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Pharma 2020: Challenging business models Which path will you take? Table of contents

Previous publications in this series include:

Pharmaceuticals Pharmaceuticals and Life Sciences Pharmaceuticals and Life Sciences

Pharma 2020: The vision Pharma 2020: Virtual R&D Pharma 2020: the future Which path will you take?* Which path will you take? Which path will you take?

*connectedthinking  Pharma 2020: The vision # Pharma 2020: Virtual R&D 1

Published in June 2007, this paper This report, published in June 2008, Published in February 2009, this paper highlights a number of issues that will explores opportunities to improve the R&D discusses the key forces reshaping the have a major bearing on the by process. It proposes that new pharmaceutical marketplace, including 2020. The publication outlines the changes will enable the adoption of virtual R&D; and the growing power of healthcare payers, we believe will best help pharmaceutical by operating in a more connected world the providers and , and the changes companies realise the potential the future industry, in collaboration with researchers, required to create a marketing and holds to enhance the value they provide to governments, healthcare payers and model that is fit for the 21st century. These shareholders and society alike. providers, can address the changing needs changes will enable the industry to market of society more effectively. and sell its products more cost-effectively, to create new opportunities and to generate greater customer loyalty across the healthcare spectrum.

“Pharma 2020: Challenging business models” is the fourth paper in the Pharma 2020 series on the future of the to be published by PricewaterhouseCoopers. This publication highlights how Pharma’s fully integrated business models may not be the best option for the pharma industry in 2020; more creative collaboration models may be more attractive. This paper also evaluates the advantages and disadvantages of the alternative business models and how each stands up against the challenges facing the industry.

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

Introduction 1

Profiting alone versus profiting together 1

Harking back to the future 2

Reading the signs 2

Broadening the value proposition and managing the value chain 4

Choosing between different collaborative models 6 • The federated model • The virtual variant of the federated model • The venture variant of the federated model • The fully diversified model

Charting a successful course 12

Conclusion 13

Acknowledgements 15

References 17

Pharma 2020: Challenging business models Table of contents In the following pages, we shall look Introduction What is a business model? at the main trends dictating the need The pharmaceutical marketplace for a more collaborative approach. We The term “business model” is used is undergoing huge changes, as shall also evaluate the advantages and to encompass a wide range of formal we indicated in “Pharma 2020: disadvantages of the alternative business and informal descriptions of the core The vision”, the White Paper models and how each stands up against elements of a business. We have PricewaterhouseCoopers* published in the challenges facing the industry. used the term in the following sense: June 2007.1 These changes will have a “A company’s business model is the major bearing on the kind of business means by which it makes a profit – models pharmaceutical companies Profiting alone versus how it addresses its marketplace, the need to employ. offerings it develops and the business profiting together relationships it deploys to do so.” Most companies have traditionally done everything from research Big Pharma’s traditional business model and development (R&D) through to hinges on the ability to identify promising business model collapses.3 commercialisation themselves. But we new molecules, test them in large clinical Pharma is currently undergoing just predict that, by 2020, this model will trials and promote them with an extensive such a period of disruptive . no longer for many organisations. marketing and sales presence (see By 2020, most will be If they are to prosper, they will need to sidebar, What is a business model?). In paid for on the basis of the results improve their R&D productivity, reduce the predominant version of this model, a their costs, tap the potential of the single company may employ contractors they deliver – and since many factors emerging economies and switch from to supplement its own efforts, but it influence outcomes, this means that selling medicines to managing outcomes seeks to generate profits on its own. In it will have to move into the health – activities few, if any, companies can essence, it pursues what might be called space, both to preserve accomplish on their own. a “profit alone” path. the value of its products and to avoid being sidelined by new players. If it is to Even the largest pharmaceutical But, by 2020, the strategy of make groundbreaking new medicines companies will have to collaborate with singlehandedly placing big bets on a for which governments and health other organisations to develop effective few molecules, marketing them heavily insurers are prepared to pay premium new medicines more economically, and turning them into blockbusters will prices, it will also have to build the help patients manage their health and not suffice. As J.P. Garnier, former chief relationships and infrastructure required ensure that the products and services executive of GlaxoSmithKline, recently to ensure that it can get access to the they provide really make a difference. pointed out, it is a “business model outcomes data they collect. Moreover, they may have to step far where you are guaranteed to lose your outside the sector to find some of the entire of business every 10 to In short, the rules of the game are partners they need. 12 years”.2 shifting dramatically. And, as Michael G. Jacobides, Associate Professor of More importantly still, it is a business We believe that two principal business Strategic and International Management models – federated and fully diversified model that will no longer meet the at the Business School, notes, – will emerge, as Pharma prepares for market’s needs. Management guru when an entire “industry architecture” the future. We also think that the current Clay Christensen has convincingly is transformed, it is not only “who does economic downturn will accelerate demonstrated how disruptive what” that changes, it is also “who the shift to these new models, both by in various industries have takes what”.4 reinforcing one of the key causal factors dismantled the prevailing business – the pressure on healthcare payers model, by enabling new players to By 2020, no pharmaceutical to maximise the value they get for the target the least profitable customer company will be able to “profit money they spend – and by opening up segments and gradually move upstream alone”. It will, rather, have to “profit new opportunities to build or buy the until they can satisfy the demands of together”, by joining forces with a networks that will be required. every customer – at which point the old wide range of organisations, from

*‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Pharma 2020: Challenging business models 1 academic institutions, and will be a “do or die” requirement Apple’s core strategy of providers to companies for pharmaceutical companies and collaboration offering compliance programmes, healthcare payers alike. It will be Professor nutritional advice, stress management, essential for pharmaceutical companies Michael G. Jacobides has recently physiotherapy, exercise facilities, health to develop effective new medicines argued that successful companies do screening and other such services. and address the demands of payers not compete in a sector; they shape increasingly well equipped to measure the nature of a sector. They redefine what they are getting for their money; the part of the value chain they Harking back to the and essential for payers to cope with occupy, and keep most of the value- rapidly escalating healthcare costs. add through the intelligent of future their collaboration with others in the sector. Of course, some pharmaceutical companies have already tried to Reading the signs Thus collaboration is not just a tool collaborate with other organisations. for doing the same things more Rhone-Poulenc Rorer (now part of Various forces are changing the effectively. At its most powerful, it -aventis) created RPR Gencell, the environment in which Pharma operates can reshape an entire market, as world’s first network, in and the relative positions of the different Apple has shown. Apple redefined the 1994.5 Many of the largest companies players in the healthcare arena. These mobile music sector by also established management trends all point towards the need for the production of the devices and programmes in the 1990s, although much greater collaboration (see Figure 1). accessories, while retaining control of most of them were not very successful the iTunes software. In other words, The global healthcare bill is soaring, – primarily because healthcare it recognised that it could make as the population ages, new medical payers were sceptical about industry- money by creating and orchestrating needs emerge and the disease burden sponsored disease management.6 a network of relationships – by of the developing world increasingly So we are not suggesting that the controlling, rather than owning. resembles that of the developed world. differences between these early efforts Hence the fact that governments Apple used three specific tactics and the business models that are likely and health insurers everywhere are to change the rules of the game. It to prevail in 2020 will be completely struggling to contain their expenditure. enhanced the mobility of the parts black and white. Nevertheless, we think The issue is further exacerbated by the of the sector in which it has no that two key differences will apply. current economic turmoil that will put presence, by establishing a small even greater financial pressure on the set of suppliers who know that they First, the technological and cultural payer . can be replaced at any time. It made pre-conditions to facilitate collaboration itself into a bottleneck, by holding are now in place. In the mid-1990s, the Healthcare payers in the industrialised onto the music format and ensuring was still in its infancy and many economies are already mandating that files compatible with iPod can of the tools that enable collaboration did what doctors can prescribe. The only be played on iPod devices. not exist. Today, however, such tools are British National Health has And it redefined who did what, by plentiful and the wider business also introduced a flexible pricing encouraging other companies to has changed dramatically. IBM, Apple, scheme under which the prices of develop accessories rather than Amazon and their ilk have demonstrated new medicines can be lowered or entering the accessories market the power of open platforms, lifted, depending on the outcomes transformed corporate attitudes itself. This has enabled it to benefit they deliver.8 And US President towards networking and shown that it is from the efforts of those that support Barack Obama’s administration is possible to reap much richer rewards by its architecture, without making any moving towards opening up the US profiting together than by profiting alone capital commitment itself. market to much greater competition (see sidebar, Apple’s core strategy of from generics, as well as allowing the collaboration).7 importation of cheaper Second, by 2020, collaboration from “safe” countries.9

2 PricewaterhouseCoopers The developing world will soon come the country’s current economic they will expect the industry to go under equal pressure. The emerging development. However, it is hard to see “beyond the ” by providing economies will experience the most how the plan will not entail a substantial prophylactics and healthcare packages rapid growth in demand for medicines increase in China’s healthcare costs.10 designed to help patients manage their over the next 11 years, but many (if not health. Moreover, patients will play a all) of them will struggle to fund this Healthcare payers in both the much bigger role in determining how demand. The Chinese government has, developed and developing worlds are they are treated, as the money they for example, undertaken to introduce also beginning to measure outcomes spend on medicines likewise rises a universal healthcare system with a much more carefully and to emphasise and the Internet gives them access to level of cover that does not exceed the importance of prevention. By 2020, more information. Armed with insights

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

Trends

Market trends Health and healthcare trends Scientific and technological trends • Patients are becoming better informed • The burden of – and bill for – chronic • R&D is becoming more virtualised • Patients are picking up a bigger share disease is soaring • The research base is shifting to Asia of the bill • Healthcare payers are establishing • Remote monitoring is improving rapidly • Demand for personalised medicine is treatment protocols increasing • Pay-for-performance is on the rise • Patients want , not treatments • The boundaries between different forms • The emerging markets are becoming of care are blurring more important • Financial constraints on payers are increasing

Implications

Pharma will need to go “beyond the R&D will need to go beyond the lab The Pharma and healthcare value chains medicine” will become much more intertwined

• Pharma will be paid for outcomes, • Pharma will need access to outcomes • Pharma will have to work more closely

not products data with the regulators

• Outcomes data will drive healthcare • Pharma will have to work with • Pharma will have to collaborate with policy technology vendors to virtualise R&D payers and providers to perform • Prevention will gain a higher healthcare • Pharma will need a wider, more continuous trials profile multi-disciplinary skills base • Pharma will have to collaborate with • Pharma will need to offer “medicine- • Pharma will need to expand its numerous service providers to deliver plus” packages of care presence in Asia packages of care • Pharma will have to adopt more flexible • Pharma will need to demonstrate “real” pricing strategies value-for-money

