Pharma needs to collaborate to survive

A flurry of merger and acquisition (M&A) deals such as Roche/Genentech, Pfizer/Wyeth, GlaxoSmithKline/Stiefel and Merck/Schering Plough, have been triggered by the imminent expiry of blockbuster drugs. But PwC says collaboration presents an alternative to M&A that will be more flexible and value-enhancing in the long term, pointing to the recently announced joint venture in which GlaxoSmithKline and Pfizer have pooled their HIV/AIDS-related assets.

“In the next decade no pharmaceutical company will be able to profit alone,” says Jo Pisani, partner in the pharmaceutical and life sciences practice at PwC. “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.”

The financial crisis may force many more companies into collaboration. In fact the government’s response to the economic climate has allowed collaboration outside the pharma sector that would have been unthinkable before, such as waiving competition issues for mergers.

While the problems of falling R&D productivity and shrinking pipelines that are besetting pharma are well-rehearsed, 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, says PwC. A study by the RAND Corporation estimated the financial savings from having 100 per cent participation in disease management programmes for asthma, chronic obstructive pulmonary disease, diabetes and congestive heart failure in the US to be $28bn, or around 2 per cent of total US health expenditure. And there would be additional benefits to the economy in terms of working days saved.

Pharma companies will need to move fast to stake the territory, because several non-pharmaceutical companies have already entered the arena. For example, mobile phone operator Vodafone has joined forces with Spanish telemedicine provider Medicronic Salud and device manufacturer Aerotel Medical Systems to offer a wireless home monitoring service. Similarly, the insurance company 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 with reduced premiums.

The changing face of the healthcare model, coupled with demands from different stakeholder communities, including the patient, will require pharmaceutical companies to provide holistic solutions in the place of narrow treatments, says Pisani. “This means that pharmaceutical companies must work more with other parties.”

This could include organisations ranging from academic institutions, hospitals and technology providers, to companies offering compliance programmes, nutritional advice, stress management, physiotherapy, exercise facilities and health screening.

“In the future, collaboration will be a do or die requirement for pharmaceutical companies and healthcare payers alike,” says Pisani. “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 [it will not work] by 2020.”

Pisani continued, “If the leading pharmaceutical companies cannot change their business models rapidly, other firms may ultimately feature more prominently on the healthcare scene than they themselves. The shift in the market and strategic importance of data and new technologies opens the door to new entrants to take a leading role, such as Google and Microsoft, data providers and companies with strong brand reputations that can be stretched such as GE Healthcare.”

One approach could be to adopt a federated model, in which a pharma 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 would be a federation to address cardiovascular disease that includes drugs companies, clinics and diagnostics to provide diagnosis and treatment but also nutritional advisors and stress management services to prevent disease. All the parties would be rewarded based on patient-centred measures such as increased quality of life.

Only the very largest pharma companies have the means to support a fully diversified model, according to PwC. This would involve expanding from the core business into the provision of related products and services, such as diagnostics and devices, generics, nutraceuticals and health management. Johnson & Johnson is pharma’s leading exponent of this approach. This approach would enable companies to reduce reliance on blockbuster medicines and spread risk by moving into other areas of the market.

Simon Friend, global pharmaceutical and life sciences leader at PwC, says, “Most large pharmaceutical companies use external contractors to supplement their in-house resources, but very few firms have taken the next step. Yet there is no reason why many companies could not outsource R&D, manufacturing and promotional activities.”

Friend says this would allow companies to focus on their main value-adding functions of project management, business development, regulatory affairs, intellectual property management, pharmacoeconomic analysis and the formation of good relationships with key opinion leaders and healthcare payers.