health outcomes. Our IT organization partners with our Product Management business unit and our R&D teams by providing seed funding and resources to enable innovative solutions. We are actively working to establish standards which will enable implementation of global solutions.

However, as the industry moves toward a new outcomes-focused ecosystem, new IT challenges will continue to emerge. The quantity and quality of data will expand — from wellness data to social data to data from implantable devices and wearable medical devices — so we must enable global solutions with privacy and security. Some of the greatest challenges lie in the interoperability of medical devices with consumer devices and the ability to maintain the safety levels that are assured in our medical devices. Resolving other challenges such as data privacy, data ownership, the role of health care participants and support across borders are part of our future areas of focus.

In the new ecosystem, IT resources in life sciences companies will also need new skill sets. Fundamentally, they can no longer be just IT professionals — they need to be life sciences IT professionals. All of my direct reports have to visit five customers a year at the point of care. This could involve attending an implant or a surgical procedure or working for a day with nurses in a hospital. We must truly understand our customers’ needs and help them make better decisions faster. IT professionals will need to cultivate skills in data analytics, so we can gain insight from data, which can then be used to better customize and personalize care. IT is truly a transformative force, helping create a more accessible, efficient and effective health care paradigm.

IT of the futurePerspective on information strategy

62 Progressions 2011

4. Performance management Robust performance management provides a company with not just the numbers, but a firm understanding of the story behind the numbers. A driver-based approach to planning and reporting is important because:

• It enables planning to support decision-making and change behavior, rather than just extrapolating financial line items.It also enables scenario testing and portfolio analysis acrossthe enterprise.

• It ties together strategic decisions, resource allocation and performance targets. When these processes are stuck in theirown silos, decisions made in one process don’t migrate effectively to the rest of the decision-making chain.

• It allows for reports and score cards to be tied back to thebusiness drivers used in planning.

Performance management can accelerate a company’s success, because companies that master their focus on these drivers will make better decisions. These drivers must by understood, tracked and communicated.

Outcome metrics and drivers: the insight behindthe numbers

At its core, driver-based performance management is a simple concept. Companies identify the outcome metrics that are most important to them and then decompose the drivers that underlie those outcome metrics. The drivers should include external variables, such as competitor pricing or disease rates. They should also include internal operational variables, such as the efficiency rates of managing various business processes and drug franchise life cycles. This enables real decision support, since these drivers are leading indicators of success, and success is measured by outcome metrics.

To unleash their full decision-support power, drivers should be quantitatively linked to outcome metrics. While it may not be easy to quantify these relationships precisely, companies can work at improving their understanding of the drivers over time.

Outcome metrics typically include financial results such as revenue, profit, cash flow and capital efficiency. The power of a driver-based approach becomes apparent when companies start to quantify the impact of drivers on financial metrics, through questions such as: What drives market share? How much of our cost increase is due to success in unit growth vs. inefficiency in managing our processes? Did we miss our revenue target because we discounted too much, or because we lost share, or because the overall market shrank? This rigorous focus gives the ability to plan for and improve drivers such as customer acquisition costs, revenue growth from emerging markets, asset utilization, and life cycle of drug franchises. These drivers become core to decision-making, reinforced by planning and reporting processes. As companies allocate scarce investment dollars, for example, they can put each initiative in the same arena by analyzing its impact on drivers and outcome metrics. They can also run risk scenarios by altering key drivers, such as drug performance, regulatory constraints or competitor pricing.

Performance management in Pharma 3.0

In a Pharma 3.0 world, companies need to develop health-outcome-based metrics, such as life-cycle efficiency of providing care. These health-outcome-based metrics help focus the organization on more than financial results. The financials still matter, but focusing on health-outcome-based metrics can provide unique competitive advantage. Defining and measuring these metrics is challenging, but vital to success. Ideally, these metrics will be developed in conjunction with other players in the ecosystem, such as payers, regulators, providers and partners.

Digging into drivers for health-outcome-based metrics reveals interesting insights. Important drivers jump out, such as early diagnosis, consistent delivery of medicine, patient behaviors (e.g., exercise) and application of leading treatment practices. Companies can measure these drivers and quantify their relationship to “patient outcomes.” As they build that understanding, the drivers also point out the need for pulling in other members of the ecosystem that can influence specific drivers. This approach also facilitates the sharing of key information and insights among partners in a value network in order to be in a better position to demonstrate end-to-end value for the system. At this point, companies will be focused on the outcome metrics that matter, and will understand the drivers behind them. That enables them to make better decisions and to integrate with other ecosystem members.

Implementing Pharma 3.0 performance management

Many life sciences companies are already quite good at forecasting financial statement line items in the near term. However, most struggle to integrate strategy with annual plans, to allocate resources across the enterprise, and to understand the root cause of variance. Building a driver-based performance management process improves all of these issues.

Taking this to the Pharma 3.0 level requires some innovative thinking. It requires articulating those health-outcome-based metrics and building out their specific drivers — ideally with the involvement of others in the ecosystem. It will also involve modifying processes and systems for planning, reporting and decision support to bring these new insights into the mainstream of the business. A leader in Pharma 3.0 will have multiple partners and value networks that, individually, need to have an articulated value proposition to manage and perform to. In addition, leading Pharma 3.0 players will have developed a core competency in portfolio management of their engagement in the ecosystem. We can envision that the portfolio as a whole will have health-outcome-based metrics and can be greater than the sum of the parts with portfolio outcomes and drivers. In the future, we expect that active Pharma 3.0 leaders will be both successful operators as well as network conductors of their portfolios of partners.

63

A closer look

Scenario planning for 3.0

Today’s pharmaceutical business environment is shifting rapidly, making planning more challenging. Forecasting tools, based on extrapolations from the past, already show limitations when what were long-term trends increasingly change on short notice. The quality of business decisions is at risk of being impaired. Changing business models will further compound these problems with the many new uncertainties arising from an exposure to a broader ecosystem.