Business models based on collaboration

Source: PricewaterhouseCoopers

Pharma 2020: Challenging business models 3 gleaned from educational , a monumental collaborative effort far Emerging collaborative networks discussion groups and blogs, they will exceeding that required to complete the Several pharmaceutical firms not only want better, safer medicines, .13 have already begun to use more they will also want a range of satellite The economic case for change is collaborative models. One such services they can tailor to their clear. The decline of revenue growth instance is Lilly, which is currently individual needs. and margins result in reduced transforming itself from a traditional If Pharma is to accommodate these shareholder returns which will force fully integrated pharmaceutical changes in the marketplace, it will have pharmaceutical companies to adapt. company into a fully integrated to collaborate much more extensively There is a compelling case for increased pharmaceutical network, so that it can – as it will, indeed, to capitalise on collaboration. Delivering draw on a wide range of resources some of the scientific and technological beyond its own walls. Lilly hopes that to payers and patients in a 2020 world trends that are now emerging. The teaming up with other organisations will require new skills, technologies and research base is shifting, for example. to create virtual R&D programmes channels - the infrastructure required will Non-OECD economies accounted for will enable it to get better access to be uneconomic for anyone, other than 18.4% of the world’s R&D in 2005, up innovation, reduce its costs, manage the largest players, to build internally. from 11.7% in 1996. The number of risks more effectively and enhance To sum up, the key social, economic filed by Asian researchers also its productivity. For example, the and technological changes currently Chorus Project is a virtual organisation increased significantly over the same 11 taking place in the pharmaceutical and to take molecules quickly to Proof period, albeit from low levels. So the industry will have to forge much closer healthcare arena will all necessitate the of Concept. Lilly also uses external development of multinational, multi- networks comprising third parties such links with the most reputable centres of scientific excellence in these countries. disciplinary networks on a as Piramal Life Sciences, Hutchison much wider range of skills than Pharma MediPharma, Suven Life Sciences for Meanwhile, new technologies are alone can provide. The constraints the development of molecules. providing new sources of knowledge. that previously hindered organisations Swiss development Home surveillance systems, portable from collaborating over distance are specialist Debiopharm has pioneered a devices and implants, linked to online simultaneously evaporating – paving the more radical approach. The company and wireless networks, will facilitate way for the use of new business models in-licenses promising new candidates the monitoring of patients on a real- (see sidebar, Emerging collaborative from academic institutes and biotech time basis outside a clinical setting. networks).14 In the next sections, we shall companies, develops them and then But if Pharma is to get access to the look at the implications of broadening the out-licences them to Big Pharma. outcomes data remote monitoring value proposition, the various models that Debiopharm’s successes include three generates, it will have to collaborate exist and the different opportunities and products with combined global sales with the hospitals and clinics that risks they present. of more than US$2.6 billion in 2007. capture this information. Most of the collaborative models that Technological advances will likewise currently exist are limited to R&D. But enable the virtualisation of large parts Broadening the value it is easy to envisage various other of the R&D process, as we explained in proposition and permutations, including networks “Pharma 2020: Virtual R&D”.12 Some of focusing on different therapeutic the leading pharmaceutical companies managing the value chain areas and covering everything from are already exploring the potential of R&D through to sales and marketing; semantic technologies and computer- Pharma currently creates value by networks focusing on different aided molecule design. Various developing new medicines (and a enabling technologies, such as academic institutes and bioinformatics relatively limited number of diagnostics). genomics, proteomics and stem firms are also computer models Collaborating much more closely with research; and networks focusing of different organs and cells, with the the key stakeholders in the healthcare on the management of outcomes in ultimate aim of creating a “virtual man”. sector will enable the industry both specific segments. But developing such a model will require to expand its remit and to align its

4 PricewaterhouseCoopers value chain more closely with those of on getting access to the patients whom a more dynamic relationship with healthcare payers and providers. providers serve and income from the healthcare payers and providers. So, payers who fund those providers. Yet too, will building the networks required As we indicated in more detail in the relationship between the different to deliver healthcare packages that “Pharma 2020: Marketing the future”, players is often quite antagonistic and, encompass a wide range of products the value chains of the three parties while they continue to clash, they are and services from numerous different are heavily interdependent. The value struggling to retain their respective suppliers. This will ultimately result in payers generate depends on the goals.15 the convergence of the separate, linear policies and practices of the providers value chains that exist today and the they use. The value providers generate If Pharma broadens its value emergence of a single, circular value depends on the revenues payers raise proposition, it can begin to close the chain (see Figure 2). and the medicines Pharma makes. And gap. Creating feedback loops to capture the value Pharma generates depends outcomes data will help it to establish

Figure 2: By 2020, the pharmaceutical, payer and provider value chains will be much more closely intertwined

M Practice ed tc. guide ic r es e line a e rvic s, c l S v se lin e o e ica r C tiv ary ca l g v f tra Prim re ui ic o is da e in S n s e ce n m on c , o d ti T o p M i A n e n h s , e rt d a a i s v ia a r v ie e ry ry m n o d r a a r tu P c & c g s a o P l re e e a c m c o i n g L o e o o m l n o n i i f c t g m o n e - e v s o t a d i i e i t l k u p s r a a m E y l s l i t i u r o a n p t c

n s a a o A e r p t

e c Patient .

