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European Pharmaceutical Contractor

Paths to Progress

The life sciences industry stands at a crossroads – does it continue with its existing approach, or totally rethink how it operates in the wider healthcare ecosystem? In considering the future landscape, companies must consider some fundamental questions about their strategic direction

The challenges facing the life sciences industry over the past decade are well-known: scientific and commercial productivity has declined; the blockbusters medicines on which it has long relied for much of its financial prosperity have come off patent; sales forces are shrinking as physician access is restricted; and payers are increasing price pressures. Economic, social and technological forces are simultaneously
reshaping the world where the industry works.

As if this was not enough to contend with, the healthcare ecosystem in which the industry operates is changing dramatically. Healthcare costs are soaring, and the level of complexity is rising, with more complex pricing, reimbursement and payment mechanisms and more
complex regulations. Patients and consumers are, in general, becoming more demanding; they want more for their money – more and better care, delivered in more convenient settings, as well as medicines that work for them personally.

In addition, new organisations – many of them from industries that have not previously played a role in healthcare – are entering the healthcare field. Some of them could revolutionise the way in which diseases are identified and treated, providing opportunities
to introduce well-being and health lifecycle management services. For example, in January this year, scientists unveiled an antimicrobial gel that can eradicate drug-resistant bacteria. The underlying principles used to uncover this breakthrough were born and initially used in semiconductor manufacturing (1).

Most executives have tried to solve the immediate problems, but there has been little focus on the root causes (2). The industry as a whole has generally resisted developing new business models, and instead carried on with the traditional model of launching new
blockbuster medicines or selling lots of generics. It has made little progress in improving the safety profile of existing therapies, determining which therapies work for which patients or reducing the number of adverse events. Effective patient adherence programmes remain a largely theoretical concept. And while the industry remains data rich, it is weaker when it comes to turning data into insights.

Choices Past and Present

In response to these challenges and the changed ecosystem in which it operates, the life sciences industry has been consolidating, repositioning itself both therapeutically and geographically, and cutting costs. However, not all of these measures have been successful.

Between 1999 and 2011, the industry consolidated from 108 companies to 35 as a result of mergers and acquisitions (3). However, they have rarely resulted in a big surge in scientific or commercial productivity, with nearly every megamerger delivering relatively flat sales growth once the initial synergies have been realised. An analysis by IBM shows that, in most of the biggest deals, revenues from the target company have grown at a compound annual rate of five per cent or less, five years after the deal was completed. In addition, many
pharmaceutical firms have invested heavily in treatments for cancer and rare diseases, but this intense concentration on a few therapeutic areas has resulted in a deficit of patients available for clinical trials. Also, these therapies for very small patient populations cannot deliver the returns produced by massmarket medicines, unless they are sold for very high prices. Recognising the limited commercial potential of specialised treatments, some traditional pharma companies have hedged their bets by building generics subsidiaries which will also give them better access to growth markets.

Strategic Direction

The life sciences industry has been suboptimal in addressing the problems it faces. The primary reason is that the industry has seen itself as an independent product supplier to healthcare, rather than an integrated part of, and collaborator with, the other participants in the healthcare ecosystem.

The industry cannot fix everything in the ecosystem, but it certainly has a key role in optimising health outcomes and lowering costs. Looking ahead, it can stick to its current course – consolidating, cutting costs, tinkering with adjacent market spaces, reorganising the existing sales force and investing ever more money in searching for new medicines in crowded therapeutic areas. Or it can completely rethink how it engages with the ecosystem: the individuals, governments, healthcare providers, insurers or other life sciences companies that help keep people healthy.

Moving forward, a key challenge for life sciences companies is to decide whether they will move away from their current siloed thinking towards a systems thinking approach. Will they become true partners with peers and other healthcare stakeholders, helping to strip out waste within the healthcare ecosystem by optimising outcomes and reducing healthcare costs while maximising their profits? In considering the future landscape, there are four fundamental questions driving the strategic direction for life sciences organisations over the next decade.

1. What will your organisation’s role be in the healthcare ecosystem?

To define a new role and improve the public’s perception of the industry, life sciences companies will need to rethink and refocus on strategies that are consistent with the larger healthcare ecosystem.

Is your company focused on patients or people?
If you see the end user as a patient, then the company’s obligation is limited to providing medication that is distributed and administered by someone else. If the end users is seen more broadly, then providing the pill is still important, but your company and its partners may provide expanded offerings to address the needs of a person with the condition, the healthcare professionals and the family caregivers who constitute the care team.

Is your organisation focused on disease or on health?
A focus on disease leads to efforts aimed at driving broader and earlier diagnosis of that disease, while a focus on the health of the person ultimately increases the opportunity to provide value beyond the medication.

Is your company a supplier or a partner?
A supplier of products to the healthcare ecosystem brings its products to market at a negotiated price. Partners offer solutions, and value is sought by both parties in the relationship.

The industry today is perceived as being focused on patients with diseases that need prescriptions for products that it supplies. Life sciences companies are therefore viewed as suppliers of products – products that many perceive to be expensive, unsafe and ineffective.
The historical position of the industry has limited its permissions and value proposition, leading to it being often marginalised and maligned. From here, the question is how can an organisation refine itself to broaden and unlock the value of the industry?

2. What business will you be in?

In the past, life sciences companies have been in the business of developing innovative biopharmaceutical products. These products were proprietary and patent protected, and the margins provided sufficient return to justify the large amount of R&D, sales and marketing costs. This model served the industry well for decades, but there is now compelling evidence that it is no longer sustainable on a broad scale. The industry is faced with a set of choices to expand the definition of what it offers, or to fix the existing business.

