The realities of unrelenting price pressure and patent expiries put a special pressure on pharmaceutical companies to consistently create new and differentiated medicines. Pharma companies are compelled to innovate in order to survive, and the rewards for successful innovation are substantial. To understand the magic of innovation in pharma today, we have explored the lessons that can be learned from the FDA’s breakthrough innovation scheme. This relatively recent scheme provides a good indication of compounds that have the potential to become game changers, and through that the habits and behaviours of the companies that are achieving this, for some the “ultimate” level of innovation. So in this paper we review and analyse the granted breakthrough approvals from the scheme’s initiation in 2012 until the end of 2016, and explore the companies that are leading the way in the scheme. We conclude by exploring the lessons learned for would-be breakthrough innovators, defining the criteria and parameters that enable the discovery and development of game changing drugs.

A new measure of innovation for the pharmaceutical industry

The FDA’s introduction of its breakthrough designation scheme in July 2012 provided a new standard and benchmark for innovation in the pharmaceutical industry. The scheme aims to fast track and expedite the development and review of drugs for serious or life-threatening conditions. More specifically the criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint versus existing therapy. Once a drug has been designated as a breakthrough therapy, the FDA will then work with the sponsor (applicant) to ensure the design of the clinical trials is efficient and practical. Regulatory standards to demonstrate safety and efficacy must still be met to support final marketing approval. Nearly five years in, the scheme therefore now provides a comparative framework between the different products in development stage and a consistent indication of products’ potential of becoming game changers.

Between 2013 and 2016, the FDA’s CDER (Centre of Drug Evaluation and Research) and CBER (Centre of Biologics Evaluation and Research) have received 387 small molecules and 81 biologics breakthrough designation requests respectively. Of these requests, 36% have been granted by the CDER and 30% by the CBER. There has been a consistent year on year increase of granted breakthrough designations, coupled with a slow decline of failed requests that are either denied or withdrawn by the applicant.

As the Breakthrough Designation scheme is maturing, more designations are being granted and fewer are failing for both small molecules (NDA) and biologics (BLA)

Source: Novasecta analysis of the FDA’s Breakthrough Designations List. NDA is New Drug Application through CDER, BLA is Biologic Licence Application through CBER. Failed = Denied + Withdrawn

While the number of granted designations has been increasing, it is also encouraging to note that in the last three years an average of 10 breakthrough approvals per year have also been granted. For an industry with research and development timelines that can stretch to 12 years, this represents an important achievement for the companies that have made it happen.

FDA granted an average of 10 breakthrough marketing approvals per year from 2014 – 2016

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

While the number of granted small molecule (NDA) breakthrough designations is almost six times the number of granted biologics (BLA) designations, the story for breakthrough designations that have subsequently been translated into marketing approvals is very different: the percentage of granted designations that subsequently obtained full marketing approvals is 50% for BLAs and only 15% for NDAs.

The chance of securing a marketing approval after a breakthrough designation is significantly higher for biologics than for small molecules

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

In summary, the year on year increase of granted breakthrough designations will with time surely translate into a higher number of breakthrough approvals. The fact that biologics are delivering a higher ratio of approvals compared with small molecules points to a more biologics-oriented innovation landscape for the future.

So far breakthrough innovation is a Big Pharma – Biotech phenomenon

Now we take a closer look at the companies that are taking the lead in breakthrough innovation in the pharmaceutical industry.  We considered both size (using revenue as a measure) and geographical presence of these companies, for both designations and approvals, also noting the originators of the innovation. In terms of the breakthrough designation applicants that subsequently achieved marketing approvals, 73% were big pharmas/biopharmas (defined as revenue greater than $10bn) and 27% were biotechs (defined as revenue up to $3bn). Note we are using the term “biotech” to mean smaller and earlier stage companies rather than the nature of the molecule (biologics or small). So far companies with revenues between $3bn and $10bn have been notably absent from the breakthrough approvals list.

73% of breakthrough approvals have been achieved by Big Pharma applicants (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List (2013-2016) and GlobalData for companies’ revenues

Though it is still in its early days for the scheme, it is interesting to note that in last two years smaller biotech companies have started to take an important share of approvals in comparison to Big Pharmas, taking their drugs all the way from discovery to regulatory approval.

