In the current global environment creation of value in pharmaceutical industry, no matter whether in India or globally, is really an uphill task as the constraints, limitations and opportunities often cross each other. Adding value or creating value goes beyond business models. If we can create value, we may automatically build business models. It is important to create and deliver value to ultimate customers like patients, payers and providers.
The triangle of patient, payer and providers (3 Ps) of pharmaceutical products and healthcare services is going to be synergetic with each other and hence, variety of innovative dimensions can be opened to serve and create value for these 3 Ps. A holistic chain of creation of value from medical condition will give insights to develop great value at any junction of the value chain. Each organisation can create uniqueness around this chain and create superiority with its capability and obtain results.
The question of adding value is all pervasive. It becomes clear that if one wishes to add value or create value, the dimensions flow beyond himself/herself, his/her product or services and organisation towards society.
SOCIAL DIMENSIONS
Fortunately, pharmaceutical business has two distinct dimensions and sometimes they act opposite to each other in a given situation. These two dimensions are business and social dimensions.
A social dimension, all over the world, is to put trigger on rationalising the prices by different regulations, models and methodologies, while the business dimension compels organisations to improve their margins, create investment for research and development (R&D), develop new products, molecules and also expect returns from these investments which they have made by charging premium. There are many confrontations in operations between these two dimensions.
What is needed is to create a balance between these two seemingly opposite dimensions of pharma industry. Majority of decision making situations demand this balance before we start thinking of creating value.
In the current global environment, creation of value in pharmaceutical industry, whether in India or in the world, is really an uphill task as the constraints, limitations and opportunities are crossing each other. The situation gets further complicated as some entrepreneurs with a mindset to create businesses at any cost, compete with each other for market capitalisation, ranks, turnover, growth and profits, ignoring scientific character of this lifeline industry. In borderless economies with opening of global market, innovation plays a key role in value creation. This calls for synergy in business to create sizable surplus for ploughing back in research development. This is attempted through mergers and acquisitions. This is a largely adopted business model by many companies.
BUSINESS MODELS
Earlier issues of business were simpler as the value migration model was delivering its value to business by creating a molecule through robust R&D process to address diseases of patients and patenting it to recover the returns of R&D. It is true that these molecules did not necessarily cure and treat all medical conditions. However, these new medical entities provided support to manage various diseases thus adding value to social welfare.
Overtime, we added a few molecules which were rational in nature and created more extensions to the molecules. We patented these newly created combinations / platforms / dosages / galenical forms and gained competitive advantage. After the expiry of these patents we brought generics and continued the business on patent expired molecules. This is just an extension of value migration model.
This was possible till various countries adopted TRIPS compliance norms of patent protection. With the onset of expiry of a large number of patents, a large market, estimated at $80 billion by 2010, is opening up for generics. Today, generics have enormous competition and it is leading to a price war with perhaps no or low value to the organisation. Considering the high risk and investment needed for R&D and delays in commercialisation compel us to re-look at the earlier model and its utility. In fact, David Jones, executive director of Ciba Geigy observed in this context that "Most new drugs introduced in US market in this decade have been assessed by Food and Drug Administration (FDA) as essentially duplicating already available products."
Similarly, Dr Dey from BMS also point out that it does not necessarily create an entry barrier and hence the power which this business model had to create and add value to pharma business is weaning.
In the absence of such blockbuster model for the industry, it is important to look at how we really proceed further to develop a viable business model and go beyond business models to create value for society and conduct our business.
TRADITIONAL MODEL
Traditionally, we created value of molecule through R&D and grafted it on a disease treatment. Value based products were created with relevant features for it to be well positioned. We launched many new products and created recognition of products by physicians by building brand awareness. Branded medicines scored over generic medicines for a considerable time.
EMERGING MODEL
Now that environment has changed, we will have to consider elements like:
● Invest to develop innovative product and obtain patent
● Life of brand will last only as long as the life of the patent
● Chance of having significant market share in short period (3-4 years) is low
● Brand value to be focused on consistency and brand essence
● Leveraging of brand equity is essential. It could be even corporate brands
The purpose of any business is to create and retain the customer. The next couple of years will be a period of transition during which the product patent protection regime will be fully entrenched by effective implementation and development of jurisprudence. We need a model during this transition.
KEY DRIVERS
The key drivers for pharma for last 2 to 3 years relate to organic and in-organic growth. They were dependant on key variables like:
● Launching new products as quick as possible
● Adding more field force to cover more territories and improve reach
● Adding more speciality divisions to gain more penetration in a specific segment group
● Developing and marketing generics and improving the business share
● Starting international business through non regulated or semi regulated markets to improve overall margins
● Business intensifying through in-organic growth - mergers and acquisitions in India and abroad
It is uncertain whether these drivers will continue or decline. Considering the socio-economic, regulatory returns and streamlining of patent era, it is possible that key drivers for the period 2009 - 2011 will be different.
