pharma 2020: challenging business models

8/14/2019 Pharma 2020: Challenging business models

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Pharma 2020: Challenging business modelsWhich path will you take?

Pharmaceuticals and Lie Sciences



Table of contents

Pharma2020:Thevision #

Pharma 2020: The visionWhich path will you take?*

Pharmaceuticals

*connectedthinking Pharma 2020: Virtual R&D 1

Pharma 2020: Virtual R&D

Which path will you take?

Pharmaceuticals and Life Sciences

Pharma 2020: Marketing the futureWhich path will you take?

Pharmaceuticalsand Life Sciences

Previous publications in this series include:

This report, published in June 2008,explores opportunities to improve the R&Dprocess. It proposes that new technologieswill enable the adoption o virtual R&D; andby operating in a more connected world theindustry, in collaboration with researchers,governments, healthcare payers and

providers, can address the changing needso society more eectively.

Published in February 2009, this paperdiscusses the key orces reshaping thepharmaceutical marketplace, includingthe growing power o healthcare payers,providers and patients, and the changesrequired to create a marketing and salesmodel that is t or the 21st century. These

changes will enable the industry to marketand sell its products more cost-eectively,to create new opportunities and to generategreater customer loyalty across thehealthcare spectrum.

Published in June 2007, this paperhighlights a number o issues that willhave a major bearing on the industry by2020. The publication outlines the changeswe believe will best help pharmaceuticalcompanies realise the potential the utureholds to enhance the value they provide to

shareholders and society alike.

“Pharma 2020: Challenging business models” is the ourth paper in the Pharma 2020 series on the uture o the pharmaceutical industry to bepublished by PricewaterhouseCoopers. This publication highlights how Pharma’s ully integrated business models may not be the best option or thepharma industry in 2020; more creative collaboration models may be more attractive. This paper also evaluates the advantages and disadvantages othe alternative business models and how each stands up against the challenges acing the industry.

All these publications are available to download at: www.pwc.com/pharma2020


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Table o contents

Introduction 1

Proting alone versus proting together 1

Harking back to the uture 2

Reading the signs 2

Broadening the value proposition and managing the value chain 4

Choosing between dierent collaborative models 6The ederated model•

The virtual variant o the ederated model•

The venture variant o the ederated model•

The ully diversied model•

Charting a successul course 12

Conclusion 13

Acknowledgements

Reerences 17



Table of contents


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Introduction

The pharmaceutical marketplaceis undergoing huge changes, aswe indicated in “Pharma 2020:The vision”, the White Paper

PricewaterhouseCoopers* published inJune 2007.1 These changes will have amajor bearing on the kind o businessmodels pharmaceutical companies

need to employ.

Most Big Pharma companies havetraditionally done everything rom researchand development (R&D) through tocommercialisation themselves. But we

predict that, by 2020, this model willno longer work or many organisations.I they are to prosper, they will need to

improve their R&D productivity, reducetheir costs, tap the potential o the

emerging economies and switch romselling medicines to managing outcomes– activities ew, i any, companies canaccomplish on their own.

Even the largest pharmaceuticalcompanies will have to collaborate withother organisations to develop eectivenew medicines more economically,

help patients manage their health andensure that the products and services

they provide really make a dierence.Moreover, they may have to step aroutside the sector to nd some o the

partners they need.

We believe that two principal businessmodels – ederated and ully diversied– will emerge, as Pharma prepares orthe uture. We also think that the currenteconomic downturn will accelerate

the shit to these new models, both byreinorcing one o the key causal actors– the pressure on healthcare payers

to maximise the value they get or themoney they spend – and by opening up

new opportunities to build or buy thenetworks that will be required.

In the ollowing pages, we shall lookat the main trends dictating the needor a more collaborative approach. Weshall also evaluate the advantages anddisadvantages o the alternative businessmodels and how each stands up againstthe challenges acing the industry.

Profting alone versus

profting together

Big Pharma’s traditional business modelhinges on the ability to identiy promisingnew molecules, test them in large clinicaltrials and promote them with an extensivemarketing and sales presence (seesidebar, What is a business model? ). In

the predominant version o this model, asingle company may employ contractorsto supplement its own eorts, but itseeks to generate profts on its own. Inessence, it pursues what might be calleda “proft alone” path.

But, by 2020, the strategy osinglehandedly placing big bets on aew molecules, marketing them heavily

and turning them into blockbusters willnot suce. As J.P. Garnier, ormer chie

executive o GlaxoSmithKline, recently

pointed out, it is a “business modelwhere you are guaranteed to lose yourentire book o business every 10 to

12 years”.2

More importantly still, it is a business

model that will no longer meet themarket’s needs. Management guru

Clay Christensen has convincinglydemonstrated how disruptive

innovations in various industries havedismantled the prevailing business

model, by enabling new players to

target the least protable customersegments and gradually move upstreamuntil they can satisy the demands o

every customer – at which point the old

business model collapses.3

Pharma is currently undergoing just

such a period o disruptive innovation.

By 2020, most medicines will be

paid or on the basis o the results

they deliver – and since many actors

infuence outcomes, this means that

it will have to move into the health

management space, both to preserve

the value o its products and to avoid

being sidelined by new players. I it is to

make groundbreaking new medicines

or which governments and health

insurers are prepared to pay premium

prices, it will also have to build the

relationships and inrastructure required

to ensure that it can get access to the

outcomes data they collect.

