Supply/value chain hot topics for today and tomorrow
Center-led principal and value-added services structures
Supply chain best practices
- Using strategic business processes to impact performance
- Inventory and working-capital management
- Governance and compliance
Industry trends and drivers
- Collaborations
1. 22nd Annual Health Sciences
Tax Conference
The evolving value chain in life sciences
December 4, 2012
2. Disclaimer
► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
Page 2 The evolving value chain in life sciences
4. Presenters
► Jeff Holtz ► Peter Anderson
Johnson & Johnson Ernst & Young LLP
New Brunswick, NJ New York, NY
+1 212 773 3720
► Karen Holden peter.anderson@ey.com
Ernst & Young LLP
New York, NY ► Sanjeev Wadhwa
+1 212 773 5421 Ernst & Young LLP
karen.holden@ey.com Iselin, NJ
+1 732 516 4183
sanjeev.wadhwa@ey.com
Page 4 The evolving value chain in life sciences
5. Agenda
► Supply/value chain hot topics for today and
tomorrow
► Center-led principal and value-added services
structures
► Supply chain best practices
► Using strategic business processes to impact performance
► Inventory and working-capital management
► Governance and compliance
► Industry trends and drivers
► Collaborations
Page 5 The evolving value chain in life sciences
6. Key challenges for the pharmaceutical
(pharma) and life sciences industry
Demand side challenges Supply side challenges
Challenges to meet
for investments
across the supply and
value chain
► Adapting business strategy ► Competition and price
to the new mix of: pressures (open markets)
► Generic competition
► Cultures and tastes Demand side Supply side
► Cost reduction essential to
Marketing; compete and be profitable
Supply chain
► Ensuring business research and
manufacturing
development
processes and assets match (R&D)
operations
► Supply side rationalization a
market needs
critical success factor
► Emerging market focus
► Procurement, e.g., rationalize
► Brands across markets suppliers
Sales activities Sourcing activities
► Intellectual property (IP)
management strategy across
► Meeting changing patterns multiple brands
of consumer demand in line Direct Wholesale
Suppliers Logistics
► Regulatory environment
with new key markets sales Retail
Page 6 The evolving value chain in life sciences
7. Meeting the challenges — examples of supply
and demand side rationalization strategies
Active pharmaceutical Opportunities across the supply chain
Inactive
Suppliers ingredient (API)
ingredients
Other materials
Reduce spend
Centralization of services and risk management
Leveraging purchasing skills,
Procurement rationalizing suppliers
Operations:
Internal
► Manufacturing/services provision Supply chain rationalization
supply
► R&D and IP management
chain Lean manufacturing processes
processes ► Clinical trial processes and management Logistics management
Inventory/capacity management
Sales
Protect and develop brands
Coordinated IP management and
brand development strategy
Finished
End users goods
Management of issues re generics
Adapting business models to the new outcomes-based, patient-centric world
Page 7 The evolving value chain in life sciences
9. Centralized business models implemented for pharma
and life sciences companies
Centralization can be achieved in: Key decision variables:
► Key functions ► What degree of change can be implemented?
► Transaction flows (hub) ► Where do the key opportunities exist?
► Product groups ► What are the potential benefits?
► Assets such as IP ► Are the benefits realistically achievable?
