Business Model Innovation is not a one-way road, but a crossroad.

All around the world new companies are both developing new business models and innovating current ones, with great success and without the help of new revolutionary technologies. These companies teach us that business success and innovation does not only rely on technology, but also on a rational understanding of business models and how to improve them.

Innovation is not a one-way road; it can be achieved through several paths. At BMI Lab, we have collected many examples of this, even in sectors where innovation is still not ingrained into the core business. Let’s take a closer look at an example in the pharmaceutical industry.

Pharma companies do not get in the innovation spotlight very often. When we read or hear about the most innovative businesses in the world, most of them are from the fields of IT, telecommunications or automotive. According to the Global Innovation Index, issued by the World International Property Organization, those are the sectors where companies invest more in new technologies. Therefore, is not surprising that they get most of the attention. But several pharmaceutical companies are already working hard to change and innovate their business models to adapt to an increasingly changing market.

A business model in trouble

Traditionally, business models for pharmaceutical companies have been based on three approaches.

  1. The Blockbuster Model. In this model, companies research and sell very few and very profitable drugs, with over a billion of global sales. Success depends on large profits from these blockbuster drugs and is needed to pay for the high R&D, marketing, and sales costs. Viagra is a great example of this kind of “blockbuster drugs”. J.P. Garnier, the former CEO of GlaxoSmithKline, recently defined the blockbuster model “as a business model where you are guaranteed to lose your entire book of business every ten to twelve years”.

  2. Diversification model. In this model companies research and develop a bigger range of drugs, to be sold in smaller niche markets. This model only works in small niches where distribution cost is low. This is the case for most of the drugs sold just to hospitals and healthcare institutions, not to the main public.

  3. Intermediate model. In this business model companies mix elements from the previous ones, often through different branches, selling both blockbusters and particular drugs.

All these business models have an obvious revenue model: selling products. Usually, this means managing complicated marketing and sales channels, including government agencies and public institutions. Since pharma is a highly-regulated industry the operational costs increase even more. As a result, pharma companies usually have huge sales departments responsible for profiting the drugs they make. Patent management and licensing is also a great source of revenue, although a secondary one.

The "business as usual" in pharmaceutical companies, based on three basic models, is showing some symptons of fatigue.

The "business as usual" in pharmaceutical companies, based on three basic models, is showing some symptons of fatigue.

Nevertheless, these business models are in trouble. Some studies about the pharma industry, like the one issued by KPMG in 2014, show that “The business model that has powered the pharma industry over the last few decades is showing signs of fatigue – costs are skyrocketing, breakthrough innovation is ebbing, competition is intense and sales growth is flattening”. Several factors drive the imminent failure of the blockbuster model, but probably the most important one is the global growth of generic drugs, together with the steps made by many governments to control healthcare spending, including drug prescriptions to guarantee an affordable healthcare for citizens.

But there is another important cause for the fading of this model on the customer side. As in many other industries, nowadays most customers do not look for products, but for services (most of them digital ones). New technologies empower them, and they do not longer accept "pushing" as a selling strategy. Before purchasing a product in a pharmacy (including  drugs), they will probably search for options in Google. They will also check specialized blogs and web pages to find the most suitable option. Pharma companies are not prepared for that. Their huge, expensive marketing and sales departments were built for a narrower world, where customers seek advice just from a doctor or a pharmacist. New customer´s behavior lies far beyond their understanding or skills.

Addressing the challenge with business model innovation

Thus, here is the challenge for pharma industry: profits are shrinking due to market changes. At the same time, companies are ill prepared to follow new digital behaviors. Fortunately, we can find many businesses that are already exploring a “beyond the pill” approach. This means to drop the traditional business model based of “pushing” drugs to customers to try to make them purchase products, and adopt a “pulling” approach: delivering new services and solutions that address patient’s needs. A big leap, indeed. Some real-life examples will give some insights into how some companies are applying this new approach.

23andMe has developed a genome testing kit for end users, taking personalized medicine to the next stage.

23andMe has developed a genome testing kit for end users, taking personalized medicine to the next stage.