In short, no pharmaceutical company

will be able to “prot alone”. It will,

rather, have to “prot together”,

by joining orces with a wide range

o organisations, rom academic

institutions, hospitals and technology

providers to companies oering

compliance programmes, nutritional

advice, stress management,

physiotherapy, exercise acilities, health

screening and other such services.

What is a business model?

The term “business model” is usedto encompass a wide range o ormaland inormal descriptions o the coreelements o a business. We haveused the term in the ollowing sense:“A company’s business model is the

means by which it makes a proft –

how it addresses its marketplace, the

oerings it develops and the business

relationships it deploys to do so.”

*‘PricewaterhouseCoopers’ reers to the network o member rms o PricewaterhouseCoopers International Limited, each o which is a separate andindependent legal entity.


http://slidepdf.com/reader/full/pharma-2020-challenging-business-models 6/242 PricewaterhouseCoopers

Harking back to the

uture

O course, some pharmaceutical

companies have already tried to

collaborate with other organisations.

Rhone-Poulenc Rorer (now part osano-aventis) created RPR Gencell, the

world’s rst biotechnology network, in

1994.4 Many o the largest companies

also established disease management

programmes in the 1990s, although

most o them were not very successul

– primarily because healthcare

payers were sceptical about industry-

sponsored disease management.5

So we are not suggesting that the

dierences between these early eorts

and the business models that are likelyto prevail in 2020 will be completely

black and white. Nevertheless, we think

that two key dierences will apply.

First, the technological and cultural

pre-conditions to acilitate collaboration

are now in place. In the mid-1990s, the

Internet was still in its inancy and many

o the tools that enable collaboration did

not exist. Today, however, such tools are

plentiul and the wider business culture

has changed dramatically. IBM, Apple,

Amazon and their ilk have demonstratedthe power o open platorms,

transormed corporate attitudes

towards networking and shown that it is

possible to reap much richer rewards by

proting together than by proting alone

(see sidebar, Apple’s core strategy o

collaboration ).6

Second, by 2020, collaboration

will be a “do or die” requirement

or pharmaceutical companies and

healthcare payers alike. It will be

essential or pharmaceutical companies

to develop eective new medicines

and address the demands o payers

increasingly well equipped to measure

what they are getting or their money;

and essential or payers to cope with

rapidly escalating healthcare costs.

Reading the signs

Various orces are changing the

environment in which Pharma operates

and the relative positions o the dierent

players in the healthcare arena. These

trends all point towards the need or

much greater collaboration (see Figure 1 ).

The global healthcare bill is soaring,

as the population ages, new medical

needs emerge and the disease burdeno the developing world increasingly

resembles that o the developed world.

Hence the act that governments

and health insurers everywhere are

struggling to contain their expenditure.

The issue is urther exacerbated by the

current economic turmoil that will put

even greater nancial pressure on the

payer community.

Healthcare payers in the industrialised

economies are already mandating

what doctors can prescribe. The

British National Health Service has

also introduced a fexible pricing

scheme under which the prices o

new medicines can be lowered or

lited, depending on the outcomes

they deliver.7 And US President

Barack Obama’s administration is

moving towards opening up the US

market to much greater competition

rom generics, as well as allowing the

importation o cheaper medications

rom “sae” countries.8

Apple’s core strategy o

collaboration

Collaboration is not just a toolor doing the same things moreeectively. At its most powerul, itcan reshape an entire market, as Apple has shown. Apple redened themobile music sector by outsourcingthe production o the devices andaccessories, while retaining control othe iTunes sotware. In other words,it recognised that it could makemoney by creating and orchestratinga network o relationships – bycontrolling, rather than owning.

Apple used three specic tacticsto change the rules o the game. Itenhanced the mobility o the partso the sector in which it has nopresence, by establishing a smallset o suppliers who know that theycan be replaced at any time. It madeitsel into a bottleneck, by holdingonto the music ormat and ensuringthat les compatible with iPod canonly be played on iPod devices. And it redened who did what, byencouraging other companies todevelop accessories rather thanentering the accessories market

itsel. This has enabled it to benetrom the eorts o those that supportits architecture, without making anycapital commitment itsel.



The developing world will soon come

under equal pressure. The emerging

economies will experience the most

rapid growth in demand or medicines

over the next 11 years, but many (i not

all) o them will struggle to und this

demand. The Chinese government has,

or example, undertaken to introduce

a universal healthcare system with a

level o cover that does not exceed

the country’s current economic

development. However, it is hard to see

how the plan will not entail a substantial

increase in China’s healthcare costs.9

Healthcare payers in both the

developed and developing worlds are

also beginning to measure outcomes

much more careully and to emphasise

the importance o prevention. By 2020,

they will expect the industry to go

“beyond the medicine” by providing

prophylactics and healthcare packages

designed to help patients manage their

health. Moreover, patients will play a

much bigger role in determining how

they are treated, as the money they

spend on medicines likewise rises

and the Internet gives them access to

more inormation. Armed with insights

Figure 1: The key trends now emerging and their implications or Pharma

Health and healthcare trends Scientific and technological trends

Pharma will need to go “beyond the

medicine”