High
Full principal with
IP
Medium
Sales and
marketing
principal
Benefit
Supply chain
management
company
Import and
export company
Low
Sourcing
company
Service
company
Business impact
Page 9 The evolving value chain in life sciences
10. Full principal model for global pharma and
life science companies
Profit Profit
Ownership of products Ownership of products
Invoice Invoice
Contract manufacturer IP principal Limited risk distributor
Invoice Product
Ownership Deliver Warehousing
Invoice sales and
of material goods services
services
Deliver
goods
Suppliers Centralized warehouse (inventory of principal) Customers
Legal title Physical flow
Material rel. invoice Services
Page 10 The evolving value chain in life sciences
11. The center-led principal (CLP) alternative
Business issue Business drivers
No overall estimated ► CLP can mitigate
realization ERP issues
percentage (ERP)
Center-led
principal system
CLP provides: Bundled or unbundled Deductibility and ► Unbundled services
services, IP withholding tax and royalties may
► Routine
(WHT) mitigate these issues
services ► Value-based fees
for value-added
► Non-routine Indirect tax and ► No change in
services
services customs duty product flows/pricing
► Management fees
► IP ► Limited value-added
for routine
services tax/customs impact
► Royalties for IP
Local sales entities
Page 11 The evolving value chain in life sciences
12. The value-added services model within CLP
It is essential that the CLP has full control over the risks it assumes, substance behind the
functions it performs and the financial capacity to withstand the risks it contractually bears.
► Allocation of risks to the CLP must be substantive in nature.
► The substance follows control and financial capacity to bear the risks.
Control — capacity to make decisions to take ► Requires company to have employees with
on the risk (decision to put the capital at risk) authority to perform control functions
and decisions on whether and how to manage ► Not required to perform day-to-day activities
the risk, internally or using an external provider but must be able to assess outcomes
► Requires company to hold sufficient of
Financial capacity — capital and liquidity
capital and liquid assets to bear risks
position should be held as per that which an
► Can be arranged via financial guarantees
independent entity would require to be able to
and other means as long as arm’s-length
bear and withstand the risks allocated to it
principle is applied to transactions
Consequence: party controlling risk should be compensated by an increase in expected return.
Page 12 The evolving value chain in life sciences
13. Foreign base company services income
(Sec. 954(e))
► The foreign base company services income rules apply to
treat services income as Subpart F income when a
Controlled Foreign Corporation (CFC) performs services
for, or on behalf of, a related person and performs those
services outside its country of incorporation.
► When the CFC receives substantial assistance from
related US persons, service income will be Subpart F,
regardless of where earned.
► Under Notice 2007-13, this rule applies only when the cost to the
CFC of the assistance provided equals or exceeds 80% of the total
cost to the CFC of performing the services.
► The rule does not apply to assistance from other CFCs.
Page 13 The evolving value chain in life sciences
14. Foreign base company services income
(Sec. 954(e))
► Place of performance is a factual issue.
► Watch for foreign base company sales vs services
income.
► Service income related to the purchase and sale of property from
or to related parties may be characterized as foreign base
company sales income (see Treas. Reg. Sec. 1.954-1(e)(1)).
► Substantial contribution rules come into play.
► Certain transactions may be treated separately.
► For example, a CFC manufactures and sells property to a related party
and also provides installation and warranty services.
► In general, the CFC will be viewed as earning separate sales and services
income.
► Compare the predominate character rule (Rev. Rul. 86-155).
Page 14 The evolving value chain in life sciences
15. Foreign base company services income
(Sec. 954(e))
► There is no branch rule of foreign base company services
income.
► Thus, services provided between and among disregarded entities
will not be Subpart F.
Page 15 The evolving value chain in life sciences
16. Overall risks and benefits — incremental
value-added services vs CLP
The overall risks and benefits vary based on several factors.
CLP with value-added CLP with profit split CLP with full residual
service
Bundled or split return Split (per service) Bundled Bundled
Expected risk of challenge Medium risk Medium risk High risk
Implementation difficulty Low difficulty Medium difficulty Medium difficulty
Expected benefits Medium benefits Medium benefits High benefits
Substance shift to center Low to medium shift Medium shift High shift
Initial conclusions
► Various types of return structure are applicable for a CLP providing value-
added services.
► Payments may be bundled or split.
Page 16 The evolving value chain in life sciences
17. Bundled or separate payments? WHT
considerations in Asia
► Services fees do not always attract WHT in Asia-Pacific.
► For technical services fees, WHT generally applies if the services are sourced or performed in the local country.
► Payments may avoid WHT if:
► The payments are characterized as technical services fees and rules are based on the rule detailed above.
