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Pharma 2020: Challenging business modelsWhich path will you take?
Pharmaceuticals and Lie Sciences
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Table of contents
Pharma2020:Thevision #
Pharma 2020: The visionWhich path will you take?*
Pharmaceuticals
*connectedthinking Pharma 2020: Virtual R&D 1
Pharma 2020: Virtual R&D
Which path will you take?
Pharmaceuticals and Life Sciences
Pharma 2020: Marketing the futureWhich path will you take?
Pharmaceuticalsand Life Sciences
Previous publications in this series include:
This report, published in June 2008,explores opportunities to improve the R&Dprocess. It proposes that new technologieswill enable the adoption o virtual R&D; andby operating in a more connected world theindustry, in collaboration with researchers,governments, healthcare payers and
providers, can address the changing needso society more eectively.
Published in February 2009, this paperdiscusses the key orces reshaping thepharmaceutical marketplace, includingthe growing power o healthcare payers,providers and patients, and the changesrequired to create a marketing and salesmodel that is t or the 21st century. These
changes will enable the industry to marketand sell its products more cost-eectively,to create new opportunities and to generategreater customer loyalty across thehealthcare spectrum.
Published in June 2007, this paperhighlights a number o issues that willhave a major bearing on the industry by2020. The publication outlines the changeswe believe will best help pharmaceuticalcompanies realise the potential the utureholds to enhance the value they provide to
shareholders and society alike.
“Pharma 2020: Challenging business models” is the ourth paper in the Pharma 2020 series on the uture o the pharmaceutical industry to bepublished by PricewaterhouseCoopers. This publication highlights how Pharma’s ully integrated business models may not be the best option or thepharma industry in 2020; more creative collaboration models may be more attractive. This paper also evaluates the advantages and disadvantages othe alternative business models and how each stands up against the challenges acing the industry.
All these publications are available to download at: www.pwc.com/pharma2020
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Table o contents
Introduction 1
Proting alone versus proting together 1
Harking back to the uture 2
Reading the signs 2
Broadening the value proposition and managing the value chain 4
Choosing between dierent collaborative models 6The ederated model•
The virtual variant o the ederated model•
The venture variant o the ederated model•
The ully diversied model•
Charting a successul course 12
Conclusion 13
Acknowledgements
Reerences 17
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Introduction
The pharmaceutical marketplaceis undergoing huge changes, aswe indicated in “Pharma 2020:The vision”, the White Paper
PricewaterhouseCoopers* published inJune 2007.1 These changes will have amajor bearing on the kind o businessmodels pharmaceutical companies
need to employ.
Most Big Pharma companies havetraditionally done everything rom researchand development (R&D) through tocommercialisation themselves. But we
predict that, by 2020, this model willno longer work or many organisations.I they are to prosper, they will need to
improve their R&D productivity, reducetheir costs, tap the potential o the
emerging economies and switch romselling medicines to managing outcomes– activities ew, i any, companies canaccomplish on their own.
Even the largest pharmaceuticalcompanies will have to collaborate withother organisations to develop eectivenew medicines more economically,
help patients manage their health andensure that the products and services
they provide really make a dierence.Moreover, they may have to step aroutside the sector to nd some o the
partners they need.
We believe that two principal businessmodels – ederated and ully diversied– will emerge, as Pharma prepares orthe uture. We also think that the currenteconomic downturn will accelerate
the shit to these new models, both byreinorcing one o the key causal actors– the pressure on healthcare payers
to maximise the value they get or themoney they spend – and by opening up
new opportunities to build or buy thenetworks that will be required.
In the ollowing pages, we shall lookat the main trends dictating the needor a more collaborative approach. Weshall also evaluate the advantages anddisadvantages o the alternative businessmodels and how each stands up againstthe challenges acing the industry.
Profting alone versus
profting together
Big Pharma’s traditional business modelhinges on the ability to identiy promisingnew molecules, test them in large clinicaltrials and promote them with an extensivemarketing and sales presence (seesidebar, What is a business model? ). In
the predominant version o this model, asingle company may employ contractorsto supplement its own eorts, but itseeks to generate profts on its own. Inessence, it pursues what might be calleda “proft alone” path.
But, by 2020, the strategy osinglehandedly placing big bets on aew molecules, marketing them heavily
and turning them into blockbusters willnot suce. As J.P. Garnier, ormer chie
executive o GlaxoSmithKline, recently
pointed out, it is a “business modelwhere you are guaranteed to lose yourentire book o business every 10 to
12 years”.2
More importantly still, it is a business
model that will no longer meet themarket’s needs. Management guru
Clay Christensen has convincinglydemonstrated how disruptive
innovations in various industries havedismantled the prevailing business
model, by enabling new players to
target the least protable customersegments and gradually move upstreamuntil they can satisy the demands o
every customer – at which point the old
business model collapses.3
Pharma is currently undergoing just
such a period o disruptive innovation.
By 2020, most medicines will be
paid or on the basis o the results
they deliver – and since many actors
infuence outcomes, this means that
it will have to move into the health
management space, both to preserve
the value o its products and to avoid
being sidelined by new players. I it is to
make groundbreaking new medicines
or which governments and health
insurers are prepared to pay premium
prices, it will also have to build the
relationships and inrastructure required
to ensure that it can get access to the
outcomes data they collect.
In short, no pharmaceutical company
will be able to “prot alone”. It will,
rather, have to “prot together”,
by joining orces with a wide range
o organisations, rom academic
institutions, hospitals and technology
providers to companies oering
compliance programmes, nutritional
advice, stress management,
physiotherapy, exercise acilities, health
screening and other such services.
What is a business model?
The term “business model” is usedto encompass a wide range o ormaland inormal descriptions o the coreelements o a business. We haveused the term in the ollowing sense:“A company’s business model is the
means by which it makes a proft –
how it addresses its marketplace, the
oerings it develops and the business
relationships it deploys to do so.”
*‘PricewaterhouseCoopers’ reers to the network o member rms o PricewaterhouseCoopers International Limited, each o which is a separate andindependent legal entity.
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Harking back to the
uture
O course, some pharmaceutical
companies have already tried to
collaborate with other organisations.