R&D will need to go beyond the lab

Trends

Implications

Market trends

The Pharma and healthcare value chains

will become much more intertwined

Business models based on collaboration

• Pharma will be paid for outcomes,not products

• Outcomes data will drive healthcare

policy

• Prevention will gain a higher healthcare

profile

• Pharma will need to offer “medicine-

plus” packages of care

• Pharma will have to adopt more flexiblepricing strategies

• Pharma will need access to outcomesdata

• Pharma will have to work with

technology vendors to virtualise R&D

• Pharma will need a wider, more

multi-disciplinary skills base

• Pharma will need to expand its

presence in Asia

• Pharma will need to demonstrate “real”

value-for-money

• Pharma will have to work more closelywith the regulators

• Pharma will have to collaborate with

payers and providers to perform

continuous trials

• Pharma will have to collaborate with

numerous service providers to deliver

packages of care

• R&D is becoming more virtualised

• The research base is shifting to Asia

• Remote monitoring is improving rapidly

• The burden of – and bill for – chronic

disease is soaring

• Healthcare payers are establishing

treatment protocols• Pay-for-performance is on the rise

• The boundaries between different forms

of care are blurring

• Financial constraints on payers are

increasing

• Patients are becoming better informed

• Patients are picking up a bigger share

of the bill

• Demand for personalised medicine isincreasing

• Patients want cures, not treatments

• The emerging markets are becoming

more important

Source: PricewaterhouseCoopers



gleaned rom educational websites,

discussion groups and blogs, they willnot only want better, saer medicines,

they will also want a range o satellite

services they can tailor to theirindividual needs.

I Pharma is to accommodate thesechanges in the marketplace, it will have

to collaborate much more extensively– as it will, indeed, to capitalise on

some o the scientic and technologicaltrends that are now emerging. The

research base is shiting, or example.Non-OECD economies accounted or

18.4% o the world’s R&D in 2005, up

rom 11.7% in 1996. The number opatents led by Asian researchers also

increased signicantly over the sameperiod, albeit rom low levels.10 So theindustry will have to orge much closer

links with the most reputable centres oscientic excellence in these countries.

Meanwhile, new technologies areproviding new sources o knowledge.

Home surveillance systems, portable

devices and implants, linked to onlineand wireless networks, will acilitate

the monitoring o patients on a real-time basis outside a clinical setting.

But i Pharma is to get access to the

outcomes data remote monitoringgenerates, it will have to collaboratewith the hospitals and clinics that

capture this inormation.

Technological advances will likewise

enable the virtualisation o large partso the R&D process, as we explained in

“Pharma 2020: Virtual R&D”.11 Some othe leading pharmaceutical companies

are already exploring the potential osemantic technologies and computer-

aided molecule design. Various

academic institutes and bioinormaticsrms are also building computer modelso dierent organs and cells, with the

ultimate aim o creating a “virtual man”.

But developing such a model will require

a monumental collaborative eort ar

exceeding that required to complete the

Human Genome Project.12

The economic case or change isclear. The decline o revenue growthand margins result in reduced

shareholder returns which will orcepharmaceutical companies to adapt.There is a compelling case or increasedcollaboration. Delivering drug therapiesto payers and patients in a 2020 worldwill require new skills, technologies andchannels - the inrastructure required willbe uneconomic or anyone, other thanthe largest players, to build internally.

To sum up, the key social, economicand technological changes currentlytaking place in the pharmaceutical and

healthcare arena will all necessitate thedevelopment o multinational, multi-disciplinary networks drawing on amuch wider range o skills than Pharma

alone can provide. The constraintsthat previously hindered organisationsrom collaborating over distance aresimultaneously evaporating – paving the

way or the use o new business models(see sidebar, Emerging collaborative

networks ).13 In the next sections, we shall

look at the implications o broadening the

value proposition, the various models thatexist and the dierent opportunities andrisks they present.

Broadening the value

proposition and

managing the value chain

Pharma currently creates value by

developing new medicines (and a

relatively limited number o diagnostics).Collaborating much more closely with

the key stakeholders in the healthcare

sector will enable the industry both

to expand its remit and to align its

Emerging collaborative networks

Several pharmaceutical rmshave already begun to use morecollaborative models. One suchinstance is Lilly, which is currentlytransorming itsel rom a traditional

ully integrated pharmaceuticalcompany into a ully integratedpharmaceutical network, so that it candraw on a wide range o resourcesbeyond its own walls. Lilly hopes thatteaming up with other organisationsto create virtual R&D programmeswill enable it to get better access toinnovation, reduce its costs, managerisks more eectively and enhanceits productivity. For example, theChorus Project is a virtual organisation

to take molecules quickly to Prooo Concept. Lilly also uses externalnetworks comprising third parties suchas Piramal Lie Sciences, HutchisonMediPharma, Suven Lie Sciences orthe development o molecules.

Swiss biopharmaceutical developmentspecialist Debiopharm has pioneered amore radical approach. The companyin-licenses promising new candidatesrom academic institutes and biotechcompanies, develops them and then

out-licences them to Big Pharma.Debiopharm’s successes include threeproducts with combined global saleso more than US$2.6 billion in 2007.