What will be the stance of reforms of health care toward cost-cutting versus a long-term perspective on sustainability? Will health IT be deployed broadly? Can the interoperability problems (and associated diverging incentives) really be solved? Will social networking around health-related topics gain traction and empower the “normal” patient, or will it get diluted within the flood of other networks. Can mobile health really be scaled to make a difference beyond pilot projects? Will there be a global market for health outcomes? Can value-mining initiatives by payers be expanded beyond local initiatives? What if a large IT company makes a bold and transformational move into the healthcare space?

The traditional forecasting consisting of a planning calculation, which is based on just one set of assumptions — the so-called official future of the company — will not work in this highly volatile environment.

The intelligent organization will identify and select some of the uncertainties that are critical to its success and for which it needs to be prepared. Scenarios can be built around these uncertainties, providing alternative images of potential futures. While these scenarios enable the organization to think ahead, they also enable the stress-testing of possible strategies (and associated business models) in a quantitative manner. In this process, the KPIs (EBIT, EVA and cash flow) for each strategy within each scenario are

Frank BroetzmannErnst & Young Ltd.

Strategies Scenario 1 Scenario 2 Scenario 3

Strategy 1(Business model/measures)

Strategy 2(Business model/measures)

Strategy 3(Business model/measures)

Strategy 4(Business model/measures) Very successful (with respect to EBIT, EVA, FCF) Successful (with respect to EBIT, EVA, FCF) Unsuccessful (with respect to EBIT, EVA, FCF)

determined and compared in a financial planning model. The results are used to create a so-called strategy/scenario matrix.

The application of this methodology allows the enterprise to consider critical questions. Does the chosen strategy and direction of the business sufficiently secure the growth and survival of the company in the relevant scenarios? Are further measures or even changes to the strategy needed to help ensure future stability and growth in some of the scenarios? These are questions that cannot usually be answered by a simple “yes” or “no,” but there are general criteria that provide guidance. Strategy and business alignment should preferably:

• Provide a satisfactory performance in as many defined scenarios as possible (robustness)

• Leave the strategic options open as long as possible (flexibility)

• Allow the parallel pursuit of competing options for as long as possible (multi-track)

• Provide the highest return, even when losses occur in other scenarios

Robustness and flexibility are the key criteria that can help to “future-proof” the company in a 3.0 world. In times of great volatility and uncertainty, flexibility can be even more important than robustness. Flexibility can enable a more profitable strategy by allowing a delay in strategic decision-making without excessively high opportunity costs.

By testing strategy and potential business models using new scenario planning tools and preparing action programs focusing on possible developments early, valuable time can be gained that, in turn, can be used when remediation measures become necessary. This can create the decisive advantage in a rapidly changing business environment.

A scenario planning approach

64 Progressions 2011

5. Capital strategyThe investments that pharma companies have made so far in Pharma 3.0 have been very small compared to their investments in drug R&D. As discussed in the previous chapter, this is somewhat attributable to the fact that companies are in the early stages of the “learning” model and are just exploring or initiating limited experiments. However, since Pharma 3.0 represents such a tremendous disruption, it will become imperative for companies to start making much larger investments in outcomes-focused initiatives over time — making the capital strategy as it applies to Pharma 3.0 a key aspect of operationalizing their approach.

But this is not merely a matter of investing more — companies will also invest differently, because the move to Pharma 3.0 has several implications for the ways in which pharma companies approach their capital strategies:

• For one, the risk/reward profile will be very different in Pharma 3.0 investments. Compared to their traditional investments in drug R&D, most 3.0 experiments will have shorter time horizons and a higher probability of success. However, companies will have less information on which to base capital allocation decisions, since there will often be little or no prior experience on which to estimate probabilities or predict which

business model experiments will gain market acceptance. Compounding this, in many of the new business model experiments (think Phase 1 commercial trials), companies won’t be able to fully answer the question “How will I make money?” until the equivalent of a Phase 2b trial, or the question “How much money can I make?” until Phase 3. And because many of the uncertainties are new and unfamiliar, managers might attribute larger hurdle rates than necessary.

• In addition, Pharma 3.0 will take the need for capital efficiency — something firms have already been increasingly focused on in Pharma 2.0 — to a whole new level. In Pharma 2.0, companies have already been adapting to often dramatic cash shortfalls in the wake of patent expirations — seeking to triage among drug R&D, M&A, dividends and share repurchases. In Pharma 3.0, the need to invest in new outcomes-focused business models will add a new demand on the shrinking pool of available funds.

As a result, companies will revisit everything from modeling methodologies to the mix of deal structures. A good way to examine these shifts is through Ernst & Young’s “capital agenda” framework, which looks at the capital-related challenges facing a company across four dimensions: investing capital, raising capital, preserving capital and optimizing capital.

• Balance capital structure for increased diversifi cation and risks of Pharma 3.0

• Monetize intellectual capital created in radical collaborations

• �Reconfi gure global risk management to protectextended enterprise

• Adjust cost structure once exclusivity hasbeen lost

• Anticipate evolving regulatory regimes• �Enhance supply chain fl exibility

• Implement a business modelinnovation process

• Build capabilities for partneringwith non-traditional players

• Revamp transaction strategy, duediligence and integration capabilitiesfor emerging markets

• Employ creative partnerships and M&Astructures to improve R&D capital effi ciency

• Rationalize business and product portfolios; justify conglomerate rationale

• Accelerate synergies capturedfrom recent mergers

• Improve working capital management

• Proactively communicate value of business model portfolio to investors

• Upgrade corporate capabilities to adapt to 3.0 implications

• Address growing pressure on balance sheet effi ciency and shareholder payout policies

• Plan for continued decrease in availability of VC and IPO funding: M&A is the only exit for many players

• Anticipate increasingly diverse deal structures and fi nancing methods to address capital scarcity and increased risk

Pres

erving

Optimizing

Investing

Rais

ing

The challenges presented in bold are new in Pharma 3.0.Source: Ernst & Young.