From a geographic perspective, breakthrough approvals have been an exclusively US and European domain, with 73% of the total granted breakthrough approvals from 2013 to 2016 being to companies located in the US, and 27% to those located in Europe. Many reasons may explain these regional disparities, including the fact that it is the US’s FDA that has the scheme. US companies also have better access to funds for high-risk innovation, are close to thriving scientific hubs with access to exceptional talent, and a long tradition of entrepreneurship.

So far US companies have led the way in achieving breakthrough approvals (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List and Companies’ websites

By contrast with the granted approvals being so far dominated by Big Pharmas, when considering the originators of the breakthrough approvals (the companies that created the initial compound before it was acquired or partnered for further research and development), the majority are biotechs, comprising 67%, with only 33% coming from the internal R&D of Big Pharma. It therefore appears that many Big Pharmas have been acquiring or partnering with small biotech innovators prior to requesting a breakthrough designation that they hope will subsequently result in an approval.

67% of the companies that originated the drugs that then achieved breakthrough approvals are Biotechs (n=33)

Source: Novasecta analysis of FDA Breakthrough Approvals and GlobalData for companies’ revenue

Of the Big Pharma companies that have led the way in originating the 11 breakthrough drugs that have subsequently been approved, Roche comes first with three approvals, all from its wholly owned subsidiary Genentech, followed by MSD, Boehringer Ingelheim, and Gilead with two approvals each, and Novartis and AstraZeneca with one approval each. It is also worth noting the US vs. Europe origination phenomenon for Big Pharmas. The European-headquartered Big Pharmas have originated eight breakthrough drugs internally compared to four for their US-headquartered counterparts. This also corresponds to the trend we observed in previous research of US Big Pharma companies being involved in more M&A and partnership activities than their European counterparts.

By contrast with those that originated the breakthrough molecules, of the sponsors that applied for breakthrough designations that subsequently achieved approvals, Gilead, Genentech and Abbvie have taken the lead, with four, four and three respective approvals obtained between 2013 and 2016. In the case of Gilead and Genentech this represents an impressive rate of one breakthrough approval per year.

In summary, the typical breakthrough innovator profile so far appears to be companies based in the US or Europe that are very entrepreneurial and have access to funds either through their own financing as a Big Pharma or through external investments as a smaller biotech.

The lessons for Pharma R&D

The good news is that companies do not necessarily need to undertake expensive M&A activities to increase their innovation output. Indeed, only 27% of breakthrough-approved drugs between 2013 and 2016 came from M&A, while 73% came from internal R&D and partnerships. As far as breakthrough innovation is concerned, M&A represents a quick fix and not a strategy for the long term. This is even more relevant in an environment where M&A prices are reaching new highs.

Partnerships and strong internal R&D are more sustainable paths to innovation than M&A

Source: Novasecta analysis of FDA Breakthrough Approvals and press releases

Our analysis of the breakthrough approvals confirms our prior research (M&A versus Partnerships, Defragmenting R&D) that strong internal R&D and partnerships represent the best way to innovate in today’s pharmaceutical environment. 73% of breakthrough approvals so far were achieved through this path. Developing internal know-how and capabilities is a sound strategy to build the foundations that will enable continuous excellent innovation. This can be achieved by:

  • Focusing on the company’s strength and capabilities
  • Collaborating strategically with other pharmaceutical companies, exchanging capabilities and assets that can create increased value for both parties involved
  • Fostering an entrepreneurial spirit and biotech mentality internally, with self-directed and motivated entities that entrepreneurially secure funding by understanding the commercial and business rationale for their innovation.