Rhone-Poulenc Rorer (now part osano-aventis) created RPR Gencell, the
world’s rst biotechnology network, in
1994.4 Many o the largest companies
also established disease management
programmes in the 1990s, although
most o them were not very successul
– primarily because healthcare
payers were sceptical about industry-
sponsored disease management.5
So we are not suggesting that the
dierences between these early eorts
and the business models that are likelyto prevail in 2020 will be completely
black and white. Nevertheless, we think
that two key dierences will apply.
First, the technological and cultural
pre-conditions to acilitate collaboration
are now in place. In the mid-1990s, the
Internet was still in its inancy and many
o the tools that enable collaboration did
not exist. Today, however, such tools are
plentiul and the wider business culture
has changed dramatically. IBM, Apple,
Amazon and their ilk have demonstratedthe power o open platorms,
transormed corporate attitudes
towards networking and shown that it is
possible to reap much richer rewards by
proting together than by proting alone
(see sidebar, Apple’s core strategy o
collaboration ).6
Second, by 2020, collaboration
will be a “do or die” requirement
or pharmaceutical companies and
healthcare payers alike. It will be
essential or pharmaceutical companies
to develop eective new medicines
and address the demands o payers
increasingly well equipped to measure
what they are getting or their money;
and essential or payers to cope with
rapidly escalating healthcare costs.
Reading the signs
Various orces are changing the
environment in which Pharma operates
and the relative positions o the dierent
players in the healthcare arena. These
trends all point towards the need or
much greater collaboration (see Figure 1 ).
The global healthcare bill is soaring,
as the population ages, new medical
needs emerge and the disease burdeno the developing world increasingly
resembles that o the developed world.
Hence the act that governments
and health insurers everywhere are
struggling to contain their expenditure.
The issue is urther exacerbated by the
current economic turmoil that will put
even greater nancial pressure on the
payer community.
Healthcare payers in the industrialised
economies are already mandating
what doctors can prescribe. The
British National Health Service has
also introduced a fexible pricing
scheme under which the prices o
new medicines can be lowered or
lited, depending on the outcomes
they deliver.7 And US President
Barack Obama’s administration is
moving towards opening up the US
market to much greater competition
rom generics, as well as allowing the
importation o cheaper medications
rom “sae” countries.8
Apple’s core strategy o
collaboration
Collaboration is not just a toolor doing the same things moreeectively. At its most powerul, itcan reshape an entire market, as Apple has shown. Apple redened themobile music sector by outsourcingthe production o the devices andaccessories, while retaining control othe iTunes sotware. In other words,it recognised that it could makemoney by creating and orchestratinga network o relationships – bycontrolling, rather than owning.
Apple used three specic tacticsto change the rules o the game. Itenhanced the mobility o the partso the sector in which it has nopresence, by establishing a smallset o suppliers who know that theycan be replaced at any time. It madeitsel into a bottleneck, by holdingonto the music ormat and ensuringthat les compatible with iPod canonly be played on iPod devices. And it redened who did what, byencouraging other companies todevelop accessories rather thanentering the accessories market
itsel. This has enabled it to benetrom the eorts o those that supportits architecture, without making anycapital commitment itsel.
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The developing world will soon come
under equal pressure. The emerging
economies will experience the most
rapid growth in demand or medicines
over the next 11 years, but many (i not
all) o them will struggle to und this
demand. The Chinese government has,
or example, undertaken to introduce
a universal healthcare system with a
level o cover that does not exceed
the country’s current economic
development. However, it is hard to see
how the plan will not entail a substantial
increase in China’s healthcare costs.9
Healthcare payers in both the
developed and developing worlds are
also beginning to measure outcomes
much more careully and to emphasise
the importance o prevention. By 2020,
they will expect the industry to go
“beyond the medicine” by providing
prophylactics and healthcare packages
designed to help patients manage their
health. Moreover, patients will play a
much bigger role in determining how
they are treated, as the money they
spend on medicines likewise rises
and the Internet gives them access to
more inormation. Armed with insights
Figure 1: The key trends now emerging and their implications or Pharma
Health and healthcare trends Scientific and technological trends
Pharma will need to go “beyond the
medicine”
R&D will need to go beyond the lab
Trends
Implications
Market trends
The Pharma and healthcare value chains
will become much more intertwined
Business models based on collaboration
• Pharma will be paid for outcomes,not products
• Outcomes data will drive healthcare
policy
• Prevention will gain a higher healthcare
profile
• Pharma will need to offer “medicine-
plus” packages of care
• Pharma will have to adopt more flexiblepricing strategies
• Pharma will need access to outcomesdata
• Pharma will have to work with
technology vendors to virtualise R&D
• Pharma will need a wider, more
multi-disciplinary skills base
• Pharma will need to expand its
presence in Asia
• Pharma will need to demonstrate “real”
value-for-money
• Pharma will have to work more closelywith the regulators
• Pharma will have to collaborate with
payers and providers to perform
continuous trials
• Pharma will have to collaborate with
numerous service providers to deliver
packages of care
• R&D is becoming more virtualised
• The research base is shifting to Asia
• Remote monitoring is improving rapidly
• The burden of – and bill for – chronic
disease is soaring
• Healthcare payers are establishing
treatment protocols• Pay-for-performance is on the rise
• The boundaries between different forms
of care are blurring
• Financial constraints on payers are
increasing
• Patients are becoming better informed
• Patients are picking up a bigger share
of the bill
• Demand for personalised medicine isincreasing
• Patients want cures, not treatments
• The emerging markets are becoming
more important
Source: PricewaterhouseCoopers
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gleaned rom educational websites,
discussion groups and blogs, they willnot only want better, saer medicines,
they will also want a range o satellite
services they can tailor to theirindividual needs.
I Pharma is to accommodate thesechanges in the marketplace, it will have
to collaborate much more extensively– as it will, indeed, to capitalise on
some o the scientic and technologicaltrends that are now emerging. The
research base is shiting, or example.Non-OECD economies accounted or
18.4% o the world’s R&D in 2005, up
rom 11.7% in 1996. The number opatents led by Asian researchers also
increased signicantly over the sameperiod, albeit rom low levels.10 So theindustry will have to orge much closer
links with the most reputable centres oscientic excellence in these countries.
