Reshaping biopharmaceutical business models
New technologies, customers and competition are forcing – and enabling – biopharmaceutical companies to find novel ways to create and capture value. Technological, economic, competitive and consumer-driven pressures are forcing fundamental changes in how pharmaceutical and biotechnology (“biopharma”) firms do business.
The buyers of their products are changing. The products themselves are changing. And the nature, and number of their competitors is changing too. These pressures are shifting how value is defined in the pharmaceutical industry, as well as how it’s captured – and by whom.
Those buying pharmaceutical products are now highly price-sensitive, and demanding proof of value. Buyers now include not just traditional government or commercial payers, but also increasingly discerning providers and more informed, connected and cost-conscious patients. These stakeholders have been empowered by ready access to advanced data and digital tools, raising expectations for a more engaging and efficient customer experience.
Scientific advances are making it harder for pharma firms to differentiate their products based on molecular design or mechanism of action alone. Same-class alternatives are getting to market faster, shortening the exclusivity period for ‘first-in-class’ breakthrough therapies. This demands differentiation based on proven outcomes, lower prices, or both in order to secure positioning in increasingly competitive and complex treatment pathways.
Digital technology and data can enable some of that differentiation. Rapidly-multiplying novel sources of data, including from wearables, plus improving analytical tools, offer huge promise - in boosting treatment efficiency, in engaging patients, and in turning products into more integrated solutions. But they also require new capabilities, partnerships, stakeholder relationships and organizational models.
Meanwhile, technology firms, wellness companies and other non-traditional players, many rich with consumer data, are venturing onto pharma’s territory. These competitors may be new to the timelines and risks of therapeutic R&D, but they are far ahead in understanding consumer behavior, brand-building, big-data analysis, IT and short-cycle innovation – all areas that are shaping today’s healthcare landscape, and where most pharma companies lack skills.
Biopharma knows it must adapt. The question is, how?
The disruptive forces of rapidly-evolving customer expectations, intensifying competition, digital and data democratization collectively threaten to drive down pharma’s profitability and sustainability – at a time when payers’ pricing squeeze has already put margins under pressure.
We have moved beyond the point of asking whether pharmaceutical firms need to invest in digital, embrace data analytics, focus on outcomes or be patient-centric. The important question now is how these changes should be implemented, and with what expertise, tools, partners, investments and organizational structures? The answers depend heavily on the businesses and therapy areas that a group operates in.
The forces affecting healthcare are changing how value is created and captured across the board. But they’re not doing so in the same ways, or with the same intensity, across all business segments, disease areas and geographies. Yet companies marketing patented drugs in any therapy area face similar pricing constraints and pressure to prove that their products deliver better outcomes.
Innovators can no longer count on creating entirely new treatment classes that allow long periods of patent-protected pricing. Maximizing product revenues is now more likely to involve deeper integration into evolving treatment pathways, via an expanding network of partnering relationships with payers, care providers, and/or data analytics firms.
This explains the growing number of data-enabled outcomes-based reimbursement deals between payers and pharma across high-cost disease areas. However, outcomes-based payment deals are notoriously tricky to implement.
New tools and technologies enhance customer knowledge and competitive position
How can biopharma companies employ new digital and data-driven capabilities to strengthen ties to stakeholders? Which digital solutions are most aligned with their current business models?
The new landscape isn’t only about challenges; it presents opportunities, too. Businesses that rely on novel delivery methods and reformulations in competitive disease areas can now create new digital tools and communication channels to further enhance outcomes and drive patient engagement. Whether monitoring and modifying patient behaviors, educating and intervening to support healthier habits, or simply creating more connected online communities, such tools can provide additional product life cycle extension opportunities and help grow companies’ understanding of their customers’ current and future needs.
This emerging world of more numerous, digitally- and data-enabled therapeutic solutions, new revenue models and new market participants is complex. Yet the fundamental needs of payers, providers and patients remain the same:
- Improved efficacy
- Outcomes at a lower overall cost of care
Pharma can now meet those needs in new and unique ways that extend beyond the drug, thereby gaining a competitive edge, and delivering more value at the same time. Yet it must move fast to do so.
Many of healthcare’s new players are accustomed to shorter product life-cycles. Those new entrants are rapidly investing in new capabilities of their own, and partnering with pharma’s traditional rivals. So pharma must quickly determine exactly how technological, economic and competitive forces are affecting each of its particular disease franchises and markets, in order to prioritize investment in the most innovative solutions in those segments
Focus matters more than ever...
This differential change across sectors and therapy areas has two broader consequences. First, companies need to be more flexible than ever to adapt their operating models and investment decisions to the markets they compete in to tailor approaches to each specific market.
Second, therapeutic businesses must rethink how they balance focus with diversification. “Companies will have to focus their capital more narrowly,” warns Pamela Spence, EY’s Global Life Sciences Industry Leader, “to ensure they maximize both value creation and capture” in their chosen business areas.
So companies must carefully consider, in the digitizing, price-pressured and consumer-driven new healthcare world, the most appropriate mix of therapy areas and businesses where they are best positioned to compete effectively. The portfolios that succeeded in the pre-digital, free-pricing, physician-centric era are likely to differ from the ones that can compete effectively in the data-swamped, value-focused, patient-centric era.
The arguments for and against diversification across businesses areas are also evolving. Can a single organization leverage the efficiencies of better data across both innovative R&D and generic supply chains? Does a consumer care business enable the kind of brand-recognition that can support prescription drug uptake? These questions aren’t new. But the answers to what kind of businesses it makes sense to have under the same roof are changing.
Over the last decade, pharmaceutical firms have been rationalizing and optimizing their portfolios through targeted deal-making. This increasing focus on core pharma franchises has rewarded “divestors” who have out-performed “non-divestors” by 11% in cumulative total shareholder returns over the last three years. As market forces and technology convergence demand more investment in data, digital, device and diagnostic technologies, therapeutic focus is likely to become even more critical for effective capital deployment.
At the same time, digital disruption is redefining “therapeutic focus” to be not only about biology and chemistry, but also the patient journey and related data. As a result, businesses that offer multiple products and deep expertise in particular disease areas are well-positioned to further strengthen their competitive position by creating integrative digital-enabled solutions across that therapy area. This in turn drives both disease understanding and new product development.
Going forward: focus matters, more than ever. Yet within their focus areas, companies need to build new capabilities across a wider range of technologies, and forge a broader set of cross-sector partnerships in order to achieve market leadership. Increasingly being “best in class” will not only mean having the best drug, but also the best data-enabled holistic solution.
Creating operational models to allow business model adaptation
No matter how focused or diversified, any strategy is only as good as its execution. Operational considerations are paramount as biopharma adjust and adapt their business models to remain winners in an increasingly complex, fast-changing marketplace.
Driving and managing the cultural changes required for pharmaceutical firms to take full advantage of the scientific, technological, data- and consumer-driven revolutions is as important as identifying the new kinds of required expertise – data scientists, behavioral experts, sociologists or psychologists.
In some cases where a group seeks to invest in a business with an entirely novel product and revenue model, attempting to integrate it into the existing organization may present too much of a culture shock – even if both groups share the same goal of improving patient outcomes. Setting up a separate venture is one solution. This limits the risks to the legacy business, but also prevents it from stifling creativity and innovation while reducing potential conflicts of interest.
Senior management needs to provide the leadership and establish resources and processes to understand changing stakeholder needs and competitive imperatives, and to adapt its portfolio and organization to the new landscape. The challenges are difficult, but present tremendous opportunities to establish new kinds of relationships with payers and patients, targeted application of rich data sources and tools, and a lasting advantage over the competition.