► The services are not deemed to be sourced in the local country.
► Note that this general rule does not always apply — full WHT applies on technical services regardless of source
in some cases.
► Under a single payment, many Asia-Pacific authorities deem such payments
to be royalties:
► Technical service fee characterization may be challenged in favour of a royalty if former does not attract WHT.
► If the payment is a single payment and IP or know-how is deemed included, then such challenges are frequent.
► Examples include India, Korea, Hong Kong, Indonesia, China, Japan, Thailand and others.
► Note: technical services fees are shown at non-treaty rates.
SG Treaty WHT rates CN IN JP KR AU NZ ID TH MY SA
Royalties 10% 10% 10% 15% 10% 5% 15% 15% 8% 5%
Dividends 10% 0% 15% 15% 15% 15% 10% 10% 0% 10%
Interest 10% 15% 10% 10% 10% 10% 10% 15% 10% 0%
Technical services 25% 10% 20% 20% 0% 15% 20% 15% 10% 0%
Source: Ernst & Young Worldwide corporate tax guide and the relevant tax treaties
Page 17 The evolving value chain in life sciences
18. Bundled or separate payments? WHT
considerations in Latin America
► Services fees do not always attract WHT in Latin America (Latam):
► WHT in Latam countries depends on the nature of the service. Each country has a definition for each type of service (i.e.,
royalties, technical assistance, management fees).
► Management fees and general services
► WHT generally applies if the services are sourced or performed in the local country.
► Payments may avoid WHT if the services are not deemed to be sourced in the local country.
► Technical services are typically subject to withholding taxes regardless of where they are performed.
► Under a single payment, many Latam authorities deem such payments to be subject to the higher
withholding taxes:
► Service fee characterization may be challenged in favor of a royalty or other category if the former does not
attract WHT.
► If IP or know-how is deemed included, then royalty classification is likely.
Brazil Mexico Argentina Colombia Venezuela Chile Peru Panama
Royalties 15% 30% 28% 33% 30.6% 30% 30% 12.5%
Dividends None None None or 35% None or 33% None or 34% 35% 4.10% 5%
Interest 15% 30% 35% 33% 32.30% 35% 30% 12.50%
Technical services 15% 25% 31.5% 33% 10.2% 20% 15% 12.50%
Source: EY Worldwide corporate tax guide. General rates under domestic law.
Page 18 The evolving value chain in life sciences
19. The value added services solution
► Potential solution: Expected
incremental
prof its Full residual prof its
► Divide the payment into several
component parts, including:
► Routine management
services fee
► Value-added services fee Intellectual property
► Royalties on IP in the event Value-added services
that any rights on valuable Routine services
IP are granted to the sales
companies Commercial risks and dif f iculty in implementation
► Deductibility and transfer
pricing challenges easier
to manage:
► Multiple payments linked to
specific services and IP ► Value added services are a newer
► Easier to defend using concept but are frequently applied.
benchmarks
Page 19 The evolving value chain in life sciences
20. Types of value-added services for life
sciences/pharma companies
1. Services to API manufacturer
Product testing services ► Comparable uncontrolled price (CUP) or controlled
price method (CPM) search for similar service
providers
Plant/production plan layout/design ► CUP or CPM search for design service providers
Centralized procurement services ► CUP or CPM search for procurement companies
Quality processes ► CUP or CPM search for quality service providers
2. Services to API local market life sciences/pharma sales
Request for proposal support services ► CUP or CPM search for marketing services
Warranty support services ► CUP or CPM search for warranty insurers
Database creation ► CUP or CPM search for IT service providers
Demand planning and inventory management ► CUP or CPM search for Supply Chain Management
(SCM) service providers
3. Services to drug R&D entities
Clinical trials project management/technical support ► CUP or CPM search for similar at-risk service prov.
Drug R&D strategy and development services ► CUP or CPM search for similar at-risk service prov.
