Caution: you are now entering a new world

pharmafile | February 1, 2010 | Feature | Sales and Marketing |  coleiro, industry 

Now is traditionally a time for both reflection and forward planning, of wiping the slate clean and making a fresh start. And so, as we move into a new decade, it is interesting to look at the issues facing our industry and perhaps to make a few resolutions and face up the challenges of the future head-on.

It is widely recognised that in recent years our industry has undergone rapid change. From a relatively clear, simple, business model with abundant opportunities for growth, it is moving to an era of uncertainty, with more complex, fragmented markets that offer fewer, smaller opportunities.

Senior industry figures have described the current situation as “the tipping point in the pharma industry” or that “we could be facing a nuclear winter scenario”. In short, there seems little doubt that our industry is in a state of flux. We face some serious challenges and the future is uncertain.

To get some insight into these challenges, and to better understand the latest industry thinking on how to meet them, Complete Medical Group interviewed 26 senior figures from a range of companies across the industry. They came from many different companies and geographies, and their roles covered global and local, clinical, commercial and pricing and market access, and big and small pharma.

One thing everyone was very clear about was that living in the old world is no longer an option – a view with which we strongly agree. What perhaps senior leaders are less clear about was how they are going to survive and thrive in this new world.

Pharma’s five big challenges

The interviews revealed five big challenges facing the pharma industry:

1. Getting the right market access & adapting to rising payer power

Not surprisingly, the increasing power of payers, and the broader implications for pricing and market access, was the ‘top of mind’ issue for our participants. Getting better at understanding payers, their relationships with other key stakeholders, and the value claims they’ll be looking for, as well as the pressures on healthcare budgets, were key challenges.

2. Re-defining the business model

There was widespread questioning of the current pharma business model. The question was one of future focus: whether to broaden from drugs into wider healthcare delivery and whether to move from treatment to diagnosis, from illness to wellness?

Others pondered the value of expanding from a focus on branded prescription drug into areas such as generics or OTC medicines, while a few discussed dividing R&D and discovery from commercialisation.

3. Better and more patient-focused innovation needed

Getting better at innovation was seen as critical. The ability to really harness new technologies, rather than just recognise their potential, and the flexibility to adapt to the “shifting sands” of government, payer and regulator policies were also seen as part of this innovation agenda.

4. Better decision making processes

More complex and challenging markets have created a need for better, more aligned decision making and action across the business and from Global to Local. Avoiding silos has long been a significant issue, especially for big pharma and companies involved in increasingly complex joint ventures and partnerships. Part of better decision making will be more efficient investment decisions, including filtering out weak pipeline products that won’t deliver value.

5. Engaging with the customer

The growing complexity of audiences and channels, including their use of digital and electronic media, and the regulations surrounding communication with healthcare professionals and patients, make meaningful interaction with users and decision makers increasingly difficult. There is a major need to better navigate these communications channels, especially around the balance between ‘pushing’ information to customers and helping them ‘pull’ the information they need. And let us be clear, this is a key battleground for the industry with regulators, and one which will either enable pharma to better engage more openly with key customer groups, or else be forced further to the periphery.

Although the context, combination and force of those challenges may be new, the fundamental  issues are not. They are the same questions the industry has been tackling for the last decade. However, are we any closer to solving these issues? Perhaps not. When asked what new skills and competencies pharma needed to unlock future growth, the responses included scientific selling, building the “customer voice” into all areas of decision making, digital strategies and pricing and market access skills.

These responses did raise alarm bells. It seems to us we have invested in nothing but key account management, customer insight, e-strategy, and payer activities for many years and yet these are the very areas highlighted in the ‘must do better’ box. So, what has all of this investment achieved? And why have we not fundamentally addressed the core issues we face? And importantly, if we do not address these issues, what might the implications be?

We tend to think of our own industry as unique, but there are analogies to be drawn and lessons to be learned from other sectors which have faced similar issues (see The Danger of Denial, opposite).

And in pharma, we have a challenging traditional business model which is coupled with a challenging healthcare funding model, but are the two sides really working together as stakeholders in healthcare provision to build the future vision? As one senior figure from our research stated: “We have been standing on the outside, jumping up and down shouting, it’s not fair, its not fair.” The industry must engage with and lead the process, otherwise the consequences could be the same as suffered by the music industry

A vision for the future

If this paints a bleak picture of the new world, many opportunities for growth exist in the future world. The question is, how can we best unlock them?

We believe at the heart of a vision of the future needs to sit a clear definition of what industry we are actually in. In the old world there was a clear focus on size for obvious reasons. We would argue that in the long term this ‘big pharma’ model cannot maintain the revenue and profit growth shareholders have come to expect sustainable to deliver historic levels of shareholder return. That is not to say the big pharma company is under threat, but the underlying business model of large global organisations focused primarily on developing prescription drugs from initial product discovery through to in market commercialisation is unlikely continue to be the norm. No longer will there be a one size fits all model. Again, looking outside our own industry for inspiration, the IT sector overcame analogous issues of product commoditisation, a new complex customer network, tough procurement systems and a downward pressure on prices, by applying innovation, specialisation and diversification.

We believe the same can and will happen in our new world. Businesses are already evolving in one of these two directions. One direction is to become more specialised, focusing on specific types of therapy areas, specific parts of the drug development process or most possibly both. The second direction is to broaden beyond prescription drugs and move towards becoming more diversified healthcare businesses. Certainly it is evident in the strategies of many of the larger pharma organisations that this is underway. But arguably this is only stage one of the process – could today’s big pharma company take a larger step in this direction to take an even larger slice of the overall healthcare pie?

