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Pharmaceutical Executive Digital Edition - August 2012

This sponsored supplement was produced by Focus Reports.  

Research and Editorial: Kirsty Avril Jane Walker 

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 Photo credit: Kirsty Avril Jane Walker			

But what does this recent categorization as a 'growth market' suggest for Mexico's pharma industry, recently left red-faced in regional second place after Brazil's bullish and apparently unstoppable growth?   

With an estimated value between 12 and 14 billion USD, the Mexican pharmaceutical industry has seen some significant changes over the last four years. The government has significantly increased public health spending and coverage in an effort to pull Mexico up from the bottom of the pile; according to the latest OECD Health Data, Mexico fared 33rd out of 34 OECD countries for total expenditure on public health as a percentage of GDP. The government is also fighting against rapidly increasing levels of chronic long-term illnesses rife in the population, such as diabetes.  

Most notably, the Popular Insurance Scheme 'Seguro Popular' increased its coverage from 17 million Mexicans to more than 50 million who were previously not under any kind of health scheme. Now almost every single Mexican in the country is covered under a public health system. 

The Federal Commission for the Protection against Sanitary Risk (COFEPRIS) oversaw several recent regulatory changes. Suppression of the manufacturing plant law in 2008 enables foreign pharmaceutical companies to distribute and sell their products in Mexico without the presence of a manufacturing plant on Mexican territory. The deadline for new generic drug registrations passed in February 2010 which, after being subjected to stringent bio-equivalency testing, cleaned up an estimated 7000 products from the market. Additionally, the antibiotics law was enacted in August 2011, requiring a prescription to be presented before any antibiotic can be dispensed. 

Rafael Gual, General Director, CANIFARMA			

For Rafael Gual, general director of CANIFARMA, the National Chamber of the pharmaceutical industry, there is one goal that COFEPRIS must still achieve, "Full recognition [from PAHO, the Pan American Health Organization], which will provide a strong opportunity for national companies to reach the Latin American market; a win-win situation for both industry and government."			

These wide-reaching changes have affected industry dynamics, and coupled with the patent cliff and the worldwide innovation drought, have opened up a bigger space for generics penetration and created the perfect storm that has pushed present multinational companies to either diversify, or to focus on niche markets. Mexico's solid macroeconomic policies and encouragement of foreign investment have also increased competition in the market, pushing local companies to take a side step on their strategies and in some cases to be more resourceful and aggressive in retaining and increasing their share of the pharmaceutical pie. 

Last but not least, there has been an undeniable shift of power towards the point of sale: pharmacies and supermarkets. Pharmacy giants are taking warehousing and distribution into their own hands and private label (store brand) drugs are becoming increasingly popular. Some say positioning a general medical service with doctors at the point of sale has created an even bigger demand for private label medicines at the expense of other brands. For many players in the market, it is a bitter pill to swallow. 

Mexico certainly offers a lot of growth potential. One can debate whether Mexico is still truly an emerging market, but as Ricardo Alvarez Tostado, president and general director of AstraZeneca Mexico points out, "It is not how fast you grow, but how consistent your growth is over time, and I genuinely believe that Mexico is very well positioned through a rigorous monetary policy and an improving fiscal policy. It is a democratic, free enterprise emerging market. Mexico is, and will remain, a strategic market for any industrial interest." 

But to grow, or in some cases survive, pharmaceutical companies must adapt to dynamic market conditions. Those who manage to achieve this flexibility in Mexico will be the ones with smiles on their faces in 2020 as successful players in one of the world's largest economies. 

Healthcare has been a top priority in Mexico for the last ten years, with the government working hard to keep its promise of universal coverage and increased hospital and medical infrastructure throughout the country.  

As a testimony to this, Margaret Chan, the director general of the World Health Organization, openly praised the Mexican government at the International Forum on Universal Health Coverage in Mexico City on April 2nd, 2012 by stating: "I am pleased to hear that Mexico is achieving its goal [of universal coverage], with health care available to everyone in the country. This gives the world an outstanding example of what can be achieved through high-level political commitment." 

Ricardo Alvarez Tostado, President and General Director, AstraZeneca Mexico			

Under the current system, there are three major institutions. The Mexican Institute of Social Security (IMSS) is the largest social security institution in Latin America. IMSS covers all formal workers in the private sector, which according to the latest IMS Health data represents 44.3% of the total population. 

The Institute of Health and Social Services (ISSSTE), covers all government workers and represents around 9.8% of the total population. Recent financial restructuring and cost saving initiatives within both IMSS and ISSSTE have contributed to a strongly pro-generics attitude within the two health systems. 

Thirdly, Seguro Popular was created in 2003 as a type of public insurance scheme to provide health service coverage for Mexicans not affiliated with any social security institution. Seguro Popular has been the main driver of increased public health coverage, and the government recently pledged that 80% of state-purchased medicines should be comprised solely of generic drugs. 

The Mexican pharma market has always had an historically low generics penetration, and these three initiatives are pushing it firmly towards a more generics-focused environment. 

Although the pharmaceutical industry has expressed its delight at such a noble scheme, the government healthcare systems have not been without their problems. Many people in the industry feel that when price is the only basis on which to win a government tender, quality falls into second place. 

Hector Carillo, general director of Apotex Mexico, points out that "The government continues to be a good business for us because supplying on time is becoming increasingly important. When it comes to timely and high quality product delivery, they know we can do it. But we cannot supply at their requested benchmark prices. They demand the lowest possible pricing from the market, and while we understand Seguro Popular has a limited budget and is required to look for the lowest possible prices, Apotex cannot compromise on quality just to get the extra sale." 

HÃ©ctor Carrillo, General Director, Apotex Mexico			

Alongside these pricing concerns are questions over the administrative complexities of Seguro Popular and the fact that it is run locally across each State in the country. This is causing headaches for pain specialists Grünenthal.  

Tomas Bordonaba, general manager of Grünenthal de Mexico notes that, "The institutional market represents a big opportunity for Grünenthal, but it has additional complexity because every state manages its own budget and has its own priorities. You have to create an individual strategy for every state." He also goes on to say that, "In general, the awareness of the importance of correct pain management strategies is growing across the different institutions, and Grünenthal is playing a key role." 

Tomas Bordonaba, General Manager, GrÃ¼nenthal Mexico			

Awareness within government institutions and the need to treat certain conditions has become a priority within the pharmaceutical industry. Since public health institutions have increased their coverage of the population, the sales ratio between the government and the private market for the pharmaceutical industry as a whole has shifted in favor of the government. Awareness is the key that unlocks the door to new business opportunities, otherwise known as market access. This has been surprisingly rosy in recent times as Aurelio Martinez, general manager for Cegedim Mexico, CA & Caribbean can qualify when it comes to orphan drugs. 

"When the government started getting involved because of the high cost of treatments and the growth of social services, they also started listening more closely to the industry," he says. "That is the reason why market access has gained such importance for pharmaceutical companies in Mexico."  

On February 29th 2012, the government published a change in the general health law to recognize the presence of both orphan diseases and the drugs available to treat them. In essence, the Ministry of Health is now required to support the diagnosis and treatment of orphan diseases. 

For Markus Krenzlin, country manager of Shire Mexico, the change has been fantastic news.  

"Mexico has a great attitude towards orphan drugs," he said. "The Mexican authorities are very conscious of the various niche problems that exist for patients across the country and have been very open in making orphan drugs available to them. This Mexican public sector consciousness is the reason why we have been able to provide patients with new treatments." 

Despite a universal health coverage coming forward in leaps and bounds, figures show that coverage is still limited in some areas. Current out-of-pocket spending accounts for more than 50% of total healthcare costs, and 85% of pharmaceutical expenditure. This is more than substantial enough to fuel a large retail sector. But Mexico's age pyramid is becoming more similar to that of a mature market each day, and for the most part this means rising healthcare costs for the government as more Mexicans turn to the state for support. Medical education is contributing towards a more effective culture of diagnosis, and chronic disease demographic is on the increase. All of which will require the Mexican government to be very well equipped with the right skills, decision makers and foresight to cope with these mammoth changes. 

Life has not been easy for Mikel Arriola since he stepped in as head of COFEPRIS in March 2011. The organization regulates 10% of the Mexican GDP and 12% of the country's international trade, and the regulatory authority's agenda is, and has been, fit to bursting since Arriola's entrance. But aside from the immense responsibility and the current administrative blockages in the system, there was a different kind of challenge that presented itself first of all. For Arriola it was a completely new area, which represented a tough barrier in terms of communicating with the industry. 

