1. * excluding title page, table of contents and in-text references
The future of the
pharmaceutical industry
The good times of billion dollar blockbusters are far behind us. What are large
pharmaceutical incumbents doing, or what can they do to innovate and
transform the sector business model for the future
July 2015
Word Count*:
Submitted by:
Maria Zaritskaya
CID: 01011573

2. 2
Abstract
Market share in the pharmaceutical sector is inexorably shifting from former denizens
of the industry (Eli Lilly, GSK), to rivals that have adopted drastic changes to their
business models (Allergan, Valeant).
In many ways, pharmaceutical companies are victims of their own success. Heavy
reliance on blockbuster drugs, immense past financial success, significant in-house R&D
investments –these factors contribute to the reservations involved with innovating
business models and identifying novel ways of creating value.
Although there can be no single recipe for success in the pharmaceutical industry,
understanding key trends, and applying them to particular companies’ profiles can
result in novel and lucrative value-creating business models.
This report can be logically divided into two parts: chapters 2-3 analyse what
pharmaceutical incumbents are currently undertaking to distance themselves from the
‘blockbuster’ mind-set, the advantages, drawbacks and risks of their strategies; chapters
4-5 explore future trends in the industry and evaluate changes to business models that
can be implemented to adapt to the changing social and market environment.
6 pharma companies with
largest revenue decline rates
2013-2014
Company Decline rate %
Eli Lilly -18%
Daiichi Sankyo -14%
Boehringer
Ingelheim
-12%
GlaxoSmithKline -11%
Merck KGaA -9%
Pfizer -5%
5 pharma companies with largest
revenue growth rates
2013-2014
Company Growth rate %
Gilead Sciences 127%
Actavis (now: Allergan) 51%
Biogen Idec 41%
Johnson & Johnson 15%
AbbVie 8%
Data by: Global Data (PMLiVE, 2014)

3. 3
Table of Contents
Abstract…………………………………………………………………………………………………………
1. Introduction…………………………………………………………………………………………………
1.1. Subject overview…………………………………………………………………………………………………
1.2. Report objectives………………………………………………………………………………………………
1.3. Research resources……………………………………………………………………………………………
1.4. Clarification of terms………………………………………………………………………………
2. Mergers and acquisitions – does bigger really mean better? …………………………
2.1. Acquisition of generic drug manufacturers………………………………………………………
2.2. Acquisition of biotech companies ………………………………………………………
2.3. Precision M&A and specialty drug development………………………………………………
3. Diversification – supplementing the core business…………………………………………
4. Collaboration: within the sector and beyond…………………………………………………
4.1. Industry trends – a case for increasing co-operation…………………………………………
4.2. Forms of collaboration ………………………………………………………………………………………
5. Key routes for business model innovation……………………………………………………
Conclusion………………………………………………………………………………………………………………

4. 4
1. Introduction
1.1. Subject overview
The golden age of the blockbuster drug seems to be over. Gone are the days, when a
pharmaceutical company could develop a promising molecule, battle through the
difficulty-wrought path of obtaining the necessary approvals to successfully launch the
drug, and generate billion-revenue streams from the blockbuster, directing profits in
the search for the next ‘cash cow’.
As outlined in Pharma 2020: The vision, until recently the established pharmaceutical
business model has been to undertake all steps of drug development in-house: from
R&D to commercialization (PricewaterhouseCoopers, 2007). However, by 2020 this
model is predicted to lose its efficacy for most industry incumbents
(PricewaterhouseCoopers, 2009). In this respect the veracity and clairvoyance of J. P.
Garnier, former CEO of GSK, as cited by K. Phelps, naming the blockbuster-development
drug model: ‘a business model, where you are guaranteed to lose your entire book of
business every 10 to 12 years’, cannot be disputed. (Phelps, 2007).
In the past blockbuster drugs were targeted towards treatment of chronic diseases and
used in primary care (Rickwood, 2012). Yet, there has been a shift in the share of
primary care blockbusters in favour of specialty therapies: drugs targeting ailments
affecting an increasingly smaller population are achieving billion-sales due to niche
positioning and high prices, effectively becoming modern-day blockbusters. Many
lucrative blockbuster drugs have recently lost patent protection, further exacerbating
their rapid market share decline.
Furthermore, certain segments of the pharmaceutical industry are increasingly being
dominated by innovative biotech start-ups and large acquisitive entities amassing
significant drug portfolios through M&A. Given these developments, it is inevitable that
pharma incumbents must identify ways to modify their business models to remain
profitable in the rapidly changing tides of the pharmaceutical industry.

