George Day (Co-director, Mack Institute for Innovation Management) and Prashant Nikam (Global Marketing Lead, Mozobil and Legacy Brands, Sanofi)
The workshop began by sharing what is known from other industries about best practices in enabling customer solutions, and the results of in-depth field interviews with 27 senior pharmaceutical executives, heads of the pharma practice at management consulting firms, and influential payers and providers. These interviews were done by Anuj Kapoor (WG’13) as part of a three-month research project.The research identified five reasons for erosion of the current commercial model:
- Loss of patent exclusivity, which creates less differentiation between products
- Decreased access to physicians
- Shift of power to the payers
- Changes in the reimbursement model that put more focus on value and outcomes
- Increasing patient advocacy and empowerment
Underlying these external factors are emotional and human issues also driving change in the healthcare sector. Chief among them are the chronically low patient medication adherence rates, and low levels of trust of the industry by the public.
“We found very strong agreement that the current model is broken. Executives admitted that the industry needed to evolve. By 2020, payers will expect pharmaceutical manufacturers to provide such services such as prophylactics and healthcare packages.” Day reported.
As environmental pressures mount, the need for a more responsive commercial model becomes more urgent. “What do we mean by customer solutions?” Day asked. “A solution fills a human need—people want solutions. Products just perform functions. A solution is a bundling of products, services, information, with the goal of helping someone.”
Three levels of possible solutions were identified. Level 1 is the current state, and includes programs such as bundling of products and information around a disease area. Going forward, the industry must reach a Level 2 or, ideally, Level 3 of customer solutions. These two levels are still emerging but are crucial for surviving in the future environment: Level 2 incorporates all of Level 1 and includes risk-sharing by making payment contingent on outcomes; Level 3 solutions are envisioned as integrated, co-created solutions that are specifically designed to improve patient outcomes.
No single definition of what a successful Level 3 will look like has emerged. That was one of the conclusions of the research, said Prashant Nikam, Global Marketing Lead, Mozobil and Legacy Brands, Sanofi. There is no doubt the current business model of the pharmaceutical industry needs radical transformation: The industry has lost 50% of its market capitalization in the last 10 years, he said. A cautionary tale from the technology sector is how Kodak came late to digital photography. Going forward, the “blockbuster” drug model is not sustainable. Pharmaceutical manufacturers will be expected to “move from volume to value,” Nikam told attendees. “Companies will need to bundle products and services together to create value for customers across the healthcare system. Patients must become more engaged, health outcomes need to be improved and optimized, and costs need to be reduced.”
Nikam cited three examples where companies have launched small-scale Level 3-like solutions that engage patients, improve outcomes, and have the potential to reduce costs. In Kenya, access to insulin for diabetes patients was a problem. Patients needed to travel long distances to get insulin and would often take smaller doses to save money. One company, working with faith-based NGOs already in Kenya, created a sustainable supply chain that took into account the need to refrigerate insulin. While these efforts did increase the company’s volume of insulin sales, it was done in one relatively small market and the overall effort was never monetized.
In another example Nikam shared, Sanofi funded a mobile mammography unit that travels village to village to reach women in remote, rural areas of Iraq. “These women were not part of the healthcare system,” Nikam said. “By bringing mammography technology to them, they will not only come into the healthcare system, but potentially have more long-term positive outcomes due to earlier detection.” As with the previous example, this Level 3-like solution had a big impact on patients, but has not been monetized as a business offering.
Merck & Co., Inc. created a wholly owned subsidiary, Vree Health, aimed to improve the reach, cost-efficiency, and efficacy of health care through innovative technologies that meet the needs of health care providers, payers, and consumers. For instance, one of their products/services addresses the problem of unplanned hospital readmissions. The subsidiary’s goal is to reduce the burden of unnecessary readmissions within the 90-day post-discharge date. Vree Health combines technology and human interactions to keep patients healthy and at home following hospitalizations. While this Level 3 Solution is not directly impacting Merck’s core business, “they are engaging with the healthcare system. They could use it to branch out into something that does bring money into the business,” Nikam said. Another potential Level 3 solution could also come from Merck’s newly acquired weight management business. Overall, through these two recent acquisitions, Merck is demonstrating its commitment to develop or evolve their current commercial model and diversify their offerings.
Each of these examples places the patient at the center, Nikam said, and provides care coordination through bundling or aggregation of products and services. This type of aggregation allows a firm to have more control over costs, outcomes, and care delivery efficiencies. However, Level 3 solutions will not come from just one company or even just one segment of the market. For instance, the insurance industry can offer a financing solution, but that alone does not improve outcomes. The randomized clinical trials run by pharmaceutical manufacturers cannot ensure care coordination. But combining the information gleaned from clinical trials with innovative insurance plans can improve outcomes, empower patients, and may lower costs.
“You need to start care coordination in little pods; then they must be scaled up,” Nikam said. However, the roles to create and scale such projects are not inherent at legacy institutions.
Another change required for success in building a new commercial model is accepting lower profit margins for such start-up Level 3 solutions, Nikam said. “Management must be able to invest in lower profit margins. Don’t expect a $1 billion return from these integrated solutions. Having diverse business streams with varying degrees of margin structures can still deliver the steady growth that shareholders want to see,” he added.
Seeing the market from your customer’s point of view allows you to see their pain points—and shows you how your capabilities can be used to offer a solution, Day said. “What’s very important in any potential solution is to have one accountable point of contact for your customer. The aim of any Level 3 is to create a win-win scenario for the buyer and seller. Each solution must be tailored to each customer. Your supplier becomes a part of your development team so that you can provide superior service on the customer’s terms.” Other components of a viable Level 3 solution include a “have it your way” mindset, the ability to orchestrate an ecosystem, incentives that welcome input from outside the firm, and creation of cross-functional teams that focus on customer segments or key accounts. “You will need to develop close relationships at multiple levels with your customers and to have an understanding of the customer’s economics,” Day added.