Creating New Value for Biopharma

Advise • Build • Operate www.kinapse.com Summary The biopharma industry has primarily relied on product-led value creation. This has been driven by price and volume maximisation of innovative medicines, and operating cost base reduction. We believe an alternative focus is required to ensure value creation in the longer term. The continually evolving healthcare ecosystem presents value creation opportunities for entities which address the high priority needs of the key stakeholders in this ecosystem. Patient insight generation and management, performance management of healthcare solutions, solution bundling and product development with an expanded portfolio present promising strategic plays for biopharma in the future. These opportunities will require a revised operating model tailored to success factors for that particular strategy.

Creating New Value for Biopharma 2 Introduction

In this paper we envisage future opportunities for Price will continue to be challenged by governments value creation by the global biopharma industry. and payers as they pressurise the industry to We set these opportunities in the context of an contain the prices of treatments and encourage use evolving healthcare ecosystem which continually of cost-effective generics and biosimilars. creates new business opportunities and challenges for the industry. We illustrate our ideas with some Recent initiatives by governments have focussed on examples and reflect on the actions which the providing better healthcare at reduced costs. industry needs to consider. • In the US, the Patient Protection and The success of the biopharma industry has been Affordable Care Act under Obamacare, which primarily based on product-led value creation. established Accountable Care Organisations to improve health outcomes and lower costs1, The central value drivers have been price and has contributed to a lower healthcare spend. volume maximisation of innovative medicines, and Medicare will create estimated savings of $700 operating cost base reduction. We believe that billion between 2013 and 2022.2 (Figure 1). an exclusive focus on these value drivers will not sustain value creation in the medium- to long-term. • European initiatives are similarly focused on tackling rising healthcare costs. Germany’s AMNOG (the Act on the Reform of the Market for Medical Products) compares the benefits of new pharmaceutical products with those already on the market and sets the price accordingly, constraining the amount companies can charge for their offerings.

Percent

5 4 3

2 1

0 1960 1970 1980 1990 2000 2010

Note: 2013 is a CMS projection Source: Centers for Medicare and Medicaid Services, National Health Expenditure Accounts and Projections

Figure 1: Annual per capita growth in US national health expenditure

Creating New Value for Biopharma 1 Volume will be challenged as the diseases to be traditional ‘blockbuster’ drugs, and require an addressed apply to increasingly stratified patient associated biomarker. Although the highly targeted populations (Figure 2) with highly specific genotypic nature of these therapies means that a higher price or phenotypic sub-types constraining the use of is often justifiable, we believe that novel medicines innovative medicines. Stratified medicines are for highly-stratified populations will also become applicable to a much smaller market size than price constrained.

Compound annual growth rate

27% 162,020 Head and neck cancer

Ovarian cancer 122,020 Colorectal cancer

90,520 Melanoma

Breast cancer 63,020 65,020 Lung cancer

Leukaemia

Asthma

2014 2015 2016 2017 2018

Figure 2: The ABPI predict that demand for stratified diagnostics will increase by 27% per year through to 2018

Process improvement and automation will continue Various stakeholders in the healthcare ecosystem to lead to incremental cost savings in R&D’s largest have high priority needs which will create value cost centres but these strategies are optimised for the entity which addresses them. by generics and other players focused on a low cost value proposition. Generics players maximise The healthcare ecosystem is centred on the profits by employing lean operating models and treatment of patients, and the different players benefit from the fact that infrastructure and in this ecosystem are placing a significant focus labour costs remain around 40-50% cheaper than on becoming more ‘patient-centric’. This reflects in the West.3 Therefore, we believe an operational an aspiration to ensure that patients’ needs are excellence strategy is unlikely to create significant fully considered and addressed throughout the new value for biopharma. lifecycle of health research and development, new product introduction, health service procurement We are therefore of the view that the biopharma and delivery. industry needs to look beyond its traditional value drivers and interact, partner and innovate with other entities in the broader healthcare ecosystem to sustain value creation in the longer term.