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1.2. Report objectives
This report represents an analysis of how pharma industry players are adapting to the
shifting business environment and innovating their business models. The aim is,
drawing on real life examples and recent industry developments, to establish the
benefits and drawbacks of the paths currently taken by incumbents, to explore industry
trends and suggest potential courses of action to secure a promising future for
companies, its investors and patients.
1.3. Research resources
To fully develop the report topic and relate it to the present-day business environment,
a wide variety of sources have been consulted: from up-to-date newspaper articles
(Financial Times, The Economist, Fortune Magazine) and specialist publications
(Pharma 2020 series, The Pink Sheet) to statistical data and video interviews with
industry experts.
1.4. Clarification of terms
Before proceeding with the analysis, a clarification of terms used must be sought.
Blockbuster drugs are drugs with sales of £1bn or more (Caroll, 2009), specialty drugs
are defined as ‘high-cost, scientifically engineered drugs used to treat complex, chronic
conditions that require special storage, handling, administration and involve a
significant degree of patient education, monitoring and management’ (Robinson, 2014).
Orphan drugs are a subset of specialty drugs developed to treat a rare medical condition
affecting a small number of patients (U.S. Food and Drug Administration, 2015).
Furthermore, 2 distinct types of pharma incumbents: ‘Big Pharma’ and ‘specialty
pharma’ must be defined, due to, as shall be seen further, fundamental differences in
their business models and paths to innovation.
Largest Specialty Pharma by market capitalization
Company Market cap., USD
Allergan Inc. $120.45B
Valeant Pharmaceuticals
International, Inc. $78.17B
Shire plc. $47.82B
Endo International plc. $16.55B

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The definition of what constitutes
‘specialty pharma’ is debated upon.
An excellent classification is provided in the Financial Times (Crow, 2015), whereby
specialty pharma consists of 2 parts. One are ‘highly acquisitive’ entities that have
marginal investment in in-house R&D, but depend on M&A to grow their business.
These companies are aided by current low debt interest rates and potentially lower tax
rates due to tax inversions.
Another are acquisition targets for the first group: biotech companies with a focus on a
particular drug or specific area of research. Such is the example of Salix – a takeover
target for Allergan. Another, is NPS Pharma, recently bought by Shire.
The criteria to determine whether the company belong to ‘Big Pharma’ have been
excellently summarized by M. Rosen (Rosen, 2005):
 ‘Sales exceed $2 billion/annum
 International exposure to the main 3 markets: U.S., Europe and Japan
 R&D in minimum 5 various therapeutic areas
 A fully integrated pharmaceutical operations models, that encompasses in-house
R&D, operations, clinical trials, a regulatory department, sales and marketing’
Only ~30 companies globally are estimated to meet all 4 criteria to qualify as ‘Big
Pharma’ (Rosen, 2005).
Mallinckrodt plc. $14.07B
Data: Yahoo Finance, 02.07.2015

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2. Mergers and acquisitions – does bigger
really mean better?
Over the past year pharmaceutical companies have undertaken M&A deals worth
£300bn (Financier Worldwide Magazine, 2014). The first quarter of 2015 has already
seen deals of £95.2bn, making up 12% of all M&A and accounting for a 70% increase on
the same period from the previous year (Massoudi&Fontanella-Khan, 2015).
Pharma incumbents are adopting several distinct stances in terms of M&A deal-making:
2.1. Acquisition of generic drug manufacturers
One is the acquisition of generic drug manufacturers to, firstly, deliver efficiencies
through cost-cutting. Given potential patent expirations, this path can, furthermore, be
seen as an attempt to retain decreasing revenue streams from off-patent blockbusters.
Another reason for acquiring generics manufacturers is gaining fast exposure to
emerging markets with millions of patients, unable to afford high-price branded
medicines
Such is the £8.05bn deal, where Endo seeks to acquire drug maker Par, careering the
company to top-5 generic drug makers by U.S. sales (Paton, 2015). 5 years ago the
company was heavily reliant on a single blockbuster – Lidoderm, and derived almost
half the revenues from it. Using the M&A strategy Endo successfully adapted and is
valued more than 3 times as much. (Financial Times, 2015).
Another pharma player to acquire a generics drug-maker is Pfizer with its £16.8bn
acquisition of Hospira, the world leader in biosimilars – genetic copies of biotech drugs
(Fortune Magazine, 2015). Ian Read, the company CEO, has justified the deal by claiming
excellent alignment with Pfizer’s business and a strong exposure to growing developing
markets (Pfizer, 2015).
However, modifying the business model to focus more on generics carries inherent
risks.
To increase revenues from low-margin generics, companies have been selling drugs at
different prices in developed and developing markets. This approach has recently