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s l a l & e i g r R c b k n S ’ a i n e s i a s r s t i a i e n l i a n e n i d g s f i g R v p f o r r e o p m e r iu a m R M c s a h a lt o i & n a r s u e t i D f t a n a h h x g is c c n f e t r e o s tr u a t , o ib rin e n C f u g s m e o F tio e y m lle n R a y c in P a t a l p in n D t il & g c evelopmen B g ou e rin Payer t-o ito f-p on oc m ke nt, Provider t p me aym age Pharma ent man s Referral

Source: PricewaterhouseCoopers

Pharma 2020: Challenging business models 5 Choosing between models are not mutually exclusive. A technology suppliers, data analysis fully diversified company might choose firms and lifestyle service providers different collaborative to use a federated model for certain based in numerous countries. They models aspects of its business, and vice versa. might also include business units from But we think that the federated model within the company itself, which it One vital question remains, however; will ultimately dominate, primarily places at “arm’s length” (see Figure 4). namely, what sort of model should because it is quicker and more companies use to effect these changes? economical to implement. The various participants have a mutual We believe that two principal models goal – such as the management of – federated and fully diversified – will outcomes in a given patient population. The federated model emerge. We have also identified two They also share funding, data, access variants of the federated model. In the In the federated approach, a company to patients and back-office services, virtual version, a company outsources creates a network of separate and this interdependence is the most or all of its activities; in the entities with a common supporting glue that holds them together. They venture version, it manages a portfolio infrastructure. These might include are rewarded for their efforts using of investments (see Figure 3). The two , hospitals, clinics, measures like increased life expectancy

Figure 3: The different business models

Collaborative: Federated Model Owned: Fully Diversified Model

• Network of separate entities • Network of entities owned by one parent company • Based on shared goals & infrastructure • Based on provision of internally integrated • Draws on in-house and/or external assets product-service mix • Combines size with flexibility • Spreads risk across business units

Virtual Variant Venture Variant • Network of contractors • Portfolio of investments • Activities coordinated by one company • Based on sharing of intellectual property/ acting as hub capital growth • Operates on project-by-project basis • Stimulates entrepreneurialism & innovation

• Fee-for-service financial structure • Spreads risk across portfolio

Source: PricewaterhouseCoopers

6 PricewaterhouseCoopers or quality-adjusted life years. And each Figure 4: The federated model is rewarded in a manner that reflects the evidence base for the contribution it has made (see sidebar, How should the ology Dat 16 hn a cake be sliced?). Tec rs Anal plie ysts Sup P The federated model provides a h s ys ic rs i framework for creating integrated r re C o e u e th n t n e packages of products and services, and e c t r G fa re a u s p thus diversifying beyond a company’s n y a core offering. It also combines the M benefits of nimbleness and size. It

e H e c would enable each player to build a r o n t

s a n i specific area of expertise, establish a l e p

p i C t

a l competitive advantage as a result of m l l

s

a o

C that expertise and sell its products, C Federation knowledge or skills, leaving activities that are better performed by others to M its partners within the federation. a W n C s a e c e g ig n e h in More importantly still, the federated t r m t n e li s e model might encourage greater n C t cross-fertilisation and deliver bigger improvements in performance, without F it forfeiting any flexibility. The stronger ne es s iti s C rs members of the network could help lu ive bs Un the weaker ones to improve – since Pharmaceutical federations have an incentive to perform Company well as a whole – but they could also replace any participant that persistently underperforms. Source: PricewaterhouseCoopers

How should the cake be sliced? much? Various studies have established better collaboratively it is essential to some parameters. They show, for define upfront measurable components It may sometimes be hard to measure instance, that high-frequency exercise of delivery and value. the value different participants have can improve the cardio-respiratory created for two reasons. First, the Defining the value provided by each fitness of patients with heart disease parties in any collaboration typically player in the federation will then inform by at least 10% – and that, in turn, value the contributions they have how each party should be rewarded - can reduce the by 15%. made more highly than those of their this will be a combination of theoretical We believe that many more studies partners. This is a problem that can analysis and monitoring of outcomes to evaluate the effectiveness of non- be solved with watertight contracts, and benefits to the patient. Clearly pharmacological interventions will be robust performance indicators, good to avoid the risk of litigation or the conducted in future, as healthcare governance and a proper trail. constraints of exclusivity, the federation payers everywhere focus more heavily Second, assessing the impact of needs to be underpinned by mutual on preventative measures. different forms of intervention can be trust between all parties. However, there very difficult indeed. This approach is essentially a more are several examples of where this has Medicines, diet and exercise all play complex variant of the co-development worked effectively such as a franchising a role in managing cardiovascular and co- agreements we have model where the value of a is disease, for example, but precisely how today. In order for companies to work measured and rewarded.