Mikel Arriola, Federal Commissioner, COFEPRIS			

"The most important challenge I faced when entering COFEPRIS was the human challenge. There was a myth that this agency had to be administered by doctors or by people related to the medical or pharmaceutical business, and I came from the Ministry of Finance, so conceptually, that was the biggest challenge," he recalls. 

It also seemed that there was a strong sense of good cop-bad cop where historically the authorities seemed to systematically challenge the opinion of the industry. This required Arriola to apply a complete communication 'reset'. Regular meetings with CANIFARMA and other industry associations, together with an 'open door' policy for meeting directly with pharmaceutical companies helped the relationship enormously.  

As Rafael Gual of CANIFARMA points out "The way they have been communicating and working with the [industry] has been tremendously supportive." 

Strengthening Guidelines for Biosimilars			

Indeed, the new COFEPRIS leadership team appeared, by almost complete industry consensus, to bring about one of the most positive changes the industry has seen. 

Both leading up to and while Arriola and his team have been heading up the organization, there have been three main items on the COFEPRIS agenda. Firstly, the essential 'clean up' of the market. Secondly, the continuous improvement of regulatory framework and reduction of barriers to enter the market. Finally, the agency has been working hard to get recognition from PAHO as a regulatory body.  

Country Report

Over ten years ago, the economic concept of the 'BRIC' countries-Brazil, Russia, India and China-was formed, and it's pretty much all we've heard about ever since. Yet earlier this year, the very same man who coined the term-Jim O'Neill, chief economist at Goldman Sachs-declared that by 2020 Mexico would be the seventh largest economy in the world, surpassing both India and Russia. Mexico belongs to one of four recently defined 'growth markets' alongside Indonesia, South Korea and Turkey. That certainly shakes things up a little for both outside observers and active local stakeholders in the economy.

Country Report: Mexico

Our look into the future begins with a familiar format: a meeting, taking place in the United States, which is still where the money is, and where for that reason strategic and operational issues are vetted for execution in a thoroughly global pharmaceutical organization. What is different is that the CEO is a female and her team is convening at the ungodly hour of 3 a.m. for that important monthly conversation with division heads from facilities and offices around the world. Since most of the R&D, production, packaging, clinical trials, medical communications, regulatory affairs, and pharmacovigilance activities take place in India or China, where it is mid-afternoon, the meetings are held at this time. 

Before the meeting began, several of the officers were reminiscing about the days in the early 2000s when most of those functions were performed in the United States. Some lamented those middle management colleagues who had passed on the opportunity to learn Mandarin earlier in their careers and now faced more limited career prospects.  

It's worth taking a closer look at the strategic forces underpinning today's discussion. Surprisingly, sales leadership in the industry has remained remarkably stable, with few new entrants to the top-10 players—Israeli-based Teva is the exception that proves the rule, having earned a place on the list by combining state-of-the-art efficiencies around low-end generics with a growing stake in biosimilars and innovative specialty drugs. As was the case with Japanese companies in the 1990s, promising mid-sized European and emerging country drug makers failed to achieve global scale by capitalizing on a profitable domestic base—the fiscal debt crisis earlier in the last decade froze prospects for forward sales momentum in place.  

There is no longer any drug production in Europe, Japan, or the United States. Since nearly all of the active pharmaceutical ingredients (API) in a drug now come from Asia, it makes sense to complete the final dosage forms in nearby factories where labor costs are a small fraction of those in the United States, Western Europe, or Japan. Moreover, leaders of governments in the emerging market countries have become aggressive in providing incentives for Big Pharma to construct facilities there as a way to generate more local employment. Since the API is synthesized in Asia and dosage form manufacturing is also performed there, it is only reasonable for manufacturers to take further advantage of reduced labor and transportation costs and to prepare the packaging in the same countries. 

Perhaps the most important function within companies in 2020 is the group that negotiates the purchase of licenses for new product candidates. This division has subsumed the previous importance of the R&D department; much of the in-house discovery research function was either eliminated or outsourced between 2010 and 2015, a time which also coincided with the peak of the patent-expiration cliff. The lackluster performance in generating new molecules in-house convinced the management of most Big Pharma firms that this was no longer a cost-effective option. The capability which remains has been organized with operational efficiencies uppermost in mind: most companies place their bets on development work in only four or five areas where they have specialized expertise or good contacts in biotech or academia.  

Today, in 2020, the company's vice president for licensing travels constantly, visiting smaller pharma laboratories in Slovenia, Croatia, Greece, Turkey, Israel, Korea, and California as well as in the Philadelphia and Boston areas. The department has two functions: licensing in new drug or biological candidates, as well as purchasing minority interests in some of the companies licensing their lead/promising products. Most of those agreements call for options for the large pharmaceutical manufacturers to purchase additional shares and even gain majority ownership according to milestone agreements based upon the likely success of the candidate products. 

Let's now take a look at some other departments and functions in this new world of 2020. 

Pricing and reimbursement: industry gets the squeeze 

Pricing has been transformed in the last decade, with a new configuration of stakeholders that has substantially altered the power equation in favor of the payer. During his second term, US President Barack Obama persuaded Congress, as part of a long-term deficit reduction deal, to require the federal government to purchase drugs for the Medicare Part D program directly from manufacturers, via a bid system. Gone is the era of the $4 pill. Today, prices paid to Big Pharma by the government are closer to Veterans Administration formulary prices. That $4 tablet is now purchased by the federal entitlement programs for 75 cents. Spurred by negative publicity from a series of Senate and House committee hearings about the high profit margins from drug pricing in the private sector, prices obtained from the big PBMs and managed care insurers—whose enrollments have been swollen by millions of new customers enlisted through the 2010 Affordable Care Act – have fallen by an average 35 percent. Pharma company CEOs, discredited by years of publicity about excessive pay and stock options, were unable to defend why published US prices were often double those in Western European countries with similar levels of wealth. 

If that were not enough, the three remaining large PBMs have leveraged their market clout to render their own interpretation of "value-based pricing" for their Managed Care clients. In essence, pharmaceutical companies are being forced to cap estimated MCO expenditures for a therapeutic category. Big Pharma has reacted to the price pressure by purchasing reinsurance to protect itself from an escalating cycle of unpredictable financial risk. The fact is that government has taken de facto control of the entire US healthcare system, setting price precedents that are subsequently applied by the giant PBMs to the entire patient pool.  

Technology assessment: precision tools for personalized medicine 

It is now common to genotype each patient entering a physician's practice. From this information, physicians know which drugs are likely to work for each patient, instead of the old hit or miss strategy prevalent back in 2010, where a drug might help anywhere from 60 percent to 85 percent of patients, and sometimes much less. What were once considered blockbusters are only semi-blockbusters as the medical profession applies the evidence that shows some products cannot be used for all patient types; other therapies previously considered "me too" imitators have moved up in the physician prescribing ranks since they have been identified as the optimal drug for some patient genotypes. 

The good news is that intensive research using new processing and analytical tools has given new life to compounds that had been shelved for failing to demonstrate efficacy on their own, but which perform spectacularly as fixed-dose combinations. Industry researchers are discovering that discarded ACE inhibitors that barely lowered blood pressure, when combined with a diuretic or calcium channel blocker that fared equally poorly alone, work in combination better than anyone could imagine. This new concept of attacking diseases from multiple angles has opened up huge new opportunities for treatment, particularly in high-profile diseases like cancer.  

Technology innovations in computer assisted order entry has simplified prescribing and reduced adverse events and drug interactions. The result is that nearly all prescriptions are being written at the correct dosage for patients. Over the last five years almost all medical practices, clinics, and hospitals have switched over to electronic health records, which includes direct prescribing on hand-held computers right in the examining room. The physician wanting to prescribe lovastatin will see a screen that says this patient's insurance covers only simvastatin and pitavastatin, and since pitavastatin is not metabolized in the liver, it would be a better choice for the hypothetical Mrs. Jones. The prescription generated on the computer is e-mailed to the patient's preferred pharmacy where there are no mysteries or guessing—handwritten prescriptions are a relic of the past.  