8. 8
erupted in a scandal enveloping Gilead, a US company, over the sale of U.S. hepatitis-C
Sovaldi and its generic version Sofosbuvir (Kazmin, 2015) in developing markets at just
1% of the U.S. $1000/pill price. The company, in order to prevent the spillover of the
cheap generic into developed markets (potentially undermining sales), has come under
fire for policing usage, almost demanding that patients return empty bottles before
receiving the next instalment. Selling generic and branded drugs with same outcomes at
divergent prices in different markets is the acid test facing pharma incumbents in
entering the generics playfield.
A further risk lies in the strategic implications of acquiring generic drug-makers.
Unbranded and standardized, such medicines extend a lifeline to millions of patients in
the emerging world. However, future expansion of the middle class is an almost
established fact, representatives of which could increasingly move upmarket,
demanding access to more expensive and branded medicines.
Overall, the overriding rationale behind this strategy appears to be short/medium-term
cost-cutting measures. Following this M&A path will do little to bolster company growth
and deliver solid returns to shareholders in the long-run in the absence of further
measures taken.
2.2. Acquisition of biotech companies
Another M&A strategy is the acquisition of biotech start-ups by Big Pharma and
specialty pharma incumbents to tap the latters’ innovative potential and restock own
drug development pipelines.
The parallel drawn between specialty pharma and ‘Big Pharma’ in section 1.4 is of
importance, as motives behind acquisitions by the two types vary widely.
Big Pharma frequently acquire biotech companies with incomplete research,
transferring development of promising molecules in-house.
However, big specialty pharma players frequently do not have sufficient in-house R&D
resources to successfully fully develop a drug. Thus, they choose to take the safer route
and target biotechs with either successful existing drugs or drugs nearing a successful
launch.

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To prove the point at case, Valeant, a large specialty pharma company, spent just 3% of
sales on R&D last year, as opposed to Big Pharma’s spend of 15% of sales (Crow, 2015) .
According to Ronny Gal, analyst at Bernstein, as cited by David Crow (Crow, 2015)
‘Valeant is a financial construct that happens to be in the pharmaceutical business’.
Nevertheless, such business model as Valeant’s is popular amongst investors and serves
as a model for other companies, albeit with variations.
Circassia, a UK drug developer is aiming to raise £275M to finance two acquisitions
(Ward, 2015a), seeking to not only acquire the drugs, but also retain the commercial
infrastructure of targets to cross-sell own drugs.
In the absence of viable R&D solutions in the pipeline to supplement thinning revenue
streams, both Big and specialty pharma are seeking acquisition targets with promising
drugs or molecules, ruthlessly outbidding each other and ratcheting up targets’
valuations. In a recent deal Alexion agreed to pay ~$8.4bn to acquire Synageva
BioPharma, a biotech company with a single drug in the pipeline, expected to be
launched this year. The offer of cash and stock is reported to represent a 140%
premium over Synageva’s closing price on 05.05 (Pollack, 2015).
Another similar deal is AbbVie’s $21bn acquisition of Pharmacyclics. The deal rationale
is adding a blood cancer drug, Imbruvica, to AbbVie’s shrivelling drug portfolio. Yet,
AbbVie paid ~$900M in excess of runner-up offers from Johnson&Johnson and an
unknown bidder. (Crow & Fontanella-Khan, 2015). $21bn for a company producing but
a single drug raises significant concerns as to the sensibility of such high valuation
premiums for biotechs.
One risk of this strategy is the impending interest rates raise by the Federal Reserve,
making ultra-cheap debt a bygone and further acquisitions prohibitively expensive. The
Actavis-Allergan deal was possible through the mammoth £21bn bond offering, the
Valeant-Salix deal through raising £10.1bn in junk bonds (Fuller, 2015). Should interest
rates rise, attracting such vast sums of money will prove financially difficult, reducing
the scope for high-value investments and threatening the viability of the entire business
model.
Another risk is the diminishing number of potential targets. CEO of Actavis, as cited by
David Crow, even described the ‘pool of targets depleted’ (Crow, 2015). Furthermore