Most o the collaborative models thatcurrently exist are limited to R&D. Butit is easy to envisage various otherpermutations, including networksocusing on dierent therapeuticareas and covering everything romR&D through to sales and marketing;networks ocusing on dierent

enabling technologies, such asgenomics, proteomics and stem cellresearch; and networks ocusingon the management o outcomes inspecic patient segments.



Choosing between

dierent collaborative

models

One vital question remains, however;

namely, what sort o model should

companies use to eect these changes? We believe that two principal models

– ederated and ully diversied – will

emerge. We have also identied two

variants o the ederated model. In the

virtual version, a company outsources

most or all o its activities; in the

venture version, it manages a portolio

o investments (see Figure 3 ). The two

models are not mutually exclusive. A

ully diversied company might choose

to use a ederated model or certain

aspects o its business, and vice versa.

But we think that the ederated model

will ultimately dominate, primarily

because it is quicker and more

economical to implement.

The ederated model

In the ederated approach, a company

creates a network o separate

entities with a common supporting

inrastructure. These might include

universities, hospitals, clinics,

technology suppliers, data analysis

rms and liestyle service providers

based in numerous countries. They

might also include business units rom

within the company itsel, which it

places at “arm’s length” (see Figure 4 ).

The various participants have a mutualgoal – such as the management o

outcomes in a given patient population.

They also share unding, data, access

to patients and back-oce services,

and this interdependence is the

glue that holds them together. They

are rewarded or their eorts using

measures like increased lie expectancy

Virtual Variant Venture Variant

Owned: Fully Diversified ModelCollaborative: Federated Model

• Network of separate entities

• Based on shared goals & infrastructure

• Draws on in-house and/or external assets

• Combines size with flexibility

• Network of contractors

• Activities coordinated by one company

acting as hub

• Operates on project-by-project basis

• Fee-for-service financial structure

• Portfolio of investments

• Based on sharing of intellectual property/

capital growth

• Stimulates entrepreneurialism & innovation

• Spreads risk across portfolio

• Network of entities owned by one

parent company

• Based on provision of internally integratedproduct-service mix

• Spreads risk across business units

Figure 3: The dierent business models




or quality-adjusted lie years. And each

is rewarded in a manner that refects

the evidence base or the contribution it

has made (see sidebar, How should the

cake be sliced? ).15

The ederated model provides a

ramework or creating integratedpackages o products and services, and

thus diversiying beyond a company’s

core oering. It also combines the

benets o nimbleness and size. It

would enable each player to build a

specic area o expertise, establish a

competitive advantage as a result o

that expertise and sell its products,

knowledge or skills, leaving activities

that are better perormed by others to

its partners within the ederation.

More importantly still, the ederatedmodel might encourage greater

cross-ertilisation and deliver bigger

improvements in perormance, without

oreiting any fexibility. The stronger

members o the network could help

the weaker ones to improve – since

ederations have an incentive to perorm

well as a whole – but they could also

replace any participant that persistently

underperorms.

Federation

T e c h n o

l o g y

G e n e r i c

s

C o m p

l i

a n c e

M a n a g

e m e n t

C e n t r e

s

W

e i g h t

F i t n e s s C

l u b s

Compan y

U n i v e

r s i t i

e s

C l i n

i n c s

H o s

p i

t a l

s

P h y

s i o t h

e r a p

y

An a l y s t s

D a t a

S u p p l i

e r s

C a

l l

C e n t r e

M a n u f a

c t u

r e r s

P har maceu t i c a l

C e n t r e

s

Figure 4: The ederated model

How should the cake be sliced?

It may sometimes be hard to measurethe value dierent participants have

created or two reasons. First, theparties in any collaboration typically

value the contributions they havemade more highly than those o their

partners. This is a problem that canbe solved with watertight contracts,

robust perormance indicators, goodgovernance and a proper audit trail.Second, assessing the impact o

dierent orms o intervention can bevery dicult indeed.

Medicines, diet and exercise all play

a role in managing cardiovasculardisease, or example, but precisely how

much? Various studies have establishedsome parameters. They show, or

instance, that high-requency exercise

can improve the cardio-respiratory

tness o patients with heart disease

by at least 10% – and that, in turn,

can reduce the mortality rate by 15%.

We believe that many more studies

to evaluate the eectiveness o non-

pharmacological interventions will be

conducted in uture, as healthcare

payers everywhere ocus more heavily

on preventative measures.

This approach is essentially a more

complex variant o the co-development

and co-distribution agreements we have

today. In order or companies to work

better collaboratively it is essential todene upront measurable components

o delivery and value.

Dening the value provided by each

player in the ederation will then inorm

how each party should be rewarded -

this will be a combination o theoretical

analysis and monitoring o outcomes

and benets to the patient. Clearly

to avoid the risk o litigation or the

constraints o exclusivity, the ederation

needs to be underpinned by mutualtrust between all parties. However, there

are several examples o where this has

worked eectively such as a ranchising

model where the value o a brand is

measured and rewarded.