Even more dramatic is the way in which the patient interacts with the healthcare system. In 2020, patients access the system by either phone or e-mail to an assigned patient care manager, usually a nurse with advanced training, employed by their insurer. The patient explains the symptoms and is directed to a website that employs artificial intelligence and asks about 15-25 questions customized on the basis of the patient's cumulative health record. So the patient complaining of gastritis will be asked if the pain is constant, or localized in a standing or sitting positions; and whether it occurs after a spicy meal. The website will then tell the nurse practitioner that the problem is 85 percent likely to be simple indigestion, and will further present options for follow up by an MCO employed physician who can order diagnostic tests able to uncover something more serious. These website diagnosing modules will be in place for nearly all of the most common chronic medical conditions by 2020. 

Pharmacy practice: the power of direct mail  

By 2020, mail service pharmacy will have grown to over one third of prescription volume, and these mega dispensary organizations will be successful in obtaining deep discounts or rebates from manufacturers for formulary placement and market share positioning. In order to cut costs necessitated by dispensing fee reductions from Medicare, chain pharmacies moved to central fill operations, similar to the airline "hub and spoke" design. It is similar to the 1960s when the photo finishing business used many drop-off sites and couriers to take film back and forth to the processing lab. 

Here is how it works: a prescription is brought to the chain pharmacy on 1st Avenue that is picked up within the hour or e-mailed to the central filling site, then dispensed and sent back to the 1st Avenue Pharmacy location. In this model, prescription drug inventory is needed only at the central fill locations (hubs). With economies of scale, 2,000-plus prescriptions might be dispensed per day entirely by automation.  

Surprisingly, given the near ubiquitous role of generics in prescription volume, there are no longer any pure-play generic companies. Margins have dipped so low that a business built entirely around commoditized generics is no longer viable. What has happened in the last decade is the distinction between branded and generic companies has totally disappeared. Today, in 2020, research intensive firms all have generic divisions, and companies previously described as generic firms have moved into drug discovery by buying smaller branded companies, in-licensing NDA candidates, as well as buying existing patented products. There are new joint ventures with US generic and foreign research companies, and a bewildering array of other arrangements and combinations.  

Niche players are virtually everywhere, and a few companies have founded a new business model focusing on the cash pay out-of-pocket market, bypassing the restrictive covenants of managed care and government reimbursement entirely.  

Government: the ultimate arbiter of evidence 

The brick wall between clinical registration and market value has finally been breached in the United States, based on precedents in Europe and Canada. The FDA is now requiring applicants for a NDA to conduct comparative effectiveness research as part of a process where candidates are no longer tested against placebo but rather against the lead existing drug in its therapeutic category. Up to now, a large company with an extensive field force could detail their latest ARB or ACEI and quickly earn a five to 10 percent market share based on its reputation and field force contacts and prowess. Until now, prescribers had no way of knowing whether the new drug was inferior, equal or superior to the drugs already available. Now prescribers will know this information in advance. 

The Agency for Healthcare Research and Quality (AHRQ) in the US Department of Health and Human Services has also become more supportive of comparative head-to-head research with the goal of developing "best practices," based on evidence-based medicines studies. AHRQ has begun distributing objective disease state management algorithms showing doctors what are the optimal steps in caring for specific medical conditions. The protocol states when and what testing should be performed, what drugs and doses should be used, and when the patient should return for follow-up.  

In fact, due to the rapidly growing spend on Medicare drugs, and with the mid-term congressional elections safely out of the way, the Obama Administration launched in 2015 without legislative approval a plan to extend the remit of the Patient Centered Outcomes Research Institute (PCORI) to emulate the United Kingdom's National Institute for Health and Clinical Excellence (NICE) by advising on the risk/benefit ratio of new products and whether paying for them can be justified in terms of value to the population. 

Precisely because an NDA must incorporate convincing evidence built around a specific value proposition to society, clinical trials have become lengthier and more costly. Trials have to be run longer than three months, with a large, strictly defined base of study subjects, and actual outcomes must be measured. For example, an endpoint around lowering blood sugar levels in diabetics is not enough. That diabetes drug will have to prove it reduces kidney failure or amputations, cardiovascular disease or neuropathies. There is some talk that drugs introduced before 2020 will have to undergo this degree of evaluation within the next five years to remain on the market, as is now commonly the case in Europe. Norway's vaunted "medical need" clause, formerly defunct, is now alive and well.  

Federal actions against drug companies for fraud and promotional excesses continue to increase, with cumulative fines over the past decade exceeding $50 billion. More countries have joined the United States and the United Kingdom with tough extraterritorial anti-bribery laws. Since 2016, penalties imposed by the FDA, the FTC, and the Justice Department Office of Inspector General include the possibility of a maximum 50 percent fine against the illicit revenues that must be paid directly by the CEO, not company funds. Compliance, corporate integrity agreements, and other federal government actions against industry promotion practices also include the possibility of criminal actions against individual executives. And more than one CEO has served time in prison.  

Required by the latest round of FDA PDUFA regulations, pharmacovigilance compliance now occupies the time of departments bursting with experienced professionals; in an era of retrenchment, headcount for this function continues to grow. Several years of multi-billion dollar fines has convinced most companies that the FDA is serious about receiving process validation (PV) reports that are complete and on time. It has not been all bad, as a poor record on PV gives firms with rival therapies the opportunity to steal market share.  

In 2020, what has always been true about the industry remains true. Health is a universal value, and medicines are an essential good with no expiration date on expectations. Returns continue to flow for those who combine good science and focused investments in human capital with a little bit of luck to deliver on that value. Compared to other sectors, biopharmaceuticals remain profitable, with well-supported specialty biologics continuing to find acceptance in the mature markets, while traditional small molecule drugs and branded generics find new buyers in emerging markets. Another windfall is the steady flow of prescription drugs that have switched to OTC status, where firms with strong consumer marketing capabilities have done extremely well. Biosimilars have met the regulatory, reputational, and cost challenge; a modest but thriving market is underway. 

Finally, many foreign countries have reversed course and are falling into line with the TRIPS agreement, respecting intellectual property rights as they work to incentivize their own industries around a pro innovation industrial policy.  

The most exciting chapter in the story remains the promise of innovation. The long-promised results from our improved understanding of molecular biology and the genetic pathway of disease are paying off with more breakthrough drug approvals, particularly in rare and orphan diseases as well as hard to treat cancers.  

Insurer reluctance to pay for these advanced treatments has been eased through cooperative efforts among industry, academia, government and patient groups to invest in companion diagnostic tests that allow for targeting those patients most likely to benefit. As such, M&A activity is no longer limited to therapeutics but now includes robot surgery and nanotechnology geared to better drug delivery. Likewise, nearly a decade-long recovery in vaccine investment is finally yielding a rich harvest: several versions of an AIDS vaccine are slowing the HIV infection rate, and a new vaccine for malaria is making inroads despite persistent challenges of infrastructure.  

But best of all is the revival of the human part of the enterprise. The pharma community now more resembles the global mosaic, with a far more diverse workforce. The membership of corporate boards is also less insular, which has been an important factor in helping women break into the CEO suite. As a result, people now want to work in the industry again, and total employment is up after the loss of more than a quarter of million workers in the decade up to 2013, though it is far from the level of the golden era of the 1990s. For older workers, their stock options are now worth something, and bright young university graduates are again looking toward pharma industry careers.  

 Editorial Advisory Board Member and a Professor of Pharmacy Sciences at Temple University. He can be reached at 

Features

Albert Wertheimer looks beyond today's dark clouds with a comparatively sunny forecast for the biopharm industry in 2020-just watch out for the harsh light of complacency.

Sunny Outlook for Biopharm 2020?

Previous columns in this series have underscored how the industry's transition into the competitive stage of its lifecycle has changed virtually every aspect of pharma's traditional business models. Despite this transition into an entirely new era, many companies continue to use old business models to compete, including "customer-centric" regional sales realignments; hasty, belated initiatives to tap opportunities in emerging markets; and endless corporate level reorganizations. These attempts routinely fail because companies have been slow to recognize that new 

 models—not new commercial ones – are critical to winning in this time of market churn. 

However, there are a few truly pioneering companies who are thinking outside of the (pill) bottle by initiating creative competitive collaborations, or what I term "creallaborations." Creallaborations can be defined as potential game-changing partnerships with non-pharmaceutical organizations that complement, enhance, or help a pharmaceutical company reshape its competitive landscape or achieve breakthrough results. These alliances confer unique competitive capabilities or advantages that the company could not obtain internally, through unique expertise in efficiencies, processes, relationships, or technologies.  