Enabling• Establish enterprise-wide criteria for

all investment decisions: M&A,alliances, capex, R&D andbusiness model innovation

• �Adapt drug R&D fi nancial tools and mindset to commercial trials

• Explore real options and scenario planning for investment evaluation

• �Establish shared view of value creation throughout the extended enterprise

A capital agenda for pharma companies

65

Adrian RawcliffeAdrian Rawcliffe

GlaxoSmithKlineSenior Vice President, Worldwide

Business Development and Finance

Ernst & Young: How have your capital allocation decisions for R&D projects been changing in Pharma 2.0? How do you see them changing further in 3.0?

Rawcliffe: The economics of pharma have been broken for some time, for two reasons. First, it costs too much to find out whether something works. Second, it then costs too much to establish safety and efficacy to bring a product to market. Both of these will need to change in Pharma 3.0. We have already been working on the first problem in 2.0 by disaggregating the front end of R&D. Today, only 40% of GSK’s R&D spend is early stage, while 60% is late stage. I see this trend continuing in 3.0. Pharma companies will need to develop incredibly wide funnels, leveraging as much capital — not just financial capital, but also intellectual capital — from the outside world, including VCs, academia, nonprofits and governments. We will then need to apply a very rigorous filter at the discovery/development decision point, taking into account not just the science but also the route to market, the cost of that route to market and, critically, the impact on health outcomes.

To have flexibility in allocating capital, companies will need to “variablize” fixed costs because we have massive overheads. We may have been able to afford that overhead in the past, but in three years, we will need cost structures that can adjust rapidly. The problem is that you can’t allocate capital in pharma the way you can in the capital markets, where you can move money from one investment to another very quickly. Pharma’s infrastructure creates inertia that makes it very difficult to change capital allocation without shutting down facilities and reducing headcount. At the extreme, it could even be possible to radically reduce the pharma backbone of discovery and development to just people who select and invest in discovery targets from the outside and teams that get projects to market once the go/no-go decisions have been made. These people would essentially be managing large investment budgets for maximum return.

We will also continue to move toward truly formalizing capital allocation decisions. At GSK, pharma R&D investments now have to compete and demonstrate their ROI relative to all sorts of other investments — including acquisitions, emerging markets investments, consumer health care, vaccine infrastructure, etc. Any other industry would have done this 20 years ago if they hadn’t been making 33% margins.

Ernst & Young: How do you see pharma companies making capital allocation decisions for investments in developing new business models? What processes and metrics will be needed?

Rawcliffe: As we expand into new areas, we have to be mindful of the need to find synergies — not just cost synergies but intellectual synergies. There will be interfaces and synergies where it makes sense for us to try to own or control a set of information, or we can benefit from the value that is created by the information because it abuts something that is useful to us. And there will be other areas where we decide we can’t add much value, and we would subcontract that.

I do agree with your analogy (made elsewhere) between how one approaches bets in new molecule discovery and bets in new business models. Pharma focuses so much on situations where we make marginal investments on the top end of big budgets — US$100 million on a budget of US$3 billion. But that US$100 million could fund 10 new, completely different ventures. And I don’t think we think about that nearly enough. We’re too scared of failure and we tend to focus on investment opportunities that are large.

These 3.0 investments are pilot programs involving really small investments compared to what we spend on drug R&D. But the potential payoff is huge. We’ll need something closer to a venture/seed funding or incubator approach. But the successful companies in Pharma 3.0 will be those that can effectively run a discovery program approach for new business models.

Allocating capitalPerspective on capital strategy

66 Progressions 2011

Investing capital

Some of the biggest implications of the move to Pharma 3.0 will be in the area of investing capital. This is not surprising, since creating new business models will require structured investments in building the portfolio of development and business initiatives. Funding product innovation — which has always driven success in this industry — will remain as critical in Pharma 3.0, but the scope of investment will expand.

A key challenge will be allocating capital efficiently among individual Pharma 2.0 and 3.0 investments. Making the business case for commercial-stage 3.0 investments will require a very different approach from that used in Pharma 2.0, for a couple of reasons. First, the risk/reward profiles of 3.0 commercial trials will not look much like those of their 2.0 counterparts. Second, Pharma 3.0 investment opportunities will typically have materially greater uncertainty and longer time frames and require more go/no-go decision-making throughout their lives. Consequently, traditional commercial capital budgeting methodologies — using standard discounted cash flow (DCF) analysis and return on investment (ROI) — will not translate well to Pharma 3.0. Instead, companies will need to adapt the tools, methodologies and processes they typically employ for making drug R&D investments. At a minimum, this means using expected net present value (eNPV) and decision tree analysis, which can incorporate the additional uncertainty and optionality inherent in these projects. Companies may also want to consider real options analysis and scenario planning, which can account for 3.0 uncertainty in more sophisticated ways. (For more on scenario planning, refer to the “A closer look” article by Frank Broetzmann on page 63.)

In Pharma 2.0, companies have often used a single hurdle rate when making capital allocation decisions. This practice will become increasingly untenable in Pharma 3.0, where companies will be making investments in a very wide range of new offerings and business models at different stages of experimentation. Required rates of return could vary significantly by market and type of offering. Simply carrying forward Pharma 2.0 enterprise-

wide or early-stage drug development hurdle rates without regard for the specific risks of the 3.0 project being evaluated could result in under- or over-investment and be detrimental to shareholder value. When structuring alliances with third parties, particularly non-traditional players, it will be essential for the partners to reach alignment on risk and return expectations. We have said frequently that in Pharma 3.0, companies will need to focus not on how to fit others into their business models, but rather on how they fit into other companies’ business models. Here is one specific area where they will do exactly that.

Since Pharma 3.0 will not replace Pharma 2.0 as much as supplement it, capital will be allocated not just between different Pharma 3.0 projects but also between Pharma 3.0 and Pharma 2.0 projects. When we wrote about Pharma 2.0 in Progressions 2009, we declared that pharma CFOs, many of whom came from outside the industry, were “the new stars in the executive suite.” We noted that companies were transforming their finance functions to bring more rigor to capital allocation decisions and improve operating efficiencies. Since then, many pharma companies have established an “internal market” to make investments across the enterprise compete for capital with each other using common economic metrics. (For one example of such an approach, refer to the interview with Adrian Rawcliffe of GSK on the previous page.)