10. 10
integration of acquisitions can prove difficult - biotech start-ups can simply be folded in
the existing corporate culture, stifling the entrepreneurial spirit that led to discoveries.
Overall, business models based on this M&A
strategy are currently providing investors
with ample returns (Crow, 2015). However,
the long-term prospects of the strategy
seem rather bleak. As mentioned, a key
factor is cheap leverage. The future
exchange rate raise being an established
fact, reliance on debt-fuelled acquisitions
and no in-house R&D is a costly and risky
path to take.
‘Specialty pharma total shareholder returns’ (Thompson Reuters Datastream as cited by
Crow, 2015)
2.3. Precision M&A and specialty drug development
Precision M&As differ from regular mergers, as they represent not an expansion of the
business, but a focus on streamlining the portfolio (Ward & Fontanella-Khan, 2015).
Utilizing this strategy companies aim to focus on core areas of expertise, where they
have the knowhow and resources to compete internationally, whilst divesting non-core
assets.
Thus, Merck sold its consumer healthcare division, expedited by patens expiration of
key revenue-generating drugs and the pressure to supplement its drug development
pipeline. The decision taken by company management is to focus R&D on select areas,
divest non-core parts of the business and engage in mass cost-cutting (Ward, Hammond
& Vasagar, 2015).
Yet, cutthroat competition means pharma incumbents increasingly spearhead funds to
imitate the strategy described in 2.2., and acquire companies with a specialty drug
portfolio, focusing the business model on specialty segments. This enables to attain

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leadership positions in niche highly specialized segments, effectively creating a
monopoly and a core strength, as biologic specialty drugs are significantly harder to
replicate compared to conventional blockbusters (Amgen, 2014). With the average cost
of a specialty treatment at $35000- $75000 and spending predicted to increase 67% by
2015 (Grom, 2014), potenial margins seem irresistible.
However, a heavy blow has been dealt at the recent IMS Health UK Market Access
Summit. Health secretary, Jeremy Hunt, as cited by Andrew McConaghie, stated that
funding priority until 2020 would be given to primary care and not specialty drugs
(McConaghie, 2015). This means U.K. market conditions for specialty treatments will
become more challenging, potentially causing other countries to follow suit. This could
render the strategies of acquiring specialty treatment biotechs and ‘precision M&A’ with
a focus on specialty drugs unviable, as payers refuse to reimburse high costs of
treatments.
Overall, it is to be concluded that M&A at stratospheric prices bear risks of losing sense
of reality. Buoyed by cheap leverage, it is too easy to overpay or acquire a company so
out of focus with the acquirer’s expertise, that no tangible gains can be generated. When
revenue streams from biotech acquisitions are unable to justify exorbitant price
premiums, sole reliance on the M&A strategy is perilous and dubious to deliver
sustainable long-term success.