Pharma 2020: Challenging business models 7 Table of contents

The virtual variant of the federated Figure 5: The virtual variant of the federated model model In the virtual variant of the federated model most or all of a company’s g rin Dis operations are outsourced and the tu tri ac bu uf t company itself acts as a management n io a n hub, coordinating the activities of M its partners (see Figure 5). Several industries have already adopted some aspects of this model. The typically outsources its in order to concentrate on product development, for example, and a number of companies in the medical Management devices sector are now following suit.17 g

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i t

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Similarly, strategic outsourcing of n

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design and manufacture to suppliers r m

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p

has redefined manufacturing functions o M

l

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within industries such as aerospace, v e s

e computing and electronics. D l a Most large pharmaceutical companies S also use external contractors to supplement their in-house resources, but very few firms have gone any further (see sidebar, Shire’s virtual vision).18 There are very good reasons Research why pharmaceutical companies should outsource their R&D, manufacturing and promotional activities where third party alliances can provide a wider range of opportunities, specialist Source: PricewaterhouseCoopers skills and market access. A pharma company can then focus on the value adding functions where they can Shire’s virtual vision leverage on their relationships, scale Shire Pharmaceuticals is the epitome of a virtual company. It outsources almost and market knowledge – i.e., project everything, from discovery to medical monitoring to data management to management, , statistics to medical writing. With the exception of its genetic division, regulatory affairs, intellectual property every product it develops has been purchased from an outside source, via management and the formation of good in-licensing or acquisition. relationships with key opinion leaders

8 PricewaterhouseCoopers and healthcare providers. study, a company that performs certain spread them across a number of areas activities in- in order to minimise its risk. At the end The virtual variant of the federated house can expect to pay more than of the investment period, it might either model has other advantages, too. It double what it would pay if it completely claim the intellectual property that has would enable companies to reduce their initial capital outlay, convert outsourced these activities to a third been generated or out-license it to a 19 some of their fixed costs into variable party. But a shortage of top-class third party. Alternatively, the originating costs, utilise their resources more service providers or experts in particular company (or companies) might retain efficiently and become more flexible. areas such as biological manufacturing the intellectual property, commercialise Equally important, it might help the could drive prices up. it and pay the sponsoring company a industry leaders to expand into new return on its investment (see Figure 6). product/service areas or geographic The venture variant of the GlaxoSmithKline has used a version markets without resorting to further federated model of the venture structure for many mega-mergers (and thus facing the years. SR One, its evergreen fund, The venture variant of the federated huge challenges associated with was established in 1985 and has model entails investing in a portfolio of integrating two formerly separate now invested more than US$500m in companies in return for a share of the entities) or succumbing to the corporate some 30 private and public biotech intellectual assets and/or capital growth bureaucracy that so often strangles companies focusing on , they generate, rather than outsourcing innovation. development and delivery.20 Other specific tasks. Special purpose However, the virtual variant also comes Big Pharma companies, such as are sometimes used to manage such with some significant drawbacks. and , have also set up investments, because they offer several The balance of power might shift to corporate venture capital funds,21 advantages in terms of risk sharing and suppliers, as it has done to a certain and AstraZeneca spun off part of its intellectual property protection. extent in the , gastrointestinal research operation where a number of Tier 1 suppliers A pharmaceutical company might into a new company backed by a now manage their own supply chains. choose to concentrate its investments consortium of private equity firms.22 Alternatively, a major supplier might in a particular therapeutic area or US investment Goldman Sachs get into financial difficulties and start offering an inferior service or even Figure 6: The venture variant of the federated model default on its obligations altogether. But such risks can often be managed by using multiple suppliers, wherever possible. Out-licensing/In-licensing Pharmaceutical pharmaceutical company

Some pharmaceutical companies company Return might also see their earnings diluted, of IP to since every participant in the value Royalty payment chain would expect a return for the Third party services it provides. Theoretically, this Investment should not happen, since specialist contractors typically have lower Out-licensing Growth Generation of IP costs than integrated pharmaceutical company IP companies. Indeed, according to one

Return of IP to growth company

Source: PricewaterhouseCoopers

Pharma 2020: Challenging business models 9 Portfolio of pills trends which might stimulate greater innovation. Goldman Sachs has funded a The structure of the deal gives a new “research pool” into which majority 85% stake to GSK and 15% Similarly, it would provide incentives for traditional contract service providers to pharmaceutical companies could to Pfizer with an increase of Pfizer’s make strategic, long-term investments – place a range of experimental stake to 24.5% if all milestones are as Lonza did, when it collaborated with medicines in a single therapeutic area reached. The new firm, with a current to build a manufacturing in early-stage Phase I and II trials. revenue of £1.6 billion has a portfolio plant in Singapore.27 And it would External experts, including scientists, of 11 products and a drug-discovery enable pharmaceutical companies to and clinical research pipeline of 17. R&D services will be explore numerous new avenues of R&D, organisations, would work alongside contracted directly from GSK and or expand their global manufacturing scientists from the originating Pfizer to develop these with and marketing capacity, without companies. The bank argues that this investment from the new firm. In investing too heavily in any one project. approach would reduce the costs return, the new firm will have exclusive and bureaucracy associated with Big However, venture structures are not Pharma. It might also allow competing rights of first negotiation with respect without their challenges. For a start, companies working on similar drugs to HIV drugs developed by the two the skills involved in managing a to pool their resources, rather than pharma majors. The rationale for the portfolio of holdings are very different duplicating each other’s efforts. venture is that the new firm will be from those involved in assessing and more sustainable and broader as a pursuing potential research leads, as In April 2009, GSK and Pfizer combined venture and that there are is the timeframe venture capitalists announced that they intend to synergies on the commercial side. use to realise a return. So Big Pharma combine resources to set up a new would need to recruit people with the spin off firm dedicated to the HIV. necessary expertise and manage any conflicting objectives very carefully. has already dipped a toe in the water So what might the venture variant Moreover, any company that operated with its own venture fund (see sidebar, deliver, if it were implemented on a a large corporate venture capital fund Portfolio of pills).23 much larger scale and extended to alongside its own research portfolio other parts of the value chain? It would Nevertheless, all these initiatives would have to consider the financial alleviate the funding challenges in the are very small; between 2003 and implications very carefully. R&D biotech sector, where companies often September 2006, corporate venture expenditure is typically recorded on a capitalists invested just over US$1.5 struggle to raise a second or third company’s profit and loss statement, billion in the US life sciences sector,24 round of financing because venture for example, whereas investments are a fraction of the estimated US$11- capitalists want to exit before they can registered on the balance sheet and 15 billion the member companies of commercialise their products. These subject to annual impairment reviews. the Pharmaceutical Research and challenges have been exacerbated by This has an impact on how companies Manufacturers of America spent on the crunch and are likely to get are taxed and on how they are valued discovery in 2006 alone.25 Most such even worse in the current economic by the stock markets. Similarly, if ventures are also confined to research, recession.26 It would also allow a company’s risk profile increases although the same approach could be promising start-ups to capitalise on because it has less control over research applied to development, manufacturing, Big Pharma’s experience without being that is conducted outside its own walls, distribution, and marketing and sales. stifled by a Big Pharma culture – both its cost of capital will increase.

