It’s Too Late for Pharma…

By Kostas Trakas

Most pharmaceutical companies can be categorized as walking wounded.  Why?  Take a look at their revenues.  Most are struggling to meet growth expectations and those that are managing to stay afloat are doing so by selling non-core assets and cost-cutting.  Even those who have been able to successfuly deliver unquestionably innovative products to market – Gilead, Merck, BMS, Janssen, NovoNordisk, etc. – are underperforming.  Why?  In recent years, pharma has tried to replace the traditional blockbuster model with the high cost specialty model.  Specialty products are often biologic agents targeting patients with serious, life threatening illnesses such as cancer, multiple sclerosis, and autoimmune disorders.  The problem has of course become one of affordability, especially for public budget-holders such as Medicare and the Veteren’s Administration.

How has pharma responded to this challenge?  Depending on who you talk to, either they have been silent or have gone to extraordinary lengths to justify the existing system and their price-setting policies within that system.  In a static world that strategy might be considered acceptable, but the US healthcare landscape is not static.  The Accountable Care Act (ACA) was not a one-time event, but rather the catalyst for change.  The most significant change to the US Healthcare ecosystem is the conversion from fee-for-service to value-based reimbursement.  Therein lies the problem.  Prior to the ACA, value was based on a product’s efficacy at the level of a population and this value was often tenuously tied to price.  Post-ACA, value is now tied to efficacy at the individual patient level.  In such a scheme, the price for any one agent used to treat a patient becomes meaningless.

In a blog postWende Hutton, general partner at Canaan Partners, said that in her view, pharma companies are committed to digital initiatives that would have them in essence moving “beyond the pill.”  She also went on to suggest that because they do not have the competency to accomplish this transformation internally, pharma will need to partner with established technology providers.  Beyond the pill is a term describing the provision of additional non-drug products or services for treating patients.  If pharma were to embrace the concept, they could uncouple themselves from the pricing discussion and focus on payment for the true value that they provide.

Unfortunately, I would disagree with the fundamental premise of Mrs. Hutton’s argument – that pharma is  committed to change.  Most pharma companies have instead  doubled-down on the traditional product-development and sales model.  Delivering a comprehensive treatment solution as would be required by the “beyond the pill” model requires a longterm view of the market and a willingness to take on financial risk for treating patients.  I have not talked with anyone in senior management positions within traditional pharma who would be willing to take on that kind of risk.  I do agree however that they are not independently capable of developing the technology that would be required to deliver a holistic product offering to patients.

On the other hand, tech giants such as Apple, Google (Verily) and GE just to name a few, are entirely capable of developing products.  In fact, over the past year they have been on hiring sprees bringing top-tier research and clinical talent in-house.  They are also much less risk-averse than traditional pharma.  In this type of environment, what is more likely to happen is that these tech companies may partner (or acquire) with pharma to get access to a drug product to add to their holistic tech-based solution.   In other words, pharma could become the supplier of drugs that are no longer seen as innovative on their own, but commodities who’s value is tied to the tech solution.  As the ACA further deepens the connection between the outcomes and the solution, this dynamic will only accelerate.

Tech.  The new pharma.