Table of contents

8 PricewaterhouseCoopers

The virtual variant o the ederated

model

In the virtual variant o the ederated

model most or all o a company’s

operations are outsourced and the

company itsel acts as a management

hub, coordinating the activities oits partners (see Figure 5 ). Several

industries have already adopted

some aspects o this model. The

semiconductor industry typically

outsources its manuacturing in

order to concentrate on product

development, or example, and a

number o companies in the medical

devices sector are now ollowing suit.16

Similarly, strategic outsourcing o

design and manuacture to suppliers

has redened manuacturing unctionswithin industries such as aerospace,

computing and electronics.

Most large pharmaceutical companies

also use external contractors to

supplement their in-house resources,

but very ew rms have gone any

urther (see sidebar, Shire’s virtual

vision ).17 There are very good reasons

why pharmaceutical companies should

outsource their R&D, manuacturing

and promotional activities where third

party alliances can provide a widerrange o opportunities, specialist

skills and market access. A pharma

company can then ocus on the value

adding unctions where they can

leverage on their relationships, scale

and market knowledge – i.e., project

management, business development,

regulatory aairs, intellectual property

management and the ormation o good

relationships with key opinion leaders

Management

Hub

R e searc h

S a l e

s & M

a r

k e

t i

n g

D i s t r i b u t i o

n M

a n u f a

c t u r

i n g

D e

v e

l o p

m e n t

Figure 5: The virtual variant o the ederated model


Shire’s virtual vision

Shire Pharmaceuticals is the epitome o a virtual company. It outsources almosteverything, rom discovery to medical monitoring to data management tostatistics to medical writing. With the exception o its genetic therapy division,every product it develops has been purchased rom an outside source, viain-licensing or acquisition.



and healthcare providers.

The virtual variant o the ederated

model has other advantages, too. It

would enable companies to reduce

their initial capital outlay, convert

some o their xed costs into variable

costs, utilise their resources moreeciently and become more fexible.

Equally important, it might help the

industry leaders to expand into new

product/service areas or geographic

markets without resorting to urther

mega-mergers (and thus acing the

huge challenges associated with

integrating two ormerly separate

entities) or succumbing to the corporate

bureaucracy that so oten strangles

innovation.

However, the virtual variant also comeswith some signicant drawbacks.

The balance o power might shit to

suppliers, as it has done to a certain

extent in the automotive industry,

where a number o Tier 1 suppliers

now manage their own supply chains.

Alternatively, a major supplier might

get into nancial diculties and start

oering an inerior service or even

deault on its obligations altogether.

But such risks can oten be managed

by using multiple suppliers, whereverpossible.

Some pharmaceutical companies

might also see their earnings diluted,

since every participant in the value

chain would expect a return or the

services it provides. Theoretically, this

should not happen, since specialist

contractors typically have lower

costs than integrated pharmaceutical

companies. Indeed, according to one

study, a company that perorms certain

preclinical development activities in-

house can expect to pay more than

double what it would pay i it completely

outsourced these activities to a third

party.18 But a shortage o top-class

service providers or experts in particular

areas such as biological manuacturing

could drive prices up.

The venture variant o the

ederated model

The venture variant o the ederated

model entails investing in a portolio o

companies in return or a share o the

intellectual assets and/or capital growth

they generate, rather than outsourcing

specic tasks. Special purpose vehicles

are sometimes used to manage such

investments, because they oer several

advantages in terms o risk sharing and

intellectual property protection.

A pharmaceutical company might

choose to concentrate its investments

in a particular therapeutic area or

spread them across a number o areas

in order to minimise its risk. At the end

o the investment period, it might either

claim the intellectual property that has

been generated or out-license it to a

third party. Alternatively, the originating

company (or companies) might retain

the intellectual property, commercialise

it and pay the sponsoring company a

return on its investment (see Figure 6 ).

GlaxoSmithKline has used a version

o the venture structure or many

years. SR One, its evergreen und,

was established in 1985 and has

now invested more than US$500m in

some 30 private and public biotech

companies ocusing on drug discovery,

development and delivery.19 Other

Big Pharma companies, such asNovartis and Pzer, have also set up

corporate venture capital unds,20

and AstraZeneca spun o part o its

gastrointestinal research operation

into a new company backed by a

consortium o private equity rms.21

US investment bank Goldman Sachs

Generation of IP

Return of IP to growth company

Out-licensing/In-licensing

Out-licensing

R o y a l

t y p a y m

e n t

I n v e

s t m

e n t

R e t u

r n o f I P

t o

p h a r m

a c e u t i c a l c o

m p a n y

Pharmaceutical

company

Third party

IPGrowth

company

Figure 6: The venture variant o the ederated model




has already dipped a toe in the water

with its own venture und (see sidebar,

Portolio o pills ).22

Nevertheless, all these initiatives

are very small; between 2003 and

September 2006, corporate venture

capitalists invested just over US$1.5

billion in the US lie sciences sector,23

a raction o the estimated US$11-

15 billion the member companies o

the Pharmaceutical Research and

Manuacturers o America spent on

discovery in 2006 alone.24 Most such

ventures are also conned to research,

although the same approach could be

applied to development, manuacturing,

distribution, and marketing and sales.