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31.70%
22.40%
11.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Pharma Vaccines Consumer
healthcare
Operating margins
3. Diversification – supplementing the core
business
An alternative strategy to precision M&A is moving away from the core business into
related products and services, most frequently consumer healthcare.
Bayer followed the diversification route, acquiring Merck’s consumer healthcare
division for £14.2bn. The price was lambasted in the media, being over 20x EBITDA
(Ralph & Livsey, 2015). Nevertheless, Bayer justifies the premium in terms of revenue
gains: cross-selling benefits and introducing Merck’s predominantly US-sold products in
Europe (Bayer AG, 2014).
Another company adopting elements of the diversified business model is
Johnson&Johnson, focusing on three main areas: pharmaceuticals, consumer healthcare,
medical devices and diagnostics, effectively limiting risks of exposure to purely one
category (Johnson & Johnson Innovation LLC, 2014).
GlaxoSmithKline adopts the diversification strategy for future development having
relied on its blockbuster Advair asthma medicine for 14 years. GSK is aiming to defy the
current predominant industry focus on high-price specialty drugs for the developed
world in favour of high-volume, affordably priced products for the growing middle class
in developing countries (Ward, 2015b). This strategy shift led to a 20-billion asset swap
with Novartis, whereby GSK exchanged the high margin cancer business for the lower-
margin vaccines and consumer healthcare
(Ford, 2015). The rationale behind the
swap might seem questionable and even
ludicrous. Indeed, why divest one of the
higher-margin fastest growing businesses
and willingly subject oneself to more
intense competition?
Segment operating margins. GSK annual report, as
cited in the FT (Ward, 2015).

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Yet, GSK is not abandoning the pharma sector: the company has received more drug
approvals in the past 3 years than any other company and invests £3.5 billion/annum in
R&D, matching the industry average at 15% of sales (Ward, 2015b).
This effectively means GSK is strongly investing in in-house R&D expertise, whilst,
simultaneously, hedging the risks with developing high-priced specialty drugs and
limiting its exposure to the high-risk high-reward strategy. As Sir Witty, cited by
A.Ward, aptly remarked ‘we leave open the upside potential to be one of the winners
from innovation… But it can’t be a one-way bet’ (Ward, 2015b).
Overall, the rationale behind this strategy is spreading risk across various segments and
markets. However, successfully keeping distinct parts of the business under one roof
proves a challenge. Reckitt Benckiser has demerged its pharma business, Invidior, into a
separate entity to focus on consumer healthcare, stoking the debate about whether
pharma and consumer healthcare actually belong together.
Undeniably, there are similarities between two sectors regarding R&D, yet, there is
fundamental difference between diverse parts of the business. In consumer healthcare
brand message and product design play a far greater role than molecular drug
improvement - traditionally the focus of Big Pharma. (Ralph & Livsey, 2015).
Furthermore, there are differences in target customer groups: consumer healthcare
buyers are, typically, supermarkets or pharmacies, pharmaceuticals customers in many
countries are public health services that cover the public healthcare bill (Ralph & Livsey,
2015). Hence, the two segments are vastly different, requiring different approaches in
terms of marketing, customer management and overall resource allocation.
The diversification strategy seems a viable alternative for large pharma incumbents
with sufficient funds. However, it carries with it the risks of funds dilution and
misalignment of efforts. If diversification is to be successful, a balance needs to be struck
between retaining core strengths, identifying non-core assets for divestment and areas
for expansion.
Overall, aforementioned measures to innovate and move beyond blockbuster drugs can
yield results in the short run. However, for long-term success in the pharma industry
further modifications to current business models are necessary.

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4. Collaboration: within the sector and beyond
In the future pharmaceutical companies are predicted to generate profits through
collaboration with a large network of institutions: from university partnerships to
smartphone app developers (PricewaterhouseCoopers, 2009). The following social and
economic trends underpin the prediction.
4.1. Industry trends – a case for increasing co-operation
 Spiralling healthcare costs and corresponding shift towards outcome-based
reimbursement
Worldwide there is growing public discontent towards pharma charging payers high
prices. The UK’s National Centre for Health and Care Excellence has recently rejected an
ovarian cancer treatment – olaparib, due to the £4200/month price and the rule that no
drug cost more than £30000/annum per additional quality-adjusted life year (Potts,
2015).
China, the world’s second largest pharmaceutical market, aims to cancel its existing
15% hospital drug sales mark-up and give hospitals more remit to negotiate price
rebates with suppliers (Waldmeir, 2015), which, furthermore, strains pharma
incumbents’ profits.
A crucial outcome is the pressure to shift from the pay-per-treatment to the pay-per-
outcome model. In fact, by 2020 most medicines are predicted to be paid for only if they
deliver verifiable results (Pricewaterhousecoopers, 2009).
Measuring outcomes, however, requires access to relevant data, possible through
partnerships between pharma, healthcare payers and providers.
 Patient involvement in treatment and drug self-administration
An increasing number of patients nowadays are more actively involved in
understanding their ailments and treatments needed (Grom, 2014). A rise in computer
technologies instigated this trend, with patient blogs and activist groups created to