Creating New Value for Biopharma 2 At Kinapse, we define the patient as the individual surrounding the patient. In turn, around this at risk of, or currently suffering from, disease and ecosystem we see the broader network of we recognise a cast of supporting players including stakeholders (Figure 3) all of whom have distinct relatives, caregivers, health care practitioners unmet needs relating to the health of the patient. and providers in the ecosystem immediately

‘Assessing diseases for ‘Innovation and targeted treatments’ translational science’ Device/ Biotech diagnostics companies companies ‘Improving the Academic ‘Understand disease and population’s health’ look towards treatments’ Policy Makers Institutions

‘Quality, safety, efficacy’ Regulators Payers ‘Value for money’

‘Representing Information Patient services Providing digital offerings patients’ needs’ Associations businesses ‘Access to a choice of Pharmacists Hospitals ‘Quality, on-site therapies for patients’ care for patients’ Healthcare Caregivers Practitioners ‘Evidence of ‘Dignity, holistic wellbeing’ relative effectiveness’ Patients

‘Understand, manage and treat’

Figure 3: The healthcare ecosystem is centred on the treatment of patients, and each entity has a different set of drivers

These stakeholders typically have different As well as the key stakeholders mentioned priorities and requirements. In general, patients above, we see many other players in the broader look for more information and engagement with an healthcare ecosystem (both established players and overall objective of understanding and managing new entrants) seeking to create value in a variety a health risk or getting a health problem solved. of ways. Patient associations strive to represent Regulators look for evidence of quality, safety and patients’ needs, which can range from fundraising effectiveness of the medicine during and after for access to an innovative drug to campaigning for the licensing process. Payers are driven mainly changes in legislation. With ever-increasing data by understanding and achieving value for money. availability and new tools to capture and analyse Caregivers generally care most about the holistic it, the information providers in this ecosystem are well-being of their patient/ relative and impact perhaps the most significant new entrants. on themselves. HCPs seek to practise in line with the available evidence of relative effectiveness to provide the most appropriate treatments for patients.

Creating New Value for Biopharma 3 There are multiple opportunities for each entity We see six significant opportunities for value to create value in this healthcare ecosystem. creation in this ecosystem (Figure 4). These can be delivered separately or in combination and will require the different entities in the ecosystem to interact in non-traditional ways.

6. Performance management

1.Product development

Device/ Biotech diagnostics companies companies Academic Policy Makers Institutions

Regulators Payers 5. Holistic solution 3.Insight Information Patient provision services generation Associations businesses Pharmacists Hospitals

Healthcare Caregivers Practitioners

Patients

2.Service delivery

4. Information brokerage

Figure 4: Opportunities for value creation in the healthcare ecosystem

1. Product development - focus on product-based 4. Information brokerage - create channels or innovation to discover new medicines or improve ‘platforms’ to allow for two-way sharing of old ones through reformulation, novel delivery pooled information to support the ideal matching and improved labelling. of a solution to the patients’ unmet needs. 2. Service delivery - provide patients with services 5. Holistic solution provision - bundling of products which support the resolution of a health issue. and services based on specific insights obtained on the optimal ways to address the patients’ 3. Insight generation - identify and characterise unmet needs. patients, their diseases and other related needs including how they experience existing 6. Performance management - the governance, healthcare provision to profile enhancements to measurement and monitoring of the provision existing products or services. of all other elements which contribute to the patients’ health outcomes.

Creating New Value for Biopharma 4 Box 1 provides case studies of entities as examples for these six opportunities.

Product development - Bristol Myers Squibb BMS combines elements of traditional pharma and biotech operating models to successfully discover and develop innovative products for patients. • Target customer: Patients, payers and providers • Products / services: Medicines to treat cancer, serious mental illness, HIV/AIDS, hepatitis B, rheumatoid arthritis, cardiovasular disease, organ transplant and diabetes. More than one- third of compounds in development are biologics.

Service delivery - Partners Healthcare Partners Healthcare delivers a patient-centred, transparent care model that aims to benefit patients through prevention to long-term treatment in a cost-effective manner. • Target customer: Patients, communities and researchers • Products / services: Rehabilitation, long term acute care, skilled nursing, home healthcare and hospice services.

Insight generation - Real Life Sciences Real Life Sciences systematically develops, validates and integrates patient insights from internal and external real world data sources to provide a qualitative and quantitative analysis of patient experiences, behaviours and unmet needs. • Target customer: Biopharma companies, payers and providers • Products / services: Aggregation, analysis and integration of real world evidence across digital channels to enable rapid development of patient / medical insights in a single interface.

Information brokerage - Microsoft HealthVault Microsoft HealthVault brokers information between patients and their caregivers to ensure that the right data is shared to enable patients access to the appropriate care. • Target customer: Patients, carers and healthcare providers • Products / services: HealthVault Connection Center (software that allows users to add data from health and fitness devices) and HealthVault Platform (online personal health database with interfaces that allow third party interactions).

Holistic solution provision - Samsung Healthcare Samsung Healthcare aims to improve the quality of people’s lives by providing holistic solutions including medical equipment and advanced technologies. • Target customer: Medical professionals, payers and providers • Products / services: Biosimilars, digital radiography, ultrasound, in-vitro diagnostics and transducers.