The GlaxoSmithKline (GSK) partnership with the McLaren Group and the Teva-Proctor & Gamble joint venture are two recent examples which highlight the benefits of such creallaborations. With dramatically increasing competition and payer pressures, GSK realized that it could no longer depend solely on its traditional marketing prowess to gain competitive advantage. The company identified three new "winning market factors" essential to competing in the future: speed to market, market adaptability, and cost efficiencies. GSK then identified a potential partner which excelled in all three areas: the McLaren Group, a leading global Formula One racing car company. In September 2011, GSK CEO Andrew Witty announced a five-year partnership with McLaren to help GSK "innovate and rapidly respond to change and competitor activity...This partnership is another example of GSK looking outside its sector for inspiration and fresh perspectives on how we can achieve our strategic goals."  

McLaren is recognized for high-speed, results-driven race car performance based on real-time monitoring, sophisticated system analytics, and flexible, just-in-time decision-making competencies. McLaren has used such engineering and technical expertise to simulate, monitor, assess, and enhance the performance of every single component within its cars during a race. In fact, McLaren's supercomputers can process telemetric data simultaneously from over 3,000 Grand Prix car races. 

GSK plans to apply this powerful technology to significantly improve its global efficiency, productivity, and adaptability in supply chain management and clinical research. To help facilitate this knowledge and technology transfer, the two companies will jointly build and leverage the "McLaren GSK Centre for Applied Performance." The facility will train GSK employees to deliver world-class results across its 2,000 production lines in 80 global factories. In addition, the GSK nutritionals division will construct an all-new mission control facility at its London headquarters modeled after McLaren Racing's own Formula 1 race-strategy mission control center. The facility will help expedite management and decision-making for wholesaler stocking, inventory management, pricing, customer responses, and competitor activity. GSK will also evaluate how McLaren's system of in-car driver communications can be applied to modify and expedite clinical trials. 

McLaren Group's Executive Chairman Rod Dennis summarized this approach by stating that "this all-new collaboration between McLaren Group and GSK—McLaren's first ever such association with a major pharmaceutical corporation—represents a strategic partnership that engages two great British companies at a variety of levels across a number of disciplines in a multi-faceted and ground-breaking way. Specifically, our intention is that GSK will harness McLaren's world-beating Formula-1 bred technology processes and operational dynamism, in order to enhance its performance across a wide variety of its divisions in a way that none of its competitors can match." 

Teva taps the consumer world's biggest brander 

Despite being the world's leading generics company, Teva Pharmaceuticals also recognized the need to adapt its competitive business model. Teva is increasingly competing with not only generics but also branded products, which innovators are continuing to promote after patent expiry to supplement flagging sales. Brand versus generic battles are particularly fierce in the growing emerging markets, where price differentials are smaller than the United States and consumers have strong brand recognition and loyalty. Consequently, Teva needed to dramatically enhance its branding capabilities, product portfolio, and global reach. 

Strange bedfellows: GSK CEO Andrew Witty and Ron Dennis, Executive Chairman of McLaren Group hope to add some horsepower to GSK's supply chain management and clinical research programs.			

To that end, Teva formed a global joint venture in November 2011, called PGT Healthcare with Proctor & Gamble (P&G), the world's recognized leader in product branding. The two companies will combine their two global over-the-counter (OTC) businesses with plans to build a $4 billion business leveraging P&G's strengths in consumer research and marketing, with Teva's experience and relationships with regulators and pharmacies. The joint venture will pool Teva's active pharmaceutical ingredients with P&G's recognized brands to create novel OTC products, such as new Vick's allergy relief combination products and line extensions.  

Leaders of the two companies have publically emphasized PGT's competitive advantages, stating that their combined capabilities are "unmatched in the industry" with "one of the broadest and deepest OTC product portfolios and geographic footprints." However, Teva's primary underlying motive is to learn and apply P&G's best branding practices globally to its growing portfolio of branded generics and OTC products and, ultimately, its innovative products. "P&G has demonstrated it may be better than anyone...when it comes to branding, [which] increases the efficiency and the success," said Eli Shani, PGT's chief operational officer. 

These are only two high-profile examples of creallaborations being developed in the pharmaceutical industry. Pharmaceutical companies seeking to enhance their competitive models and positions should adopt a five-step "Creallaboration Framework" for creating innovative collaborations: 

» Creallaboration analysis—Identify and prioritize the Winning Market Factors in a particular competitive space to determine essential new corporate capabilities.

» Creallaboration brainstorming—Brainstorm and broadly analyze potential non-pharmaceutical partners and their capabilities to select the best potential matches. 

» Creallaboration contests—Conduct scenario analyses, innovation tournaments, or competitive simulations to test potential company and competitor collaborations.

» Creallaboration actions—Quickly explore and execute on selected creallaborations. 

» Creallaboration monitoring—Develop clear objectives and parameters for evaluating and refining such initiatives.  

Pharmaceutical companies and professionals that recognize the importance of identifying and leveraging unique, first-in-class capabilities from other industries and partners will gain significant first-mover advantages, resulting in a much more competitive and timely business model. 

 MD, MBA, is President of Bernard Associates, LLC, a global pharmaceutical industry competition consulting firm. He can be reached at 

Column

Creative non-pharmaceutical partnerships can offer innovators unique capabilities against the competition in a new era where challenges to market leadership are coming from every direction.

Creallaborations: Pharma Starts Thinking Outside the Pill Box

IT'S HARD TO FIND THESE DAYS A FLAT, DECLARATIVE STATEMENT DELIVERED IN CANDOR— 

that combination of content and expressiveness that hits you straight between the eyes. 

 struck that rare marker in this month's feature by Ben Comer highlighting what's behind the new Corporate Integrity Agreement (CIA) imposed on GSK by the HHS Office of Inspector-General to compensate for a long list of marketing and pricing malfeasances. As one of our interviewed experts put it, these agreements—now in place for nine of the Big Pharma 10, with Roche the stand-out exception—mean that "the federal government will be running your US operations for the next five years."  

Like all good quotes, it exposes for scrutiny questions that relate to something larger and more fundamental. To me, it speaks volumes about the debate now raging on whether the biopharmaceutical industry is overregulated and that it shares many common characteristics with the financial sector: too big; too global; too self-involved and detached from the real world experience of the customer; and too willing to test the boundaries of ethics and risk to pump up profit margins that are already the envy of other businesses. Even if you assume the analogy with finance is overstated because drug makers produce an essential good that improves the human condition, we still trend toward the bottom in public attitudes and reputation. It means that the "incentive to regulate" will always be central to the conversation about this industry.  

Our GSK feature points out that the real significance of the CIA is not the financial penalties—though $3 billion in fines and penalties is enough to finance the entire cost of GSK's latest acquisition, Human Genome Sciences. Rather, it is creatively applying regulatory fiat to force fundamental changes in company culture and the way GSK does business. The most important of these is the removal of the age-old link between compensation and volume and profits from sales. In essence, the CIA tells GSK that how well you sell counts more than how much.  

There are other examples that lend credence to our source's assertion that the feds are now calling the shots on the way Big Pharma does business. Take the FDA Risk Evaluation and Mitigation Strategies program (REMS). By mandating that selected individual products conform to a tool set of post-marketing approval commitments, the FDA is shaping the basics of the standard marketing campaign. REMS accentuates the importance of "smart" marketing, creating an internal incentive among companies toward smaller niche products able to benefit from carefully targeted, regulatory compliant messaging.  

Likewise, drug development is slowly being turned on its head by regulatory mandates that some observers fear has "democratized" the process around a range of outside influences, all of which stand ready to upend the complex interface between private enterprise and science that has produced most new medicines over the past 50 years. A September 2010 Memorandum of Understanding between the FDA and the Center for Medicaid/Medicare Services (CMS) gives the payer a consultative role in policies on market authorization, while the new PDUFA V legislation commits the FDA to devise a "systematic framework" for considering the risks and benefits of candidate drugs under review. That framework grants patient groups a prominent role in evaluating the need for new or modified endpoints that will drive the content of protocols in clinical trials. What these decisions represent is the empowerment of two new players in the already crowded business of drug development, which will shape the basic risk calculation that individual companies make in deciding where to place their bets. Vastly increased commitments to spending on observational, real-world evidence are going to be necessary to compete successfully for the regulators' approval.  