Should your company focus on core biopharmaceutical business, but do it better?
You should focus on what you are good at, while considering what you can do differently to make the core business more productive. For instance, one option is to move away from mass market blockbusters into smaller, more targeted treatments to smaller patient populations. This presumes that R&D can discover and develop these drugs, that smaller quantities can be manufactured and distributed
efficiently, and that the commercial business can be transformed by using multiple channels.

Does your company diversify into a broader set of products?
This model has proven beneficial as a hedge against risk, as growth in one business can offset issues in another. In addition, the bringing together of these businesses can drive outcomes and lower overheads. The challenge here is defining an operating model that allows the individual businesses to grow, while creating value across the portfolio – showing ‘one face to the customer’ that can drive health outcomes and lower costs.

Does your company move into services and/or solutions businesses?
The real value here lies in bringing products and services together to offer solutions. The whole is greater than the sum when value is created that could not be achieved by buying the pieces separately. To be truly solutions focused, the company must be willing to provide
services and solutions that benefit or even include competitors’ products. This model provides the best chance for the life sciences industry to redefine itself and play a new and valuable role in improving care and lowering healthcare costs as it drives revenue and profit growth for shareholders – but it is difficult to implement.

3. How will you approach innovation to drive superior and more predictable results?

One of the great, unsolved challenges in life sciences is creating a more productive R&D function. The choices to solve this issue include:

Tighten the Belt, or Invest in Growth
One of the recurring themes in R&D has been reducing operating costs. Increased efficiency will certainly have a positive bottom-line short-term impact, but will not contribute to transformational R&D growth. Future R&D investments must be measured against how effectively they enable R&D organisations to drive planned and meaningful innovation. For this to work, life sciences companies will need to find innovative approaches to improve productivity, such as advanced analytics, in-silico research and transformed business.

Collaborative R&D Versus Networked Models
Becoming a systems player will require life sciences companies to collaborate with traditional and new healthcare stakeholders in a more flexible model, built on transparency and shared responsibilities, that focuses on achieving independent scientificdriven objectives. Companies will need to choose between the traditional ‘collaborative R&D’ model, tightly controlled by internal governance and metrics, or the more open ‘networked R&D’ model, based on shared control and objectives linked to scientific or health outcomes. True collaboration ultimately means unconstrained collaboration across all healthcare ecosystem stakeholders for the advancement of common goals. The overarching implication for any company adopting an open or networked R&D model is that it will have to become far more transparent. Thomas Lonngren, former head of the EMA, recently estimated that about 70 per cent of global life sciences R&D expenditure – now some $85 billion a year – is squandered (4). If the industry could halve that, it would save almost $30 billion a year.

4. How will you organise to maximise growth in the emerging markets?

Mature life sciences markets in the developed world are expected to grow by low single digits for the foreseeable future. While mature markets still yield the bulk of company profits, there is general agreement that growth will come from emerging markets. But how
do companies capture that growth and create a sustainable global model that can potentially benefit both mature and emerging markets?

Replicate Your Model All Over the World
The most obvious approach is to buy or set up local operations in these countries and give them significant autonomy to drive business results. This approach is relatively straightforward and can be done quickly at relatively low cost. The challenge results from the large number of independent, redundant operations that are using different technology platforms, processes and metrics. It is very
difficult to manage and will generate suboptimal economies of scale.

Globally Integrate the Enterprise
Another model is the Globally Integrated Enterprise – essentially, a shared services model for key back-office functions with common
systems, processes and metrics. These back-office functions support local ‘front offices’, where client-facing business takes place and
key local market decisions are made. Global centres of excellence are established in the geography where the capability is most efficient
and effective. This model results in a lower global cost structure that benefits both mature and emerging markets, while enabling the
organisation to think and act locally.

At the Crossroads

The life sciences industry stands at a crossroads, and the road signs are clear. Global business leaders are expressing a view that the speed, immediacy, unpredictability and viral nature of change mean they can no longer expect to manage through this environment.
Rather, success will depend on their ability to innovate through it. There is more than one way to successfully navigate today’s challenges, and each company will choose its own path – and the direction it takes will determine whether that company fades or flourishes.

References

1. IBM and the Institute of Bioengineering and Nanotechnology develop new antimicrobial hydrogel to fight superbugs and drug-resistant biofilms, January 2013. Visit: www-03.ibm.com/press/uk/en/pressrelease/40199.wss

2. Pharma 2010: The Threshold of Innovation. Visit: www-07.ibm.com/services/pdf/pharma_es.pdf. Fade or Flourish: Rethinking the role of life sciences companies in the healthcare ecosystem. Visit: www-935.ibm.com/services/us/gbs/thoughtleadership/ibv-lifesciences-fade-flourish.html

3. Capital IQ database, 2011

4. Stovall, S, Europe’s drug regulator says innovation must pick up, The Wall Street Journal, 15th December 2010


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Heather Fraser has over 25 years’ experience in the life sciences and healthcare sector, working across community pharmacy, the pharmaceutical industry and in consultancy. She is currently the Global Leader for the sector at IBM’s Institute for Business Value, where she develops strategies on related business issues. Recent papers have investigated the future of the life sciences industry and the implications for clinical and pharmaceutical development, manufacturing and the supply chain; alliance management between pharma, biotech and
academic organisations; and the impact of emerging markets on R&D. She has also developed a set of viewpoints based on interviews with life sciences and healthcare CXOs.
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