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The developing world will soon comeunder equal pressure. The emergingeconomies will experience the mostrapid growth in demand for medicinesover the next 11 years, but many (if notall) of them will struggle to fund thisdemand. The Chinese government has,for example, undertaken to introducea universal healthcare system with alevel of cover that does not exceedthe country’s current economicdevelopment. However, it is hard to seehow the plan will not entail a substantialincrease in China’s healthcare costs.10Healthcare payers in both thedeveloped and developing worlds arealso beginning to measure outcomesmuch more carefully and to emphasisethe importance of prevention. By 2020,they will expect the industry to go“beyond the medicine” by providingprophylactics and healthcare packagesdesigned to help patients manage theirhealth. Moreover, patients will play amuch bigger role in determining howthey are treated, as the money theyspend on medicines likewise risesand the Internet gives them access tomore information. Armed with insightsFigure 1: The key trends now emerging and their implications for PharmaTrendsMarket trendsHealth and healthcare trendsScientific and technological trends Patients are becoming better informed Patients are picking up a bigger shareof the bill Demand for personalised medicine isincreasing Patients want cures, not treatments The emerging markets are becomingmore important The burden of – and bill for – chronicdisease is soaring Healthcare payers are establishingtreatment protocols Pay-for-performance is on the rise The boundaries between different formsof care are blurring Financial constraints on payers areincreasing R&D is becoming more virtualised The research base is shifting to Asia Remote monitoring is improving rapidlyImplicationsPharma will need to go “beyond themedicine”R&D will need to go beyond the labThe Pharma and healthcare value chainswill become much more intertwined Pharma will be paid for outcomes,not products Outcomes data will drive healthcarepolicy Prevention will gain a higher healthcareprofile Pharma will need to offer “medicineplus” packages of care Pharma will have to adopt more flexiblepricing strategies Pharma will need access to outcomesdata Pharma will have to work withtechnology vendors to virtualise R&D Pharma will need a wider, moremulti-disciplinary skills base Pharma will need to expand itspresence in Asia Pharma will need to demonstrate “real”value-for-money Pharma will have to work more closelywith the regulators Pharma will have to collaborate withpayers and providers to performcontinuous trials Pharma will have to collaborate withnumerous service providers to deliverpackages of careBusiness models based on collaborationSource: PricewaterhouseCoopersPharma 2020: Challenging business models3

Emerging collaborative networksSeveral pharmaceutical firmshave already begun to use morecollaborative models. One suchinstance is Lilly, which is currentlytransforming itself from a traditionalfully integrated pharmaceuticalcompany into a fully integratedpharmaceutical network, so that it candraw on a wide range of resourcesbeyond its own walls. Lilly hopes thatteaming up with other organisationsto create virtual R&D programmeswill enable it to get better access toinnovation, reduce its costs, managerisks more effectively and enhanceits productivity. For example, theChorus Project is a virtual organisationto take molecules quickly to Proofof Concept. Lilly also uses externalnetworks comprising third parties suchas Piramal Life Sciences, HutchisonMediPharma, Suven Life Sciences forthe development of molecules.gleaned from educational websites,discussion groups and blogs, they willnot only want better, safer medicines,they will also want a range of satelliteservices they can tailor to theirindividual needs.If Pharma is to accommodate thesechanges in the marketplace, it will haveto collaborate much more extensively– as it will, indeed, to capitalise onsome of the scientific and technologicaltrends that are now emerging. Theresearch base is shifting, for example.Non-OECD economies accounted for18.4% of the world’s R&D in 2005, upfrom 11.7% in 1996. The number ofpatents filed by Asian researchers alsoincreased significantly over the sameperiod, albeit from low levels.11 So theindustry will have to forge much closerlinks with the most reputable centres ofscientific excellence in these countries.Swiss biopharmaceutical developmentspecialist Debiopharm has pioneered amore radical approach. The companyin-licenses promising new candidatesfrom academic institutes and biotechcompanies, develops them and thenout-licences them to Big Pharma.Debiopharm’s successes include threeproducts with combined global salesof more than US 2.6 billion in 2007.Meanwhile, new technologies areproviding new sources of knowledge.Home surveillance systems, portabledevices and implants, linked to onlineand wireless networks, will facilitatethe monitoring of patients on a realtime basis outside a clinical setting.But if Pharma is to get access to theoutcomes data remote monitoringgenerates, it will have to collaboratewith the hospitals and clinics thatcapture this information.Most of the collaborative models thatcurrently exist are limited to R&D. Butit is easy to envisage various otherpermutations, including networksfocusing on different therapeuticareas and covering everything fromR&D through to sales and marketing;networks focusing on differentenabling technologies, such asgenomics, proteomics and stem cellresearch; and networks focusingon the management of outcomes inspecific patient segments.Technological advances will likewiseenable the virtualisation of large partsof the R&D process, as we explained in“Pharma 2020: Virtual R&D”.12 Some ofthe leading pharmaceutical companiesare already exploring the potential ofsemantic technologies and computeraided molecule design. Variousacademic institutes and bioinformaticsfirms are also building computer modelsof different organs and cells, with theultimate aim of creating a “virtual man”.But developing such a model will require4a monumental collaborative effort farexceeding that required to complete theHuman Genome Project.13The economic case for change isclear. The decline of revenue growthand margins result in reducedshareholder returns which will forcepharmaceutical companies to adapt.There is a compelling case for increasedcollaboration. Delivering drug therapiesto payers and patients in a 2020 worldwill require new skills, technologies andchannels - the infrastructure required willbe uneconomic for anyone, other thanthe largest players, to build internally.To sum up, the key social, economicand technological changes currentlytaking place in the pharmaceutical andhealthcare arena will all necessitate thedevelopment of multinational, multidisciplinary networks drawing on amuch wider range of skills than Pharmaalone can provide. The constraintsthat previously hindered organisationsfrom collaborating over distance aresimultaneously evaporating – paving theway for the use of new business models(see sidebar, Emerging collaborativenetworks).14 In the next sections, we shalllook at the implications of broadening thevalue proposition, the various models thatexist and the different opportunities andrisks they present.Broadening the valueproposition andmanaging the value chainPharma currently creates value bydeveloping new medicines (and arelatively limited number of diagnostics).Collaborating much more closely withthe key stakeholders in the healthcaresector will enable the industry bothto expand its remit and to align itsPricewaterhouseCoopers