Page 20 The evolving value chain in life sciences
22. Using strategic business processes to
impact operating performance
► Sales and operations planning (S&OP)
► Principal governance
Page 22 The evolving value chain in life sciences
23. Using strategic business processes to
impact operating performance
► Sales and operations planning (S&OP):
► As part of supply chain redesign, many companies are looking at
this key business process to drive significant improvements in
planning and forecast accuracy and to sustain governance and
compliance structure.
► S&OP processes support substantial contribution.
► The governance and compliance process can be designed within
the S&OP framework.
► Process should monitor that the principal is “living the structure.”
► Process should create documentation for future tax authority review.
Page 23 The evolving value chain in life sciences
24. What is sales and operations planning
(S&OP)?
► S&OP has a vast array of definitions:
► “an integrated business management process developed in the 1980s by Oliver
Wight through which the executive/leadership team continually achieves focus,
alignment and synchronization among all functions of the organization”
Wikipedia, the free encyclopedia
► “a set of decision-making processes to balance demand and supply, to integrate
financial planning and operational planning, and to link high level strategic plans
with day-to-day operations”
Tom Wallace, S&OP 101
► the “function of setting the overall level of manufacturing output and other activities
to best satisfy the current planned levels of sales, while meeting general business
objectives of profitability, productivity, competitive customer lead times, etc., as
expressed in the overall business plan”
APICS The Association for Operations Management
Page 24 The evolving value chain in life sciences
25. Substantial contribution and S&OP
Indicia of manufacturing Potential activities carried out by principal
1 Oversight and direction of the activities or process ► Oversight of manufacturing processes
► S&OP process
under which the product is manufactured
► Formulate policy internal and external manufacturers
2 Activities that are considered in, but are ► Finish and fill
insufficient to satisfy, the substantial transformation ► Sterilization
► Ownership of inventory
3 Material selection, vendor selection or control of
► Manage supplier risk (capacity, obsolescence)
raw materials, work-in-process or finished goods ► Determine supplier capacity and continuity
► Identify and manage cost-improvement initiatives
4 Management manufacturing costs or capacities
► Cost reduction (e.g., inventory reduction, price reduction)
► Direct the planning and production schedules for internal and
5 Control of manufacturing-related logistics external manufacturing
► Monitor production orders, schedules and output to ensure
products are manufactured and scheduled delivery dates are met
► Evaluate quality systems and share best practices
6 Quality control ► Negotiate quality agreements
► Ultimate quality responsibility
7 Developing, or directing the use or development of, ► IP ownership
product design and design specifications, as well as trade ► Develop technology transfer process for new product introductions
secrets, technology or other intellectual property for the ► Transition design or process changes to external partners
purpose of manufacturing or producing the product ► Partner with partners on supply chain development initiatives
Page 25 The evolving value chain in life sciences
26. Effective S&OP aligns objectives
Product Make-vs-
availability buy
decisions
Promotional
plans Short- and long-
term capacity
Customer management
opportunities
Product lifecycle
Competitor management
actions
Inventory management
Portfolio
management Network optimization
Annual plan/budget
Revenue plan
Operating income/profit plan
Capital investment plan
Wall Street guidance
Finance
S&OP supports the organization by balancing goals across
markets, plant operations, supply chain and finance.
Page 26 The evolving value chain in life sciences
27. Why does S&OP fail?
► Companies are organized and typically work in silos, but planning
needs to be executed horizontally.
► S&OP is viewed as a supply chain process instead of a fully
integrated, enterprise-wide planning process.
► Financial, sales, marketing and operations plans rarely match.
► Organization structure does not support effective S&OP.
► Processes are not focused on the right elements; people are not
doing the right things the right way.
► Executive sponsorship is inadequate.
A lack of management support and leadership is the most
common reason for implementation failures.