This depends on a number of factors but what is clear is that to successfully evolve in the new world, companies need to be clear about where they want to evolve to and build the appropriate operating framework to support that position. One that may very well not look like the one it uses today. The challenge for us as an industry is to be completely clear on where our organisations want to be on that spectrum and how we each plan to get there.

New product development

Potentially one way in which we can re-shape our industry going forwards is to re-assess the way in which we create products. We are already seeing companies evolve away from the traditional clinically dominated product development process where R&D create new products in isolation and then commercial teams find a way to sell them, to more marketing led approaches were products are designed with customer input from a very early stage.

Could this potentially evolve one step further to a co-creation model where multiple stakeholders collaborate to create products all parties see as important innovations and share the risk and reward which is fundamental to R&D. The Translational Medicine Research Collaboration (TMRC), a unique collaboration partnering four Scottish universities, four NHS trusts, Scottish Enterprise and Wyeth is indicative of this emerging this model.

Clearly these private/public partnerships are not easy but they are common in many other areas of crucial public policy so why not in the healthcare arena?

New pricing

The world of pharmaceutical marketing has a relatively limited consideration to actively tinkering with the pricing lever. The mantra always seems to be ‘achieve the maximum price at all costs’.

In the old world that seemed to make very good sense as price was clearly very inelastic. Decision making physicians were largely concerned with making the best clinical choices, and with few credible substitutes available this choice was often the high priced, branded medication regardless of what it cost.

Demand in the new world however, is much more sensitive to price. The increasing role of payers as decision makers and the increasing availability of credible generic substitutes mean how a new drug is priced is not the simple question it once was. Potentially the whole approach to pricing could (and in some cases is) being radically reinvented. Instead of simple portfolios of higher priced branded medications and lower priced generics, future portfolios could be much more complex – with products at a range of different price points, with different priced products targeted at customers who are able to (and willing) to contribute different levels of investment in their healthcare. While current regulatory frameworks are not always conducive to innovative pricing (at least with benefits to provider as well as user), it seems some attempt to create better win-wins needs to be considered. We were challenged when presenting this subject at a conference recently that it was all well and good examining alternative pricing models, but innovations like this don’t work in our industry, which I thought was an interesting mindset! Our counter to that is simple. The old pricing model worked in the old world, but we no longer in that world. Our belief is that the industry has for too long been far too passive in driving alternatives and leading the debate with regulators and payers to look for new solutions. New world working needs new world thinking.

New branding

Fundamental to the theory of brands is building equity into an entity that has value over and above the core functional characteristics of product. Historically, in the pharmaceutical industry this has largely focused on product brands with specific patent lives. Potentially the emphasis for branding in the future could be quite different.

Instead of investing huge sums in multiple entities with short life spans, a more powerful (not to mention more cost effective) strategy could well be to focus on the corporate or franchise level brand – delivered via an endless stream of ever more superior product variants. So instead of consistently creating, building and watching their brands die, companies will have a real opportunity to build real long term emotional equity into their brands, potentially without the suffocating regulatory restrictions associated with current product brands.

And tomorrow’s list of the world’s top brands won’t be dominated by just the likes of Coke, Google and Sony but perhaps by other mega brands like Roche Oncology, AstraZeneca Neuroscience or Pfizer Health.

 Conclusion

It is clear that the pharma and healthcare models are undergoing serious re-evaluation. There is a sense that change is inevitable due to a variety of trends that are squeezing budgets and margins and posing severe challenges for development, marketing and communications. As we have seen, some possible solutions emerging, but just how profound a change is underway, and how well pharma is prepared for these changes, is still an open question.

A CASE STUDY: THE DANGER OF DENIAL

The record industry offers a salutary lesson on how rapidly changing trends in technology and customer behaviour can leave an industry’s business model obsolete within just a few short years.

In the year 2000, the record industry was dominated by a handful of global players-   Sony, EMI, Warner Music and Universal –  which had all profited from a prolonged period of growth in music sales.  Revenues and the traditional business model were locked into CDs and other physical formats, but the arrival of digital downloads began to change things very fast.

Music fans began sharing music through illegal peer-to-peer file sharing websites,  which  the companies responded to by mounting legal action against illegal filesharing services, rather than providing legal alternatives to them. They focused on fighting ‘the enemy’ and yesterday’s problems and didn’t lead change to finding new solutions. This contributed to customer disenchantment, poor communication and ultimately as the world moved on without them, tumbling revenues.

The internet age means artists can market themselves directly to fans via websites such as Facebook and MySpace, and artists such as Lilly Allen and The Artic Monkeys have emerged this way in the last decade. This new model calls into question the role of the record company, with some artists concluding they were now surplus to requirements. Radiohead, one of the biggest bands in the world ended its contract with EMI in 2007, and released its new album In Rainbows direct to fans over the internet. In a daring move, the band also allowed fans to pay as little or as much as they wanted for the album.

“I for one regret that we weren’t faster in figuring out a sustainable model for the internet,” stated Geoff Taylor, Head of British Phonographic Industry (BPI).

The record companies fought to preserve the old business model when the world had moved on. The digital age is not all bad news for the record industry, however.  Despite the widespread illegal downloading of songs, consumers are now purchasing records amount of singles as digital downloads, reviving a format some had feared dead.

For further information please contact ConsultComplete (a division of Complete Medical Group) via info@consultcomplete.com or via phone on +44 1625 624003