Planning that Thousand Year Future

August 1, 2012
Pharmaceutical Executive, Pharmaceutical Executive-08-01-2012, Volume 0, Issue 0

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.

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 that change genes. 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?

Nature nurtures business

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?

IBM: case study in survival

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:

Investing in new technologies. 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?

Growing through software and services. 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.

Adding value through services. 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.

Twelve potential paths to reinvention

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:

Health outcomes services. 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?

Lowering consumer costs. 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?

Prevention-based services. 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 in developing markets. 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?

Capital support services. 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?

Treatment adherence services. 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?

Spotting healthcare adjacencies. "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?

Superior information and analytics. 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?

Innovations along the supply chain. 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?

Providing value directly to the patient. 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 daniel.pascheles@merck.com. Chris Bogan is CEO of Best Practices, LLC, a leading consultancy on biopharma strategy, commercial excellence, and change management. He can be reached at Cbogan@best-in-class.com.

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