If "stealth rule" by government is going to figure in industry prospects going forward, then this month's second feature—"Planning that Thousand Year Future"—shows how Big Pharma can survive, and thrive, by applying the basic lessons of evolutionary biology to keep business strategy alert and on point. It notes that the world's oldest continuously operating company is Japan's Hoshi Ryokan, an inn owned by one family for 46 generations—and a symbol of hospitality, open to all comers. With governments and a host of new fellow travelers at the gates of today's "c suite," that's a mindset worth cultivating. 

From the Editor

This month's feature by Ben Comer highlights what's behind the new Corporate Integrity Agreement (CIA) imposed on GSK by theHHS Office of Inspector-General to compensate for a long list of marketing and pricing malfeasances

The Phrase that Plays

It's an unusual sight in the United Kingdom—a television commercial for a Big Pharma company. But among the cultural and commercial innovations being attributed to the London Olympic Games is GSK's first UK consumer-facing corporate brand campaign, showcasing its anti-doping operations. The television ad debuted on July 16; and the company's campaign went "outdoors" in late July with hoardings and posters appearing around the country. 

As the first private company to be responsible for overseeing Olympic drug testing (it will test up to 50% of all competing athletes for more than 240 prohibited substances), the UK drugmaker has opted for a distinctive ad that rises above a lot of the other Games-oriented TV fare. Taking a virtual tour through British athlete Marlon Devonish as he limbers up for an event, the film intersperses CGI "medical imaging" with potent visual metaphors and assorted pyrotechnics to convey the stimulating effect an Olympic-level dose of natural adrenaline has on the body. But surely the commercial's masterstroke is in juxtaposing medical imaging elements—and, not least, the GSK logo—with the emotive catch-line, "The crowd is my only drug."  

A screen shot of GSK’s television advertisement.			

The TV campaign is of course governed by European rules on DTC advertising, but the idea of a Big Pharma company eschewing its traditional wares to promote a "pure," "drug free" Games is a neat one. And it looks to be providing a welcome if gentle (and likely temporary) boost to GSK's reputation in the United Kingdom following some of its more recent negative exposure, not least its $3 billion run-in with the US government following the off-label marketing of Paxil and Wellbutrin, and other offenses. 

As a drug company promoting a drug free Olympiad, GSK wins our gold hands down for finally putting the industry's best face forward on the last frontier of advertising-the TV sets of Europe.

Brand Building—Not!

People can live to be 100. What is long life for a corporation—100 years? Two hundred years? Defined legally as a person, modern public corporations don't live very long. Most expire within 25 to 50 years. A few of the best ones survive for more than a century. There are some companies—the "millenarians"—that have defied the odds and served customers for 1,000 years or more. Most are small, highly specialized, family-controlled companies—Hoshi Ryokan is a Japanese traditional inn that currently occupies the longevity throne. Founded in 718, it is the world's oldest functioning business, still open and operated by the same family for 46 generations.  

Elsewhere in the world, the Chateau du Goulaine is the oldest wine making business—founded in the year 1000 in France. Italy's Pontificia Fonderia Marinelli remains the world's oldest bell foundry. Nearing 1,012 years old, it provides 90% of the Catholic Church's bells. 

These exemplars of commercial longevity raise the ultimate strategic planning question: is it possible that a modern biopharmaceutical company—what we might call BioPharmaCo—can thrive and endure for a millennium? More practically, what survival traits characterize health, resilience, and longevity in the modern corporation? Is there a specific business model that will enhance the likelihood of long-term survival, especially in a contemporary healthcare environment characterized by continuous market churn?  

The natural world presents many examples of longevity—with some species surviving for billions of years. The world around us is a large learning laboratory: Nature has engineered whole species for long-term survival.  

Many species don't really die, they evolve into new forms or models best suited for survival. Using natural selection as one of its most powerful innovation tools, nature has figured out how to engineer continuous learning into a successful species pathway to survival.  

 Nature's mechanisms for survival consist principally of gene mixing, mutations, and environmental pressure. Together they stimulate changes that—through natural selection—ensure genes will find their way to the most robust mix of strategies for survival:  

Mixing genes through procreation and pollination.

 Procreation is a powerful approach to mixing genes in most species. A male and a female combine their genes to create offspring with both parents' DNA. Among many plants, pollination accomplishes the same: A third-party partner transports pollen from plant to plant, thereby enabling fertilization and sexual reproduction. Nature has developed various flexible approaches for innovation. From all this diversity, nature then selects which combinations are most suitable for survival. 

 Mutations in nature are also very common. Some biologists observe that most organisms may have more than 100 genetic mutations. Most mutations are trivial and have no consequence. Some are deadly—such as those mutations that create cancers. A few are positive and enhancing. Why did some 50 to 100 million people die during the Avian Flu Pandemic of 1918—and yet others who were exposed still survived? Imagine if companies—like our hypothetical BioPharmaCo—innovated as effectively to ensure survival amidst great economic, regulatory, governmental, and political turbulence. 

Environmental pressures that reshape genes through external pressures.

 External pressures also trigger change. Again, often we see the bad results of external pressures, such as the long-term effects of smoking or exposure to carcinogens. Sometimes there are positive changes, such as when skin color evolves to adjust to greater or lesser sunlight in a hemisphere. In commerce, the adage stands: "Necessity is the mother of invention." External pressures are stimulating change and innovation; Google, Microsoft, the Mayo Clinic, the Cleveland Clinic, and others are all vying to play a role in electronic health records, for example. What will these external changes mean for BioPharmaCo? 

The practical question arises: what are the natural analogs of extending these proven survival principles into our contemporary pharma organizations? The fact is corporations also employ "gene mixing" and other approaches to seed corporate vitality. Proven tactics include partnerships (R&D and commercial), new business forms and spinouts, M&A, product and technology acquisitions, hiring from outside talent pools, and rotations (scientific or commercial) with other universities or partners. Surely BioPharmaCo has done many or all of these. The more telling issue is whether BioPharmaCo consistently does most or all of these frequently enough to ensure ongoing diversity—not just stress-induced episodic diversity. Is BioPharmaCo progressing fast enough? Is it pollinating and mixing new technologies and "genes" to ensure its survival for the next 1,000 years?  

In the business world, there are some striking examples of companies that teetered on the edge of extinction, only to change, adapt, and evolve to survive. Some have even returned to even greater health and vitality. IBM is perhaps our best current example.  

IBM is an innovation and technology-oriented company—very similar in lineage, pedigree, and culture to our BioPharmaCo. However, IBM nearly went extinct in the early 1990s. Like the Roman Empire at its height, IBM became slow, bloated, and full of itself—resting at the time on its extraordinary early innovations in a mainframe and hardware-centric world. The company failed to fully appreciate the threats of its changing world. Lou Gerstner famously led the company's much chronicled turn around between 1993 and 2002. Today, IBM has returned to health and profitability, with great resilience. How did it evolve to avoid extinction? What growth and survival strategies has it "expressed" to help it become a stronger company in a world that remains highly turbulent for technology companies? Current chairman and former CEO Sam Palmisano describes various key strategies: 

 IBM has consistently acquired, invested in, and invented break-through technologies. Interestingly, companies like IBM, Cisco, GE and others have grown so large that they have determined their internal innovation engines are not adequate to ensure their long-term survival. So they do scores of deals, acquisitions, and partnerships to bring in new technologies. Indeed, IBM has acquired more than 100 companies during the past decade. 

This is similar to nature's way of mating to mix up the gene pool. In view of this strategy, one may ask: "Is BioPharmaCo investing rapidly enough and frequently enough in external technologies to continuously reinvigorate its gene pool?" This strategy is different than the ad hoc large M&A or a few alliances. It is a systematic approach to renewing the gene pool. 

Acquiring is easy. Successfully integrating the technologies, talent, products, and facilities is a greater challenge. If a company embraces new technology acquisitions as a core strategy, then M&A integration expertise becomes a required competence. Interestingly, this is an area that many biopharma have been observed to be weak, not knowing how to integrate new technologies, units, founders, scientists, and approaches for optimal impact of the products, technology, and culture. How does BioPharmaCo score on this competence for its acquisitions? How can BioPharmaCo enhance its skills here if it is to continue to acquire new companies and high-potential technologies?  

