Swallowing the Innovator's Rx - Pharmaceutical Executive

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Swallowing the Innovator's Rx

Pharmaceutical Executive


Three Keys to Change

Incumbents (the companies being disrupted) typically view such transformations as events to be forestalled through competitive maneuvering, strategic acquisitions, and lobbying. From the perspective of the consumer and other stakeholders, however, disruptions offer significant advantages. In the case of America's healthcare system, a disruptive solution could potentially reduce cost, improve care, and broaden coverage while unleashing significant growth potential for pragmatic pharmaceutical manufacturers and other sector participants. The Innovator's Prescription provides a detailed diagnosis of how this transformation will take place.

Technology A key driver of market disruption is the introduction of new technology. In the computer industry, disruption was sparked by the microprocessor. In healthcare, new imaging systems and gene-typing biomarkers will improve the accuracy of diagnostics, while precise surgical procedures and compounds tuned to unique genes and their expression will improve efficacy and predictability of outcomes. Already, we see evidence of the power of integrated diagnosis, treatment, and dosage.

In a recent agreement with health authorities in the UK and France, Johnson & Johnson has guaranteed that its drug Velcade (bortezomib) will be effective against a specific form of multiple myeloma—or the company will refund the cost of therapy. J&J can do this because the treatment is undertaken only after a definitive diagnosis has been made with a specific biomarker. Pharmaceutical firms that are unable to match this pay-for-results offer will find their market position diminished or eliminated.

Diagnostic precision will tend to fragment target markets, as patient populations become more narrowly defined; the age of the one-compound-cures-many "blockbuster" approach is coming to a close. This poses a problem for large manufacturers that require huge breakthrough products to fill multi-billion-dollar gaps in their portfolios.

Business models As disruptive technologies emerge in a market, they are accompanied by new business models that enable the technology to reach customers in a cost effective way. These new models often create challenges for market leaders.

One way to meet those challenges is to allow a business unit devoted to the new technology to discover its own business model rather than trying to fit into the larger company's model. That is what IBM did in creating its PC business, and what Roche accomplished by keeping Genentech at arm's length until its model had the chance to mature.

The fragmentation resulting from precision diagnostics will require a new approach to production and a resetting of internal expectations around sales forecasting and the yields of R&D efforts. Firms with more flexible development, production, and distribution models will thrive in this new era while less responsive firms get bogged down with tactical responses (for example, realigning the sales force's compensation expectations).

The potential routes to discovering a compound can grow manifold as a firm moves into this new business model. Diagnostic firms might locate a biomarker and a firm can then seek an associated target. University researchers and start-ups might discover more targets, given their focus on particular patient segments. And internal decisions around compound prioritization will need to reflect complex assessments of how microtargeting may cannibalize more broadly marketed drugs.

Moreover, as the task of sorting patients and delivering complex therapies becomes more complicated, physicians and payers are likely to seek total solutions to the problems around a disease state, rather than simply a pill or injectable. They will look to pharma to provide diagnostics, monitoring of effectiveness, mechanisms to ensure adherence, and even behavior modification—demands that will be unfamiliar for many firms.

Value Network As the shifting business model enables a disruptive technology to achieve greater penetration, the value network of the industry is also transforming. In computers, the power and profits shifted from the integrated system developers (IBM, DEC) to the component manufacturers (Intel, Microsoft). For healthcare, new technologies and business models will empower a new class of providers; payer models will evolve to reward the models that underwriters see as more cost-efficient or least risky; and the role of the patient in the care cycle will shift from an isolated, passive recipient of care to a connected, knowledgeable participant in the diagnosis and therapeutic processes.


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