There's more to success than better efficacy. A 2003 study by McKinsey located the most important drivers of drug-value creation
in areas other than effectiveness. Specifically, the study showed that improved efficacy was the key driver of value creation in only two of ten therapeutic
classes. In the other eight classes, measures such as safety and convenience drove commercial success. While this study focused
only on blockbuster drugs, it confirmed a central idea of disruptive innovation theory: New performance measures are often
more important than the traditional metrics used by many firms.
Today, new standards of performance make the delivery mechanism at least as important as the efficacy of the delivered medicine.
For instance, development of controlled-release formulations can deliver longer-lasting doses of medication, or medications
in variable bursts. There is no change in medical efficacy, but the innovation can address important healthcare needs, such
as eliminating the need for children to visit the school nurse for medications or improving compliance of psychiatric patients.
Blockbuster drugs are not likely to be the value drivers they have been in recent times. At the top-end, new technologies
like genomics are beginning to realize their promise, leading to effective therapies for more tightly defined target conditions.
At the bottom-end, generics will continue their rapid growth. Their manufacturers—like low-cost producers in any industry—will
seek to move up-market into large categories with their own, more profitable compounds. Squeezed in the middle, and going
off patent, are the blockbuster drugs that provide so much of today's revenue.
Most pharma firms are focused on maintaining their price premium with ever-more effective, patent-protected therapies. They
face pricing pressure not only from generics, but also from payers, who are consolidating and increasing their power in the
United States. Genomics and other new fields on the frontier of pharmaceutical performance promise to alleviate that pressure.
Will customers really demand so much increasing efficacy? Clearly, some existing treatments are not yet good enough. For other
conditions, however, marginal improvements—some isomers, for example—are being introduced at steep price premiums. This unlikely
strategy can succeed, as shown by AstraZeneca's launch of Nexium to replace the off-patent Prilosec. But AstraZeneca invested
$224 million in DTC advertising in the United States, where the condition is very widespread.
Five Disruptive Trends
We see five disruptive trends in pharma that call for a different aproach than Nexium's build-a-better-mousetrap model. These
trends call for re-thinking competitive and portfolio strategy, placing greater emphasis on new forms of product differentiation,
and making money in unfamiliar ways.
The first is the much-heralded rise of consumer-driven healthcare. While the long-term effects of this trend remain to be
seen, some aspects are already apparent. DTC advertising of prescription medicines, the rise of health savings accounts, and
ready consumer access to the best available medical information are all moving companies away from the traditional doctor-centered
revenue models of the past. Firms must find new ways to create brand relevance for consumers, not just through advertising
(an effective but very blunt and expensive instrument) but also through initiatives, such as sponsoring user communities and
creating direct-marketing dialogues with consumers, the way media companies do.
Second, the pharma industry is largely missing its chance to capitalize on the rise of simple diagnostics, which eliminate
the need for lengthy and expensive lab tests. Simplified diagnostics in the primary care physician's (PCP's) office can provide
enough information for effective diagnosis, treatment, or disease management—and serve as new generators of product demand.
Historically, diagnostic firms haven't made much money, but time and again we have seen the profit migrate within an industry's
value chain. Just as Intel seized profits from computer makers by putting the most difficult design work inside its microprocessors,
diagnostic makers can raise their profits by precisely characterizing a condition and taking advantage of increasing patient
The third trend is to empower PCPs and nurses to provide treatments previously reserved for specialists, such as monitoring
diabetes management and cardiac treatments. This trend lowers costs, is more convenient for the patient, keeps the patient
with the trusted PCP, and cuts the expensive specialist physician out of the value chain.