Meanwhile, new technologies areproviding new sources o knowledge.
Home surveillance systems, portable
devices and implants, linked to onlineand wireless networks, will acilitate
the monitoring o patients on a real-time basis outside a clinical setting.
But i Pharma is to get access to the
outcomes data remote monitoringgenerates, it will have to collaboratewith the hospitals and clinics that
capture this inormation.
Technological advances will likewise
enable the virtualisation o large partso the R&D process, as we explained in
“Pharma 2020: Virtual R&D”.11 Some othe leading pharmaceutical companies
are already exploring the potential osemantic technologies and computer-
aided molecule design. Various
academic institutes and bioinormaticsrms are also building computer modelso dierent organs and cells, with the
ultimate aim o creating a “virtual man”.
But developing such a model will require
a monumental collaborative eort ar
exceeding that required to complete the
Human Genome Project.12
The economic case or change isclear. The decline o revenue growthand margins result in reduced
shareholder returns which will orcepharmaceutical companies to adapt.There is a compelling case or increasedcollaboration. Delivering drug therapiesto payers and patients in a 2020 worldwill require new skills, technologies andchannels - the inrastructure required willbe uneconomic or anyone, other thanthe largest players, to build internally.
To sum up, the key social, economicand technological changes currentlytaking place in the pharmaceutical and
healthcare arena will all necessitate thedevelopment o multinational, multi-disciplinary networks drawing on amuch wider range o skills than Pharma
alone can provide. The constraintsthat previously hindered organisationsrom collaborating over distance aresimultaneously evaporating – paving the
way or the use o new business models(see sidebar, Emerging collaborative
networks ).13 In the next sections, we shall
look at the implications o broadening the
value proposition, the various models thatexist and the dierent opportunities andrisks they present.
Broadening the value
proposition and
managing the value chain
Pharma currently creates value by
developing new medicines (and a
relatively limited number o diagnostics).Collaborating much more closely with
the key stakeholders in the healthcare
sector will enable the industry both
to expand its remit and to align its
Emerging collaborative networks
Several pharmaceutical rmshave already begun to use morecollaborative models. One suchinstance is Lilly, which is currentlytransorming itsel rom a traditional
ully integrated pharmaceuticalcompany into a ully integratedpharmaceutical network, so that it candraw on a wide range o resourcesbeyond its own walls. Lilly hopes thatteaming up with other organisationsto create virtual R&D programmeswill enable it to get better access toinnovation, reduce its costs, managerisks more eectively and enhanceits productivity. For example, theChorus Project is a virtual organisation
to take molecules quickly to Prooo Concept. Lilly also uses externalnetworks comprising third parties suchas Piramal Lie Sciences, HutchisonMediPharma, Suven Lie Sciences orthe development o molecules.
Swiss biopharmaceutical developmentspecialist Debiopharm has pioneered amore radical approach. The companyin-licenses promising new candidatesrom academic institutes and biotechcompanies, develops them and then
out-licences them to Big Pharma.Debiopharm’s successes include threeproducts with combined global saleso more than US$2.6 billion in 2007.
Most o the collaborative models thatcurrently exist are limited to R&D. Butit is easy to envisage various otherpermutations, including networksocusing on dierent therapeuticareas and covering everything romR&D through to sales and marketing;networks ocusing on dierent
enabling technologies, such asgenomics, proteomics and stem cellresearch; and networks ocusingon the management o outcomes inspecic patient segments.
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Choosing between
dierent collaborative
models
One vital question remains, however;
namely, what sort o model should
companies use to eect these changes? We believe that two principal models
– ederated and ully diversied – will
emerge. We have also identied two
variants o the ederated model. In the
virtual version, a company outsources
most or all o its activities; in the
venture version, it manages a portolio
o investments (see Figure 3 ). The two
models are not mutually exclusive. A
ully diversied company might choose
to use a ederated model or certain
aspects o its business, and vice versa.
But we think that the ederated model
will ultimately dominate, primarily
because it is quicker and more
economical to implement.
The ederated model
In the ederated approach, a company
creates a network o separate
entities with a common supporting
inrastructure. These might include
universities, hospitals, clinics,
technology suppliers, data analysis
rms and liestyle service providers
based in numerous countries. They
might also include business units rom
within the company itsel, which it
places at “arm’s length” (see Figure 4 ).
The various participants have a mutualgoal – such as the management o
outcomes in a given patient population.
They also share unding, data, access
to patients and back-oce services,
and this interdependence is the
glue that holds them together. They
are rewarded or their eorts using
measures like increased lie expectancy
Virtual Variant Venture Variant
Owned: Fully Diversified ModelCollaborative: Federated Model
• Network of separate entities
• Based on shared goals & infrastructure
• Draws on in-house and/or external assets
• Combines size with flexibility
• Network of contractors
• Activities coordinated by one company
acting as hub
• Operates on project-by-project basis
• Fee-for-service financial structure
• Portfolio of investments
• Based on sharing of intellectual property/
capital growth
• Stimulates entrepreneurialism & innovation
• Spreads risk across portfolio
• Network of entities owned by one
parent company
• Based on provision of internally integratedproduct-service mix
• Spreads risk across business units
Figure 3: The dierent business models
Source: PricewaterhouseCoopers
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or quality-adjusted lie years. And each
is rewarded in a manner that refects
the evidence base or the contribution it
has made (see sidebar, How should the
cake be sliced? ).15
The ederated model provides a
ramework or creating integratedpackages o products and services, and
thus diversiying beyond a company’s
core oering. It also combines the
benets o nimbleness and size. It
would enable each player to build a
specic area o expertise, establish a
competitive advantage as a result o
that expertise and sell its products,
knowledge or skills, leaving activities
that are better perormed by others to
its partners within the ederation.
More importantly still, the ederatedmodel might encourage greater
cross-ertilisation and deliver bigger
improvements in perormance, without
oreiting any fexibility. The stronger
members o the network could help
the weaker ones to improve – since
ederations have an incentive to perorm
well as a whole – but they could also
replace any participant that persistently
underperorms.