on getting access to the patients whomproviders serve and income from thepayers who fund those providers. Yetthe relationship between the differentplayers is often quite antagonistic and,while they continue to clash, they arestruggling to retain their respectivegoals.15value chain more closely with those ofhealthcare payers and providers.As we indicated in more detail in“Pharma 2020: Marketing the future”,the value chains of the three partiesare heavily interdependent. The valuepayers generate depends on thepolicies and practices of the providersthey use. The value providers generatedepends on the revenues payers raiseand the medicines Pharma makes. Andthe value Pharma generates dependsa more dynamic relationship withhealthcare payers and providers. So,too, will building the networks requiredto deliver healthcare packages thatencompass a wide range of productsand services from numerous differentsuppliers. This will ultimately result inthe convergence of the separate, linearvalue chains that exist today and theemergence of a single, circular valuechain (see Figure 2).If Pharma broadens its valueproposition, it can begin to close thegap. Creating feedback loops to captureoutcomes data will help it to establishFigure 2: By 2020, the pharmaceutical, payer and provider value chains will be much more closely intertwinedaM&PayerProviderPharmaanou cetofpocket paymentsReferralillsall Pg & piB rinDevelopmentagemanyong ollisi s, CRa axetingcharesReay m emen nttofhealthRaof f isinginancegetinMark les& Sartsoiumemg prRaisinnDi ufacstrib turinuti gfFonecinroviders’bPatientcarepertiar daryc yaAnalyspopul isatioat ris nkPologic rovalstu isidi onesof,AePronntievreemia&Epidstrinient luations etc.em ic evaag onoman oeccareM acmtermarngphLodmMediPractice guideclines, c al Sliniecal g rvuid icPrimary careanSecec,oTnesofrve eoC tivetc.icesvrseit oon,mtnmeSource: PricewaterhouseCoopersPharma 2020: Challenging business models5

Choosing betweendifferent collaborativemodelsOne vital question remains, however;namely, what sort of model shouldcompanies use to effect these changes?We believe that two principal models– federated and fully diversified – willemerge. We have also identified twovariants of the federated model. In thevirtual version, a company outsourcesmost or all of its activities; in theventure version, it manages a portfolioof investments (see Figure 3). The twomodels are not mutually exclusive. Afully diversified company might chooseto use a federated model for certainaspects of its business, and vice versa.But we think that the federated modelwill ultimately dominate, primarilybecause it is quicker and moreeconomical to implement.The federated modelIn the federated approach, a companycreates a network of separateentities with a common supportinginfrastructure. These might includeuniversities, hospitals, clinics,technology suppliers, data analysisfirms and lifestyle service providersbased in numerous countries. Theymight also include business units fromwithin the company itself, which itplaces at “arm’s length” (see Figure 4).The various participants have a mutualgoal – such as the management ofoutcomes in a given patient population.They also share funding, data, accessto patients and back-office services,and this interdependence is theglue that holds them together. Theyare rewarded for their efforts usingmeasures like increased life expectancyFigure 3: The different business modelsCollaborative: Federated ModelOwned: Fully Diversified Model Network of separate entities Network of entities owned by oneparent company Based on shared goals & infrastructure Draws on in-house and/or external assets Combines size with flexibility Based on provision of internally integratedproduct-service mix Spreads risk across business unitsVirtual VariantVenture Variant Network of contractors Portfolio of investments Activities coordinated by one companyacting as hub Based on sharing of intellectual property/capital growth Operates on project-by-project basis Stimulates entrepreneurialism & innovation Fee-for-service financial structure Spreads risk across portfolioSource: PricewaterhouseCoopers6PricewaterhouseCoopers