Performance management - Kaiser Permanente Kaiser Permanente provides personalised healthcare and measures the quality of care it delivers using outcomes data. • Target customer: Patients and communities • Products / services: Personalised healthcare from doctors and other caregivers who are connected to the patient and each other through advanced electronic healthcare records, online tools and mobile applications.

Creating New Value for Biopharma 5 Biopharma can consider four strategic plays The following table presents the success factors which can create value in the longer term in this and the operating model implications for these four evolving landscape. strategic plays.

STRATEGIC ECOSYSTEM SUCCESS FACTORS OPERATING MODEL IMPLICATIONS PLAY

PATIENT-CENTRIC MODEL • Model driven from the target value proposition for the patient • Patient access and trust • Closer collaboration between R&D & Commercial • Two way communication functions loops • Relationships and alliances with stakeholders close 1. Patient insight to the patient generation and • Real-time responses • Use of real time patient data and generation of management patient insights • Incorporation of the patient voice into internal processes

VIRTUAL MODEL • Independent and • Ownership of tools and analytics to build business/ objective analysis value cases for new interventions • Create confidence in the • Possible alliances with academic or government- 2. Performance products, services and sponsored public bodies management of solutions available • Possible industry consortium pre-competitive approach healthcare solutions

• ‘One stop shop’ for INTEGRATED MODEL solutions • Company offers a ‘one stop shop’ of all relevant • Unbiased positioning products to meet the needs of the patient • Effective use of real world • Partnerships and joint ventures between biopharma evidence 3. Solution bundling companies, solution providers and patients associations • Service skills for more complex disease areas

• Sustainable excellence in R&D • Scientific leadership in order to adapt to NETWORKED MODEL changing environmental factors • More networked operating models as innovators are • Process and systems challenged by the pace of development of science, 4. Product technology platforms and new entrants development innovation • ‘Disintegration’ of vertically integrated operations

Creating New Value for Biopharma 6 A common need for all of the strategic to assess organisational capabilities and individual opportunities above is clear definition of the competencies, which we believe will need to evolve customer(s) and their needs, deep understanding significantly to adapt to the changing ecosystem: of the competitive and collaborative dynamics in biopharma’s ability to manage huge quantities the ecosystem and a focused, realistic view of the of information will need to advance to the levels competencies required to create value. of companies like McLaren; the industry needs to become as effective at engaging patients as We see some bold moves amongst several of Amazon is at interacting with consumers; individual our clients today. They are rethinking strategies competencies need to be oriented towards cross- and devising operating models in new ways. A functional working, flexibility and adaptability. critical factor when revising operating models is

ORGANISATIONAL CAPABILITIES INDIVIDUAL COMPETENCIES Current Future Company example Current Future Information Functional Management Expertise

Alliance Cross-functional Management Working

Soft Skills: Scientific Communication, Innovation Project Management

Real World Characteristics: Evidence Flexibility, Adaptability, Patient Entrepreneurship Engagement

Figure 5: Current level of capability realisation in biopharma versus ideal future level

We believe that all of the major biopharma ecosystem will be remarkably different from companies should consider radical new ways of today’s, and we believe now is an excellent time to creating value in tomorrow’s healthcare ecosystem. prepare for long-term value creation within it. If nothing else is certain, the future healthcare

1 Accountable Care Organisations in the United States and England: Testing, Evaluating and Learning What Works. The King’s Fund (2014). 2 Obamacare Effect Linked to Lower Medical Cost Estimates. Bloomberg (2014). 3 The Emergence of India’s Pharmaceutical Industry and Implications for the U.S. Generic Drug Market. U.S. International Trade Commission (2007).

Creating New Value for Biopharma 7 About Kinapse Kinapse provides expert advisory, capability building and operational services to the life sciences industries. Our mission statement is: ‘Collaborating with our clients to innovate for exceptional results’. Kinapse clients include many of the world’s leading pharmaceutical, biotechnology, medical device and specialty pharmaceutical companies, government organisations and life sciences service providers. Our key advantages are: • Focus on the life sciences industries • Deep industry experience and technical acumen • History of successful project delivery

Authors Contributors Andy Black Jonathan Peachey Chief Executive Officer Head of Client Partnerships [email protected] [email protected] Mudit Mohan Matthew McLoughlin Senior Manager, Advisory Services Head of Advisory Services [email protected] [email protected] Rosie Pigott Senior Analyst, Advisory Services [email protected]

We would be delighted to hear your feedback and comments.

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Creating New Value for Biopharma 8