Page 27 The evolving value chain in life sciences
28. S&OP process cadence
Weekly view
Activity Month 1 Month 2 Month 3
Demand
review and
exception
process
Supply
review
process
Integrated
reconciliation
meeting
MBR
meeting
EBR
meeting
Process Month 1 Month 2 Month 3
Meeting
Page 28 The evolving value chain in life sciences
29. Principal governance and compliance
► Use of a performance management framework to review
operational performance
► Establishes principal oversight of manufacturing and
markets
► Monitors that the principal is “living the structure”
► Creates documentation for future tax authority review
Page 29 The evolving value chain in life sciences
30. Supply chain governance
Operational metrics are used by principal companies to monitor the performance of manufacturing
sites and markets. Metrics should be reliable and action oriented.
Centrally reported metrics were collected Centrally reported
through various scorecards and dashboards. metrics
Operational
Metrics were reviewed and operational
focused metrics
focused metrics identified.
identified
Metrics reviewed
Operational focused metrics were reviewed
with stakeholders
with stakeholders to determine validity.
Critical operational metric was identified that Operational
measures key business process performance. metrics
Page 30 The evolving value chain in life sciences
31. Supply chain governance — example of
operational metrics
These 15 metrics provide visibility into manufacturing and markets’ operational performance.
Operational metrics scope Recommended operational metrics
Process Item
Operational metrics Existing
area no.
Strategic 1 Percent in stock
metrics 2 Forecast error
Planning 3 Forecast bias
4 Inventory value
5 Inventory turnover
Operational 6
Percent principal approved/endorsed
1
Procurement spend
metrics 1
7 Percent of spend in principal lead SRM
(in scope) 8 Distribution cost as percent of sales
Global logistics and 9 Distribution cost per unit shipped
supply 10 Shipments not delivered on time (%)
11 Shipments not delivered full (%)
12 Right first time
13 BOH commitments
Tactical metrics Manufacturing
14 Budget variance
15 Critical findings
Page 31 The evolving value chain in life sciences
32. Supply chain governance activities
Compliance guidelines and operating metrics are aligned to key activities that are critical for governance
and oversight.
# Supply chain governance activity Compliance guidelines Operational metrics
► Demand plan submitted to principal monthly ► % in stock
► Master Production Schedule (MPS) submission ► Forecast error
1 Finished goods planning/manufacturing
guidelines ► Forecast bias
► MPS adherence guidelines
► MPS/Material Requirements Planning (MRP) ► Forecast error
submission guidelines ► Forecast bias
2 Intermediate goods planning/manufacturing
► MPS/MRP adherence guidelines
► Substantial direct material/drug product ► % principal approved/endorsed spend
contracts endorsed by principal ► % of spend in principal lead SRM
3 Direct materials sourcing ► Purchase price variance report submitted to
principal monthly
► Excess and obsolete inventory management ► Budget variance
costing performed at principal ► Inventory value
4 Manufacturing cost management
► Supply chain agreements adjustments ► Inventory turnover
approved by principal
► All inter-transfer approved by principal ► Distribution cost as % of sales
► Transportation plan submitted to principal ► Distribution cost per unit shipped
5 Logistics
monthly ► Shipments not delivered on time (%)
► Transportation plan adherence ► Shipments not delivered full (%)
► Quality parameters met ► Right first time
6 Quality ► Quality reports submitted ► Board of Health (BOH) commitments
► Critical findings
Page 32 The evolving value chain in life sciences
33. Supply chain governance — metrics,
agreements and S&OP
Key activities that help achieve business objectives and support the principal structure
Supply chain
► The principal to review the
agreements and
1 MSA planning
parameters
currently used planning
parameters for select
products
►
Compliance The implementation of
S&OP ► A key process for decision
2 guidelines and
operational
compliance guidelines to
support the principal structure
and operational metrics to
support the business
4 process
making and control of supply
chain activities and business
results
metrics processes
► Identification of thresholds
Escalation and setting of business
3 thresholds
scenarios that will need to be
escalated to the principal for
Operating ► The operating manual to be
review or approval
5 manual
the guiding document for all
processes, responsibilities
and controls
Page 33 The evolving value chain in life sciences