The relative advantages of being a privately owned or publicly listed pharma company is an enduring debate across the industry. It polarises opinion. The central consideration is simple: how much influence does ownership structure have on the evolution and growth of a pharma business? With private pharmas typically smaller than their listed counterparts, it’s often suggested that this fuels a nimbleness and agility that gives private an advantage over listed. Conversely, it’s argued that listed companies’ ability to access capital markets gives them opportunities to scale that are rarely possible in privately owned businesses. Our own analysis reveals a deeper complexity. Although there are distinct advantages to both ownership types, these seldom relate to size and scale. The comparative benefits of private and listed companies – and indeed the characteristics that can stifle their growth – are embedded in cultures and processes that are synonymous with ownership type. The clues for value creation are in the same place. To grow, pharmaceutical companies must craft R&D and commercial strategies that suit their ownership structure. A bespoke approach is best; one size does not fit all.

Ownership matters: impact on growth

The ownership structure of a pharmaceutical company can have a significant influence on the nature of its evolution and growth. Yet in an industry where the majority of the biggest players are stock-market listed, a large proportion of highly successful mid-sized companies are privately funded. A good example is the European MidPharmas, defined by Novasecta as R&D-based integrated pharmaceutical companies with annual revenues of between €50m and €5bn. Over 70% of them are privately owned or controlled. The resilience and growth of the European MidPharmas has been an ongoing trend in the market for several years. Their growth has invariably been accompanied by an R&D intensity that illustrates a strong commitment to long-term innovation, with many consistently investing more than 15% of their revenues in R&D.

The MidPharma model, which typically relies on a long-term view and ‘patient capital’, contrasts sharply with the approaches of listed counterparts. However, the attractiveness of the mid-sized sector, as evidenced by J&J’s $30bn acquisition of Actelion in 2017, shows that carefully planned private ownership prior to listing can yield stunning results.

The relative benefits of listed and private ownership are difficult to isolate. However, through the analysis of trends, data and real-world experience, it is possible to evaluate the influence that ownership structure can have on a business, and to explore strategies – in keeping with that structure – that may help stimulate the growth required for sustainability.

The data: comparing private and listed performance

In late 2017, Novasecta reviewed the R&D and commercial performance of 84 large and mid-sized pharmas in Europe. Our evaluation focused on the volume and commercial success of New Drug Applications (NDAs) for every company within the sample, with both US and EU-approved drugs (Marketing Authorisation Applications) included in the calculation. We also looked at New Molecular Entities (NMEs) as a subset of NDAs to establish the volume of approvals in more innovative classifications. 70% of the sample were privately held or privately controlled companies (where >50% of shares are privately owned). The remaining 30% were listed. The private companies tended to be smaller than their listed counterparts, yielding a mean revenue of €2bn versus €7.5bn in listed companies.

In terms of NDA generation, the proportion of non-producing companies in the two ownership categories was broadly similar, with a slightly higher percentage for private companies (64%) than listed (54%). At the other end of the scale, in terms of the more innovative NME generation, the share was even closer, with 22% of private companies and 23% of listed generating NMEs.

However, of the producing companies, private companies appear to be more productive than listed. Our analysis shows that private companies generate more NDAs per €100m R&D spend (1.48 versus 1.03) and more NDAs per €1bn revenue (2.64 versus 1.64).

Private companies generate more NDAs per R&D spend and per revenue

 

Notes
-26 companies generated NDAs in the past 5 years AND had available R&D spend data (12 listed and 14 private)
-32 companies generated NDAs in the past 5 years AND had available revenue data (12 listed and 20 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

How Ownership Influences Pharma Strategies

When comparing NME-producing companies, the difference is even more pronounced. Private pharmas generate 0.98 NMEs per €100m R&D spend versus 0.24 in listed organisations – almost 4 times the amount. Similarly, private firms generate 1.46 NMEs per €1bn revenue, nearly 3 times as many as listed companies (0.54).

Private companies generate more NMEs per R&D spend and per revenue

 

Notes
-19 companies generated NMEs in the past five years and comprise the analysis above (6 listed and 13 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

Private companies also appear to be more efficient with their R&D spend, investing a slightly smaller proportion (16%) of their revenues on R&D than listed (19%), yet generating more NDAs and NMEs as a result.