So what might the venture variant

deliver, i it were implemented on a

much larger scale and extended to

other parts o the value chain? It would

alleviate the unding challenges in the

biotech sector, where companies oten

struggle to raise a second or thirdround o nancing because venture

capitalists want to exit beore they can

commercialise their products. These

challenges have been exacerbated by

the credit crunch and are likely to get

even worse in the current economic

recession.25 It would also allow

promising start-ups to capitalise on

Big Pharma’s experience without being

stifed by a Big Pharma culture – both

trends which might stimulate greater

innovation.

Similarly, it would provide incentives or

traditional contract service providers to

make strategic, long-term investments –

as Lonza did, when it collaborated with

Genentech to build a manuacturingplant in Singapore.26 And it would

enable pharmaceutical companies to

explore numerous new avenues o R&D,

or expand their global manuacturing

and marketing capacity, without

investing too heavily in any one project.

However, venture structures are not

without their challenges. For a start,

the skills involved in managing a

portolio o holdings are very dierent

rom those involved in assessing and

pursuing potential research leads, asis the timerame venture capitalists

use to realise a return. So Big Pharma

would need to recruit people with the

necessary expertise and manage any

conficting objectives very careully.

Moreover, any company that operateda large corporate venture capital undalongside its own research portoliowould have to consider the fnancialimplications very careully. R&Dexpenditure is typically recorded on acompany’s proft and loss statement,or example, whereas investments areregistered on the balance sheet andsubject to annual impairment reviews.This has an impact on how companiesare taxed and on how they are valuedby the stock markets. Similarly, ia company’s risk profle increasesbecause it has less control over researchthat is conducted outside its own walls,its cost o capital will increase.

Goldman Sachs has unded a

new “research pool” into which

pharmaceutical companies could

place a range o experimental

medicines in a single therapeutic area

in early-stage Phase I and II trials.External experts, including scientists,

chemists and clinical research

organisations, would work alongside

scientists rom the originating

companies. The bank argues that this

approach would reduce the costs

and bureaucracy associated with Big

Pharma. It might also allow competing

companies working on similar drugs

to pool their resources, rather than

duplicating each other’s eorts.

In April 2009, GSK and Pzer

announced that they intend to

combine resources to set up a new

spin o rm dedicated to the HIV.

The structure o the deal gives a

majority 85% stake to GSK and 15%

to Pzer with an increase o Pzer’s

stake to 24.5% i all milestones are

reached. The new rm, with a current

revenue o £1.6 billion has a portolio

o 11 products and a drug-discovery

pipeline o 17. R&D services will be

contracted directly rom GSK and

Pzer to develop these drugs with

investment rom the new rm. In

return, the new rm will have exclusive

rights o rst negotiation with respect

to HIV drugs developed by the two

pharma majors. The rationale or the

venture is that the new rm will be

more sustainable and broader as acombined venture and that there are

synergies on the commercial side.

Portolio o pills



The ully diversied model

The ully diversied model is one in

which a company expands rom its

core business into the provision o

related products and services, such

as diagnostics and devices, generics,

nutraceuticals and health management(see Figure 7 ). Johnson & Johnson

is Pharma’s leading exponent o this

approach. It is now the world’s largest

consumer health company, ollowing

the US$16.6 billion acquisition o

Pzer’s over-the-counter business

in December 2006.27 It is also the

third-largest biologics and sixth-

largest pharmaceutical company, has

an extensive medical devices and

diagnostics operation,28 and recently

started building a wellness and

prevention platorm, with the purchase

o HealthMedia, a web-based “health

coach”.29

A number o other companies are now

ollowing suit. Novartis has spent nearly

US$25 billion beeng up its vaccines,

generics and eye-care products

operations over the past three years,or example.30 Roche is drawing on

its expertise in molecular diagnostics

to develop a consumer product test

or measuring indoor allergens.31 And

GlaxoSmithKline has announced plans

to “diversiy and de-risk” by ocusing

more heavily on vaccines, consumer

health and the emerging markets.32

The ully diversied model has several

merits, not least the act that it enables

companies to reduce their reliance on

blockbuster medicines and spread their

risk by moving into other market spaces

with the potential to act as a bulwark

against generic competition. Like

the ederated model, it also provides

a means o moving into outcomes

management by oering combined

product-service packages and playing

to the growing political emphasis onprevention rather than treatment.

In addition to these advantages, it might

oer opportunities both to develop more

powerul brands and to acquire a better

corporate image. Numerous studies

show the extent to which Pharma’s

reputation has declined over the past

decade.33 Supplementing its products with

“wellness” services might help a company

to create a more positive impression,

although it would have to handle its

relations with the regulators, healthcare

providers and patients very careully.

Ethical

Pharmaceuticals

Diagnostics

& DevicesGenerics

Consumer

Health

Health

Management

• Molecular testing

• Clinical biomarkers

• Medical devices

• Branded generics

• Commodity generics

• Super-generics

• Follow-on biologicals

• Over-the-counter

medicines

• Consumer

diagnostics

• Nutraceuticals

Mass-Market

• Primary-care

products (includingpatches, inhalants

and controlled-release

implants)

• Poly-pills

Specialised-Market

• Biologicals

• Orphan drugs

• Vaccines

• Patient education

• Delivery and drug

administrationservices

• Monitoring and

counselling

• Physiotherapy

• Nutritional advice

• Wellnessmanagement


Figure 7: The ully diversifed model



Table of contents

12 PricewaterhouseCoopers

However, the ully diversifed model hasdrawbacks, too. It requires a substantialinvestment in new equipment, premisesand personnel, as well as major culturalchanges, since the provision o productsis very dierent rom the provision oservices. It might also create new risks

by distracting management’s attentionrom the core business – and evenalienate investors, who oten preer tospread risk themselves.

