Partnerships 2010: Value Creation through Strategic Sourcing and New Business Models

Keynote Speaker:
Jason Hwang, MD, MBA, Executive Director of Healthcare, Innosight Institute; Co-author The Innovator’s Prescription: A Disruptive Solution for Health Care

This is a discussion on using what he calls disruptive innovation to re-invent the pharmaceutical industry. What does he mean? He describes in the terms of centralization or decentralized. Computing for instance began as decentralized with the slide rule where we all carried the solution in our pocket. Then with the advent of the mainframe we had to go to the corporate mainframe to compute. Beginning with the mini computer decentralization began in waves and follows through the personal computer, the laptop, and now handhelds. You get the idea.

This is enabled by disruptive innovation. Essentially as the product, computers, offer more complex innovations users are parsed into those who need those innovations and those who don’t. Basically a spectrum of users needs. Computer producers then can become more diverse with ‘ disruptive’ products that are cheaper, faster, etc, but offer a specific subset of innovations. In other words you can use TurboTax if your tax return is relatively simple but if not you still need an accountant.

Dr Hwang notes that it is usually a new entity that ‘disrupts’ and not a leading incumbent. Mainframe makers are always trying to make the next generation of mainframes. There are exceptions. IBM has been able to sustain business though successive waves of disruption at least to a point.

Simplifying technologies that introduce predictability and obviate costly trial and error experimentation enables disruption. Now it’s beginning to sound like it could apply to health care, right? Dr Hwang puts it n terms of the practice of medicine moving from intuitive to empirical and to precision (redefining categories of disease). Enabling technologies include molecular diagnostics. These types of technologies enable new business models that can alter the landscape of an industry. Think of the IBM Mainframe and Microsoft Windows versus the Dell PC and Linux. With heart diseases you may need the ‘hospital version of the mainframe’. If you have a sore throat you may need a nurse practitioner or self-management.

Pharmaceuticals have traditionally been highly integrated. R&D to Clinical Trials, volume manufacturing, and marketing and sales. The mismatch has been that commercial operations demand predictability from an unpredictable supply chain of drug discovery and development. Remember when computer manufactures used to manufacture and build the units they sold. What happened? It became cheaper and more efficient for come components to be outsourced to multiple vendors. Iteration after iteration until the computer manufacturer didn’t manufacture any part, just marketed the product. Dr Hwang’s contention is that this can and is happening to the pharma industry.

What about generics? Dr Hwang says that they are low-end disruptions using the same business model and that greater impact will come from disruptions that target new markets.

The future will be different than the past. Who will the players be? Basically, those that can piece together the appropriate components. There are several examples. Novartis for instance has announced a companion diagnostic test to screen out patients susceptible to liver toxicity from a Cox-2 inhibitor. Eli Lilly has a division called Chorus focusing successfully on early stage development using a nontraditional lean approach.

Barbarians at the gate? Not necessarily. Surviving disruptive change requires the fostering of riding the successive waves of disruption. Surfing anyone?