Federation
T e c h n o
l o g y
G e n e r i c
s
C o m p
l i
a n c e
M a n a g
e m e n t
C e n t r e
s
W
e i g h t
F i t n e s s C
l u b s
Compan y
U n i v e
r s i t i
e s
C l i n
i n c s
H o s
p i
t a l
s
P h y
s i o t h
e r a p
y
An a l y s t s
D a t a
S u p p l i
e r s
C a
l l
C e n t r e
M a n u f a
c t u
r e r s
P har maceu t i c a l
C e n t r e
s
Figure 4: The ederated model
How should the cake be sliced?
It may sometimes be hard to measurethe value dierent participants have
created or two reasons. First, theparties in any collaboration typically
value the contributions they havemade more highly than those o their
partners. This is a problem that canbe solved with watertight contracts,
robust perormance indicators, goodgovernance and a proper audit trail.Second, assessing the impact o
dierent orms o intervention can bevery dicult indeed.
Medicines, diet and exercise all play
a role in managing cardiovasculardisease, or example, but precisely how
much? Various studies have establishedsome parameters. They show, or
instance, that high-requency exercise
can improve the cardio-respiratory
tness o patients with heart disease
by at least 10% – and that, in turn,
can reduce the mortality rate by 15%.
We believe that many more studies
to evaluate the eectiveness o non-
pharmacological interventions will be
conducted in uture, as healthcare
payers everywhere ocus more heavily
on preventative measures.
This approach is essentially a more
complex variant o the co-development
and co-distribution agreements we have
today. In order or companies to work
better collaboratively it is essential todene upront measurable components
o delivery and value.
Dening the value provided by each
player in the ederation will then inorm
how each party should be rewarded -
this will be a combination o theoretical
analysis and monitoring o outcomes
and benets to the patient. Clearly
to avoid the risk o litigation or the
constraints o exclusivity, the ederation
needs to be underpinned by mutualtrust between all parties. However, there
are several examples o where this has
worked eectively such as a ranchising
model where the value o a brand is
measured and rewarded.
Source: PricewaterhouseCoopers
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8 PricewaterhouseCoopers
The virtual variant o the ederated
model
In the virtual variant o the ederated
model most or all o a company’s
operations are outsourced and the
company itsel acts as a management
hub, coordinating the activities oits partners (see Figure 5 ). Several
industries have already adopted
some aspects o this model. The
semiconductor industry typically
outsources its manuacturing in
order to concentrate on product
development, or example, and a
number o companies in the medical
devices sector are now ollowing suit.16
Similarly, strategic outsourcing o
design and manuacture to suppliers
has redened manuacturing unctionswithin industries such as aerospace,
computing and electronics.
Most large pharmaceutical companies
also use external contractors to
supplement their in-house resources,
but very ew rms have gone any
urther (see sidebar, Shire’s virtual
vision ).17 There are very good reasons
why pharmaceutical companies should
outsource their R&D, manuacturing
and promotional activities where third
party alliances can provide a widerrange o opportunities, specialist
skills and market access. A pharma
company can then ocus on the value
adding unctions where they can
leverage on their relationships, scale
and market knowledge – i.e., project
management, business development,
regulatory aairs, intellectual property
management and the ormation o good
relationships with key opinion leaders
Management
Hub
R e searc h
S a l e
s & M
a r
k e
t i
n g
D i s t r i b u t i o
n M
a n u f a
c t u r
i n g
D e
v e
l o p
m e n t
Figure 5: The virtual variant o the ederated model
Source: PricewaterhouseCoopers
Shire’s virtual vision
Shire Pharmaceuticals is the epitome o a virtual company. It outsources almosteverything, rom discovery to medical monitoring to data management tostatistics to medical writing. With the exception o its genetic therapy division,every product it develops has been purchased rom an outside source, viain-licensing or acquisition.
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and healthcare providers.
The virtual variant o the ederated
model has other advantages, too. It
would enable companies to reduce
their initial capital outlay, convert
some o their xed costs into variable
costs, utilise their resources moreeciently and become more fexible.
Equally important, it might help the
industry leaders to expand into new
product/service areas or geographic
markets without resorting to urther
mega-mergers (and thus acing the
huge challenges associated with
integrating two ormerly separate
entities) or succumbing to the corporate
bureaucracy that so oten strangles
innovation.
However, the virtual variant also comeswith some signicant drawbacks.
The balance o power might shit to
suppliers, as it has done to a certain
extent in the automotive industry,
where a number o Tier 1 suppliers
now manage their own supply chains.
Alternatively, a major supplier might
get into nancial diculties and start
oering an inerior service or even
deault on its obligations altogether.
But such risks can oten be managed
by using multiple suppliers, whereverpossible.
Some pharmaceutical companies
might also see their earnings diluted,
since every participant in the value
chain would expect a return or the
services it provides. Theoretically, this
should not happen, since specialist
contractors typically have lower
costs than integrated pharmaceutical
companies. Indeed, according to one
study, a company that perorms certain
preclinical development activities in-
house can expect to pay more than
double what it would pay i it completely
outsourced these activities to a third
party.18 But a shortage o top-class
service providers or experts in particular
areas such as biological manuacturing
could drive prices up.
The venture variant o the
ederated model
The venture variant o the ederated
model entails investing in a portolio o
companies in return or a share o the
intellectual assets and/or capital growth
they generate, rather than outsourcing
specic tasks. Special purpose vehicles
are sometimes used to manage such
investments, because they oer several
advantages in terms o risk sharing and
intellectual property protection.
A pharmaceutical company might
choose to concentrate its investments
in a particular therapeutic area or
spread them across a number o areas
in order to minimise its risk. At the end
o the investment period, it might either
claim the intellectual property that has
been generated or out-license it to a
third party. Alternatively, the originating
company (or companies) might retain
the intellectual property, commercialise
it and pay the sponsoring company a
return on its investment (see Figure 6 ).