Private companies are more efficient with their R&D spend

 Notes
-26 companies generated NDAs in the past 5 years AND had available R&D spend data (12 listed and 14 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

However, significantly, listed companies appear to be more successful in commercialising their NDAs and NMEs. Listed firms generate more revenue per NDA than private pharmas (€1,023m per NDA in listed versus €848m in private). Moreover, they generate more than twice as much revenue per NME (€3,792m) than their private counterparts (€1,825m).

Listed companies generate more revenue per NDA and per NME

 Notes
-32 companies generated NDAs in the past 5 years AND had available revenue data (12 listed and 20 private)
-19 companies generated NMEs in the past five years and comprise the analysis above (6 listed and 13 private)
-Revenue and R&D figures are 5-year averages across 2012-2016

Creating R&D value

Our analysis reveals three hypotheses that could relate to the common characteristics of each ownership type. The first hypothesis is simple: private companies are better at generating NDAs than listed companies. The data shows that private companies are generating more NDAs on a bang-for-buck basis, yielding a greater number of new drugs despite investing less revenue in R&D.

However, further interrogation of the data brings private pharma’s productivity into sharper focus. Private companies’ NDAs appear less valuable than those produced by listed companies; they generate lower revenues and rarely reach the same levels of peak sales. This fuels two related hypotheses: either listed companies are better at commercialising new drugs, or they produce more commercially-viable NDAs and NMEs than private firms. In some cases, both may actually be true.

Let’s examine the first hypothesis. Our experiences of working closely with leadership teams at European MidPharmas tell us that it’s no surprise that R&D is more productive and efficient in private companies. It’s their lifeblood. Private companies depend heavily upon having innovation within their pipelines – without it, they could quickly disappear. Moreover, since they don’t have access to the capital markets to buy their way out of trouble, private firms need to be totally focused on innovation to ensure they remain sustainable. As a result, they tend to take a longer-term perspective, leaving them free to focus on delivering better R&D.

Taking the long view is a key characteristic of private ownership. Whereas listed companies are likely to be more focused on quarterly earnings, commercial growth and shareholder value, family companies are typically thinking about sustainability and the next generation. For example, Roche CEO Severin Schwan says being family owned gives his company an important edge and allows it to think about the long term. Roche, he says, thinks in ’30-year cycles’ that afford it the luxury of making decisions that may not produce tangible benefits for 10-15 years. This philosophy is unlikely to fly in most listed companies.

A natural consequence of the long-term focus is that private organisations tend to take fewer risks. If your key goal is sustainability, rather than shareholder price, you’re likely to refrain from pursuing ‘super drugs’ or making big bets with innovation. Private companies avoid the volatility and vulnerability of market fluctuation but miss out on the high risk, high reward of ground-breaking innovation.

Nevertheless, there are some great R&D success stories among the European MidPharmas. In terms of the number of NMEs per €1bn revenue, two of the top-performing companies are privately-held MidPharmas; Helsinn Therapeutics (6 NMEs per €1bn revenue) and Chiesi (1.5 NMEs per €1bn revenue). Another high performer – Ipsen (0.9 NMEs per €1bn revenue) – is privately controlled and part-listed.

By comparison, some of the industry’s biggest companies yield far fewer NMEs. For example, AstraZeneca and Novartis both generated 0.25 NMEs per €1bn revenue.

Lugano-based Helsinn is the most prolific producer of NMEs per €1bn revenue in our sample, with an enviable record of FDA approvals for a privately-held company. The business has grown significantly off the back of its cancer portfolio. Its approach has been to focus on innovation, securing approval for drugs that it can subsequently distribute through commercial partners. Without the inherent pressure of a commercial organisation, Helsinn has proven extraordinarily strong at securing NMEs. It’s a great example of how releasing yourself from the commercial discipline can help a business focus on R&D value. Such has been Helsinn’s success that it is currently introducing its own commercial salesforce in the US. That’s a powerful evolution fuelled by innovation.