 If you think of IBM still as a computer maker, you'd be wrong. Since its turn around, it has dramatically morphed to high-margin and high-growth recurring-revenue software and services. IBM's current annual report highlights this transformation from an early hardware innovator to a larger but more nimble company generating 81 percent of revenues through recurring software licenses and technology services. Indeed, 44 percent of IBM's $99.8 billion revenue in 2010 flowed from these recurring revenue software sources; 39 percent came from multi-year technology services. "We changed our business mix toward higher-value, more profitable technologies and market opportunities," acknowledged Chairman Palmisano. What lessons are there to be learned here for long-cycle life science companies like BioPharmaCo?  

Focusing on global business growth and integration.

 IBM, GE, and others—just like BioPharmaCo and other companies in the pharmaceutical and medical device industry, but arguably even more so—are focused on global growth and demand. IBM, for instance, has already achieved 21 percent of its revenue sourced from developing countries—and it is targeting 30 percent within three to five years. Right now, in the biopharma sector, developing country revenue is more typically 5 to 15 percent of total revenue. 

 One hallmark of resilient companies like IBM and General Electric is their embrace of services. Focused on growth and survival, savvy companies expand their offerings beyond manufactured goods to include services. Because the global services economy is larger and more value adding than many manufacturing economies, service expansion becomes a critical survival skill.  

Google is a stunning recent example of a company that re-envisioned opportunity—and then transformed the advertising and media landscape with a disruptive technology and service for Internet search. Likewise, Pfizer—forced through economic crisis to re-imagine itself—has launched an e-payment card system offering electronic payment services for Pfizer medicines. This service links it directly with patients in many of the world's fastest-growing economies such as the BRIC countries. 

From this perspective, how might BioPharmaCo re-envision new and emerging opportunities within the healthcare landscape? How can BioPharmaCo—or any evolving biopharma company—add value and earn healthy profits through healthcare services? Consider the following opportunity fronts, which may spotlight new pathways to future growth and profits: 

How can a company add value through superior health outcomes services? Payers and governments clamor for health outcomes studies that can help them determine which medicines, therapies, diagnostics, and tests to support and reimburse. Are there health outcomes services, systems, and approaches that will become value-adding and fee-bearing in their own right? Health outcomes represent a large frontier of opportunities—all that may lead to greater insight regarding which therapies produce the most desirable and measureable results. Broadly speaking, health outcomes require potentially diverse research, connecting large amounts of often disparate information, and developing insights that will improve healthcare for broad populations, specific groups, or individuals. How might BioPharmaCo play a leadership role on this emerging frontier—beyond just demonstrating the benefits of its products? 

 In most of the economy, new technologies help reduce costs for customers. In healthcare, new technologies usually raise costs. What approaches would help a company transform this model by harnessing global demand for reduced costs that are effective? Wal-Mart Stores, Inc. has demonstrated that low-cost strategies that build volume can be a winning formula across global markets. In rapidly emerging markets such as China, governments are requiring reduced prices—compared with the United States—to access the exploding Chinese healthcare market where China will be adding $125 billion in spending on healthcare. How might BioPharmaCo tap new growth opportunities using a different approach or business model? Indeed, one hallmark of larger, resilient companies is their ability to operate different business models simultaneously within the company's overall portfolio. What might this mean for how BioPharmaCo sees future opportunities? 

 What services might help prevent consumer healthcare conditions—and thereby offer significant patient and payer benefits? Like many other areas across healthcare, "prevention-based services" can have multiple dimensions. How might a healthcare provider help prevent side effects, avoid contraindications, prevent disrupted treatments, prevent non-responders from using the wrong medicine, or prevent improper dosing?  

 Micro-lending has been a source of keen interest ever since Muhammad Yunus won the Nobel Prize for his work combating poverty through the use of small "micro loans" to help the poor. His work began with a $27 loan. It grew to a pilot program in which Yunus lent money to 42 women in Bangladesh so they could purchase bamboo to make and sell stools. In a short time, the women were able to repay the loans while continuing to support themselves and their families. This pilot sewed the seeds of the Grameen Bank, and the concept of microcredit. Extending this finance innovation how might BioPharmaCo use microcredit to expand access to its medicines or improve healthcare opportunities for the world and for BioPharmaCo? Could BioPharmaCo help accelerate healthcare deployment in developing markets through such innovative finance practices applied to medicines? 

 How can a company add other forms of value through superior financial capabilities and support? Consider General Electric. During the past 20 years, GE Capital has grown to become a significant contributor of growth and profits within GE. Indeed, many companies that create expensive manufactured goods—healthcare, automotive, aerospace, transportation, etc.—have long realized the benefits of finance and leasing units that help bankroll customer purchases of company goods. Moreover, these units have a window into customer needs and opportunities that spur new kinds of innovation.  

GE's "Healthyimagination" initiative, for example, is a cross-functional approach to advancing healthcare in its employees, customers, and partners. "Healthyimagination is designed to position GE to grow organically over the long term at two to three times GDP, with technology and investment as the foundation," GE chief executive, Jeff Immelt, recently observed in the company's annual report to shareholders. "We're tracking toward our launch goal of investing $6 billion in R&D, financing, and solutions to improve health cost, quality, and access by 15 percent."  

To date, GE has used its capital resources to fund a broad base of healthcare experiments and innovations including health-site certifications to measure and reward healthy worksites, and health outcomes pilots in GE work communities. One pilot in Cincinnati, OH, a major GE employment center, is designed to improve the health of the local population, enhance the patient experience in Cincinnati clinics and hospitals, and reduce per capita health costs. Other Healthyimagination-funded experiments include consumer health apps for the iPhone, consumer health tools, employee wellness programs, a consumer-based health insurance program, a "Healthyimagination" equity fund, and venture capital investments into various healthcare-related start-ups. How might BioPharmaCo further employ its financial strengths to help stimulate new healthcare businesses, innovations, and opportunities? 

Helping patients maintain their treatments to full benefit is a well known opportunity front among chronic care brand leaders. However, it continues to stymie most biopharmaceutical companies. Some studies suggest more than 50 percent of patients prematurely stop taking their medicines across multiple therapeutic areas. What patient adherence or persistence services could benefit patients? Not all service or support innovations are obvious. Something as simple as a "packaging" innovation for the antibiotic Zithromax created a new support to help patients take their pills in the correct order and on the correct day. This packaging innovation helped address patient adherence—and helped turn Zithromax from a product that was nearly removed from the market because of poor sales—into a blockbuster. Now the "Z-pak" is a familiar medicine among many families that have required antibiotics. They often know the medicine by its packaging name better than they know its branded name. What innovative approaches to adherence could help patients, healthcare providers and BioPharmaCo? How might BioPharmaCo claim more points along the healthcare value chain—or disrupt the traditional value chain and healthcare ecosystem—through other customer-focused services? 

 "Adjacencies" are closely-related businesses or niches that exist along your core business. Sometimes value mapping is focused to identify previously unrecognized opportunities that support or exist contiguous to your core. Companies such as Microsoft, USAA, 3M, IBM, ServiceMaster, and GE have developed growth strategies to invest and expand along adjacencies among existing customers and markets. In his most recent report to shareholders, GE's Immelt revealed: "We have launched more than 20 infrastructure adjacencies and are in the process of growing them. Each can be at least $1 billion in revenue, while some will reach $10 billion or more. By expanding our core, we accelerate growth while building stronger, more diverse business models." What adjacencies are there among therapeutic areas, patient clusters, healthcare providers, hospitals, or payers that might lead BioPharmaCo into healthy new growth fronts?  

 Companies and consumers stand dwarfed before an Everest-sized mountain of information—thanks to computers and the Internet. So dawns an age in which superior information integration and analytics provide great value to consumers and corporations. What might be the economic value of analytic insights that help determine which patients respond best to which medicines...or guide patients to know when and how to take certain medicines to optimize their treatment benefits? How might BioPharmaCo use superior information and analytics to add value and support growth among its many customer segments? 

Toyota, Dell, and Wal-Mart have all demonstrated that supply-chain innovations can be cornerstones for revolutionizing their industry business models. Last year, for example, Wal-Mart booked $419 billion in revenues during its 2011 fiscal year by keeping its costs to customers low and serving more than 200 million customers each week. Toyota used supply-chain innovations to revolutionize automotive manufacturing and become the world's pre-eminent car company. Dell employed different sorts of supply-chain service innovations to build a more direct model of serving customers. What value-adding supply chain services and innovations would enable BioPharmaCo to better serve patients, payers, hospitals, governments, research partners, commercial partners, or other customer segments? How might BioPharmaCo's business model evolve if it were to revolutionize the healthcare supply chain?  