GlaxoSmithKline has used a version
o the venture structure or many
years. SR One, its evergreen und,
was established in 1985 and has
now invested more than US$500m in
some 30 private and public biotech
companies ocusing on drug discovery,
development and delivery.19 Other
Big Pharma companies, such asNovartis and Pzer, have also set up
corporate venture capital unds,20
and AstraZeneca spun o part o its
gastrointestinal research operation
into a new company backed by a
consortium o private equity rms.21
US investment bank Goldman Sachs
Generation of IP
Return of IP to growth company
Out-licensing/In-licensing
Out-licensing
R o y a l
t y p a y m
e n t
I n v e
s t m
e n t
R e t u
r n o f I P
t o
p h a r m
a c e u t i c a l c o
m p a n y
Pharmaceutical
company
Third party
IPGrowth
company
Figure 6: The venture variant o the ederated model
Source: PricewaterhouseCoopers
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has already dipped a toe in the water
with its own venture und (see sidebar,
Portolio o pills ).22
Nevertheless, all these initiatives
are very small; between 2003 and
September 2006, corporate venture
capitalists invested just over US$1.5
billion in the US lie sciences sector,23
a raction o the estimated US$11-
15 billion the member companies o
the Pharmaceutical Research and
Manuacturers o America spent on
discovery in 2006 alone.24 Most such
ventures are also conned to research,
although the same approach could be
applied to development, manuacturing,
distribution, and marketing and sales.
So what might the venture variant
deliver, i it were implemented on a
much larger scale and extended to
other parts o the value chain? It would
alleviate the unding challenges in the
biotech sector, where companies oten
struggle to raise a second or thirdround o nancing because venture
capitalists want to exit beore they can
commercialise their products. These
challenges have been exacerbated by
the credit crunch and are likely to get
even worse in the current economic
recession.25 It would also allow
promising start-ups to capitalise on
Big Pharma’s experience without being
stifed by a Big Pharma culture – both
trends which might stimulate greater
innovation.
Similarly, it would provide incentives or
traditional contract service providers to
make strategic, long-term investments –
as Lonza did, when it collaborated with
Genentech to build a manuacturingplant in Singapore.26 And it would
enable pharmaceutical companies to
explore numerous new avenues o R&D,
or expand their global manuacturing
and marketing capacity, without
investing too heavily in any one project.
However, venture structures are not
without their challenges. For a start,
the skills involved in managing a
portolio o holdings are very dierent
rom those involved in assessing and
pursuing potential research leads, asis the timerame venture capitalists
use to realise a return. So Big Pharma
would need to recruit people with the
necessary expertise and manage any
conficting objectives very careully.
Moreover, any company that operateda large corporate venture capital undalongside its own research portoliowould have to consider the fnancialimplications very careully. R&Dexpenditure is typically recorded on acompany’s proft and loss statement,or example, whereas investments areregistered on the balance sheet andsubject to annual impairment reviews.This has an impact on how companiesare taxed and on how they are valuedby the stock markets. Similarly, ia company’s risk profle increasesbecause it has less control over researchthat is conducted outside its own walls,its cost o capital will increase.
Goldman Sachs has unded a
new “research pool” into which
pharmaceutical companies could
place a range o experimental
medicines in a single therapeutic area
in early-stage Phase I and II trials.External experts, including scientists,
chemists and clinical research
organisations, would work alongside
scientists rom the originating
companies. The bank argues that this
approach would reduce the costs
and bureaucracy associated with Big
Pharma. It might also allow competing
companies working on similar drugs
to pool their resources, rather than
duplicating each other’s eorts.
In April 2009, GSK and Pzer
announced that they intend to
combine resources to set up a new
spin o rm dedicated to the HIV.
The structure o the deal gives a
majority 85% stake to GSK and 15%
to Pzer with an increase o Pzer’s
stake to 24.5% i all milestones are
reached. The new rm, with a current
revenue o £1.6 billion has a portolio
o 11 products and a drug-discovery
pipeline o 17. R&D services will be
contracted directly rom GSK and
Pzer to develop these drugs with
investment rom the new rm. In
return, the new rm will have exclusive
rights o rst negotiation with respect
to HIV drugs developed by the two
pharma majors. The rationale or the
venture is that the new rm will be
more sustainable and broader as acombined venture and that there are
synergies on the commercial side.
Portolio o pills
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The ully diversied model
The ully diversied model is one in
which a company expands rom its
core business into the provision o
related products and services, such
as diagnostics and devices, generics,
nutraceuticals and health management(see Figure 7 ). Johnson & Johnson
is Pharma’s leading exponent o this
approach. It is now the world’s largest
consumer health company, ollowing
the US$16.6 billion acquisition o
Pzer’s over-the-counter business
in December 2006.27 It is also the
third-largest biologics and sixth-
largest pharmaceutical company, has
an extensive medical devices and
diagnostics operation,28 and recently
started building a wellness and
prevention platorm, with the purchase
o HealthMedia, a web-based “health
coach”.29
A number o other companies are now
ollowing suit. Novartis has spent nearly
US$25 billion beeng up its vaccines,
generics and eye-care products
operations over the past three years,or example.30 Roche is drawing on
its expertise in molecular diagnostics
to develop a consumer product test
or measuring indoor allergens.31 And
GlaxoSmithKline has announced plans
to “diversiy and de-risk” by ocusing
more heavily on vaccines, consumer
health and the emerging markets.32
The ully diversied model has several
merits, not least the act that it enables
companies to reduce their reliance on
blockbuster medicines and spread their
risk by moving into other market spaces
with the potential to act as a bulwark
against generic competition. Like
the ederated model, it also provides
a means o moving into outcomes
management by oering combined
product-service packages and playing
to the growing political emphasis onprevention rather than treatment.
In addition to these advantages, it might
oer opportunities both to develop more
powerul brands and to acquire a better
corporate image. Numerous studies
show the extent to which Pharma’s
reputation has declined over the past
decade.33 Supplementing its products with
“wellness” services might help a company
to create a more positive impression,
although it would have to handle its
relations with the regulators, healthcare
providers and patients very careully.
