The Pharma Business Model: How to Avoid the Innovator's Dilemma

Pharma needs to adopt the business models of tech companies if it is to flourish

Healthcare is the largest sector in the world – around three times larger than banking – yet, in spite of the cutting-edge medical breakthroughs, it lags behind in other forms of innovation.

Pharma continues to spend heavily on R&D (around $140bn a year), which results in 30-40 new drug approvals each year, a return on investment that is not as strong as one might expect for the investment. The industry is an example of a ‘business-as-we’ve-always-done-it’ approach. 

The experiences of other disrupted industries may be relevant to pharma, such as:

  1. Continuing ‘business as usual’ and failing to innovate – for example, Blockbuster Video, Kodak and Borders
  2. Financial challenges – for example, 11 of the top 13 companies have more debt on their balance sheet than cash (AstraZeneca especially). J&J and Novo Nordisk are the only two with more cash than debt.
  3. Tech companies entering the space – for example, Blockbusters replaced by Netflix and Kodak by the iPhone. Google and Amazon are entering the pharma space, with Silicon Valley investing more in healthcare AI and tech than any other sector.

The pharma industry is ripe for disruption. In the past, our value was in new, cutting-edge and effective medicines, discovered, developed, manufactured, marketed and sold by pharma. However, pharma companies are no longer alone, and competitors are coming from unexpected sources. For example, Fuji Film was once a rival of Kodak but has now been in the pharma business for a while, with plans for $921m in pharma sales by 2024 and a bigger global push into complex biologics.

New types of companies can enter the market because the barrier to entry is lower. Once, the entire process was carried out in-house but, over time, pharma has outsourced large parts of R&D and manufacturing, as well as distribution, and sales and marketing. Thousands of companies now do the tasks that pharma companies need and around 30% of drugs were licensed in.

Outsourcing to the competition
This reminds me of the cautionary tale of Dell, which was a leader in the computer market when Asus (full name ASUSTeK Computer Inc), a Taiwanese company that manufactured PC circuits, proposed producing the motherboards as well – for 20% less. Seeing an opportunity to cut costs, Dell agreed. Asus came back with a similar proposal for taking over assembly, then supply chain management, and this continued until Asus controlled everything but the brand.

When Asus entered the market on its own, it offered a more affordable computer that was essentially identical to Dell’s. In effect, Dell had trained, funded and created this competitor and the result was disastrous, nearly putting the company out of business. It was a hard lesson, and one that pharma companies don’t seem to have learned from.

Once a clinical trial company, Covance has since grown to offer services at every stage of drug development, and there are thousands of outfits right across the pharma chain that can be outsourced to thousands of players.

With the traditional pay-per-pill model breaking down – and payers increasingly demanding pay-for-performance pricing models – the signs for increased financial turbulence and disruption are on the wall. Pharma needs to consider more options.

Below are the business models of VC-funded, disruptive companies in other industries, which may offer insights into what may happen in healthcare.

  1. Subscription (Netflix, Forward)
  2. Freemium (Dropbox, LinkedIn)
  3. Free (Google, Facebook)
  4. Marketplace (eBay, Uber, Airbnb)
  5. Access-over-Ownership (Airbnb, Zipcar)
  6. Hypermarket (Amazon)
  7. Experience (Apple, Tesla)
  8. Pyramid (Microsoft)
  9. On-Demand (Uber, TaskRabbit)
  10. Ecosystem (Google, Apple)

Could pharma consider some of these? The two that make the most sense for pharma are Subscription and Ecosystem.

The doctor will see you… straight away
Many health-focused disruptive companies are using a subscription model. For example, Forward is a Google-funded start-up that operates a wellness clinic like a high-end gym. Users pay $149 a month and get unlimited genetic and blood testing, weight loss planning, doctor visits and more. Many argue that Forward won’t work because it does not accept health insurance, but it has raised $100m and is opening clinics in several US cities, so the jury is still out.

Push Doctor allows subscribers to see an NHS doctor within six minutes via an online app. Its Subscription model of £20 a month is a lot cheaper than Forward but does not include all the options Forward does (some of which people may not use a great deal in any case). Another variant of the doctor model is Babylon, which for £5 a month allows you to converse with an AI app – not a human doctor, although the app can dial you into a face-to-face online call.

In the US, there are several options offering a subscription model – for example, HealthTap for $99 per month – although, so far, none accepts insurance. These new no-wait/instant physician models certainly improve customer experience for patients and could potentially boost health outcomes (as patients see physicians faster), plus they are mostly self-pay so reduce the economic burden on healthcare payers. Importantly, they are using new business models.

Greater than the parts
The Ecosystem model of Google and Apple could also be useful for pharma. Here, the drug is simply one part of the ecosystem – for example, search is one part of Google’s ecosystem but you pay for other elements, while Apple’s products link together seamlessly, so Apple computer or iPhone users are more likely to go for Apple Watch instead of a Fitbit.

This idea fits with the much-discussed ‘beyond-the-pill’ concept. While wellness and chronic disease management programs have been a part of pharma’s armamentarium for many years, they have not been money-making streams, rather service streams. With wearables, ingestibles and implantables offering huge opportunities for pharma companies to get involved in the health of their customers – as well as to know how well their medicines are working – it’s likely that medications will soon have an accompanying mobile app and devices to track a drug's outcome. 

The customer is always right
A transformation is waiting to happen in the pharma business model, a space that is slowly evolving as we focus on better clinical outcomes and value. The current gap lies between the theoretical understanding of the need and the execution of a plan for it. Real change must come from the business focus; currently, we are still focused on medicines when we should focus on our customers as people, not as physicians or patients or payers.

To do that, we need to become a data-driven industry focused on our customers’ needs not just medical breakthroughs. Beyond-the-pill approaches can now be considered as a way to enhance customer experience (think Google and Apple) and create new revenue streams and business models.

Start by asking the right strategic questions and prioritizing – the trillions of data points delivered by big data and AI are critical factors in the creation, improvement and delivery of beyond-the-pill strategies, but they can only help you get started. A real transformation in thinking is also needed.

As more patients participate in their healthcare, opportunities arise to understand customers in a holistic way; to analyze, understand and predict what would offer real value to customers, and deliver more comprehensive healthcare solutions.

Most of the beyond-the-pill strategies I have been involved with to date have focused on aspects such as patient engagement, next-best action modelling in multichannel and omni-channel strategies, sensors combined with patient data to predict future patient-specific lack of adherence, and much more. All have utilized big data and AI to deliver personalized solutions – they are innovative, but they are not new business models.

Silicon Valley VCs invest in healthcare AI more than any other sector and we work with many incubators to assist AI healthcare start-ups monetize their offerings. Pharma should be aware of the innovation these companies are offering, and should consider new offerings and models themselves.

Pharma must keep up with innovation and utilize the latest thinking, tools and technology to evolve its business models if it wants to become a success story and a value creator. Several years ago, I posed a question: Will Silicon Valley crush big pharma?

The answer depends on how pharma decides to move forward.

Dr Andrée Bates is the Founder and President of Eularis.

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