Charting a successul

course

Clearly, the business model, or models,a company chooses will depend onits individual circumstances, includingthe particular challenges it aces, theexpertise it possesses and the marketsin which it wants to operate. A companythat ocuses exclusively on ethicalpharmaceuticals might nd it harderto diversiy than one that is alreadyexperienced in managing multipleareas o activity, or example. Moreover,ederations typically place greaterdemands on senior management thanconventional organisational hierarchies.

Creating and supervising a cross-border, cross-disciplinary networko external relationships can be verytime-consuming – and it is otenmore dicult to identiy, monitor andmanage risks. The various parties mayhave dierent cultural characteristics,dierent ways o communicating anddierent expectations, some o whichmay change over time. An individualmanager’s authority over the other

participants in the network is also likelyto be relatively limited. In a heavilyregulated industry such as Pharma, anydiminution o managerial control hasserious implications. So it is crucial toestablish clear goals and guidelines orthe governance and unding o such

arrangements, and or the division oany intellectual assets they generate,beore signing on the dotted line.

Disrupting the existing order canhave a major impact on a company’sshort-term perormance, too. WhenGlaxoSmithKline established its Centreso Excellence or Drug Discovery,the upheavals the R&D unction wasexperiencing aected its pipeline or atleast 18 months.34

We think that many companies whichchoose the ederated model willthereore adopt a progressive approach.They will start with opportunisticalliances; use the most successulalliances as building blocks to createmore strategic, longer-lasting coalitions;and, nally, use the most successul

coalitions to create a ully ederatednetwork o long-term partners (seeFigure 8 ). Taking incremental stepswill not only help them to identiy theorganisations with which they can workmost eectively, but also give themtime to establish the technological

inrastructure that is essential tomanage the interaces between two ormore dierent parties.

Most companies will also have to recruitor train people with new skills. They will,or example, need researchers who canunderstand commercial imperatives;fnancial analysts who can assessdierent investment opportunities withthe discipline o venture capitalists;senior executives who can negotiateand oversee alliances; supply chainmanagers who can supervise largenetworks o service providers; andhealth economists who can measure thevalue o the contributions the respectiveparties make. Those that choose to enterthe health management space directlywill also have to hire physiotherapists,

Opportunistic

Alliances

Strategic

Coalitions

Full

Federation • Extended alliances

• Medium-term

• Three or more parties

• One-to-manyrelationship

• Closer alignment

• Extended coalitions

• Long-term

• Many parties

• Many-to-many

relationship

• Complete alignment

• Ad-hoc

• Short-term

• Two parties

• One-to-one relationship

• Partial alignment

Figure 8: The path to ederation is likely to be gradual




dieticians, counsellors and numerous

other people with skills that were

ormerly outside Pharma’s domain.

Finding people with the appropriate

expertise will not be easy. Many

companies will thereore have to adopt

new talent management strategies, aswell as ensuring that the perormance

measures and incentive systems they

use support the behaviour they want to

encourage.

Conclusion

Pharma’s ully integrated business

model enabled it to prot alone

or many years – and to prot very

successully, as its track record in

rewarding shareholders shows. The

top companies saw their market

value soar 85-old between 1985 and

2000.35 But this model is now under

huge pressure and, by 2020, it will

not work. I the industry is to improve

its perormance in the lab, reduce its

costs, serve the emerging markets

more eectively and make the transition

rom producing medicines to managing

outcomes – as healthcare payers,

providers and patients are increasingly

demanding – it will have to collaborate

with other organisations, both inside

and outside the sector. It simply cannot

do everything itsel. In addition there is

a clear economic rationale or greater

collaboration (See sidebar, Show me

the money ).

Moreover, many companies will need to

move ast. As the healthcare landscape

changes and scientic expertise

becomes less important than the abilityto manage networks, the scope or

competition rom new entrants will

increase. Several non-pharmaceutical

companies have already entered the

arena. Vodaone has, or example,

joined orces with Spanish telemedicine

provider Medicronic Salud and device

manuacturer Aerotel Medical Systems

to oer a wireless home monitoring

service.36 Similarly, British insurance

Show me the money

There is plenty o evidence pointing to big opportunities or savings to be made through early intervention and tightermanagement o patients and treatments. The ederated model will make these savings more systematic and predictable,rewarding participants based on the value that they create. Aligning risk and incentives appropriately is key to realising thesebenets. For example:

A study by the RAND Corporation estimated the nancial savings rom having 100% participation in disease management•

programmes or our diseases (asthma, chronic obstructive pulmonary disease, diabetes and congestive heart ailure) inthe US. They estimate the net savings to the health system to be $28bn (around 2% o total US health expenditure), withadditional benets to the economy in terms o work days saved.37

Britain’s Audit Commission examined the scale o adverse events in UK hospitals. They ound that 10.8% o patients on•

medical wards experience an adverse event, 46% o which are preventable. One third o the adverse events lead to greatermorbidity or death and cost the UK’s NHS £1.1bn a year.38