While the internal market approach makes tremendous sense given the current financial pressures of Pharma 2.0, Pharma 3.0 experiments should be subjected to this process only with extreme caution. Competing with Pharma 2.0 investments could doom promising 3.0 projects to an early death, since the rates of return earned by these pilots may be significantly lower than those commonly seen in today’s drug franchises. (Indeed, this is one reason why most disruptive innovations do not come from established industry players.) However, far-seeing CFOs will recognize that drug franchise margins are likely to shrink dramatically as more and more products become subject to generic competition, and the rates of return earned in 3.0 experiments might increase equally dramatically as the most successful ones are scaled up. But while companies may decide to separate many 3.0 experiments from competition with more traditional investments for the reasons mentioned above, 3.0 investments should still be guided by a clearly articulated thesis with respect to value creation and measures of success.

Radical innovation from within is a challenge across industries. Either companies create the culture and incentives to make this work within the corpus, or they move to set up separate legal entities and (or) manage a portfolio of equity stakes in other people’s experiments in exchange for asset contributions and board governance. Bottom line: value creation in 3.0 will be the result of companies being able to be both operators and investors.

Radical innovation from within is a challenge across industries. Either companies create the culture and incentives to make this work within the corpus, or they move to set up separate legal entities and (or) manage a portfolio of equity stakes in other people’s experiments in exchange for asset contributions and board governance. Bottom line: value creation in 3.0 will be the result of companies being able to be both operators and investors.

67

Tax planning for Pharma 3.0

The move from Pharma 1.0 to Pharma 3.0 will change the approach to tax planning for pharma companies.

The US, the world’s largest drug market, also has one of the highest corporate tax rates in the world at 35%. Jurisdictions such as Singapore, Ireland and Puerto Rico have much lower rates, either through a low statutory tax rate (e.g., Ireland) or via manufacturing-friendly tax incentives (Singapore and Puerto Rico). As a result, many global pharma companies have taken tax planning into account when deciding where to locate their API manufacturing functions (which generate much of the profit in the pharmaceutical supply chain). As for R&D, most global pharma companies bear their R&D expense in jurisdictions such as the US, where the R&D deductions can be used to offset income that would otherwise be subject to a very high tax rate, and the expense may also qualify for a tax credit. Thus, under the Pharma 1.0 business model, the core tax strategy is to optimize profit allocation to the activities of the API manufacturers that are located in jurisdictions with favorable tax rates compared to those of the US, while incurring the bulk of the R&D expense in the US, or similar high-tax jurisdiction.

In the Pharma 1.0 structure, the character of income generated by pharma companies is typically product sales. However, in Pharma 3.0, the character of income could become much more service-based as pharma companies shift from having a business model built around developing and delivering drugs to getting involved in the cycle of care of the patient. From a tax standpoint, this change in the nature of income will result in a substantial change in how the tax departments of pharma companies think about tax planning, compliance, reporting and transfer pricing. Generally speaking, it will change the tax blueprint of a pharma company to resemble much more of a traditional high-tech company than the pharma companies that we have come to know.

While the move from Pharma 1.0 to Pharma 3.0 will have significant impact on the business models of pharma companies, it will also bring with it new opportunities and fresh ideas for tax planning. As pharma companies begin to team with non-traditional players to deliver innovative health solutions, there will be opportunities to leverage alliance structures to maximize the tax efficiency of the business for all parties involved.

Andy BrownErnst & Young LLP

A closer look

68 Progressions 2011

Raising capital

For much of their history, pharma companies have had the benefit of healthy cash flows and large cash balances. Consequently, they’ve had little need to raise capital. Even in recent years, pharma companies have gone out to the capital markets to raise funds primarily when they needed to finance large mergers or acquisitions.

This may change in the years ahead. As their resources diminish on the other side of the patent cliff and the demands on those scarce resources grow (not least to make the significant investments that Pharma 3.0 will require), companies may find themselves needing to raise capital on a more ongoing basis. Given the overall drive toward capital efficiency in Pharma 3.0, this will involve identifying the optimal ways of raising funds, taking into consideration factors such as the cost of capital from different sources and what implications the changing risk profile in Pharma 3.0 has for the mix of debt and equity.

Here, too, companies will have opportunities to employ other people’s capital. They will be able to raise capital for specific joint ventures that have been set up to focus on a certain aspect of 3.0, as opposed to for the entire organization. We anticipate the rise of specific project financing arrangements for innovative partnerships that can share risk and reward. Increasing sophistication in understanding the 3.0 implications for corporate finance capabilities will be required from treasury and finance departments.

Preserving capital

Another key component of capital efficiency is preserving capital — operating effectively to ensure that the funds one has are appropriately stewarded for maximizing after-tax returns.

In Pharma 2.0, for instance, we have seen many companies divest non-core assets and restructure their organizations to reinvest in businesses and geographies that are considered to

be strategic and have high growth potential. We have also seen heightened interest in innovative deal structures that maximize after-tax, risk-adjusted returns, such as large contingent payments in alliances and acquisition transactions. And there has been considerable creativity in new approaches aimed at conducting R&D more efficiently.

We expect these trends to continue, given the push to free up resources to invest more fully in Pharma 3.0. In addition, companies will benefit from a holistic approach. In Pharma 3.0, preserving capital for you and your partners will involve leveraging the investments that companies have already made, for instance the platforms of IT companies and the broadband capabilities of telecommunications firms — to say nothing of the significant investments that superconsumers have made in their personal technology platforms. Pharma 3.0 outcomes-based solutions may provide companies differing opportunities to extend the useful life of product portfolios and allow increasing returns on existing investments to drop to the bottom line.

Since capital is about optimizing after-tax returns, tax planning is a significant consideration. In Pharma 3.0, as they move into new activities, companies may have to approach these issues differently. (For more on this, see the “A closer look” article by Andy Brown on the previous page.)