10 PricewaterhouseCoopers The fully diversified model of HealthMedia, a -based “health with the potential to act as a bulwark coach”.30 against generic competition. Like The fully diversified model is one in the federated model, it also provides which a company expands from its A number of other companies are now a means of moving into outcomes core business into the provision of following suit. Novartis has spent nearly management by offering combined related products and services, such US$25 billion beefing up its , product-service packages and playing as diagnostics and devices, generics, generics and eye-care products to the growing political emphasis on nutraceuticals and health management operations over the past three years, 31 prevention rather than treatment. (see Figure 7). Johnson & Johnson for example. Roche is drawing on is Pharma’s leading exponent of this its expertise in molecular diagnostics In addition to these advantages, it might approach. It is now the world’s largest to develop a consumer product test offer opportunities both to develop more 32 consumer health company, following for measuring indoor allergens. And powerful and to acquire a better the US$16.6 billion acquisition of GlaxoSmithKline has announced plans corporate image. Numerous studies Pfizer’s over-the-counter business to “diversify and de-risk” by focusing show the extent to which Pharma’s in December 2006.28 It is also the more heavily on vaccines, consumer has declined over the past 33 third-largest biologics and sixth- health and the emerging markets. decade.34 Supplementing its products with largest pharmaceutical company, has The fully diversified model has several “wellness” services might help a company an extensive medical devices and merits, not least the fact that it enables to create a more positive impression, diagnostics operation,29 and recently companies to reduce their reliance on although it would have to handle its started building a wellness and blockbuster medicines and spread their relations with the regulators, healthcare prevention platform, with the purchase risk by moving into other market spaces providers and patients very carefully.

Figure 7: The fully diversified model

Ethical Diagnostics Consumer Health Generics Pharmaceuticals & Devices Health Management

Mas s-Market • Molecular testing • Brand ed generics • Over-the-counter • Pa tien t medicines • Primary-care • Clinical biomarkers • generics • Delivery and drug products (including • Consumer administration • Medical devices • Super-generics patches, inhalants diagnostics services and controlled-release • Follow-on biologicals • Nutraceuticals • Monitoring and implants) counselling • Poly-pills • Physiotherapy Specialised-Market • Nutritional advice • Biologicals • Wellness

• Orphan drugs mana gement • Vaccines

Source: PricewaterhouseCoopers

Pharma 2020: Challenging business models 11 Table of contents

However, the fully diversified model has participants in the network is also likely coalitions to create a fully federated drawbacks, too. It requires a substantial to be relatively limited. In a heavily network of long-term partners (see investment in new equipment, premises regulated industry such as Pharma, any Figure 8). Taking incremental steps and personnel, as well as major cultural diminution of managerial control has will not only help them to identify the changes, since the provision of products serious implications. So it is crucial to organisations with which they can work is very different from the provision of establish clear goals and guidelines for most effectively, but also give them services. It might also create new risks the governance and funding of such time to establish the technological by distracting management’s attention arrangements, and for the division of infrastructure that is essential to from the core business – and even any intellectual assets they generate, manage the interfaces between two or alienate investors, who often prefer to before signing on the dotted line. more different parties. spread risk themselves. Disrupting the existing order can Most companies will also have to recruit have a major impact on a company’s or train people with new skills. They will, short-term performance, too. When for example, need researchers who can Charting a successful GlaxoSmithKline established its Centres understand commercial imperatives; course of Excellence for Drug Discovery, financial analysts who can assess the upheavals the R&D function was different investment opportunities with Clearly, the business model, or models, experiencing affected its pipeline for at the discipline of venture capitalists; a company chooses will depend on least 18 months.35 senior executives who can negotiate and oversee alliances; supply chain its individual circumstances, including We think that many companies which managers who can supervise large the particular challenges it faces, the choose the federated model will networks of service providers; and expertise it possesses and the markets therefore adopt a progressive approach. health economists who can measure the in which it wants to operate. A company They will start with opportunistic value of the contributions the respective that focuses exclusively on ethical alliances; use the most successful parties make. Those that choose to enter pharmaceuticals might find it harder alliances as building blocks to create the health management space directly to diversify than one that is already more strategic, longer-lasting coalitions; will also have to hire physiotherapists, experienced in managing multiple and, finally, use the most successful areas of activity, for example. Moreover, federations typically place greater Figure 8: The path to federation is likely to be gradual demands on senior management than conventional organisational hierarchies. Opportunistic Strategic Full Creating and supervising a cross- Alliances Coalitions Federation border, cross-disciplinary network of external relationships can be very • Ad-hoc • Extended alliances • Extended coalitions time-consuming – and it is often • Short-term • Medium-term • Long-term more difficult to identify, monitor and • Two parties • Three or more parties • Many parties manage risks. The various parties may • One-to-one relationship • One-to-many • Many-to-many have different cultural characteristics, relationship relationship different ways of communicating and • Partial alignment different expectations, some of which • Closer alignment • Complete alignment may change over time. An individual manager’s authority over the other Source: PricewaterhouseCoopers