Ethical
Pharmaceuticals
Diagnostics
& DevicesGenerics
Consumer
Health
Health
Management
• Molecular testing
• Clinical biomarkers
• Medical devices
• Branded generics
• Commodity generics
• Super-generics
• Follow-on biologicals
• Over-the-counter
medicines
• Consumer
diagnostics
• Nutraceuticals
Mass-Market
• Primary-care
products (includingpatches, inhalants
and controlled-release
implants)
• Poly-pills
Specialised-Market
• Biologicals
• Orphan drugs
• Vaccines
• Patient education
• Delivery and drug
administrationservices
• Monitoring and
counselling
• Physiotherapy
• Nutritional advice
• Wellnessmanagement
Source: PricewaterhouseCoopers
Figure 7: The ully diversifed model
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Table of contents
12 PricewaterhouseCoopers
However, the ully diversifed model hasdrawbacks, too. It requires a substantialinvestment in new equipment, premisesand personnel, as well as major culturalchanges, since the provision o productsis very dierent rom the provision oservices. It might also create new risks
by distracting management’s attentionrom the core business – and evenalienate investors, who oten preer tospread risk themselves.
Charting a successul
course
Clearly, the business model, or models,a company chooses will depend onits individual circumstances, includingthe particular challenges it aces, theexpertise it possesses and the marketsin which it wants to operate. A companythat ocuses exclusively on ethicalpharmaceuticals might nd it harderto diversiy than one that is alreadyexperienced in managing multipleareas o activity, or example. Moreover,ederations typically place greaterdemands on senior management thanconventional organisational hierarchies.
Creating and supervising a cross-border, cross-disciplinary networko external relationships can be verytime-consuming – and it is otenmore dicult to identiy, monitor andmanage risks. The various parties mayhave dierent cultural characteristics,dierent ways o communicating anddierent expectations, some o whichmay change over time. An individualmanager’s authority over the other
participants in the network is also likelyto be relatively limited. In a heavilyregulated industry such as Pharma, anydiminution o managerial control hasserious implications. So it is crucial toestablish clear goals and guidelines orthe governance and unding o such
arrangements, and or the division oany intellectual assets they generate,beore signing on the dotted line.
Disrupting the existing order canhave a major impact on a company’sshort-term perormance, too. WhenGlaxoSmithKline established its Centreso Excellence or Drug Discovery,the upheavals the R&D unction wasexperiencing aected its pipeline or atleast 18 months.34
We think that many companies whichchoose the ederated model willthereore adopt a progressive approach.They will start with opportunisticalliances; use the most successulalliances as building blocks to createmore strategic, longer-lasting coalitions;and, nally, use the most successul
coalitions to create a ully ederatednetwork o long-term partners (seeFigure 8 ). Taking incremental stepswill not only help them to identiy theorganisations with which they can workmost eectively, but also give themtime to establish the technological
inrastructure that is essential tomanage the interaces between two ormore dierent parties.
Most companies will also have to recruitor train people with new skills. They will,or example, need researchers who canunderstand commercial imperatives;fnancial analysts who can assessdierent investment opportunities withthe discipline o venture capitalists;senior executives who can negotiateand oversee alliances; supply chainmanagers who can supervise largenetworks o service providers; andhealth economists who can measure thevalue o the contributions the respectiveparties make. Those that choose to enterthe health management space directlywill also have to hire physiotherapists,
Opportunistic
Alliances
Strategic
Coalitions
Full
Federation • Extended alliances
• Medium-term
• Three or more parties
• One-to-manyrelationship
• Closer alignment
• Extended coalitions
• Long-term
• Many parties
• Many-to-many
relationship
• Complete alignment
• Ad-hoc
• Short-term
• Two parties
• One-to-one relationship
• Partial alignment
Figure 8: The path to ederation is likely to be gradual
Source: PricewaterhouseCoopers
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dieticians, counsellors and numerous
other people with skills that were
ormerly outside Pharma’s domain.
Finding people with the appropriate
expertise will not be easy. Many
companies will thereore have to adopt
new talent management strategies, aswell as ensuring that the perormance
measures and incentive systems they
use support the behaviour they want to
encourage.
Conclusion
Pharma’s ully integrated business
model enabled it to prot alone
or many years – and to prot very
successully, as its track record in
rewarding shareholders shows. The
top companies saw their market
value soar 85-old between 1985 and
2000.35 But this model is now under
huge pressure and, by 2020, it will
not work. I the industry is to improve
its perormance in the lab, reduce its
costs, serve the emerging markets
more eectively and make the transition
rom producing medicines to managing
outcomes – as healthcare payers,
providers and patients are increasingly
demanding – it will have to collaborate
with other organisations, both inside
and outside the sector. It simply cannot
do everything itsel. In addition there is
a clear economic rationale or greater
collaboration (See sidebar, Show me
the money ).
Moreover, many companies will need to
move ast. As the healthcare landscape
changes and scientic expertise
becomes less important than the abilityto manage networks, the scope or
competition rom new entrants will
increase. Several non-pharmaceutical
companies have already entered the
arena. Vodaone has, or example,
joined orces with Spanish telemedicine
provider Medicronic Salud and device
manuacturer Aerotel Medical Systems
to oer a wireless home monitoring
service.36 Similarly, British insurance
Show me the money
There is plenty o evidence pointing to big opportunities or savings to be made through early intervention and tightermanagement o patients and treatments. The ederated model will make these savings more systematic and predictable,rewarding participants based on the value that they create. Aligning risk and incentives appropriately is key to realising thesebenets. For example:
A study by the RAND Corporation estimated the nancial savings rom having 100% participation in disease management•
programmes or our diseases (asthma, chronic obstructive pulmonary disease, diabetes and congestive heart ailure) inthe US. They estimate the net savings to the health system to be $28bn (around 2% o total US health expenditure), withadditional benets to the economy in terms o work days saved.37
Britain’s Audit Commission examined the scale o adverse events in UK hospitals. They ound that 10.8% o patients on•
medical wards experience an adverse event, 46% o which are preventable. One third o the adverse events lead to greatermorbidity or death and cost the UK’s NHS £1.1bn a year.38
The ve most costly conditions collectively account or 32.7% o overall healthcare expenditure. As we highlighted in•
“Pharma 2020: The vision”, improving patient compliance with enhanced treatment regimes by collaborating with othersupport services is a key enabler to drive the healthcare bill down. Further, some commentators have suggested givingpatients nancial incentives to improve compliance.39
In 2009, Cisco Systems reported healthcare cost savings o $2.6m rom a programme o on-site medical clinics covering 6,000•
employees supported by integrated healthcare technology systems, chronic disease management, and health coaching.40
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giant Prudential is collaborating withVirgin Active Health Club to oer acritical illness policy that providessubsidised gym membership andrewards people who exercise regularlyby reducing their premiums.41 I theleading pharmaceutical companies
cannot change their business modelsrapidly, such rms may ultimatelyeature more prominently on thehealthcare scene than they themselves.
