by Homi Kapadia, Vice Chairman, U.S. Life Sciences Leader, Deloitte LLP
The trend of “pure play” business strategies is rising in popularity and redefining the way many life sciences businesses compete in the broader health care market. And for many, this focus and simplicity is paying off. A focus on fewer therapeutic areas yields higher returns, according to recent Deloitte research. But smaller can often be more difficult and it doesn’t work for everyone. What should business leaders leaning toward a pure play approach to the marketplace first consider?
Steve Jobs was said to have built his career around the mantra of focus and simplicity. Both are important for companies in any industry. While the life sciences sector seems to be in a perpetual state of change and adaptation, one trend over the past year or so has caught my eye. And it pertains to exactly that: focus and simplicity versus breadth and portfolio diversity.
Amidst all the change and adaptation in the sector, “pure play” business strategies are rising in popularity and redefining the way many life sciences businesses compete in the broader health care market.
Over the last year, many of the major life sciences companies have begun re-aligning to develop specific and separate operating companies—ones that play to their market strengths. In essence, these companies are concentrating more than ever on what they do well, and more importantly, what their customers, alliance partners and investors think they do well. They are “doubling down” in select areas that they have primary “brand permission” and divesting other areas.
The move toward refining the business model and focusing on fewer, more specific therapeutic areas hasn’t been driven primarily by changes in national health care policy and legislation or by regulatory pressures. It’s also not strictly a result of new strategies forced by the Great Recession. There are other factors at work. For example, the cost of research and development (R&D) is increasing as companies strive to replace products that are approaching their patent cliff. This trend is fundamentally rooted in the basic and increasing need to show value—to become identified and known for a specific brand in a particular market. It can be hard to do this really well when a company has many competing priorities for several different types of businesses and they’re not necessarily known as a market leader in all of them.
Some companies are spinning off new enterprises and businesses that are targeted to specific therapeutic areas or types of customers. Others are forming separate standing companies so that efficiencies and savings can be achieved across the entire value chain. This is crucial in a time when national health care expenditures continue to grow (the latest calculations project more than 5 percent growth in health care in 2014) and consumers face even more out-of-pocket spending.1
There is a lot to gain for those who make the move toward a more pure play strategy. Having deep therapeutic area expertise can help drive more effective conversations with health plans around pricing, reimbursements and market access. Smaller, more flexible companies could avoid some of the complexity and bureaucracy challenges that are more prevalent in larger companies and which often overshadow the benefits of scale. More agile companies may also be more apt to place emphasis on simpler systems and data interoperability. Companies that achieve the most successful outcomes may be those that match pure play strategies with a focus on patient support, disease management and demonstrating positive outcomes to health care providers that are moving from volume to value.
Is this a smart move for organizations, or could it be too big a risk for some? It may be too soon to say definitively, but it could be a game-changer for many companies. Deloitte’s recent research, Measuring the R&D Return on Investment, discovered there is a compelling business argument for focusing on a specific product or line of research. Interviews with industry leaders on their business strategies found at companies with four or fewer therapeutic areas were the ones with the best ROI on their R&D investments.
We found that often when companies went beyond four therapeutic areas, their return actually diminished. Our take was that it could be a sign that a company’s mission was unclear or perhaps too fragmented, or that their brand recognition wasn’t as crisp.
So, while breadth and scale continue to be a successful model for some well-known life sciences enterprises, it doesn’t work for everyone. Business leaders leaning toward a pure play approach to the marketplace should consider the following:
- · Does the business have the brand recognition in the given therapeutic field to out-perform the competition?
- · Has organizational leadership undertaken sufficient risk assessment before making the move?
- · Is there enough capital available to sustain the transition to a pure play business model?
- · Is there leadership in place committed to making this change in competitive approach?
These are important, timely questions to address. The fact is, for companies that believe their value rests in being sharply focused businesses as part of a larger whole or operating on their own, this path can make sense in a shifting industry environment.
It may be a bit early to tell whether it’s a trend that works for many companies reconsidering their business model and whether it’s a good development for the industry, for individual organizations and for the consumer overall. That said, there is one thing on which many can agree. As Jobs said, “Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it's worth it in the end because once you get there, you can move mountains.”2
Read the entire Health Care Current here and subscribe at: www.deloitte.com/centerforhealthsolutions/subscribe.
1 Andrea M. Sisko, Sean P. Keehan, Gigi A. Cuckler, Andrew J. Madison, Sheila D. Smith, Christian J. Wolfe, Devin A. Stone, Joseph M. Lizonitz, and John A. Poisal, Health Affairs, “National Health Expenditure Projections, 2013–23: Faster Growth Expected With Expanded Coverage And Improving Economy,” September 2014
2 Business Week, “Steve Jobs: ‘There’s Sanity Returning,’” May 1998
Homi Kapadia is the vice chairman, Deloitte LLP, and leader of its national life sciences industry practice. A principal with Deloitte Consulting LLP, Kapadia has more than 28 years of experience at Deloitte. He has an extensive client-service background advising market-leading organizations in the areas of strategy, operations, enterprise applications and supply chain management, among others