15. 15
encourage experience sharing. Modern day patients demand easy-to-administrate
medicines that obviate regular commutes to health centres. Hence, future success in the
business environment will depend on closer ties with the patient: providing training,
measuring treatment progress and outcomes, encouraging efficient treatment follow-
through to deliver consistent results and, consequently, reinforce the pay-per-outcome
system.
 Growth of the middle class in emerging markets
Economic growth in countries such as Indonesia, China, Vietnam, Thailand is attracting
pharmaceutical companies. Yet, to ensure success in the heavily government-regulated
markets, pharma companies must collaborate with existing players to establish a solid
presence in the region. Whereas hitherto M&A was the established route to gain a
foothold, interest rates raise by U.S. Federal Reserve is expected to diminish the gains
generated from a bolt-on acquisition commonly fuelled by cheap leverage. Given
improving legal and investor protection, strategic alliances and joint ventures are a
safer way for long-term success and early entrants are expected to be at an advantage
by selecting the most credible partners.
 Emergence of new technologies
There is great scope for cross-industry implementation of cutting-edge technology. The
most recent breakthrough innovation is 3D-printing and its seemingly inexhaustible
potential. A possible application for this technology in pharma is bioprinting.
Bioprinting works by using cultured human cells, chemically turning them into a ‘bio-
ink’ and using a bioprinter to deposit a cell pattern, with the printed tissue then allowed
to grow (Powley, 2015). Partnership with bioprinting companies to produce tissue
analogies can significantly reduce drug-testing expenditure and expedite the drug
development process. Thus, collaboration beyond the healthcare sector can cross-
leverage innovations to achieve a competitive advantage.
 Threat of new entrants

16. 16
Spurred by increasing patient involvement in health management, the broader
healthcare industry is experiencing a deluge of new entrants: from health management
apps, to wearable healthcare technology.
23andMe, a Google genetics testing company, claims to have amassed the largest
database of human genetics data through providing DNA saliva tests (Ward, 2015c). The
company seeks to determine patterns in aggregate data to develop treatments and has
already partnered with Pfizer and Roche, providing limited access to its database.
Though far from directly competing with incumbents, such entities, backed by
behemoths like Google, are ambitious to enter the healthcare industry and could
potentially disrupt the status quo. Early partnerships can help pharma to supplement
their expertise, allowing leveraging others’ assets and knowhow for implementation
into own value offerings.
4.2. Forms of collaboration
Partnerships can be implemented through following forms of collaboration.
Strategic outsourcing
Capabilities beyond core areas of expertise, (e.g. manufacturing, IT, marketing) can be
outsourced to third parties (Capo, Brunetta & Boccardelli, 2014), enabling better focus
on patient value-adding activities.
This course of action could improve management of funds, deliver a higher ROI and
reduce initial capital expenditures. Pharma companies would then monitor outsourced
capabilities, ensuring seamless and lean operation. Furthermore, non-core knowhow
could be out-licensed, enabling better focus on key areas of expertise, and generating a
stream of royalty payments.
Strategic alliances and joint ventures
Strategic alliances represent a contractual agreement of, as a rule, limited scope,
whereby companies seek to leverage each other’s expertise without extensive resource
commitment.

17. 17
Joint ventures are a more long-term legal commitment to mutual collaboration and
entail a creation of a separate, jointly owned company. The newly created entity can
gain access to founders’ expertise, generating synergy cost savings.
These forms of partnership can be implemented at nearly any stage of the business
cycle (New Zealand Ministry of Business, Innovation and Employment, 2015):
 Distribution and purchasing collaborations
 Manufacturing in new markets
 Joint marketing agreements
 Transfer of technology
 Academia research projects
Strategic alliances are presently widespread through partnerships between Big Pharma
and small biotech companies in certain segments of drug development, where a
successful therapy procedure is hard to establish. Oncology is one such area.
Novartis has recently forged an alliance with Aduro of California to develop Sting – a
way of activating the immune system to destroy cancer cells. Novartis is prepared to
pay $200M to license the technology and a further $500M should it prove successful
(Garde, 2015).
Merck finalized a deal to test a checkpoint inhibitor drug – Keytruda, combined with
another drug developed by a US biotech, Syndax. This draws on the industry-
established fact, that checkpoint inhibitors perform better used in combination with
other treatments (Ward, 2015d).
A more radical technique – adoptive T-cell therapy, involving taking immune cells from
the patient and reengineering them to destroy tumours (Ward, 2015d) has spawned a
further spate of partnerships. Merck Serono has struck a $941M co-development deal
with Intexon and is developing a checkpoint inhibitor with Pfizer (McDermid, 2015)
This drive for collaboration is due to the particulars of this area of medical research.
Oncology is an extremely fast-moving field with over 200 cancer types. Sole-drug
therapies typically put the patient in remission, but to fully eradicate the aftermath and