Revolutionary changes in the science of medicines and new tools of research curtailing the speed from laboratory to market, new alliances between pharma and biotech companies, better availability of venture capital and emerging partnerships with financial institutions public and private agencies will change the future direction of business development.
Adding value or creating value goes beyond business models. If we can create value, we may automatically build business models.
BIOSCIENCES INDUSTRY
There are certain forces which are changing the total bioscience businesses inclusive of healthcare, animal health and agricultural business. The forces behind this are:
● Changes in demographic profiles of patients to high internet connectivity, increased health consciousness, new patients of consumer spending will impact market forces
● Available capital has high volatility. The biotech boom is so far producing fruitless profitability. A best fit networking business model will have to be designed
● Value migration is becoming difficult due to pressures on pricing and increasing bargaining power of buyers
● Management techniques like merges and acquisitions / consolidation / shakeouts to gain inorganic growth are losing out first mover advantage
● Innovative business models are creating value but they are based on technology requiring considerable gestation period. The commercialisation of new products is becoming more and more difficult. Recent trends indicate the need for pharmacoeconomic studies to justify price with therapeutic superiority
● Health infrastructure, diagnostics and devices are helping facilitation of patients and their diseases
● Pharma industry, which is a maturing sector, will still have to bear the brunt and act as stars or cash catalysing support for the transition. Growth and competition will remain the concerns of the industry
Considering the maturing phase of pharma industry in biosciences industry, it is important to revitalise the industry models, norms and standards. Almost from 1960's the same model is being used with extending forms. Significant changes, due to maturity of pharma industry in globally competitive conditions, are warranted.
Michael Porter in his "Revisiting Healthcare" has provided a few principles of value-based competition.
PRINCIPLES OF VALUE-BASED COMPETITION
● The focus should be on value for patients, not just lowering costs
● Competition should centre on medical conditions over the full cycle of care
● Value must be driven by provider experience, scale and learning at the medical condition level
● Competition must be based on results
● Results information to support value-based competition must be widely available
● Innovations that increase value must be strongly rewarded
● Competition should be regional and national, not just local
● High-quality care should be less costly
Close look at these principles would provide three approaches - Focus on value for patients; value must be driven by results and value for money should be built in the proposition.
How do we as industry move towards these three approaches? Porter further highlights the movement.
VALUE-BASED COMPETITION: IMPERATIVES FOR PROVIDERS
● Focus on redefine the business around medical conditions of patients
● Choose the range and types of services provided
● Organise around medically integrated practice units
● Create a distinctive strategy in each practice unit
● Measure results, experience, methods and patient attributes by practice unit
● Move to single bills and new approaches to pricing
● Market services based on excellence, uniqueness and results
● Grow locally and geographically in areas of strength
CREATING VALUE
Value creation in pharma business is dependant on four building blocks. They are:
● Shift from opportunistic to focus
● Shift from a fully integrated pharma company model (FIPCO) to using partnerships to manage risk and return
● Shift from science-driven provision of specific drugs to providing customer solutions
● Shift from functional to an integrated business organisation model
The models suggested to improve and provide value creation and add value are:
Shift from opportunistic to focus
● Focus is key - increases probability and lowers cost of developing and commercialising for organisation
● Areas: e.g. Biologics - Genentech, Drug design - Vertex pharma and Patient / physician groups (disease or therapy groups) - Novo
● Focus on patients' medical conditions and developing integrated practice
Shift from a fully integrated pharma company model (FIPCO) to using partnerships to manage risk and return to provide fully equipped practice
● Lowers risk and volatility
● Outsourcing capabilities that are not central to their strategy - IT, Manufacturing and Administration
● Partnerships in areas of New drug research and commercialisation e.g., Lipitor took advantage of Pfizer's marketing capability
● Reaching primary care physicians needs to be treated differently
Shift from science-driven provision of specific drugs to providing customer solutions
● Traditional model- address disease but don't necessarily cure them or meet needs
● Strategy to provide excellence, uniqueness
Holistic chain of creation of value from medical conditions will give insights to develop great value at any junction of the chain. Each organisation can create uniqueness around this chain and create superiority with its capabilities and results.
In nutshell, every organisation will have to create a unique space around this value chain, co-create the bundle of services integrated to the medical conditions, speciality delivery with quality and create super complementary effect on the provision of value to the patients, payers and providers.
(The author is founder and Managing Director of Interlink - A business consulting firm in pharmaceutical & healthcare industry based in Mumbai.)