Optimizing capital

So far, the value of everything pharma companies know and produce has largely been bundled in their products. Pharma 3.0, however, will allow companies to unbundle from the product the value of what they know and monetize it. This information and knowledge — about everything from the validation of health claims to disease states, disease burdens, drug interactions and regulatory processes — can be used to create new revenue-generating market offerings, allowing firms to more optimally leverage their existing assets for additional streams of revenue.

69

6. Governance, risk and controlsSuccessfully implementing a Pharma 3.0 strategy will require a robust structure for managing risk. The challenge before pharma companies is twofold. On one hand, they will need to recalibrate their approach to risk in Pharma 3.0 to recognize the fundamental shift in the risk/reward equation. On the other, they will need a robust risk-management approach to address the

increased exposure and new risks from expansion into new kinds of radical collaborations and new business models.

Recalibrating risk and reward

In our conversations with clients, we often categorize the universe of risks that pharma companies face into four quadrants: strategic, operations, compliance/regulatory and

A closer look

Privacy regulations and risks

In an increasingly borderless, Pharma 3.0 world, protecting personal patient information will become paramount. Mobile communication, social networking and cloud computing are erasing the boundaries of the traditional corporate information system, and this will continue in a Pharma 3.0 environment in which patients are increasingly engaged.

Historically, enforcement of information protection legislation has lacked teeth. Today’s regulators plan to change that by expanding their reach and imposing tougher penalties. The US Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act) is one such example. Under the HITECH Act, the compliance requirements of “business associates” — a designation that applies to many pharmaceutical companies — have increased significantly. In addition, state attorneys general can investigate and take action against organizations for failing to secure protected health information. The year 2011 will bring additional clarity and detail regarding the provisions of regulations that address the online environment in many countries. The European Commission is in the process of updating the 1995 EU Data Protection Directive. Plans for strengthening enforcement include providing data protection authorities with the ability to investigate and sue organizations that do not comply, and improving enforcement cooperation among EU member nations. In advance of the release of new regulations under the EU Data Protection Directive, several EU countries have been busy intensifying existing enforcement policies. With these changes in mind, pharmaceutical companies should revisit their risk assessments as well as evaluate whether their compliance programs for privacy and personal information are current and complete.

New technologies are creating a number of new privacy risks for organizations and patients alike. Organizations that ignore the importance of protecting personal information from outside — or inside — will often suffer more than financial penalties. Their

reputations and their brands may be tarnished. The increased reliance on portable media that hold sensitive information is a trend that impacts the larger health sciences field, including pharmaceutical companies. Hosting and processing data in the cloud is yet another evolving trend that should be addressed with privacy in mind. As data changes hands and crosses borders, its risk profile and compliance requirements change. The use of social networks will be part of many 3.0 strategies. Not only will employees interact with one another in those networks, and often discuss the company and their work, many pharma companies are now implementing or piloting opportunities to interact with patients and their caregivers over such networks. Concerns about inappropriate access or disclosure of personal information have never been higher.

Borderless security: Ernst & Young’s 2010 Global Information Security Survey reports that 81% of executives interviewed indicate that managing privacy and protecting personal data is very important or important to their organization. And no wonder: highly publicized incidents of data leaks or identity theft pose huge brand and reputation risks for businesses — a concern that survey participants ranked even higher than privacy protection (84%).

Regulation and risk are the two primary reasons we will see organizations increasing their investment in privacy. They will be spending money to hire highly skilled certified privacy professionals and will invest in technical controls that monitor and manage external attacks and leaks from within. A fundamental shift in how organizations approach privacy may be in order. Protecting personal information can no longer be an afterthought that is bolted onto an existing privacy or security program. It needs to be a series of policies for embedding privacy protection into new technologies and business practices at the outset. In Pharma 3.0, the focus on privacy will enhance the business performance of leading organizations.

Sagi Leizerov, PhDErnst & Young LLP

70 Progressions 2011

financial. While all of these risks have been important in Pharma 2.0 — and will continue to be significant in 3.0 — strategic risk will take on even more importance. The shift to health outcomes represents a disruptive change, and for pharma companies, the biggest risk — almost to the point of being an existential challenge — is the risk of standing still, or even moving in the wrong direction. “Statistics show that the greatest potential for shareholder value loss is from strategic risks,” states Sandra L. Cartie, Vice President and Chief Audit Executive at Bristol-Myers Squibb. “So we’ve shifted our risk assessment process to a top-down, shareholder-value based approach and, as a result, we are auditing the key risks that could impact the company.”

Given that a hallmark of Pharma 3.0 is experimentation with new business models through radical collaborations with non-traditional players, issues such as intellectual property, willingness to share information and ability to experiment with unproven business models will be revisited with fresh eyes. The approach to risk management that companies have had in Pharma 2.0 could be ill-suited for Pharma 3.0, since it will constrain them from experimenting in the ways that the new ecosystem will require.

Hence it will be important for companies to recognize that Pharma 3.0 represents a fundamental shift in the risk/reward equation, and to recalibrate their “need to know” approaches accordingly. The cautious, IP-shielding, super-controlled approaches of Pharma 2.0 reflected the fact that companies had multibillion-dollar drug franchises at stake. In Pharma 3.0, as the value of those drug franchises shrinks and relatively more value creation migrates to information about outcomes (much of which will be outside their four walls), companies have less to protect and more to gain from experimentation with new business models and collaboration with external parties.

Source: Ernst & Young

Set company objectivesand operating

tolerances

Understand externaland internal

requirements

Strategic

Operational

Compliance/regulatory

Financial

Ascertain common GRC requirements

Delineate GRC responsibilities/centers

of excellence andcenters of work

Identify authoritativedata sources

Understand GRC requirements timing

Assess and prioritize GRC requirements

Enhance GRC management

Governance and organization

Ownership and

alignment

Culture andvalues

Resourcemanagement

Approval andauthority

Adequacy

Relevance

Revision

Enablement

Policies and standards

Controls Improvement

Effectiveness

Efficiency

Coordination

Automation

Remediation

Proactive

Management actions

Self check

Value ofenhanced

GRC

ComfortStructure

Cost controlTransparency

Ensure communication — reporting, training, updates

Elevate monitoring — metrics, auditing, testing

Enabled by people, process and technology alignment

“ We will need to focus on educating our partners about regulatory and other rules in the pharma industry. Many of these non-traditional partners come from less regulated — or differently regulated — worlds.”