12 PricewaterhouseCoopers dieticians, counsellors and numerous for many years – and to profit very a clear economic rationale for greater other people with skills that were successfully, as its record in collaboration (See sidebar, Show me formerly outside Pharma’s domain. rewarding shareholders shows. The the money). top companies saw their market Finding people with the appropriate Moreover, many companies will need to value soar 85-fold between 1985 and expertise will not be easy. Many move fast. As the healthcare landscape 2000.36 But this model is now under companies will therefore have to adopt huge pressure and, by 2020, it will changes and scientific expertise new talent management strategies, as not work. If the industry is to improve becomes less important than the ability well as ensuring that the performance its performance in the lab, reduce its to manage networks, the scope for measures and incentive systems they costs, serve the emerging markets competition from new entrants will use support the behaviour they want to more effectively and make the transition increase. Several non-pharmaceutical encourage. from producing medicines to managing companies have already entered the outcomes – as healthcare payers, arena. has, for example, providers and patients are increasingly joined forces with Spanish telemedicine Conclusion demanding – it will have to collaborate provider Medicronic Salud and device with other organisations, both inside manufacturer Aerotel Medical Systems Pharma’s fully integrated business and outside the sector. It simply cannot to offer a wireless home monitoring model enabled it to profit alone do everything itself. In addition there is service.37 Similarly, British

Show me the money There is plenty of evidence pointing to big opportunities for savings to be made through early intervention and tighter management of patients and treatments. The federated model will make these savings more systematic and predictable, rewarding participants based on the value that they create. Aligning risk and incentives appropriately is key to realising these benefits. For example: • A study by the RAND Corporation estimated the financial savings from having 100% participation in disease management programmes for four (, chronic obstructive pulmonary disease, and congestive ) in the US. They estimate the net savings to the to be $28bn (around 2% of total US health expenditure), with additional benefits to the economy in terms of work days saved.38 • Britain’s Audit Commission examined the scale of adverse events in UK hospitals. They found that 10.8% of patients on medical wards experience an adverse event, 46% of which are preventable. One third of the adverse events lead to greater morbidity or death and cost the UK’s NHS £1.1bn a year.39 • The five most costly conditions collectively account for 32.7% of overall healthcare expenditure. As we highlighted in “Pharma 2020: The vision”, improving patient compliance with enhanced treatment regimes by collaborating with other support services is a key enabler to drive the healthcare bill down. Further, some commentators have suggested giving patients financial incentives to improve compliance.40 • In 2009, Cisco Systems reported healthcare cost savings of $2.6m from a programme of on-site medical clinics covering 6,000 employees supported by integrated healthcare technology systems, chronic disease management, and health coaching.41

Pharma 2020: Challenging business models 13 giant Prudential is collaborating with Commission shows, for example, that Key questions for senior Virgin Active Health Club to offer a annual spending on the treatment of management critical illness policy that provides diabetes ranges from less than £8 to • What is our current business subsidised gym membership and over £30 (US$11.9-US$44.6) per head.43 model? Does it play sufficiently to rewards people who exercise regularly But differences in the prevalence of our strengths? by reducing their premiums.42 If the diabetes account for only 8% of this leading pharmaceutical companies variation – and higher expenditure does • What kind of company do we cannot change their business models not result in fewer emergency want our company to be? rapidly, such firms may ultimately admissions.44 • Will our current business model feature more prominently on the To date, Pharma has focused on the enable us to expand into healthcare scene than they themselves. profits it can earn from the estimated new markets – be these new The transition will not be easy, for 10-15% of the health budget that goes products, services or countries collaborative business models are on medicines.45 Yet there are many – and satisfy the expectations of far more complex than the integrated opportunities to generate revenues our customers in 2020? If not, model that has previously prevailed. by improving the way on which the what sort of business model will Moreover, no one model will suit every remaining 85-90% is spent. It is these we need? company. Each will need to assess opportunities the industry will need to • What is the size of the gap and its position, options and future course address in the brave new world of 2020. how can we reduce it as rapidly in light of its individual strengths and as possible? needs (see sidebar, Key questions for senior management). • Do we have a clear picture of the opportunities and risks entailed However, the prospects for any by each of the alternatives pharmaceutical company that can make available to us? the switch are very promising. The potential for reallocating resources to • Do we have a plan in place that deliver better outcomes and maximise will enable us to move forward the effectiveness of expenditure quickly, while maximising the on healthcare is considerable in opportunities and minimising the most healthcare systems. Research risks? recently completed by Britain’s Audit

14 PricewaterhouseCoopers Acknowledgements

We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report. We would also like to express our appreciation for the input we received from clients and our particular gratitude to the following external experts who so generously donated their time and effort to the project; Adrian Rawcliffe, Senior Vice President Worldwide Business Development, GlaxoSmithKline Plc. Dr Dennis B Gillings, Chairman of the Board and Founder, Quintiles Transnational Corp. Dr Genghis Lloyd-Harris, Partner, Abingworth Gino Santini, Senior Vice President, Corporate Strategy and Policy, and Co. John Fowler, Head of Healthcare Investment Banking Team in Europe, Deustche Bank AG Dr John Murphy, European Pharmaceuticals Analyst, Goldman Sachs Group, Inc. Laurent Massuyeau, Head of Business Development, Addex Pharmaceuticals Ltd. Professor Michael Jacobides, London Business School Dr Vincent Mutel, Chief Executive Officer, Addex Pharmaceuticals Ltd.