  • The first example is 23andMe, a start-up from San Francisco, which patented a DYI genomic test. Anyone can get a sample of their genome, and send it to the company for testing. Results will identify a broad range of conditions to help prevent diseases, amongst other services. This biotech company stores their customer data for two purposes: first, to research and develop new treatments and therapies targeted to particular conditions of genomic origin. Second, it shares its database as a service with other pharma companies for researching purposes and then profits from fees and outcome-based deals.
  • A second example is Verily, a Google Life Sciences venture. This company focuses on researching and building devices to gather and process patient data. This data is used for further research of which the outcomes will help to improve patient’s life through a more holistic care management. Up to this date, Verily has developed two devices: The first one is a miniaturized continuous glucose monitor to help patients with Diabetes Type-2 to control their condition. This device will provide updated information that helps users control their condition whilst providing highly valuable data to researchers, helping them to understand the disease better. Besides this device, Verily has also developed a smart ocular device, including a glucose-sensing lens for continuous monitoring of glucose levels and an accommodating contact lens for people with presbyopia (age-related farsightedness). This data will be used, as in the previous device, to help both patients and researchers to understand conditions better, and thus improve healthcare. In both cases, Verily is actively working with external partners, such as Sanofi, to develop new healthcare solutions. Revenues come from service fees, rather than product selling, which represent a minor part of total earnings. In the following video we can watch an introduction to Verily´s smart ocular device, together with an analysis of its business possibilities.
  • Another example of a new business model innovation in pharma is the Novo Nordisk Alliance consisting of several companies to improve outcomes for diabetes patients. This big pharma company partnered with Glooko, a Silicon Valley company, to develop an app that monitors blood glucose levels. At the same time, this app connects with a Digital Health platform built through a partnership with IBM Watson. This platform helps patients to measure the impact of insulin, and provides advice for better healthcare through Cornerstones4Care, Novo Nordisk's personalized support program for people with diabetes. This business model is a ground breaking innovation for the company. As its CEO Lars Fruergaard says: “We have spent more than 90 years refining the molecules, yet we have less than 10 per cent of our patients in a level of control that would eliminate the risk of late-stage complications and that’s not good enough". For a deeper explanation of this patient centered approach, you can watch the video below.

Three ways to innovate in the pharma industry

Of course, this is a small glimpse to the innovation already taking place in the pharma industry. There are numerous other examples of business model innovations, such as the way Eli Lilly opened up their business model and moved away from the traditional blockbuster model. This small glimpse helps us to understand how pharma companies are applying business model innovation in the current, technology-focused era. We can sum them all up as follows: personalized medicine, networked or open business model, and the federated model.

Personalized Medicine.

All the recent advances in biotech and genomics are pursuing the same objective: to deliver a predictive and preventive diagnosis, highly customized for each niche, that allows tailoring treatment solutions based on personalized drugs, together with a wide range of software devices, developments tools, and patient management services. This business model moves away from the “product-centered” approach, and focuses on customer needs and behaviors. Consequently, revenues no longer only come from selling products, but from monetising services and healthcare outcomes. This model is a widespread approach for many innovation initiatives taken in pharma.

Networked or Open Business Model

This approach uses an in-licensing and out-licensing mechanism to deliver and capture value. Take for instance 23andMe’s approach to gathering and processing the data they gather through gene testing and then licensing it to other companies for a fee. In this business model pharma companies play the role of venture capitalists, marketers and orchestrators, integrating a network of research groups working on a contract basis. This approach delivers more efficiency, cost savings and reduced R&D lead times compared to the traditional research process.

Federated Model

This model is adopted by Verily and Novo Nordisk. Under the federated model, a single company creates a network of separate entities that share a mutual goal such as the management of outcomes in a given population. In this network, each player plays a definite role without forfeiting flexibility. They also share a common supporting infrastructure as well as funding, data, access to patients and back-office services. These networks might include universities, hospitals, technology suppliers, contract research organizations and manufacturing, data analysis firms and key opinion leaders from numerous countries. In this case, revenues come also mainly from the health outcomes of the patients paying for the service, rather than just from selling products. This approach takes one step further from the Open Business Model, establishing longer and deeper partnerships, sharing resources rather than using licensing mechanisms.

A crossroad for business model innovation.

These three business model innovations are responsible for many product and service innovations within the pharma industry. These are examples, none of them has been applied in the same way or has been applied in an isolated manner. Companies are trying to combine the models, looking for the most suitable formula to fit the needs of different niche markets. And this is an interesting lesson to learn. As we progress through the road of business model innovation, we will find many crossroads. It depends on our resources and market understanding to choose the right directions, combinations and solutions.

 

Further reading:

Pharma report from PwC:

http://www.pwc.com/pharma2020

Article in Financial Times about innovation in pharma:

https://www.ft.com/content/d7a60642-0361-11e7-ace0-1ce02ef0def9