 America's current healthcare model is highly dependent upon health insurance companies negotiating prices on behalf of consumers and then reimbursing patients for all or part of their treatment costs. What opportunities exist to provide services and create value directly to the patient—thereby avoiding the requirements of third-party reimbursement? How might a health company add value for patients and make money without depending on a payer-reimbursement model? What treatment areas lend themselves most readily to direct patient service and transaction? 

Innovating around healthcare records information.

 Innovations in healthcare records promise to change healthcare delivery in the United States. Already Microsoft, Google, AT&T, Oracle, Verizon, Cisco, Mayo Clinic, IBM, Kaiser Permanente, and others are jockeying to play a role in this emerging frontier that promises to reduce healthcare costs and improve care quality. How can a company add value through being essential to health records? If e-records become a part of the future, how can a company add value through superior therapy, service, or process for the e-record to reduce costs, avoid side effects, or improve adherence and outcomes? 

Optimizing the value of intellectual property.

 Innovation-driven companies are often rich in intellectual property. However, some are more creative at monetizing their intellectual property through commercialization, outsourcing, partnering and tax-optimization strategies. IBM, for example, has routinely exceeded $1 billion in annual revenues generated through royalties from IBM patents and intellectual property (IP) that IBM elected not to further develop. Consequently, IBM actively licensed this IP to other companies. What innovative approaches might BioPharmaCo take to monetizing the value of BioPharmaCo IP inside and outside the company? What new approaches to collaboration or partnering would help further leverage BioPharmaCo IP or help create new opportunity frontiers? 

Every business model seems to carry with it unique insights and blind spots. In the past, biopharmaceutical company business models have provided great benefits. In this time of turbulent change—for our company and the industry—the blind spots are increasingly evident. An ancient Japanese proverb long ago noted: "There are many paths up the mountain, but the view of the moon from the top is the same." There will be many paths into the future of global healthcare. Ours is not the only one. Arguably, it may no longer be the best one. 

Darwin noted that "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change." This insight has relevance for healthcare and for corporations—those companies most adaptable to change will be best suited to survive and prosper. The question stands before BioPharmaCo: Is our company agile and flexible enough to adapt to a rapidly changing world? Surely, adaptability will be essential if BioPharmaCo is one day to become a 1,000-year-old company. 

Daniel Pascheles, PhD, is Vice President of Merck & Co, responsible for Global Competitive Intelligence. He can be reached at 

. Chris Bogan is CEO of Best Practices, LLC, a leading consultancy on biopharma strategy, commercial excellence, and change management. He can be reached at 

Planning for the long term is increasingly seen as an abstract absurdity. But a lasting business model is still possible-if you learn to adapt.

Planning that Thousand Year Future

How do you judge a sales rep's performance if not on how much she sells? Two summers ago, GlaxoSmithKline (GSK) made big noise about the fact that it was eliminating sales-based compensation and bonuses for US-based sales reps. Instead of rewarding the biggest sellers, a sales rep's bonus would, beginning in 2011, be determined in part by "customer feedback, and by a sales professional's adherence to the company values of transparency, integrity, respect, and patient focus," the company said. 

Deirdre Connelly, GSK's president for North America pharmaceuticals, said in a July 26, 2010 release that "physicians have been telling us they want to see fewer sales professionals, and those they do see need to provide greater value in helping improve patient health. In response, we are changing the way we sell our medicines and vaccines in order to deliver the value our customers demand, in a transparent way, with integrity and respect for the patient." 

The story got a lot of play in the media, and has been used as a congratulatory example of how one of the major industry players is taking real steps toward changing the pharma business model from one based on sheer volume selling, to one focused on patient health outcomes. GSK's "Patient First Program" may indeed have been created in response to physician feedback, as Connelly described, but it was also created in response to the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) and the Justice Department. 

GSK "developed the [Patient First Program] in response to the investigation and the information brought to them by the government," said Greg Demske, chief counsel to the HHS inspector general, in an interview with 

 That investigation was concluded on July 2, when the Justice Department announced that GSK would pay $3 billion—the largest settlement ever—to close the book on alleged off-label marketing practices in support of Paxil and Wellbutrin, two anti-depressant drugs; for allegedly hiding safety data related to Avandia, a diabetes drug; and for allegedly false price reporting practices.  

Top Pharma Corporate Integrity Agreements			

While the dollar amount itself is significant, it wasn't a surprise; in January 2011, GSK announced that it had stashed away $3.4 billion to cover the costs of an inevitable settlement with government. The leftover $400 million may come in handy as GSK is forced to meet the multitude of requirements housed in the company's 122-page corporate integrity agreement (CIA), which began on June 28 and introduces provisions never before seen in pharma, including the previous CIA GSK signed in 2003 as part of a $88 million settlement that ended false claims litigation related to Paxil and Flonase, a nasal spray.  

A CIA first: mandatory de-link in sales force pay

Most startling, perhaps, is the provision requiring GSK to cut the link between sales rep pay and how much they sell. "The GSK CIA is very significant because it does address the issue of financial incentives for individuals within [GSK], in a way that we have not done in the past," says Demske. "There are two major ways that we do that: one is compensation for sales people; GSK's current system breaks the tie between sales person compensation and the volume of business that they're generating, and the second part is the claw-back provision."  

With respect to sales rep compensation structures, government has been gnawing on this idea for a few years. Since 2008, Pfizer, Novartis, Merck, AstraZeneca, Johnson & Johnson, Lilly, Abbott, Novo Nordisk, Allergan, and Forest Labs—to name a few—all signed CIAs that directly addressed the issue of sales rep pay as it relates to potentially incentivizing off-label promotion. The GSK CIA, however, is the first time rep compensation based on sales volume has been outlawed entirely.  

The claw-back provision, formally known as the "executive financial recoupment program," is another CIA first. It mandates that GSK establish a program that "puts at risk of forfeiture and recoupment an amount equivalent to up to three years of annual performance pay (i.e., annual bonus, plus long-term incentives) for an executive who is discovered to have been involved in any significant misconduct," according to the text of the CIA. Combine this with Park Doctrine expansions that make it easier to hold executives responsible for crimes committed by their subordinates, and government's ultimate ability to exclude non-compliant individuals from doing business with public healthcare plans, and you get a situation where "executives are no longer interested in people that can push the envelope," says Ron Ginor, CEO at Becker & Associates Consulting, a Washington DC-based firm. "They're interested in people that are going to keep them out of trouble." In other words, GSK execs have real skin in the game. The cost of doing business the wrong way just got a lot pricier. 

"The idea is to try to change the financial equation for people at the sales level and the executive level, so the executive isn't just thinking, 'Well, the more profits that are generated, the more bonus I get,' but also thinking, 'If I cross the line, I may have some of my money on the line, and I may lose that bonus, and maybe even more than that,'" says Demske. Sir Andrew Witty, GSK's CEO, wouldn't go broke if he had to give back three year's pay, but "in our analysis, nothing can damage a company's value more than a significant compliance enforcement action," says Ginor. "With a CIA, essentially for five years, the government is running your company."  

There are other completely new provisions in Glaxo's CIA. Mary Riordan, senior counsel, office of counsel to the inspector general, points to an expansion of the famous "Dear Doctor" program that requires a pharma company working under a CIA to send out a letter notifying physicians about the settlement. "This CIA goes one step further...there's also a requirement that [GSK] send a letter to payers, government, and other payers with which the company has rebate agreements, to notify the payers about the settlement," says Riordan. "Part of the purpose of that provision is to really focus the company's attention on the relationship that GSK has with government payers." Government payers, including Medicare and Medicaid, represent around half of Big Pharma's revenues.  

In addition to the provisions cited above, other CIA requirements "reflect what GSK was already doing," says Riordan, like restrictions on the way funding is provided to third party medical education organizations, and the criteria for determining which organizations are eligible. Another example, unique to GSK's CIA, requires that a physician—if requesting off-label information from a rep—sign a form stating that the request was unsolicited. This is an example of a program already instituted by GSK, but reinforced by the mandate of a CIA. "That provision is part of a broader section [III.B.3] that talks about policies and procedures that the company has to maintain," says Riordan. "We were sort of memorializing and binding GSK to abide by those policies and procedures during the course of the CIA," which lasts through June of 2017. 