The transition will not be easy, orcollaborative business models arear more complex than the integratedmodel that has previously prevailed.Moreover, no one model will suit everycompany. Each will need to assessits position, options and uture coursein light o its individual strengths andneeds (see sidebar, Key questions or
senior management ).
However, the prospects or anypharmaceutical company that can makethe switch are very promising. Thepotential or reallocating resources todeliver better outcomes and maximisethe eectiveness o expenditureon healthcare is considerable inmost healthcare systems. Researchrecently completed by Britain’s Audit
Commission shows, or example, thatannual spending on the treatment odiabetes ranges rom less than £8 toover £30 (US$11.9-US$44.6) per head.42 But dierences in the prevalence odiabetes account or only 8% o thisvariation – and higher expenditure does
not result in ewer emergency hospitaladmissions.43
To date, Pharma has ocused on theprots it can earn rom the estimated10-15% o the health budget that goeson medicines.44 Yet there are manyopportunities to generate revenuesby improving the way on which theremaining 85-90% is spent. It is theseopportunities the industry will need toaddress in the brave new world o 2020.
Key questions or senior
management
What is our current business•
model? Does it play suciently toour strengths?
What kind o company do we•
want our company to be?
Will our current business model•
enable us to expand intonew markets – be these newproducts, services or countries– and satisy the expectations oour customers in 2020? I not,what sort o business model willwe need?
What is the size o the gap and•
how can we reduce it as rapidlyas possible?
Do we have a clear picture o the•
opportunities and risks entailedby each o the alternativesavailable to us?
Do we have a plan in place that•
will enable us to move orwardquickly, while maximising theopportunities and minimising therisks?
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We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report. We would also liketo express our appreciation or the input we received rom clients and our particular gratitude to the ollowing external expertswho so generously donated their time and eort to the project;
Adrian Rawclie, Senior Vice President Worldwide Business Development, GlaxoSmithKline Plc.Dr Dennis B Gillings, Chairman o the Board and Founder, Quintiles Transnational Corp.
Dr Genghis Lloyd-Harris, Partner, Abingworth
Gino Santini, Senior Vice President, Corporate Strategy and Policy, Eli Lilly and Co.
John Fowler, Head o Healthcare Investment Banking Team in Europe, Deustche Bank AG
Dr John Murphy, European Pharmaceuticals Analyst, Goldman Sachs Group, Inc.
Laurent Massuyeau, Head o Business Development, Addex Pharmaceuticals Ltd.
Proessor Michael Jacobides, London Business School
Dr Vincent Mutel, Chie Executive Ocer, Addex Pharmaceuticals Ltd.
The views expressed herein are personal and do not refect the views o the organisations represented by the individualsconcerned.
Acknowledgements
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Table of contents
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PricewaterhouseCoopers, “Pharma 2020: The vision – Which path will you take?” (June 2007).1.
Kathryn Phelps, “Mergers May Buy Time, But Fundamental Changes Necessary, GSK’s Garnier”,2. The Pink Sheet (February 26, 2007), p. 11.
Clayton M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business Press, 1997).3.
“Rhône-Poulenc Forms Network To Develop Gene and Cell Therapies”,4. Oncology News International, Vol. 4, No. 1 (January 1, 1995), accessedDecember 8, 2008, http://www.cancernetwork.com/display/article/10165/97578
The Boston Consulting Group, “Realizing the Promise o Disease Management: Payer Trends and Opportunities in the United States” (February5.2006), p. 9.
We are indebted to Proessor Michael Jacobides o the London Business School or providing the details o this case study.6.
BBC News, “Deal reached on NHS drug prices” (November 19, 2008), accessed November 28, 2008, http://news.bbc.co.uk/1/hi/health/7737027.stm7.
“Barack Obama and Joe Biden’s plan to lower health care costs and ensure aordable, accessible health coverage or all” (2008), accessed8.November 10, 2008, http://www.barackobama.com/pd/issues/HealthCareFullPlan.pd
James J. Shen, “Will China’s healthcare reorm save the day?”9. Pharma China, Issue 27 (November 2008), pp. 2-5.
OECD, “OECD Science, Technology and Industry Outlook 2008: Highlights” (2008), accessed December 22, 2008, http://www.oecd.org/ 10.dataoecd/18/32/41551978.pd
PricewaterhouseCoopers “Pharma 2020: Virtual R&D – Which path will you take?” (June 2008)11.
For an extensive discussion o these trends, please see “Pharma 2020: Virtual R&D”.12.
Lilly website, accessed December 8, 2008, http://www.lilly.com/about/partnerships/; and Debiopharm Group website, accessed December 8,13.2008, http://www.debiopharm.com/business-model.html
PricewaterhouseCoopers, “Pharma 2020: Marketing the uture – Which path will you take?” (February 2009)14.
University o Florida Health Science Center media release, “Walk this way: UF research provides insight into heart healthy exercise regimen”15.(November 14, 2005), http://news.health.uf.edu/news/story.aspx?ID=2846
David Busch, “Can History Repeat Itsel? The Case or the Virtual Medical Device OEM”,16. Medical Product Outsourcing (December 2007),accessed February 21, 2008, http://www.mpo-mag.com/articles/2007/11/can-history-repeat-itsel
Kenneth Eng, David C. Izard & Terek J. Peterson, “Managing the CRO Relationship to Eectively Request and Receive CDISC STDM and ADaM17.Deliverables”, SAS PharmaSUG Proceedings (Atlanta, Georgia: June1-4, 2008), accessed December 12, 2008, http://www.lexjansen.com/ pharmasug/2007/c/c06.pd
SRI International, “Capital and Time Eciencies rom Outsourcing Preclinical Development” (2005), accessed March 10, 2008, http://www.sri.18.
com/biosciences/pd/OutsourcingPrecelinicalDevelopment.pd
SR One website, accessed December 14, 2008, http://www.srone.com/ 19.