Monika Pieroth, Boehringer Ingelheim

Governance, risk and controls framework for Pharma 3.0

71

Agile operations for an agile market

As the pharmaceutical industry transitions from a market driven by drug production and sales might to one increasingly driven by individual health management, success will depend on the ability to meet subjective requirements and demonstrate health outcomes. Commercial operations will face new challenges as they decide how best to go to market, how to manage a product through its life cycle, and how to optimize investment amid growing complexity.

The increasing financial and regulatory pressures are demanding a growing sophistication of the commercial function, as a driver of the emerging “customer-centric” business model. Increasingly challenged to evidence their role in driving and maximizing sustainable profitable income in both developed and developing markets, while minimizing the use of assets and investment, commercial operations must address the question: How much profitable revenue has been produced and how much did it cost to produce it?

In striving for profitable access to core and emerging markets, organizations must ask themselves: how do we select, build and sustain mutually advantageous relationships and partnerships? How do we establish commercially viable, value-based propositions to deliver health outcomes — rather than simply ensuring product availability?

It is within this context that pharma companies must re-address the entirety of their commercial business models — from customer economics and value management to market strategy and customer strategy; from channel management and alignment to customer service management. Organizations are

opening up to the experiences of those outside pharma, from sectors as diverse as consumer products and financial services. In doing so, they seek to apply relevant lessons to the specific challenges of their own environment — an environment that is increasingly complex and evolving, with an enlarged customer base, increasing cost pressure, growing customer and consumer sophistication, and an explosion in the number of channels available for customer interaction.

Online, customers are discovering and inventing new ways to share relevant knowledge, with blinding speed. Markets are getting smarter — and getting smarter faster than most companies can react.

Whether explaining or complaining, this online communication is natural, open, honest and often surprising. Pharma must become a valued partner in these important dialogues — establishing strategic listening/discussion posts and interacting with its targeted communities — not as a one-time effort but as an ongoing strategic program. Understanding the online voice and underlying subjective requirements, and determining how to relate with it, will increasingly drive success.

Tomorrow’s commercial leaders will be agile, always ready to adapt and change, able and willing to adapt the value proposition to evolving customer needs and value requirements while maintaining a vigilant eye on changing regulatory guidelines. Tomorrow’s leaders will display the ability to make intelligent and informed commercial investment trade-off decisions, weighing-up and optimizing alternatives, across brands, stakeholders and channels.

Keith ForsythErnst & Young Ltd.

A closer look

Risk management in 3.0

Risk management is not about eliminating risk. It is about having the controls in place that allow you to take the new curves in the road faster. In 3.0, pharma companies will need to enhance processes to manage risks that will be heightened because of several factors:

• � New partners. Innovation in Pharma 3.0 will require extensive partnering. To some extent, this builds on a trend already seen in Pharma 2.0, where companies have been increasing their reliance on third parties such as contract research organizations, contract manufacturing organizations and other drug companies. In Pharma 3.0, however, pharma

companies will be partnering with not just more entities, but more kinds of entities. As they collaborate with organizations ranging from IT firms and telecommunications companies to governments and nonprofit organizations, pharma will increasingly be relying on entities with very different regulatory backgrounds and cultures. In a highly regulated industry like pharma, companies will need adequate processes to ensure that the actions of their partners do not expose them to excessive financial, regulatory and reputational risk.

• � New data. Pharma 3.0 will see a tremendous expansion in the quantity of health data generated, and much of this data will reside in different settings. As pharma companies partner

72 Progressions 2011

with others to develop solutions around this data, they will be exposed to risks related to the privacy and security ofthat data.

• � New platforms. Social media platforms for interacting with patients and physicians represent a tremendous opportunity for developing patient-centric insights and solutions. However, companies face an uncertain regulatory environment in these channels and new uncertainties around how they communicate information to others.

“We will need to focus on educating our partners about regulatory and other rules in the pharma industry,” says Monika Pieroth, Corporate Health Care Compliance Officer at Boehringer Ingelheim. “Many of these non-traditional partners come from less regulated — or differently regulated — worlds.”

Managing risk in Pharma 3.0 will require building a new framework, along the following lines:

• Redefining boundaries. Enterprise risk management (ERM) as it exists today is — as the name would suggest — a control environment to manage what happens within the four walls of an enterprise. But as they operate in a world of communities, networks and portfolios of partners, companies will need to think more and more about “extraprise” risk management and focus on the universe of risks that exist beyond their boundaries.

• Identifying new risks. Venturing into unfamiliar territory exposes one to unfamiliar risks. Therefore, as companies experiment in innovative new business models to develop radically different market offerings, it will be critical to identify new uncertainties and risks that may rise in these spaces. This will need to be done across the four broad risk categories: strategic, operational, compliance/regulatory and financial. Since these categories may be differentially affected by different business models, companies will need to identify and prioritize the most significant ones.

• Delineating responsibilities. It will be important to determine who is responsible for different risks across the extraprise. This will be a function of contractual arrangements and will be at least partly driven by the different expertise and capabilities that various partners have. Having said that, there is a fine line between legal risk and reputational risk for pharma.

• Managing governance, risk and controls. Effectively managing risks across the extraprise will require robust governance mechanisms. New controls, processes, policies and standards will be required, and these will need to be customized for different business models and market offerings. Ongoing monitoring for regulatory compliance and controls will be critical, though in many cases regulations may not even currently exist, since regulators are still trying to figure out how to address new technologies and platforms. Even in the absence of clear guidance from regulators, companies will still need to develop guidelines. Effective risk management will need to be conducted at the front lines — by the people at the business units and support function levels within pharma companies and (or) their alliance partners. It will be important to ensure that people throughout the extended enterprise are conducting similar activities in a similar manner.