35. Industry trends and drivers
► The life sciences business environment
► Patents: wave of patent ► Commercial structure:
expiries on key products inefficiencies in traditional
and threat of follow-on Reduced growth (top-line) sales and marketing model
biologics ► Compliance commitments:
Margins squeezed
► Productivity: low R&D increased requirements,
productivity slide vs Reputation in complexity and enforcement
historical performance decline actions
and biotech sector ► Customer relationships:
Consolidation
► Pricing: cost containment (mid-market) increasingly informed and
placing pressure on prices active stakeholders
and market access — first demanding value and
Europe, now the US transparency over business
practices
Page 35 The evolving value chain in life sciences
36. Healthcare costs (HC) continue to outpace
economic growth
UK Germany Spain
300 300 400
€2.650 €2.250 €1.850
Index
Index
Index
200 200 250
100 100 100
1992 1997 2002 2007 1992 1997 2002 2007 1992 1997 2002 2007
France US Japan
300 300 400
€3.150 €5.351 €2.381
Index
Index
Index
200 200 250
100 100 100
1992 1997 2002 2007 1992 1997 2002 2007 1992 1997 2002 2007
HC costs GDP Wages
Source: OECD Health Data 2008; EIU. x HC cost per capita 2006 (€) Index: 1992 = 100
Page 36 The evolving value chain in life sciences
37. Higher spend doesn't necessarily lead to
better outcomes
Internationally, higher spend not Costs outpacing improved quality
correlated with increased health for past decade in US
6,000 250
5,000 United States
Expenditures ($) per capita
4,000 200
3,000
(%)
2,000 150
Japan
1,000
Singapore
0 100
68 69 70 71 72 73 74 75 76 1994 1996 1998 2000 2002 2004 2006
Healthy life years Year
Costs Quality
Source: OECD Health Data 2008; EIU.
Page 37 The evolving value chain in life sciences
38. Value-based interventions — how do we define
the value?
►
Health care
value
Health outcomes
Risk-adjusted
outcomes
Patient health experience for a
given medical condition
÷►
Cost of providing
value-based services
Self-management cost of
patient care
=
per dollar spent ► Health status achieved and retained ► Personnel
► Survival
providing ► Extent of recovery or disability ► Facilities
services ► Disease progression ► Supplies
► Recovery/disease management
► Technology
► Right diagnosis
► Value measured ► Treatment errors ► Administration
► Complications ► Net cost across cycle of
across full cycle ► Recovery time
of care ► Sustainability of health care (to minimize cost
► Recurrences shifting)
► ER visits
Focus on results — measured by
quality and efficiency
Source: Redefining Health Care: Creating Value-Based Competition on Results; Michael E. Porter.
Page 38 The evolving value chain in life sciences
39. The collaboration imperative
► Working together for mutual gain
► US health care is transforming from a provider- and payer-
dominated system to one in which patients are at the center of care.
► Forces at work require new levels of collaboration.
► Collaboration, the new competition
► Collaboration crossroads:
► When does collaboration make the most sense for your
organization?
► What strategic issues do you need to address to thrive in a
collaborative environment?
► How are your leaders serving as role models for a collaborative
culture?
► What are the tax impacts of collaboration?
Page 39 The evolving value chain in life sciences
40. In fact, several partnerships and pilots are
positioned to build collaborative care partnerships
I3G Johnson & Johnson
Merck — M2Gen AstraZeneca — Healthcore Fresenius — Aetna
(J&J) — AOK and Care4s
Nationwide network for Merck’s for-profit collaboration AstraZeneca and HealthCore A patient-centric care
integrated outpatient care for with H. Lee Moffitt Cancer Center (WellPoint’s health outcomes coordination program is
schizophrenia patients in Lower aims to improve cancer care with based subsidiary) are conducting improving clinical outcomes and
Saxony region of Germany: personalized treatments. retrospective and prospective reducing costs by slowing the
► Case managers and nurses studies to determine effective progression of chronic kidney
Moffit’s M2Gen database of
build the team on site. and economical treatments for disease in members and
genetic data derived from tumor
► Structured treatment path with chronic diseases. facilitating gentler, less costly
tissue samples and clinical
psycho-educational or drug transitions to dialysis or pre-
information from 85,000 patients
adherence and shared transplant care. The program is
allows researchers to match
decision-making initiatives are enhancing coordination of care
molecular signatures of patients’
in place. among specialists, primary care
cancers with treatments.