The views expressed herein are personal and do not reflect the views of the organisations represented by the individuals concerned.

Pharma 2020: Challenging business models 15 Table of contents References

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Pharma 2020: Challenging business models 17 26. Andrew Jack, “Drugmakers sweeten deals for biotech groups”, The Financial Times (September 19 2008), accessed December 21, 2008, http:// www.ft.com/cms/s/0/9d620a56-85d6-11dd-a1ac-0000779fd18c,dwp_uuid=aece9792-aa13-11da-96ea-0000779e2340.html 27. Jim Miller, “The Art of the Deal”, BioPharm International (September 1, 2008), accessed December 10, 2008, http://biopharminternational. findpharma.com/biopharm/GMPs%2FValidation/The-Art-of-the-Deal/ArticleStandard/Article/detail/545356 28. Andrew Ross Sorkin & Stephanie Saul, “J&J buys Pfizer unit for $16.6 billion”, International Herald Tribune (June 26, 2006), accessed November 3, 2007, http://www.iht.com/articles/2006/06/26/business/pfizer.php 29. Johnson & Johnson website, accessed December 11, 2008, www.jnj.com/connect/about-jnj 30. Johnson & Johnson press release, “Johnson & Johnson Establishes Wellness & Prevention Platform with Acquisition of HealthMedia, Inc.” (October 27, 2008), accessed December 11, 2008, www.jnj.com/connect/news/corporate/20081027_151000 31. Sarah Rubenstein, “Novartis Spends Big on Diversification”, The Journal Health Blog (April 7, 2008), accessed December 21, 2008, http://blogs.wsj.com/health/2008/04/07/novartis-spends-big-on-diversification/ 32. , “National Jewish Health and Roche Diagnostics Corporation Reach Agreement to Pursue Environmental Molecular Diagnostics Opportunities” (September 10, 2008), accessed December 11, 2008, http://www.reuters.com/article/pressRelease/idUS134552+10-Sep- 2008+PRN20080910 33. Andrew Jack, “GSK chief pushes for expansion into new markets”, The Financial Times (June 13, 2008), accessed December 21, 2008, http:// www.ft.com/cms/s/0/617a6ef8-38e1-11dd-8aed-0000779fd2ac.html?nclick_check=1 34. PricewaterhouseCoopers, “Pharma 2020: The vision”, pp. 24-25. 35. Robert S. Huckman & Eli P. Strick, “GlaxoSmithKline: Reorganizing Drug Discovery (B)”, Harvard Business (May 17, 2005). Available for order at http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=605075 36. Milken Institute, “Financial innovations for Accelerating Medical Solutions”, Vol. 2 (October 2006), accessed December 15, 2008, http://www. milkeninstitute.org/pdf/fin_innov_vol2.pdf 37. Aerotel Medical Systems media release, “Aerotel and Medicronic-Vodafone Launch Innovative Wireless Homecare System in Spain” (April 4, 2008), accessed December 8, 2008, http://www.openpr.com/news/41301/Aerotel-and-Medicronic-Vodafone-Launch-Innovative-Wireless- Homecare-System-in-Spain.html 38. Bigelow JH et al “Analysis of healthcare interventions that change patient trajectories”, The RAND Corporation, 2005, pg xxvi 39. Audit Commission “A spoonful of sugar: Medicines management in NHS hospitals”, December 2001, pg 19 40. For example, Giuffrida A and Torgerson DJ, “Should we pay the patient? Review of financial incentives to enhance patient compliance”.British Medical Journal 1997 315: 703-707 41. Cathy Weselby, “Improving health at the office”, Silicon Valley/San Jose Business Journal, accessed January 12, 2009, http://sanjose.bizjournals. com/sanjose/stories/2009/01/12/story2.html 42. Helen Loveless, “The comeback kid’s medical cover”, on Sunday (October 29, 2007), accessed October 15, 2008, http://www.thisismoney. co.uk/insurance/health-insurance/article.html?in_article_id=425744&in_page_id=39 43. Based on the midmarket exchange rate of £1.00 to US$1.48474 on December 22, 2008. 44. Audit Commission, “Health Data Briefing No. 12. Spending on disease: Diabetes” (September 2008), accessed December 15, 2008, http://www. audit-commission.gov.uk/Health/Downloads/HealthDataBriefing_spendingondiabetes.pdf 45. Total expenditure on pharmaceuticals and other medical non-durables expressed as a percentage of total healthcare expenditure ranges from 12.4% to 29.7% in the OECD countries. On average, it is thought to represent about 15% of the budget. For further information on healthcare expenditure in the OECD countries, see OECD Health Data 2008 (October 2008).

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