One of the biggest challenges for Pharma 3.0 companies is to continue with the risk/return paradigms of Pharma 2.0 while at the same time challenging the assumptions that keep you safe in 2.0, to allow the experimentation necessary in 3.0. The “art” of effective GRC happens when we see that proven 2.0 policies and procedures don’t automatically preclude the experimentation in new models — experimentation that involves heretofore “no-nos” such as side-by-side diagnosing and dispensing, interactive conversations with patient communities discussing symptoms and treatments, and hosting sites that offer insights on your products as well as the competition’s.

73

What’s next?Guiding principles for building Pharma 3.0Connect information. Develop insights. Information is the currency of Pharma 3.0. But data itself is not the answer. Real solutions — built on actionable insights — require connecting information across disparate sources. The algorithm is the future.

• �How are you identifying and developing new capabilities to extract insights from Pharma 3.0’s vast pools of disparate data?

• Is your approach to the data-driven 3.0 ecosystem one of “information technology” or “information strategy”?

• �How are your IT executives connected to strategy development? Are they active players and coaches to the business?

Build and operate multiple business models — simultaneously.Pharma 3.0’s diverse customers and diverse markets require diverse business models. But building, resourcing and operating a portfolio of models isn’t ad hoc. It’s systematic and scalable.

• How will you make investment decisions and manage the performance of your 3.0business models?

• �What is your approach to managing risk as you venture into the uncharted territory ofPharma 3.0?

Collaborate — in new ways and with new partners.Diverse business models require diverse capabilities. No single entity has everything it will take. Companies will collaborate with very different players — leveraging each others’ strengths and existing investments.

• Do you have the right teams in place to engage in radical collaboration?

• �What are your strategies for engaging customers and other stakeholders as co-creators?

• How are you working to attract non-traditional partners and become a “super node” inthe ecosystem?

Stop pitching. Start engaging.In Pharma 3.0, it’s not about you — it’s about everyone else. New communities turn roles and expectations on their head. Customers become co-creators — and demand to be listened to, not pitched at. Building trust — with personalized value and unbiased actions — is paramount.

• �How are you changing incentives, guidelines and procedures to encourage your front-line professionals to engage, rather than simply pitch or extract value?

• How are you managing the new risks created by these new modes of interaction?

Disrupt the “value network.”Pharma 3.0 won’t just happen. It will require a whole new “value network” — incentives, metrics and standards that are truly aligned to health outcomes. And that will require coordinated action.

• �How are you working with others to establish new metrics and standards aroundhealth outcomes?

74 Progressions 2011

Index of chartsThe number of Pharma 3.0 initiatives increased by 78% in 2010 2

There’s an app for that: investments in smartphone apps soared in 2010 3

Seeking unmet needs: investments diversified across disease categories in 2010 5

Building Pharma 3.0 23

The value pathway: a simplified example for diabetes 46

A scenario planning approach 63

A capital agenda for pharma companies 64

Governance, risk and controls framework for Pharma 3.0 70

75

AcknowledgmentsProject leadership

Carolyn Buck Luce, Ernst & Young’s Global Pharmaceutical Leader, provided the overall sponsorship, strategic vision and guidance for this project. Progressions reflects Carolyn’s fine strategic instincts and years of experience working with pharmaceutical companies. Carolyn guided the development of key themes and provided valuable input on drafts.

Gautam Jaggi, Managing Editor of the publication, developed many of the key themes and points of view. Gautam gave the publication its overall shape, wrote and/or edited the articles and was ultimately responsible for its content and quality. He also helped shape the data collection and charts.

As the Lead Contributor to the project, Frank Kumli brought his extensive insights and knowledge about the industry to bear in developing perspectives and points of view. Among other things, Frank led the development of the “A closer look” articles, the diabetes value pathway chart and much of the data collection.

Sue Lavin Jones, who served as Project Manager, was responsible for keeping the project running smoothly. Among other things, Sue allocated resources, delegated responsibilities, identified and addressed bottlenecks and managed the project timeline. Sue also edited the “Strategy roundtable” article and handled many editorial, procedural and logistical matters.

Strategic direction

Special thanks to Patrick Flochel and Glen Giovannetti, who played a key role in the development of this publication by providing invaluable strategic insights based on their long experience. Glen and Patrick read drafts and provideduseful feedback.

Strategic insights were also provided by members ofErnst & Young’s Life Sciences Advisory Board, including:Richard Barker (Association of the British Pharmaceutical Industry); Earl Collier (deCODE Genetics); Wendy Everett (NEHI); Gianrico Farrugia (Mayo Clinic); Panos Kanavos (London School of Economics); Hannah Kettler (The Bill and Melinda Gates Foundation); Roger Longman; David Norton (Johnson & Johnson); Susan Silbermann (Pfizer); and Catherine Sohn (Sohn Health Strategies).

Data analysis

Research, data collection and analysis was primarily conducted by Shraddha Arora, Namrita Negi and Amit Malik, including data on Pharma 3.0 investments by pharma companies and non-traditional players and research on regulatory developments and “big data” trends. Frank Kumli helped guide much of the data collection and worked with Shraddha to develop the diabetes value pathway. Gautam Jaggi provided input and helped extract and communicate insights through the charts.

Shraddha Arora, Namrita Negi and Amit Malik conducted fact checking for the entire publication. Jason Hillenbach conducted quality review of the pharma initiatives data.

Writing and editing assistance

The four main chapters were written by Gautam Jaggi, with assistance from Frank Kumli and Carolyn Buck Luce. Various Ernst & Young professionals also helped write certain sections of Chapter 4, including Jeffrey Greene (Capital strategy), Sushiel Keswani (Business model innovation), Mal Postings (Information strategy), Jeffrey Steinberg (Governance, risk and controls) and Gregg Sutherland (Performance management). Gautam Jaggi and Sue Lavin Jones served as ghostwriters for many of the guest contributions in this year’s report.

Russ Colton was the copy editor for this project. He also proofread the document.