Chiesi is family-held and has grown impressively in the past decade under the ownership, direction and active management of the Chiesi brothers Alberto (President) and Paolo (Head of R&D). Chiesi is unusual in that, unlike many other private companies, the family remains heavily involved in the running of the business. This has helped it maintain a focus on sustainability to prepare for the next generation. Consequently, Chiesi has been able to innovate in the respiratory therapy area and become an important player in a competitive category dominated by big pharmas. It has been very successful in securing approvals, not least in the triple combination therapy for COPD, where it was the first company to receive EU approval. Chiesi is a great example of how family management and control can help an organisation succeed at R&D and compete with its bigger competitors.

Actelion is historically one of the jewels in the crown of the MidPharma sector. Prior to its acquisition by J&J, it portrayed all the characteristics of a privately-held company under the leadership of Jean-Paul Clozel. This led to some very long-term decision-making and a strong focus on R&D. Actelion’s track record in innovating is impressive; not only did it secure approval for its first major product, Tracleer, in September 2017 but it quickly followed it up with approval for a second, for Opsumit, just two months later. This is highly unusual. Although Actelion was subsequently listed prior to its acquisition by J&J, the company has reaped the benefits of the long-term R&D focus it established as a privately owned organisation.

Ipsen, another high producer of NMEs per €1bn revenue, is one of the most interesting companies in our sample. The business is privately controlled by the Beaufour family but also has a listing. Ipsen’s approach has been to secure approvals for some clever innovations on the backbone of some relatively old specialist products. It’s proved very successful. The company’s commitment to the long-term and its focus on R&D has seen its share price rocket. However, the evolution comes with a twist: Ipsen has begun to commercialise itself in the US. The strategy was originally unappealing to the analyst community who weren’t keen on the idea of investing in commercial. Yet the move has proved enormously successful. Ipsen’s story provides a good counterpoint to the argument that private companies should leave commercialisation to the bigger players. They’ve bucked the trend – and it’s worked.

These examples demonstrate that a long-term model of R&D can yield great results. Ultimately, however, the job of managing R&D to create value hinges on three key steps. Primarily, create a reality-based strategy that aligns with your ownership structure and accounts for the strengths and weaknesses within your organisation. Secondly, ensure this strategy is made real through meaningful action plans for your portfolio and sources of innovation. Finally, create a management system with strong project leadership and fit-for-purpose governance. Taking these steps – irrespective of ownership structure – can help create a platform for long-term sustainability and commercial growth.

Creating commercial value

The second hypothesis – that listed companies are better at commercialising new drugs – is arguably more straightforward to quantify. At the headline level, the data shows that listed companies generate more revenue per NDA than private companies – and they generate more than twice as much revenue per NME. At a more granular level, the numbers are even more revealing.

We analysed the top 300 drugs (by sales, 2016) and ranked pharma companies according to the number of products they had in the listing. The top performers are unsurprising. Merck & Co has the most (27), followed by Pfizer (25), Novartis (23), GSK (19), and Sanofi (17). However, when we interrogated the data further to establish companies’ revenue per product in the top 300, the ranking takes on a completely different look. The top companies are: Regeneron ($3,323m revenue, per product in top 300), Alexion ($2,843m), Gilead ($2,595m), Abbvie ($2,413m), and Celgene ($2,177m).

Top performers (by revenue per product in the top 300 drugs) are largely listed US companies

 Notes
-Source: PharmaCompass – top 300 drugs by global sales in 2016

The rankings are both intriguing and instructive. The top 5 companies are all American listed companies with the top three each being classic, high-risk biotechs. Furthermore, four of the remaining five businesses in the top 10 are also listed and American; Amgen, J&J, BMS and Biogen. The only exception, in 6th position, is the family-controlled Roche, which with 16 products in the top 300, yields revenue of $2,121m revenue per product. However, Roche’s strong performance is inexorably linked to its mega acquisition of the American biotech, Genentech. That shrewd 2009 purchase, de-risked by the time it was completed, epitomises Roche’s long-term view and its willingness to look beyond a 3-5 year horizon.

Using revenue per product in the top 300 as a proxy measure, it appears that the most commercially successful companies have followed a typical route; US listing and big, high-risk bets on innovation. The two most prominent examples are Amgen and Gilead.

Amgen, perhaps the original risky biotech, kick-started the biotech revolution by investing venture funding in biologics. When the gamble started to pay off, it began the process of commercialising itself and has been growing ever since.

