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April 20, 2016
Healthcare Disrupted: Lean Innovators Role in the Era of the Patient and Value
By: Anne O’Riordan & Jeff Elton

Three meta-strategies for life sciences companies wanting to employ the Lean Innovator business model in the new healthcare era.

For life sciences companies shifting their focus from volume to value, four new business models could enable them to develop competitive differentiation: Lean innovators, around-the-patient innovators, value innovators and new health digitals. The first of these four models—Lean Innovators—has its roots in the generics companies of old, but is now poised to assume a far more influential and prominent role in the era of the patient and value.

Enabled by finite patient life and loss of exclusivity generic pharmaceutical manufacturers are an important part of the healthcare ecosystem in that they assure availability of highly efficacious therapeutics at reasonable prices (usually) to the broadest possible population of patients. Their vast portfolios of proven products put them in a unique position to affect the long term care of patients with chronic diseases. As such, they have played an important role in the evolution of the entire healthcare system and an increasingly important role with the patient as a “consumer.” Most all of the Lean Innovators also have patent protected products and devices that complement their therapeutic generics. It is how these can play together for the benefit patient outcomes and health system value that defines them as Lean Innovators.

However, they face shifting opportunities and rising pressures. Most patent expiries, which generics companies relied on, have now taken place, and the newer drugs, known as biologics, are derived from living organisms, which are much more difficult to replicate. And, despite their enormous portfolios, generics companies lack specific leverage on their markets overall. Hence the need for a new business model that couples the benefits of their unique position with new strategic choices.

What is the Lean Innovator business model?
Lean Innovators remain product-centric businesses, but they are leveraging their depth and breadth with digital technologies, devices, and new contracting constructs. They offer affordable access to proven therapeutics and market their medicines toward large providers, governments, distributors, pharmacy benefit management companies and in some cases directly to consumers. They combine the best practices of:

  • Efficient manufacturing

  • Relentless cost management

  • Return on investment rigor

  • Advanced mergers and acquisitions expertise and

  • An eye for niche treatments where there might be significant latitude in pricing and market access approaches

Now, as their customers are becoming health authorities, large risk bearing health providers, and health payers they see the opportunity to combine their therapeutics, devices, and digital services to contribute to achieving an outcome—efficiently.

Differentiating factors
Companies that use the Lean Innovator model focus on optimizing their product portfolios and leveraging mergers, acquisitions and divestitures to drive shareholder returns. They also have highly efficient global marketing networks and integrated supply chains—something that most traditional large, innovator pharma companies are still struggling to assemble—and they take advantage of these capabilities to manage innovator therapeutic products for optimal profitability. Their scale—once a requirement to respond to tenders and RFPs—has increasing relevance as the vast majority of diseases and patients can receive medical therapy with therapeutics with recent patent expiries. Typically they are highly focused in their research and development (R&D), and eschew large sales forces and their associated costs.

Challenges
The Lean Innovator model is not a foolproof path to success. Some of the Lean Innovators have faced challenges from insurance companies and risk-bearing provider systems who are balking at rising prices of their innovator or exclusive generic therapeutics—which is not surprising, given that these increases are not negotiated with payers, nor supported by new clinical evidence that could justify premium pricing due to improved outcomes. Also, big alone, is not sufficient. The scale needs to come together in a coordinated fashion whereby sets of therapeutics, devices and digital services can be made available and coordinated in how they reach health systems and patients.

Lean Innovator companies also face other challenges:

  • National governments’ rising investments in advanced analytics and value-based pricing

  • Private payers with horizontally and vertically integrated operations that will analyze patient population risk and pricing, and manage their services accordingly and

  • Regional and national healthcare providers who are forward-integrating

However, these are two-edged challenges that could provide a differential advantage to the Lean Innovator who can integrate, partner and risk share their way to value.

Three meta-strategies for Lean Innovators
But there are three meta-strategies Lean Innovators can employ, individually or together, to meet these challenges:

  1. Use strong transaction, financial management, and contracting skills. Companies need to leverage their current market position and capabilities, and continue their emphasis on mergers and acquisitions, post-merger integration, cost management and strategic pricing. Further leverage these skills into population management, health outcomes and value-based contracting models. Few firms understand their costs and pricing as well as Lean Innovators—when extended into the value world it could be a skill difficult for others to replicate.

  2. Broaden the scope of therapeutic area coverage. A second option is to leverage the scope of their business across disease coverage areas, geographies and health system relationships. These need to be linked to different treatment regimens and disease comorbidities to assure that the sets of therapeutics, devices, and digital medical tools provide an integrated approach tailorable to the requirements of different health authorities, payors, and risk-bearing health providers.

  3. Develop new partnering skills to broaden influence. Cultivating non-traditional partnerships could help companies deepen relationships with key, large, risk-bearing healthcare systems and potentially large private or public payers.

Ultimately, the Lean Innovator model will evolve. Some organizations will focus on aggressive cost management and opportunistic pricing, and others will leverage their combined portfolio of generics and innovator therapeutics, relying on partners’ expertise to become better providers and managers of broad population and disease management services. In the longer term, it’s our view that the more opportunistic approaches will likely yield highly positive returns for several more years, but that it’s the more value- and population-centric Lean Innovators who will predominate.

In our next post, we’ll describe the second of these new models—Around-the-Patient Innovators.

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