Sue Carrington helped write some of the articles. Linda Cyr, Andrew Forman and Jason Hillenbach also provided writing/editing support.

Market insights

Several Ernst & Young professionals provided valuable insights that were instrumental in developing perspectives for this year’s Progressions. These include: Ted Acosta, Michael Dalla Torre, Dan Fracas, Tom Madden, Sandee Priser, Andy Rusnak, Ram Sathyanarayana, Matthias Schmusch, John Smart, Pamela Spence, Trent Tishkowski and Melissa Whitmann.

Design and layout

George Stainback was the lead designer for this project.Dennis Ryan assisted with design and layout. Andrew Willow helped select the cover image.

Marketing and support

Public relations efforts related to the book and its launch were led by Sue Lavin Jones, Bijal Tanna and Samantha Sims. The PR firm of Feinstein Kean Healthcare served as an integral partner, led by Greg Kelley and Dan Quinn.

Alison DeCourcey, Kim Medland, Sandra Hess and Rebekah Craig helped with various logistical aspects of the project.

.

76 Progressions 2011

Global life sciences contacts

Global Pharmaceutical Leader Carolyn Buck Luce carolyn.buck-luce@ey.com +1 212 773 6450

Global Biotechnology Leader Glen Giovannetti glen.giovannetti@ey.com +1 617 585 1998

EMEIA Life Sciences Leader Patrick Flochel patrick.flochel@ch.ey.com +41 58 286 4148

Global Life Sciences Tax Leader Neil Byrne neil.byrne@ie.ey.com +353 1 221 2370

Global Life Sciences Transaction Advisory Services Leader Jeffrey Greene jeffrey.greene@ey.com +1 212 773 6500

Global Life Sciences Assurance Partner Connie Austin connie.austin@ey.com +1 617 585 1912

Australia Winna Brown winna.brown@au.ey.com +61 7 3011 3343

Austria Isabella Schwartz-Gallee isabella.schwartz-gallee@at.ey.com +43 1 21170 1072

Erich Lehner erich.lehner@at.ey.com +39 055 552 4478

Belgium Thomas Sileghem thomas.sileghem@be.ey.com +32 2774 9536

Brazil Jose Francisco Compagno jose-francisco.compagno@br.ey.com +55 11 2112 5215

Canada Paul Karamanoukian paul.karamanoukian@ca.ey.com +1 514 874 4307

China Stanley Chang stan.chang@cn.ey.com +86 10 5815 3628

Commonwealth of Independent States (CIS) Dmitry Khalilov dmitry.khalilov@ru.ey.com +7 495 755 9757

Czech Republic Magdalena Soucek magdalena.soucek@cz.ey.com +420 225 335 600

Denmark Benny Lynge Sørensen benny-lynge.soerensen@dk.ey.com +45 35 87 25 25

Finland Timo Virkilä timo.virkila@fi.ey.com +358 207 280 190

France Virginie Lefebvre-Dutilleul virginie.lefebvre-dutilleul@ey-avocats.com +33 1 55 61 10 62

Pascale Auge pascale.auge@fr.ey.com +33 1 46 93 77 23

Germany Elia Napolitano elia.napolitano@de.ey.com +49 89 14331 13106

Siegfried Bialojan siegfried.bialojan@de.ey.com +49 621 4208 11405

India Hitesh Sharma hitesh.sharma@in.ey.com +91 22 6665 5000

Ireland Nick Redmond nick.redmond@ie.ey.com +353 1 221 2322

Israel Yoram Wilamowski yoram.wilamowski@il.ey.com +972 3 623 2519

Italy Lapo Ercoli lapo.ercoli@it.ey.com +39 02 7221 2546

Japan Hironao Yazaki yazaki-hrn@shinnihon.or.jp +81 3 3503 2165

Korea Yong Sup Hyun yong-sup.hyun@kr.ey.com +82 2 3787 6762

Mexico Federico Aguilar federico.aguilar@mx.ey.com +52 555 283 1447

Netherlands Thomas Sileghem thomas.sileghem@be.ey.com +32 2774 9536

New Zealand Jon Hooper jon.hooper@nz.ey.com +64 9 375 2670

Norway Willy Eidissen willy.eidissen@no.ey.com +47 73 54 68 80

Poland Mariusz Witalis mariusz.witalis@pl.ey.com +48 225 577950

Singapore Swee Ho Tan swee.ho.tan@sg.ey.com +65 6309 8238

Southeast Europe Themis Lianopoulos themis.lianopoulos@gr.ey.com +30 210 288 6417

Spain Silvia Ondategui Parra silvia.ondateguiparra@es.ey.com +34 933 663 740

Sweden Björn Ohlsson bjorn.ohlsson.uppsala@se.ey.com +46 18 19 42 22

Switzerland Patrick Flochel patrick.flochel@ch.ey.com +41 58 286 4148

Jürg Zürcher juerg.zuercher@ch.ey.com +41 58 286 84 03

Turkey Erdal Calikoglu erdal.calikoglu@tr.ey.com +90 212 368 5375

United Kingdom Pamela Spence pspence2@uk.ey.com +44 20 7951 3523

Ian Oliver ian.oliver@uk.ey.com +44 11 8928 1197

United States Carolyn Buck Luce carolyn.buck-luce@ey.com +1 212 773 6450

Glen Giovannetti glen.giovannetti@ey.com +1 617 585 1998

Assurance | Tax | Transactions | Advisory

Ernst & Young

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

For more information, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

About Ernst & Young’s Global Life Sciences CenterLife sciences companies are facing challenging but promising times, as business models evolve, stakeholder expectations increase, new markets emerge, demographics shift, new technologies flourish, populations age and health care expendituresrise. Ernst & Young’s Global Life Sciences Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. The Center is there to help you meet your goals and execute for success. It’s how Ernst & Young makes a difference. For more information, please visit www.ey.com/lifesciences or email global.lifesciences@ey.com.

© 2011 EYGM Limited. All Rights Reserved.

EYG No. CW0071

CSG com 1012-1215231

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.