The Gilead story involves similar risk. Its $11bn purchase of Pharmasset in 2011 was the catalyst for groundbreaking successes in hepatitis C. But when it ran out of patients to treat, Gilead rolled the dice again with an $11.9 billion acquisition of Kite Pharma to access its CAR-T treatment for advanced lymphoma. Its share price immediately rocketed.

The nature of Amgen and Gilead’s successes should provide an important learning for listed companies: always be conscious of what your shareholders want. In the US, shareholders are looking for huge returns. They’re happy to put up with the inherent volatility of high innovation if the potential upsides appear worth it.

In Europe, shareholders are perhaps more conservative – and it’s led to alternative types of approaches. GSK, for instance, has convinced its shareholders to value sustainability. The company is taking the long-term view more commonly associated with private organisations. It has eschewed high risk innovation in favour of volume, focusing on getting greater quantities of its medicines around the world. The approach has seen GSK expand into emerging markets, securing high volume rather than high value. From an R&D perspective, its output of NMEs per €1bn revenue has been just 0.16. Yet its commercial model is thriving, yielding strong and sustainable dividends for shareholders.

GSK’s approach of favouring volume over radical innovation is in sharp contrast to the growth strategies of most listed companies. As our ranking of companies by revenue per top 300 products shows, many of the top performing companies are pursuing high innovation. The top 10 certainly suggests that our third hypothesis may be true: listed companies generate more commercially-viable NDAs and NMEs than private organisations. It also underlines the potential rewards of investing in high-risk innovation. However, it’s a strategy made for companies that have access to the capital markets. As we’ve already seen, it doesn’t sit comfortably with the long-term ethos of private companies.

So what of our second hypothesis? Are listed companies better at commercialising new drugs? The data backs up the claim. The reason for this once again relates to the vagaries of ownership and the divergent demands of shareholders. Whereas private companies focus heavily on innovation, listed companies typically place a greater focus on commercial performance. This is entirely driven by the discipline of the market.

Shareholders’ demands for quarterly earnings and commercial growth force listed companies to impose a capital discipline that focuses sharply on the numbers. The share price matters. This means establishing robust processes, bringing in great people and focusing them firmly on delivering commercial success. Aligned to this, the ability to recognise opportunities that can deliver shareholder value, along with a preparedness to invest, are equally important attributes. Collectively, these are the hallmarks of commercial effectiveness.

Private organisations can learn much from the commercial approaches of listed companies. Fundamentally, commercial success is not about size or scale, it’s about discipline, rigour and process. Private companies don’t need to play the high innovation game to be commercially successful. With better structure, discipline and methodology, it’s possible to squeeze more from your assets without betting the farm. A good start point is to use external benchmarking to gain an objective view of your marketing strengths and weaknesses. This can help you establish where you need to invest to achieve the greatest commercial returns.

Objective measurement and external assessment of commercial plans is standard practice in most competitive industries. As the value of external marketing audit is increasingly recognised, pharma companies are beginning to benchmark key elements of marketing against comparable companies and are using objective insight to inform commercial strategy. It’s an approach that we endorse. Companies chasing superior commercial performance must ensure that they have strong marketing excellence structure and processes.

One size doesn’t fit all

The ownership structure of a pharmaceutical company can certainly influence the nature of its evolution and growth. But that doesn’t mean that the different ownership types cannot learn from each other. They must. With R&D still essential to the future of the industry, listed pharmas can learn from private companies in taking the long view on innovation. However, since commercial success is vitally important for short-to-medium term survival, private can learn much from their listed counterparts in this crucial area.

In the final analysis the message is simple: one size doesn’t fit all. Companies should craft their R&D and commercial strategies to suit their ownership structure. The bespoke approach, based on reality-based evaluation, is always best.

For privately owned/controlled companies – in particular the European MidPharmas– our analysis can act as a satnav to guide the next part of their journey. R&D is more productive and efficient in private companies, but with listed companies proving more successful at commercialising NDAs, there’s a critical need to think carefully about your R&D and commercial strategies. European MidPharmas should certainly continue to develop their own molecules. With in-licensing too expensive, it’s important to maintain focus on your own products. But with better commercial discipline and process, it should be possible to sweat your assets and deliver more value.