18. 18
prevent the disease from developing anew, a follow-up treatment is necessary. This
creates ample scope for incumbents to secure leadership in treatments for certain types
of the ailment and makes partnerships a viable path to manage risks and build on
diverse expertise.
Collaborative networks
Utilising this model, the pharmaceutical company acts as a ‘hub’, establishing a network
of separate entities: hospitals, suppliers, universities, etc., all sharing common
infrastructure (PricewaterhouseCoopers, 2009). Players in the network are united by a
common goal and rewarded according to defined criteria and input. Common
infrastructure creates interdependence, which, in turn, creates incentives to remain
within the network. This form of collaboration provides an excellent opportunity for
idea cross-fertilisation, whereby pharma incumbents can leverage expertise within and
beyond the industry, creating integrated patient value offerings.
Integrated value chain
This model is an entirely new level of collaboration and involves various
pharmaceutical companies performing different roles within the traditional value chain,
each complementing others’ core strengths and cross-leveraging expertise.
Integrated pharmaceutical supply chain (Capo, Brunetta & Boccardelli, 2014)
The model partially resembles the outsourcing collaborative model, insomuch as certain
parts of the value chain are outsourced to third parties. However, the third parties
would not simply assume a dependent relationship, where one pharma company is the
chief party and coordinator, but would all act as equal partners, leveraging their
collaborative networks to perform parts of the value chain in the most efficient manner.
Selecting an optimal collaboration form and implementation of that decision depends
on a company’s unique requirements, targets and resources. However, as a general
Research Development Manufacturing Marketing & Sales

19. 19
trend, pharmaceutical incumbents are expected to adopt a progressive approach to
business model innovation initially (PricewaterhouseCoopers, 2009): starting with
rather short-term collaborations, identifying the most successful ones to extend co-
operation, ultimately, establishing a collaborative network and, subsequently, efficient
links between collaborative networks to implement an integrated value chain.

20. 20
5. Key routes for business model innovation
Adapting business models to focus on these key guidelines through collaboration is
expected to deliver the greatest benefits to both pharma incumbents’ bottom-line and
stakeholders.
 Development of novel commercial models of drug uptake & implementation of
outcome-based pricing
Understandably, pharma players want to recoup substantial R&D costs by charging high
prices. However, with the pressure to reduce healthcare expenditures, prices can only
be sustained if an outcome measurement system is in place.
Currently, in many markets specialty drugs reach patients through physicians buying
drugs upfront and being reimbursed upon the drugs’ administration. However, the risks
are that reimbursement will not be effected due to the payer’s refusal to cover high
costs of such medicines (Robinson, 2014). Industry incumbents could take the following
steps adapt their business models to the challenge:
 Provide support to doctors and physicians with the reimbursement process and
assistance with measuring drug results to substantiate the case for
reimbursement. Angela McFarlane, as cited by Andrew McConaghie mentioned a
novel real-world evidence collection application being developed, which could
be utilized to fund drugs that deliver verifiable positive results for patients.
(McConaghie, 2015).
 Consider implementing changes to the billing process, e.g. consenting to
postpone receiving full payment for drugs until positive outcomes have been
empirically verified, effectively providing up-front discounts to physicians. As
partnerships with payers enable access to crucial patient data, implementation
of flexible pricing can ensure that R&D investment is recouped within the drug’s
life cycle. Although this could lead to lower revenues initially, mutual trust can
be established and prices for effective, life-saving drugs justified.