The ve most costly conditions collectively account or 32.7% o overall healthcare expenditure. As we highlighted in•

“Pharma 2020: The vision”, improving patient compliance with enhanced treatment regimes by collaborating with othersupport services is a key enabler to drive the healthcare bill down. Further, some commentators have suggested givingpatients nancial incentives to improve compliance.39

In 2009, Cisco Systems reported healthcare cost savings o $2.6m rom a programme o on-site medical clinics covering 6,000•

employees supported by integrated healthcare technology systems, chronic disease management, and health coaching.40



giant Prudential is collaborating withVirgin Active Health Club to oer acritical illness policy that providessubsidised gym membership andrewards people who exercise regularlyby reducing their premiums.41 I theleading pharmaceutical companies

cannot change their business modelsrapidly, such rms may ultimatelyeature more prominently on thehealthcare scene than they themselves.

The transition will not be easy, orcollaborative business models arear more complex than the integratedmodel that has previously prevailed.Moreover, no one model will suit everycompany. Each will need to assessits position, options and uture coursein light o its individual strengths andneeds (see sidebar, Key questions or

senior management ).

However, the prospects or anypharmaceutical company that can makethe switch are very promising. Thepotential or reallocating resources todeliver better outcomes and maximisethe eectiveness o expenditureon healthcare is considerable inmost healthcare systems. Researchrecently completed by Britain’s Audit

Commission shows, or example, thatannual spending on the treatment odiabetes ranges rom less than £8 toover £30 (US$11.9-US$44.6) per head.42 But dierences in the prevalence odiabetes account or only 8% o thisvariation – and higher expenditure does

not result in ewer emergency hospitaladmissions.43

To date, Pharma has ocused on theprots it can earn rom the estimated10-15% o the health budget that goeson medicines.44 Yet there are manyopportunities to generate revenuesby improving the way on which theremaining 85-90% is spent. It is theseopportunities the industry will need toaddress in the brave new world o 2020.

Key questions or senior

management

What is our current business•

model? Does it play suciently toour strengths?

What kind o company do we•

want our company to be?

Will our current business model•

enable us to expand intonew markets – be these newproducts, services or countries– and satisy the expectations oour customers in 2020? I not,what sort o business model willwe need?

What is the size o the gap and•

how can we reduce it as rapidlyas possible?

Do we have a clear picture o the•

opportunities and risks entailedby each o the alternativesavailable to us?

Do we have a plan in place that•

will enable us to move orwardquickly, while maximising theopportunities and minimising therisks?



We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report. We would also liketo express our appreciation or the input we received rom clients and our particular gratitude to the ollowing external expertswho so generously donated their time and eort to the project;

Adrian Rawclie, Senior Vice President Worldwide Business Development, GlaxoSmithKline Plc.Dr Dennis B Gillings, Chairman o the Board and Founder, Quintiles Transnational Corp.

Dr Genghis Lloyd-Harris, Partner, Abingworth

Gino Santini, Senior Vice President, Corporate Strategy and Policy, Eli Lilly and Co.

John Fowler, Head o Healthcare Investment Banking Team in Europe, Deustche Bank AG

Dr John Murphy, European Pharmaceuticals Analyst, Goldman Sachs Group, Inc.

Laurent Massuyeau, Head o Business Development, Addex Pharmaceuticals Ltd.

Proessor Michael Jacobides, London Business School

Dr Vincent Mutel, Chie Executive Ocer, Addex Pharmaceuticals Ltd.

The views expressed herein are personal and do not refect the views o the organisations represented by the individualsconcerned.

Acknowledgements



Table of contents



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We are indebted to Proessor Michael Jacobides o the London Business School or providing the details o this case study.6.

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The member companies o the Pharmaceutical Research and Manuacturers o America spent about US$43 billion on R&D in 2006. Datamonitor24.estimates that discovery accounts or between 25% and 35% o these costs. For urther inormation, see Pharmaceutical Research and

Manuacturers o America (PhRMA), “R&D Spending by U.S. Biopharmaceutical Companies Reaches a Record $55.2 Billion in 2006” (February12, 2007), accessed February 20, 2008, http://www.phrma.org/news_room/press_releases/r&d_spending_by_u.s._biopharmaceutical_companies_reaches_a_record_$55.2_billion_in_2006/; and Datamonitor, “Pharmaceutical Outsourcing Part 2: An Introduction to Drug Discovery Strategies”(August 2006).

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Total expenditure on pharmaceuticals and other medical non-durables expressed as a percentage o total healthcare expenditure ranges rom44.12.4% to 29.7% in the OECD countries. On average, it is thought to represent about 15% o the global health budget. For urther inormation onhealthcare expenditure in the OECD countries, see OECD Health Data 2008 (October 2008).



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Table of contents

This publication has been prepared or general guidance on matters o interest only, and does not constitute proessional advice. You should not act upon the inormation contained in this publicationwithout obtaining specic proessional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness o the inormation contained in this publication, and, to theextent permitted by law PricewaterhouseCoopers does not accept or assume any liability responsibility or duty o care or any consequences o you or anyone else acting or reraining to act in reliance

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pharma 2020: challenging business models

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