Mehta Analysis: Disrupt or be Disrupted

Many industries are being profoundly disrupted by IT. The survival of the publishing industry is in question as ad rates have plummeted in response to data and content transparency in the digital world. Digital technology has enabled pricing transparency that is fundamentally shifting spending patterns in travel, entertainment, transportation and many other industries.

The biopharma industry so far has not felt too much heat—thanks to the complexity of its business. (Also see “Six Questions For McKinsey’s Fox On Pharma’s Digital Struggle” – Scrip, 28 Oct, 2016.) But let it be noted that other industries looked complex in their own way—until, that is, some newcomers figured out ways to deploy the right tools to overcome the complexity. Often they succeeded in creating parallel channels to provide the necessary product or service, completely bypassing existing structures, while adapting regulatory barriers to their advantage. Uber and Airbnb are two of the better known examples.

Digitalizing More Of The Pharma Pie

To appreciate the implications for biopharma, let us recall the way its economic pie comes together. Biopharma’s share of US healthcare spending is approximately 15%. In round numbers, a tenth of this biopharma spending goes to the cost of producing the medicines, a fifth goes to R&D, and two fifths to selling, marketing, and operations, leaving an attractive profit that fetches the biopharma sector one of the highest stock market valuations. Production has already been greatly automated, and now IT promises to reshape much of the rest of the biopharma pie.

The benefits of IT in biopharma today are most evident in new product development, and especially clinical trials. From accelerated recruitment of patients into clinical studies, to wearables that simplify data gathering, to faster analytics and automated regulatory submissions, clinical development is beginning to benefit from new tools. These incremental improvements should make the D portion of the R&D spending more efficient, although the regulatory processes themselves are unlikely to improve quickly enough over the next decade to make a dramatic difference in how the value of new product development evolves.

The impact of IT on two other fronts, drug discovery and the way health consumers procure their healthcare, including drug therapies, promises to be more dramatic and quicker. IT tools are more effectively overcoming regulatory and other barriers along these two fronts, helping to combat healthcare and biopharma inefficiencies with the power of data.

Payers around the world are sitting on data treasure troves. They are yet to fully deploy deep-data analytics, but they are beginning to do so.

Well over one-half of healthcare spending goes towards outpatient care, and a vast majority of biopharma’s 15% share of healthcare spending is in the outpatient setting. The healthcare consumer today already has at her disposal an ever-expanding range of IT tools that break open the regulatory veil, educating her not only about the disease that needs to be treated, but more importantly, about the value of the various therapeutic alternatives. Equally importantly, US payer groups, including the US government bearing the majority of the US healthcare costs, are demanding transparency to assess the cost-benefit ratio of therapy options – and increasingly they are getting it. After all, they are the ones processing the health claims. This also is true of most centralized, single-payer healthcare systems of Europe and Asia. Payers around the world are sitting on data treasure troves. They are yet to fully deploy deep-data analytics, but they are beginning to do so.

Exploding Pharma’s Low-Transparency Business Model

The results will turn evidence-based medicine from a buzzword to a true analytic power accessible to all key stakeholders, patients, payers and prescribers alike, blowing apart the low-transparency business model of biopharma and forcing a value-focused transformation of every biopharma business practice. In the US, no longer will the next product automatically be paid for at a premium to the previous generation, and the days of regular price increases regardless of value addition are history. Above all, the industry strategy of increasing prices by extraordinary amounts on the eve of US patent expiry is increasingly untenable.

Mobile health tools are reducing the role of middlemen, enabling the patient to work via telemedicine with the most appropriate clinician, not just the physician. Many of these IT tools effectively adapt the regulations, enabling easier entry for new entrants, further intensifying the competitive landscape. These interlopers range from small mobile health start-ups to the Amazons, Apples, Googles, and Microsofts of the world who have already invested tens of billions dollars in deep-data intelligence, along with an aggressive push to integrate imaging and devices to greatly enhance the entire value chain, targeting healthcare system inefficiencies from diagnostics to treatment to monitoring. (Also see “Interview: Philips Plugs Into Patient Connectivity” – Scrip, 3 Nov, 2016.)

IT integration is influencing new product innovation even more rapidly. Artificial intelligence is being fed an ever-increasing stream of life science data, leading to higher probability pathways, while pruning out potential dead-ends early. Here again, newcomers, from 21andme to Illumina to IBM, to mention just three, are not only selling their wealth of data to the biopharma companies, but, lacking the burden of big pharma bureaucracy, are deploying these insights into their own discovery platforms, ready to show that a new and truly valuable drug need not cost a billion dollars and take over a decade to reach the patient – nor would it necessarily entail the high selling and marketing costs of the traditional biopharma output.

One constant will remain: growth based on efficient innovation will be key to maintaining biopharma market valuations. But IT pioneers are challenging who qualify to be a part of this biopharma universe. It is time for the current biopharma managements to choose the path of the disruptor, or to be disrupted themselvesThis column originally appeared on Scrip Biopharma Intelligence, April 24th, 2017

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