Lisa M. Jarvis, “Thinking Outside The Big Pharma Box”,20. Chemical & Engineering News (May 7, 2007), accessed February 20, 2008, http:// pubs.acs.org/cen/coverstory/85/8519cover2.html; and Associated Press, “Pzer expands venture capital program” (August 1, 2007), accessedFebruary 20, 2008, http://www.boston.com/business/articles/2007/08/01/pzer_expands_venture_capital_program/
Jonathan Russell, “AstraZeneca spins o research”,21. The Telegraph (February 15, 2008), accessed March 9, 2008, http://www.telegraph.co.uk/ money/main.jhtml?xml=/money/2008/02/15/cnastra115.xml
Andrew Jack, “Goldman unveils plans or pharma research unding”, The22. Financial Times (December 3, 2008), accessed December 12, 2008,http://www.t.com/cms/s/0/e929d3c-c0db-11dd-b0a8-000077b07658.html?nclick_check=1
PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report based on data rom Thomson Financial.23.
The member companies o the Pharmaceutical Research and Manuacturers o America spent about US$43 billion on R&D in 2006. Datamonitor24.estimates that discovery accounts or between 25% and 35% o these costs. For urther inormation, see Pharmaceutical Research and
Manuacturers o America (PhRMA), “R&D Spending by U.S. Biopharmaceutical Companies Reaches a Record $55.2 Billion in 2006” (February12, 2007), accessed February 20, 2008, http://www.phrma.org/news_room/press_releases/r&d_spending_by_u.s._biopharmaceutical_companies_reaches_a_record_$55.2_billion_in_2006/; and Datamonitor, “Pharmaceutical Outsourcing Part 2: An Introduction to Drug Discovery Strategies”(August 2006).
Reerences
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Andrew Jack, “Drugmakers sweeten deals or biotech groups”, The25. Financial Times (September 19 2008), accessed December 21, 2008, http:// www.t.com/cms/s/0/9d620a56-85d6-11dd-a1ac-0000779d18c,dwp_uuid=aece9792-aa13-11da-96ea-0000779e2340.html
Jim Miller, “The Art o the Deal”,26. BioPharm International (September 1, 2008), accessed December 10, 2008, http://biopharminternational.ndpharma.com/biopharm/GMPs%2FValidation/The-Art-o-the-Deal/ArticleStandard/Article/detail/545356
Andrew Ross Sorkin & Stephanie Saul, “J&J buys Pzer unit or $16.6 billion”,27. International Herald Tribune (June 26, 2006), accessed November 3,2007, http://www.iht.com/articles/2006/06/26/business/pzer.php
Johnson & Johnson website, accessed December 11, 2008, www.jnj.com/connect/about-jnj28.
Johnson & Johnson press release, “Johnson & Johnson Establishes Wellness & Prevention Platorm with Acquisition o HealthMedia, Inc.”29.(October 27, 2008), accessed December 11, 2008, www.jnj.com/connect/news/corporate/20081027_151000
Sarah Rubenstein, “Novartis Spends Big on Diversication”, The Wall Street Journal Health Blog (April 7, 2008), accessed December 21, 2008,30.http://blogs.wsj.com/health/2008/04/07/novartis-spends-big-on-diversication/
Reuters, “National Jewish Health and Roche Diagnostics Corporation Reach Agreement to Pursue Environmental Molecular Diagnostics31.Opportunities” (September 10, 2008), accessed December 11, 2008, http://www.reuters.com/article/pressRelease/idUS134552+10-Sep-2008+PRN20080910
Andrew Jack, “GSK chie pushes or expansion into new markets”, The32. Financial Times (June 13, 2008), accessed December 21, 2008, http:// www.t.com/cms/s/0/617a6e8-38e1-11dd-8aed-0000779d2ac.html?nclick_check=1
PricewaterhouseCoopers, “Pharma 2020: The vision”, pp. 24-25.33.
Robert S. Huckman & Eli P. Strick, “GlaxoSmithKline: Reorganizing Drug Discovery (B)”,34. Harvard Business Publishing (May 17, 2005). Available ororder at http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=605075
Milken Institute, “Financial innovations or Accelerating Medical Solutions”, Vol. 2 (October 2006), accessed December 15, 2008, http://www.35.milkeninstitute.org/pd/n_innov_vol2.pd
Aerotel Medical Systems media release, “Aerotel and Medicronic-Vodaone Launch Innovative Wireless Homecare System in Spain” (April 4,36.2008), accessed December 8, 2008, http://www.openpr.com/news/41301/Aerotel-and-Medicronic-Vodaone-Launch-Innovative-Wireless-Homecare-System-in-Spain.html
Bigelow JH et al “Analysis o healthcare interventions that change patient trajectories”,37. The RAND Corporation, 2005, pg xxvi
Audit Commission “A spoonul o sugar: Medicines management in NHS hospitals”, December 2001, pg 1938.
For example, Giurida A and Torgerson DJ, “Should we pay the patient? Review o nancial incentives to enhance patient compliance”.39. British
Medical Journal 1997 315: 703-707
Cathy Weselby, “Improving health at the oce”,40. Silicon Valley/San Jose Business Journal, accessed January 12, 2009, http://sanjose.bizjournals.com/sanjose/stories/2009/01/12/story2.html
Helen Loveless, “The comeback kid’s medical cover”,41. Mail on Sunday (October 29, 2007), accessed October 15, 2008, http://www.thisismoney.
co.uk/insurance/health-insurance/article.html?in_article_id=425744&in_page_id=39
Based on the midmarket exchange rate o £1.00 to US$1.48474 on December 22, 2008.42.
Audit Commission, “Health Data Brieng No. 12. Spending on disease: Diabetes” (September 2008), accessed December 15, 2008, http://www.43.audit-commission.gov.uk/Health/Downloads/HealthDataBrieng_spendingondiabetes.pd
Total expenditure on pharmaceuticals and other medical non-durables expressed as a percentage o total healthcare expenditure ranges rom44.12.4% to 29.7% in the OECD countries. On average, it is thought to represent about 15% o the global health budget. For urther inormation onhealthcare expenditure in the OECD countries, see OECD Health Data 2008 (October 2008).
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