One final thought for private companies is the opportunity to part-list. A number of family companies are contemplating part-listing to access the capital markets. Others – like Ipsen, Recordati and Almirall – have already taken the plunge. It’s an option worth considering; it can give you the capital discipline and edge of the market and put you on a more ambitious, if volatile, path for growth. Part-listing won’t work for everyone. However, if it’s done with care – as is the case with Roche – it may be possible get the best of both worlds. After all, as the data shows us, ownership matters.

 

The digital revolution has been transforming and disrupting different industries from media and retail to finance and automotive. It is now the time for the pharmaceutical industry to be disrupted. To stay competitive and bring value to patients, pharmaceutical companies need to have an understanding of what digital means for them, define long-term strategies for the digital era, and commit to implementing the strategies by shifting their mindsets towards more patient-centric approaches.

In this paper we first argue that the time is now for pharmaceutical companies to embrace digital, then help frame what digital means to them by identifying the relevant applications and areas of interest for pharma. Finally we provide a step-by-step approach for the successful implementation of digital initiatives.

The time is now

While digital means different things to different people, in the context of this paper we consider the application of information technology in its broadest sense (excluding internal administrative and accounting systems) to the pharmaceutical industry. By this definition, when considering deal flow, only few pharma companies have so far taken the leap to experiment with digital initiatives such as apps, wearables and combinations of smart devices and drugs.  This can be explained partly by the fact that the pharmaceutical industry is highly regulated, traditionally very protective, and treats IP (Intellectual Property) as its main value-generating asset. By contrast the technology and digital companies are typically less regulated and generate value by moving fast into market rather than capitalising on their IP. This difference in mindsets and ways of working between these industries makes it harder for the pharmaceutical companies to take the leap into digital, or to see their tech counterparts as potential viable partners. Indeed, between 2010 and 2015 only a small percentage of the eHealth deal flow involved pharmaceutical companies, despite total deal volume increasing by 228% in that period according to a report by StartUp Health.

Few pharmaceutical companies have started experimenting with digital

Pharma is therefore clearly behind other industries and faces the challenge of bridging between early adopters and early majority. It must address this chasm if success is to be achieved.

Pharmaceutical companies have yet to cross the chasm with Digital

We can already see early adopters shaping the market. Next, the first movers (i.e. early majority) will contribute to shaping the market and will increase their chances of achieving important market shares. More risk-averse companies (i.e. late majority and laggards) are deciding to wait and see which initiatives are more successful. This positioning may avoid failure but at the expense of market position and competitive edge.

Digital starts with the patient

As the pharmaceutical industry ultimately serves patients, they should form the core of digital initiatives: from enhanced prevention and detection of disease through to R&D that is better focused on patient needs, to the provision of integrated patient services, and ultimately towards pricing drugs and services in a way that is affordable and provides real value outcomes that are approved by payers and reimbursement bodies.

All digital initiatives need to be centred around the patient

Based on Novasecta’s analysis and review, companies approach these four segments in a variety of ways, all of which can stimulate choices and inspiration in other companies:

1. Enhanced Prevention and Detection

Pharmaceutical companies can engage patients early on before their condition progresses and gets complicated. For example, through continuous monitoring using apps and wearable technologies diseases could be prevented and detected.

Furthermore, patients are increasingly willing to engage with their doctors through technology and are looking to monitor their health better. A recent online survey conducted by Ketchum on smartphone owners in the US has found that 58% of this group uses their phones to communicate with a medical professional.

2. Better R&D

So far, data available to clinicians and researchers is typically discrete and only gathered during episodic appointments. This makes it hard for researchers and clinicians to grasp the full picture of disease mechanism and evolution. With continuous monitoring there is a big potential to better understand disease progression and improve the quality of clinical trials or even find better ways to use existing treatments.

