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Pharma 2020: Challenging Business Models Summary

Core Content

The document "Pharma 2020: Challenging business models" is part of a series by PricewaterhouseCoopers that explores the future of the pharmaceutical industry. It argues that traditional fully integrated business models are becoming obsolete and that more collaborative approaches will be necessary for success by 2020.

Main Trends and Challenges

• Market Changes: The pharmaceutical industry is facing significant transformation due to:
  • Rising healthcare costs and the increasing demand for cost-effective solutions.
  • The shift from selling medicines to managing health outcomes.
  • The growing influence of healthcare payers, providers, and patients in decision-making.
• Technological Advancements: New technologies such as virtual R&D, semantic technologies, and computer-aided molecule design are enabling more efficient and innovative approaches to drug development.
• Global Demand: Emerging economies will experience rapid growth in medicine demand, but may struggle to fund it, putting pressure on pharmaceutical companies to collaborate and offer value beyond just drugs.
• Outcome-Based Pricing: Governments and health insurers are increasingly tying payments to the outcomes of treatments, requiring the industry to focus on broader health management.

Key Business Models and Collaborative Approaches

Federated Model

• A company creates a network of separate entities (e.g., universities, hospitals, technology suppliers) with shared infrastructure and goals.
• Advantages:
  • Enables diversification beyond core offerings.
  • Combines the benefits of scale and agility.
  • Encourages cross-fertilisation of ideas and expertise.
• Disadvantages:
  • Requires careful management of interdependence and trust.
  • Potential for underperformance among partners.

Virtual Variant of the Federated Model

• Most or all operations are outsourced, with the company acting as a management hub.
• Advantages:
  • Reduces capital outlay and converts fixed costs to variable costs.
  • Increases flexibility and resource efficiency.
  • Avoids the need for large mergers and reduces integration challenges.
• Disadvantages:
  • Risk of supplier dominance or failure.
  • Potential for earnings dilution due to shared value across the supply chain.

Venture Variant of the Federated Model

• Companies invest in a portfolio of external ventures in exchange for intellectual assets or capital growth.
• Examples:
  • GSK's SR One fund, which has invested over $500 million in biotech companies.
  • Novartis and Pfizer's corporate venture capital funds.
  • AstraZeneca's spin-off of its gastrointestinal research into a private equity-backed company.
• Advantages:
  • Enables access to new technologies and expertise.
  • Offers risk-sharing and IP protection.
• Disadvantages:
  • May lead to fragmentation of R&D efforts.
  • Requires careful management of intellectual property and returns.

Fully Diversified Model

• A company operates in a wide range of therapeutic areas and services.
• This model is seen as a future direction for the industry, particularly as it moves away from traditional R&D and commercialisation models.

Why Collaboration is Essential

• R&D Productivity: Traditional models are not sufficient to meet the demands of 2020; collaboration is needed to improve R&D productivity and reduce costs.
• Outcome Management: Companies must move from selling products to managing outcomes, which requires integrating with healthcare providers and payers.
• Global Partnerships: To tap into emerging markets and scientific innovation, pharmaceutical companies will need to collaborate with a wide range of stakeholders, including academic institutions, technology providers, and lifestyle service providers.

Examples of Collaborative Initiatives

• Lilly: Transitioning to a fully integrated pharmaceutical network, collaborating on virtual R&D projects.
• Debiopharm: Licensing promising candidates from academia and biotech, then developing and out-licensing to Big Pharma.
• Shire Pharmaceuticals: A model virtual company that outsources almost all functions except for its genetic therapy division.

Conclusion

• The pharmaceutical industry must move away from traditional, siloed models and adopt more collaborative and integrated approaches.
• The federated model, particularly its virtual and venture variants, is seen as the most viable path forward due to its efficiency and flexibility.
• The shift to these models is being accelerated by economic pressures and the need to adapt to outcome-based healthcare systems.
• Collaboration is no longer optional but a strategic necessity for survival and growth in the evolving pharmaceutical landscape.

References and Further Reading

• The document references previous reports in the Pharma 2020 series, including "Pharma 2020: The vision" and "Pharma 2020: Virtual R&D".
• It also cites examples from other industries, such as the semiconductor and medical devices sectors, to illustrate the benefits of collaborative models.