It may sometimes be hard to measurethe value different participants havecreated for two reasons. First, theparties in any collaboration typicallyvalue the contributions they havemade more highly than those of theirpartners. This is a problem that canbe solved with watertight contracts,robust performance indicators, goodgovernance and a proper audit trail.Second, assessing the impact ofdifferent forms of intervention can bevery difficult indeed.Medicines, diet and exercise all playa role in managing cardiovasculardisease, for example, but precisely howPharma 2020: Challenging business modelsPhyCcs ersurlsHospitaHow should the cake be sliced?DataAnalystsMa Gennu erfa ictyaperth essio ntreFederationnincsCliMore importantly still, the federatedmodel might encourage greatercross-fertilisation and deliver biggerimprovements in performance, withoutforfeiting any flexibility. The strongermembers of the network could helpthe weaker ones to improve – sincefederations have an incentive to performwell as a whole – but they could alsoreplace any participant that persistentlyunderperforms.ogyhnolTec pliersSu pt tighWe menageMan ntresCeThe federated model provides aframework for creating integratedpackages of products and services, andthus diversifying beyond a company’score offering. It also combines thebenefits of nimbleness and size. Itwould enable each player to build aspecific area of expertise, establish acompetitive advantage as a result ofthat expertise and sell its products,knowledge or skills, leaving activitiesthat are better performed by others toits partners within the federation.Figure 4: The federated modelComplianceCall Centreor quality-adjusted life years. And eachis rewarded in a manner that reflectsthe evidence base for the contribution ithas made (see sidebar, How should thecake be ieviUnSource: PricewaterhouseCoopersmuch? Various studies have establishedsome parameters. They show, forinstance, that high-frequency exercisecan improve the cardio-respiratoryfitness of patients with heart diseaseby at least 10% – and that, in turn,can reduce the mortality rate by 15%.We believe that many more studiesto evaluate the effectiveness of nonpharmacological interventions will beconducted in future, as healthcarepayers everywhere focus more heavilyon preventative measures.This approach is essentially a morecomplex variant of the co-developmentand co-distribution agreements we havetoday. In order for companies to workbetter collaboratively it is essential todefine upfront measurable componentsof delivery and value.Defining the value provided by eachplayer in the federation will then informhow each party should be rewarded this will be a combination of theoreticalanalysis and monitoring of outcomesand benefits to the patient. Clearlyto avoid the risk of litigation or theconstraints of exclusivity, the federationneeds to be underpinned by mutualtrust between all parties. However, thereare several examples of where this hasworked effectively such as a franchisingmodel where the value of a brand ismeasured and rewarded.7

Table of nSales&Most large pharmaceutical companiesalso use external contractors tosupplement their in-house resources,but very few firms have gone anyfurther (see sidebar, Shire’s virtualvision).18 There are very good reasonswhy pharmaceutical companies shouldoutsource their R&D, manufacturingand promotional activities where thirdparty alliances can provide a widerrange of opportunities, specialistskills and market access. A pharmacompany can then focus on the valueadding functions where they canleverage on their relationships, scaleand market knowledge – i.e., projectmanagement, business development,regulatory affairs, intellectual propertymanagement and the formation of goodrelationships with key opinion leaderstuacfnunIn the virtual variant of the federatedmodel most or all of a company’soperations are outsourced and thecompany itself acts as a managementhub, coordinating the activities ofits partners (see Figure 5). Severalindustries have already adoptedsome aspects of this model. Thesemiconductor industry typicallyoutsources its manufacturing inorder to concentrate on productdevelopment, for example, and anumber of companies in the medicaldevices sector are now following suit.17Similarly, strategic outsourcing ofdesign and manufacture to suppliershas redefined manufacturing functionswithin industries such as aerospace,computing and electronics.Figure 5: The virtual variant of the federated modelpmveloDeThe virtual variant of the federatedmodelResearchSource: PricewaterhouseCoopersShire’s virtual visionShire Pharmaceuticals is the epitome of a virtual company. It outsources almosteverything, from discovery to medical monitoring to data management tostatistics to medical writing. With the exception of its genetic therapy division,every product it develops has been purchased from an outside source, viain-licensing or acquisition.PricewaterhouseCoopers

GlaxoSmithKline has used a versionof the venture structure for manyyears. SR One, its evergreen fund,was established in 1985 and hasnow invested more than US 500m insome 30 private and public biotechcompanies focusing on drug discovery,development and delivery.20 OtherBig Pharma companies, such asNovartis and Pfizer, have also set upcorporate venture capital funds,21and AstraZeneca spun off part of itsgastrointestinal research operationinto a new company backed by aconsortium of private equity firms.22US investment bank Goldman SachsThe venture variant of the federatedmodel entails investing in a portfolio ofcompanies in return for a share of theintellectual assets and/or capital growththey generate, rather than outsourcingspecific tasks. Special purpose vehiclesare sometimes used to manage suchinvestments, because they offer severaladvantages in terms of risk sharing andintellectual property protection.A pharmaceutical company mightchoose to concentrate its investmentsin a particular therapeutic area orFigure 6: The venture variant of the federated modelOut-licensing/In-licensingThird par

process. It proposes that new technologies will enable the adoption of virtual R&D; and by operating in a more connected world the industry, in collaboration with researchers, governments, healthcare payers and providers, can address the changing needs of society