A new study presented at DPharm Disruptive Innovations by Validic based on interviews with 166 executives at pharma, biotech companies, and CROs, showed that 64% of executives have used digital technology in clinical trials and that 97% plan to for the next five years.

For Rare Diseases clinical trials, Aparito (a UK based digital start up) aims to capture meaningful patient-data and end-points to make clinical decisions easier, and to improve the outcome and speed of clinical trials. It also gives clinicians access to a source of data that contributes to the natural history of a disease, which is especially valuable where no therapies are currently available.

3. Integrated patient services

With increased generic competition, reduced innovation and limited new blockbusters, pharmaceutical companies can use digital technologies to repurpose their existing drugs or differentiate and add value to otherwise non-differentiated products. This way, patients will benefit from more valuable products and services that fully manage their condition.

This could be through a number of services such as apps to monitor adherence and/or a combination of drugs and smart medical devices

In this area, pharmaceutical companies can do more to develop integrated care services for patients. The initiatives so far are at very early stage and the gap needs to be filled by more innovative approaches for holistic patient care.

4. Value-based outcome pricing

Faced with increasing drug prices, payers and reimbursement bodies are rightly demanding evidence that pharmaceutical products deliver value for money for patients. Payers increasingly want to transition from a “Volume” based reimbursement (i.e. providers receiving a payment for providing a particular service or product, regardless of the outcome) to a “Value” based reimbursement structure. In this context value explicitly incorporates patient, clinical and functional outcomes. This new approach strengthens the incentive to provide care that only has a measurable positive impact on patient outcomes.

In line with these changes in the reimbursement space, digital technologies can help gather real-world data to demonstrate treatment value. Evidence can be gathered during clinical trials to support reimbursement dossiers and commissioning decisions. As an example, the Aparito app has these kinds of capabilities for Rare Diseases.

Set the foundations and secure the capabilities

Given that digital is a growing trend in the industry and that pharmaceutical companies have an opportunity to expand their services and footprint, the question facing many is how best to implement digital initiatives. Part of the answer lies in setting strong foundations and thereby enabling capabilities that generate value.

Novasecta’s framework for guiding the adoption of digital initiatives in Pharma

Foundations

Develop a patient-centric mindset: All digital health initiatives should be centred on patients, while keeping the treatment and service outcomes in mind to demonstrate value to patients and payers.

Focus initiatives and set a clear strategy: To succeed companies should be crystal clear about the type of services they want to provide, and how these complement their existing products and thereby integrate into a clear long-term digital strategy. 

Drive investment from leadership: Senior leadership should commit time and money for investments in digital initiatives. They must also ensure that the implementation is integrated across all departments of the pharma company from R&D, to commercial and BD. Companies should even consider having a digital officer seat at the executive table, to enable holistic governance across all departments.

Capabilities

Collaborate and partner: It is important to collaborate and partner with the new players rather than reinvent the wheel and attempt to compete directly with them. As the industry is being disrupted, the competitor landscape is also changing with non-traditional competitors emerging, for example technology and medical devices companies. 

Stay on top of regulation: Companies should be proactive to reflect the regulatory changes related to health and patients data. The latest example is the new General Data Protection Guidance by the EU to strengthen and unify data protection for individuals in the EU with considerations for export of personal data outside of the EU. It will enter into application on May 2018, which will extend the scope of the EU data protection laws to all non-EU companies processing data of EU residents.

Take data protection seriously: Trust should be gained from patients and patient groups by demonstrating high standards of compliance for successful digital initiatives. Patient-related data is even more critical than financial data, which requires best practices and good governance. If not properly protected the risks to patients are high. For example Johnson & Johnson released a warning in October 2016 that their OneTouch Ping pump for diabetes is vulnerable to hacking, and may result in an overdose. However even if no attacks have been reported and the risk is “extremely” low, it may impact negatively on patients’ trust in the product and tarnish the company’s reputation.

In summary, the pharmaceutical industry is being disrupted by digital, and companies need to address this challenge to avoid future irrelevance. Putting the patient at the centre, and understanding the different digital applications and how these will complement their existing R&D and products will be critical for future success. Companies should therefore set their digital strategies, invest funds and build their capabilities now.