This enshrining of internal compliance programs and policies is often the result of a typically long and protracted negotiation between pharma and government, prior to a settlement. Ginor says companies can derail enforcement actions before they escalate, by bending over backward to show that a problem is being adequately addressed. An apology letter from a CEO won't cut it. "It is escalation versus negotiation...government does not feel that they are your consultants," says Ginor. It's better to spend a little extra money on compliance programs at the outset, in good faith, than to spend a whole lot more later on, after the Justice Department steps up on its soapbox, says Ginor.   

So what is the cost of complying with a CIA over five years? Ginor says it's usually two or three times the settlement amount. GSK didn't respond to an inquiry on the estimated cost of its current CIA, but other executives with previous and current experience working under CIAs agree that roughly 80 percent of the requirements mandated by a CIA should already be happening inside of a well-run company. Given the prevalence of CIAs, though, a lot of companies still seem to need a nudge in the right direction.  

In addition to internal compliance programs and teams, CIAs also require independent review organizations (IROs) to monitor and report on a company's progress. Curiously, these IROs are often the same companies—PriceWaterhouseCoopers, Ernst & Young, and Deloitte—that are already employed by pharma as business strategy consultants. IRO contracts are certainly lucrative for the contract players involved, and their intimate knowledge of the client's business, where it's headed and where it went wrong, no doubt makes the audit and reporting processes run more efficiently. But is it not, too, an obvious conflict of interest, even if "firewalls" have been erected between practice areas at these large firms? So far government hasn't raised this issue, and Riordan seemed unmoved by the question. "These companies have done a fair amount of work in this area, and have very specialized units that are focused on pharma operations," she said. 

Government enforcers: change agent or bully?

By design, CIAs are forward-looking; they exist as a way to help protect government programs from fraud, waste, and abuse. But can CIAs help push industry into the new business model they seem ready to embrace, if only the financial models can be changed? "I would say that we are constantly looking at the CIAs that we have, and what we're receiving under the reports from those CIAs, and constantly assessing what we think is effective, and what should be in future CIAs, and other things that we should not use in the future," says Demske, adding that the OIG conducted a roundtable with pharmaceutical companies to get feedback on which provisions—from an industry perspective— are most effective in promoting compliance. A report summarizing the roundtable findings was published (available at bit.ly/OIGReport), and well-established CIA requirements are weighed and discussed, including sales rep ride-alongs, physician payment disclosures, best practices for working with independent review organizations, and changing business models.  

Regarding CIA compliance, "we have very few instances of non-compliance with CIAs" among major pharmaceutical companies, says Demske. "In our experience they put a lot of resources into insuring that they are in compliance...it's fair to say the pharmaceutical industry has had a good record of compliance under CIAs." Understandably so, given that monetary penalties and possible exclusion from government programs are the two primary dangers of non-compliance. If pharma could comply with the law to begin with, perhaps the OIG and Justice Department wouldn't have to come up with new provisions to prevent law-breaking in the future. Or maybe the old business model perpetuates overselling and excess utilization, and government CIAs will be one of the tools that finally helps push industry into selling on the basis of quality instead of quantity. Either way, expect the CIAs of the future to continue building on the precedent set by GSK's CIA. "Your clinical, regulatory, and compliance person is likely to be the most important person in your company over the next few years," says Ginor. "If you're director of sales increases revenues by a few million dollars, that's great. But if your director of compliance blows it, and you wind up in a CIA, you're cooked." 

Big Pharma talks a lot about changing its business model to one that prioritizes quality and value over quantity and waste. While the healthcare "ecosystem" waits for pharma to grow into this model, government is delivering a comeuppance that actually puts it in the driver's seat and gaining the upper hand.

Compliance Kulture: The Facts Behind GSK's CIA

Data exclusivity (DE)—the right of inventors to prevent unauthorized disclosure of essential competitive information submitted for market authorization—is facing a strong new wave of opposition. Root causes behind the assault include the growing commercial tension between brands and generics, continued concerns about access barriers in the fight to treat the global pandemic of neglected diseases, and a newly assertive industrial policy among key emerging market countries seeking to exploit gaps in multilateral standards for DE, as evidenced in the 1994 WTO Agreement on Trade Related Intellectual Property Rights (TRIPS). At the same time, patent expiries, longer development times, and slower payer uptake of new medicines make preservation of the innovators data assets more important than ever.  

Hence the key question for all Big Pharma today: How do we build a constructive case against the criticism and maintain the relevance of DE as an essential driver of new drug innovation? Most of the criticism of DE comes at a time when governments are experiencing the disconnect between a demographic of soaring healthcare costs, and a fiscal and debt crisis that makes them unable to provide patient access to the latest medicines. Since healthcare costs are projected to skyrocket by more than 70 percent over the next 10 years, there is fear that the period of data exclusivity—which varies among countries—will have a negative impact on health budgets by preventing patient access to innovative life-saving medicines or vaccines that can treat multiple chronic conditions or prevent and cure emerging diseases.  

These fears seem misguided when examined in the context of a drug innovation process that is increasingly high risk. DE provides a measure of certainty to innovators that they will be provided with a period of protection for their efforts in testing a drug among many thousands of patients and complying with the higher thresholds of safety and efficacy demanded by regulatory authorities. Providing the right incentives to protect and develop future new innovative medicines can be a key ingredient to both lowering healthcare costs, and for solving some of the world's most challenging health problems. Therefore, policymakers should reassess the importance of DE—here are five reasons why.  

Less innovative medicines can be costly to society. 

It is evident for the United States that continued investment into R&D for the development of innovative pharmaceutical/biological medicines will be indispensable in dealing with an aging population and a rising number of chronic conditions, including cancer, diabetes, obesity, and Alzheimer's disease. For example, strictly in terms of economics, if we were to look at treatment for Alzheimer's disease alone, we find that the care required for a patient with Alzheimer's in 2050 will cost Medicare and Medicaid around $800 billion a year, a figure higher than the total cost of these two programs today. When you add in other costs, it will be more like $1 trillion a year. This is a staggering amount and an exorbitant pull on public services. If there was one pill that could be invented that would delay Alzheimer's by even five years in the average patient, it would likely save the United States close to half a trillion dollars. Progress in this struggle is challenged by the elusive biology of this and other CNS diseases, which adds years to the development cycle. The only guarantee that inventors have in protecting their decade or more commitment of funds and human talent is the avoidance of a premature disclosure of their development data to an imitator. This is what DE means in practice.  

Some critics of DE argue that DE is unnecessary due to the protection provided by a patent: it's a superfluous "double dip." Of course, patents are the most visible and perhaps most important form of intellectual property, but their application is far from universal when viewed in a global context. Historically the scope of patent protection has been quite varied—in some countries there is sometimes no patent protection at all, due to local patent eligibility criteria that exclude specific sectors like pharmaceuticals; some countries have only recently enacted patent protection for pharmaceuticals, which "grandfathers" many compounds out of the framework for coverage. As a result, in these countries, DE may be the only realistic method of protecting drugs.  

Likewise, for smaller- or medium-sized companies, the high unpredictability of legal interpretations of today's patent laws makes it confusing or costly to build a strong bulwark of patent protection, in which case the more straightforward application of DE can provide the protection necessary for the investment into R&D. Further, DE can act as a back-up system for R&D, should a patent on an innovative breakthrough medicine be challenged and invalidated; or to recoup the investment cost in product liability suits, which are costly to defend and often based on unanticipated adverse side effects. 

DE can encourage R&D in developing countries. 

DE has become a topic of intense discussions when addressing access to medicines in developing countries; DE is seen as an insurmountable obstacle that keeps cheaper copies of brand name drugs off the market, which then results in higher prices paid for medicines.  

A linchpin to the debate is TRIPS Article 39.3, which states that undisclosed data are subject to protection against unfair commercial use or disclosure. This period of DE (which is not defined in TRIPS but varies between five and 11 years among countries that provide DE) means that another company when applying for a marketing authorization for a generic medicine, may not directly or indirectly use or rely upon the data submitted by the innovator to prove safety and efficacy. 

DE is often criticized as encouraging excessive profiteering but that assertion should be weighed against the growing cost and resource burden of conducting clinical trials, often across geographies and varied populations whose medical needs are often subsidized by the inventor even after a trial ends, making even larger capital investments necessary. It is becoming evident that only the largest companies can actually afford or take the risk to bring these medicines to market.  

As the scope and complexity of registration information demanded by regulators increases, protection of that know-how has become a critical differentiator in the "go" or "no go" calculation on whether to invest in a new medicine.

Pharmaceutical Executive-08-01-2012