Challenging times require bold moves if pharma companies are to survive the immediate storm

June 25, 2009

Even the largest pharmaceutical companies will soon need to step outside their sector and collaborate with other organisations, according to new research by PricewaterhouseCoopers (PwC). Recently announced activity such as GSK and Pfizer’s new HIV-focused venture confirms that pharmaceutical companies are exploring new ways to collaborate.

At the same time, a flurry of merger and acquisition (M&A) deals have been triggered. While M&A will continue, there are alternatives, such as collaboration, that PwC believes will actually be more flexible and value-enhancing in the long term.

PwC believes that the financial crisis may force many more companies into collaboration. Collaboration could address the current funding crisis for biotech firms but this requires an immediate response. In fact the pressure to change to new business models could come from outside the pharmaceutical sector, perhaps triggered by regulators, investors, and healthcare payers.

There is plenty of evidence to suggest that there are significant benefits from a collaborative approach with longer term aims. A study by the RAND Corporation estimated the financial savings from having 100% participation in disease management programmes for four diseases (asthma, chronic obstructive pulmonary disease, diabetes and congestive heart failure) in the US. They estimate the net savings to the health system to be $28bn (around 2% of total US health expenditure), with additional benefits to the economy in terms of working days saved.

Moreover, companies will need to move fast, because several non-pharmaceutical companies have already entered the arena. Vodafone has, for example, joined forces with Spanish telemedicine provider Medicronic Salud and device manufacturer Aerotel Medical Systems to offer a wireless home monitoring service. Similarly, Prudential is collaborating with Virgin Active Health Club to offer a critical illness policy that provides subsidised gym membership and rewards people who exercise regularly by reducing their premiums.

The changing face of the wider healthcare model globally, the demands from different stakeholder communities, including the patient, will demand that pharmaceutical companies provide holistic solutions not narrow treatments. In tomorrow’s world this means that pharmaceutical companies must work more with other parties. To do so they will have to ‘profit together’, by joining forces with a wide range of organisations, from academic institutions, hospitals and technology providers to companies offering compliance programmes, nutritional advice, stress management, physiotherapy, exercise facilities and health screening.

Alina Lavrentieva, partner, leader of pharmaceutical industry practice, PricewaterhouseCoopers in Russia, commented: “In the future, collaboration will be a ‘do or die’ requirement for pharmaceutical companies and healthcare payers alike. Big Pharma’s traditional fully integrated business model enabled it to ‘profit alone’ successfully for many years. The top companies saw their market value soar 85-fold between 1985 and 2000. But this model is now under huge pressure and if not already broken, is predicted that by 2020 will not work“.

“In the next decade no pharmaceutical company will be able to ‘profit alone’. It will be essential for pharmaceutical companies to develop effective medicines and address the demands of payers who will be increasingly well equipped to measure whether they are getting value for money. Extensive collaboration will take many pharmaceutical companies out of their comfort zone, but it’s the only way they will profit by 2020”.

During a Pharma Business Breakfast on 9 June 2009 held at Hyatt hotel in Kyiv, Ron Barden, leader of Tax and Legal practice for PwC Ukraine, noted that in Ukraine there was already substantial collaboration between international pharmaceutical companies and Ukrainian hospitals and doctors, particularly in the field of clinical trials: “The trend is expected to increase as Ukraine expands its reputation as a suitable location for preliminary analysis and clinical trials”.

A new model to the pharmaceutical industry is the integrated (or federated) model, whereby a company creates a network of separate entities with a common supporting infrastructure. These might include universities, hospitals, clinics, technology suppliers, data analysis firms and lifestyle service providers based in numerous countries. An example of this would be a federation to address cardiovascular disease, here the federation could include drugs companies, clinics and diagnostics to provide diagnosis and treatment but also nutritional advisors and stress management services to prevent disease. All the players would be rewarded based on patient-centred measures such as increased quality of life.

The fully diversified model will only be followed by the largest pharma companies and is one in which a company expands from its core business into the provision of related products and services, such as diagnostics and devices, generics, neutraceuticals and health management. Johnson & Johnson is Pharma’s leading exponent of this approach. This model enables companies to reduce their reliance on blockbuster medicines and spread their risk by moving into other areas of the market.

Mr. Barden concluded:

“The fully diversified model is unlikely to be implemented in Ukraine as the relevant regulations are more restrictive than in the West. Utilising the services of independent hospitals and service providers and expаnding their collaboration will be the next steps”.

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