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 Provide patients with adherence devices and support to ensure effective
treatment follow-through in order to empirically prove positive drug outcomes.
Delivering integrated product-service packages
As mentioned above, to deliver sustainable value and measurable results, pharma
players need to implement changes to the current focus on providing solely an effective
treatment/drug. There is evidence that medicines deliver better outcomes coupled with
appropriate nutrition and exercise (Gilbert, Henske & Singh, 2003). Thus, a network of
product, patient support mechanisms, wearable technology for progress measurement
and mobile apps will enable better treatment outcomes and patient value offerings.
Delivering patient-tailored solutions
This route is especially viable for pharma companies focusing on specialty drugs. A
great opportunity for innovation lies in linking genetics with conventional treatments
(Grom, 2014). The approach will enable drug manufacturers to predict which patients
will derive benefits from the drug, and which will experience adverse side effects. This
will result in better patient value creation, substantiate the price charged for a
treatment given a verified outcome and an increase in quality-adjusted life years.
Innovation in in-house R&D approach and adaptive clinical trials
Blockbuster drug development in the past entailed juxtapositioning various compounds
with a certain molecular target (Gottlieb, 2011). However, evaluating vast numbers of
chemicals to identify effective ones is a resource-consuming process with decreasing
ROI (Nisen, 2015). This dispersed approach can no longer yield cost-optimal results: a
sprawling R&D department does not translate into
better innovation, as seen from the Pfizer case. The
company built a 2.7M sq.ft of research space, only to
lay off staff after facility investment failed to
translate into more innovation (Caroll, 2015).
Pharmaceutical R&D returns, top 12 spenders (Nisen, 2015)

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To counteract this, alternative R&D approaches must be evaluated. Virtual R&D is one
approach: computer molecule design could, through leveraging existing scientific
knowledge and accumulated data, greatly expedite drug’s structure design and lower
R&D expenditure (PricewaterhouseCoopers, 2008).
Another approach is entirely changing the drug development focus to concentrate on
the particular molecular structure of an ailment and the targeted biological receptor.
This ensures efforts and resources are not wasted, but are spearheaded to find a cure
for a particular ailment, thus avoiding the industry-famous ‘Viagra experience’ (Gilbert,
Henske&Singh, 2003).
If the pharmaceutical company considers its strength to lie not in successful drug
discovery, but in, e.g., an efficient supply chain or marketing, a viable R&D approach
could be to in-licence drugs for future commercialization from smaller players with
potentially lucrative drugs in the portfolio lacking such capabilities.
Adaptive clinical trials could, further, supplement the chosen value creation model
through establishing reactions to the drug from the outset and efficiently modifying the
dosage/patient sample/combination of drugs based on initial results (Brennan, 2013).
Emphasis on prevention
As mentioned above, governments worldwide are seeking to contain healthcare costs.
Detecting ailments at early stages can significantly reduce treatment costs, as well as
ensure better patient cure rates. Pharma incumbents, have largely ignored this area.
Though this strategy may seem counterintuitive at first (indeed, the lifeline of the
business depends on curing ailments, not preventing them), first entrants can gain
favour with government healthcare payers, willing to increase spending on prevention,
whilst decreasing available funds for drug cost reimbursement.

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Conclusion
Pharmaceutical incumbents are moving away from the ‘blockbuster’ business model
through utilising various diverse strategies: from precision M&A to greater
diversification, from focusing on generic low-price high-volume drugs to creating high-
premium specialty treatments.
There is and can be no single recipe for success. The business model changes to be
implemented depend greatly on the company: its culture, vision, resources, ownership
and targets.
What cannot be doubted are the general trends of the changing pharmaceutical
business environment: the shift towards outcome-based drug reimbursement, patient
involvement in treatment, new technological innovations implementable in healthcare.
The key to successfully adapting pharma business models lies in eradicating the current
clash between pharma and healthcare payers, gaining access to patient data in order to
deliver excellent value. This can best be achieved through collaboration within and
beyond the industry by providing integrated product-service solutions, implementing
flexible outcome-based pricing, delivering tailored patient solutions.
Hence, each pharma incumbent must carefully evaluate their current business model,
identify core capabilities and strategic strengths to build on, determining the optimal
route for future development.