Can business model innovations help pharma firms fight 'pricing challenge'?

Major pharmaceutical companies have historically entrusted themselves to drive their operations end-to-end, right from R&D [research and development] to monetisation in-market. However, this model is no longer sustainable and businesses need to become leaner as they seek rapid growth across emerging markets.

In the context of emerging market opportunities and realities, I believe businesses need to lower costs and enhance R&D productivity. Companies that are more proactive and open would consciously seek to collaborate and co-create with 'enablers' who operate within or outside the pharmaceutical ecosystem, to be able to respond to changing market dynamics.

New business models to enable greater access and ensure higher affordability

In the wake of increasing competition in markets such as India, pharma companies need to work more collaboratively with care providers (hospitals, doctors), medical device manufacturers, technology providers, government departments, as well as financial institutions. The focus would be on building new business models that can enable greater access and ensure higher affordability. In a country where less than 20 per cent people are covered by medical insurance, and nearly 67 per cent of the health-care expenditure is from patient's own pocket, these factors are critical for success.

For instance, US-based Merck & Co's Indian subsidiary floated a scheme earlier this year in Punjab for its Hepatitis C drug Interferon. The pilot focuses on complete disease management support, from awareness to treatment, and rural financial inclusion. The drug company has partnered with a financial institution that provides credit assistance to patients at no additional charges. The company believes that this kind of a scheme can be extended to other medicines across different parts of the country to facilitate affordability. Initiatives focused on improving patient awareness, in collaboration with local self-help groups, NGOs and government institutions, are also a critical part of building the ecosystem.

Pressure from the authorities, yet...

To underscore the importance of affordability, India's drug pricing authority recently put a cap on the market retail prices of 36 drugs, including many being used to treat infections and diabetes, with the intent of making essential drugs more affordable. This recent addition takes the total tally of drugs deemed essential to 348, making them subject to price restrictions. These essential medicines comprise about 30 per cent of the total drugs sold in India. Besides global companies, even domestic companies such as Cipla have expressed concern that these rulings would have an adverse impact on their sales in India.

Despite these challenges and intense competition, there is no doubt that the country offers significant growth potential for the drug manufacturers in the longer run, who are willing to work towards higher penetration and market growth. To put this in context, the Indian pharma industry accounts for about 20 per cent of the global market in value and a significant 80 per cent in terms of volume. Just as importantly, the market now serves as a centre for affordable innovation, with a sizeable talent pool of researchers/scientists and lower cost base.

So, what's the way forward?

From a business model innovation perspective, I believe the companies need to leverage both their wealth of experience and market realities. The models that emerge need to focus on the underserved population segments through designed-for-market approaches and collaborations, such as partnering with insurance providers, device manufacturers or even local drug manufacturers.

Here is an example of sharing licensing to reduce manufacturing costs I generally quote during my seminars. California-based Gilead Sciences established licensing agreements with seven Indian drug manufacturers to produce the generic version of their drug Sovaldi, also known as Sofosbuvir in India. The Indian drugmakers would be empowered to sell the generic version of Sovaldi and another investigational drug in 91 developing countries. The manufacturers are allowed to decide their own prices for the drug, and would be required to pay royalties to Gilead. Interestingly, Gilead will also be selling their own version of Sovaldi in
India, at about $10 per pill, about one per cent of the market price in the US.

Collaborative partnership

The pharma companies are not just innovating through collaborative manufacturing, but are even exploring partnerships to discover innovative drugs and diagnostic solutions. Another example of a collaborative ecosystem is Cadila Pharmaceuticals' public-private partnership with the government, Indian Institute of Integrative Medicine (formerly known as Regional Research Laboratory) in Jammu, and the Council of Scientific and Industrial Research (CSIR) for developing preventive and curative pharmaceutical and diagnostic products.

The collaboration's recent innovation was Risorine, the world's first boosted-Rifampicin containing fixed-dose combination for use as an antitubercular drug. When launched in 2009, the drug was about 23 per cent cheaper than existing alternatives, and the company had estimated that their revenues from tuberculosis treatment segment would grow to Rs 80 crore by 2012.   

Innovative sales and distribution network focusing on the bottom-of-the-pyramid

While the previously mentioned collaborations focus more on improving affordability, solving the challenge of ensuring access to over 700 million people living across rural India, demands that companies co-create by engaging local stakeholders - to build new channels of distribution.

An interesting example to illustrate this is Novartis' effort in India with an innovative distribution and sales network through Arogya Parivar. The programme's Health Educators, who are normally local rural women, travel to nearby villages daily to increase disease awareness and educate the community about preventive health measures. The sick are referred to doctors, and NGOs support further spread the awareness. The programme focuses on the most widely prevalent diseases in India, and aims to make drugs available in small packages at affordable prices.

The objective of Arogya Parivar is to restrict weekly treatment costs below $1.25 or Rs 50 to Rs 70. The programme has strong networking with about 45,000 local doctors, and ensures availability of drugs in 28,000 pharmacies, even in the remotest of areas.

Arogya covers 11 therapeutic areas, and provides over 80 pharmaceutical, generic and OTC [over-the-counter] products as well as vaccines, helping treat ailments such as tuberculosis and diabetes. One must take cognizance here that this initiative is clearly marked as for-profit. It was profitable within first 30 months of launch, and since 2007, sales have grown over 25 times, for the programme.

The co-creative model is innovative and most importantly sustainable, as stakeholders across the health-care pathway are incentivised.

NOTE: Amal Sivaji contributed research for this article

(Sanjeev Jha is a Partner at InvYramid Innovation Strategy Consulting. Previously, Sanjeev founded Priority Research and 30rupees.com. In his fortnightly online column for Business Today, Jha focuses on business model innovation, business strategy, consumer insights, and entrepreneurship. Follow @sanjeev__jha or e-mail: sanjeev_jha@invyramid.com)