providers and nurses.
► Patients and relatives are
active in the decision process.
Sanofi-Aventis — Baltimore Lilly — Anthem BCBS and
Abbott — Anthem BCBS**,
Merck — Camden Coalition County Dept. of Aging, five other Indiana-based
UHC*, Humana, Cincinnati
of Healthcare Providers John A. Hartford Fdn and Health Care Provider
doctors
NCOA (HCPs)
Merck Foundation committed Cincinnati Patient-Centered Sanofi-Aventis, the Baltimore The alliance aims to achieve
$15 million in 2009–2013 to fund Medical Home (PCMH) Pilot and County Department of Aging, the better outcomes for diabetes
the Alliance to Reduce Co-Pilot Project is organized John A. Hartford Foundation and patients. Policyholders of
Disparities in Diabetes, a under the Aligning Forces for the National Council on Aging Anthem BCBS who have
public/private partnership Quality (AF4Q) initiative. (NCOA) launched a pilot diabetes, but have performed
encouraging evidence-based program to help physicians their testing, will receive
The project is sponsored by reminder phone calls.
collaborative approaches to connect older patients with
Health Improvement
improve care and reduce care diabetes to evidence-based
Collaborative of Greater
disparities in low-income, education and wellness support.
Cincinnati and funded by
underserved populations..
Anthem BCBS, Humana, Abbott,
UHC* and various physician
practices.
*UHC=United Healthcare; **BCBS=BlueCross BlueShield Association
Page 40 The evolving value chain in life sciences
41. Rather than research-focused initiatives, improving
patient health outcomes is the ultimate goal.
Inspiration Clinical transformation
Novo Nordisk in China* Aspiration ► Real-world data informing discovery and
Inspiration
Patient-focused, healthier development Merck/M2Gen
outcomes
► Increased focus on “pills+” that help prevention,
adherence and self-management
Aspiration
New therapies for druggable
compounds
Health care delivery
transformation
Aspiration
► Patient–physician Patient N Permanently funded, national
connectivity and multi- *CER Infrastructure
channel information
pipelines Patient
► Improved multi-sourced and
predictive data
► Behavioral economics levers
Aspiration
Aspiration: Collective care
Personalized Healthcare model
Inspiration
Inspiration (Nutrigenomics and Nutrigenetics) Commercial transformation
Sanofi and NCQA
Merck/CIGNA
► Providing product and services in non-traditional settings
► New business models creating lifelong relationships with
Inspiration customers and improving outcomes
Wellpoint/Watson ► Organizing around patient populations
► Customer segmentation Inspiration
Inspiration ► Behavioral economic levers Coalition Against
GSK and GAVI
in 48 Least Developed Major Diseases (CAMD)
Inspiration
Countries (LDCs)**
Merck/Camden Coalition
*Comparative effective research (CER)
Model will enable pharmaceutical companies to access larger markets (from a $200 billion to $2.5 trillion market).
Page 41 The evolving value chain in life sciences
42. Initiatives that focus on collaborative care and quality- and
outcome-based payment are the most highly evolved.
Competitive advantage
established; drives expanding Aspiration:
base of covered lives served Coordinated integrated care
Patient focused
Advanced risk-sharing Holistic payment model
Expand collaborative care pilots to employer
arrangements produce Population context
contracts and 2–3 payers: Abbott and Cincinnati
recurring, predictable cost
PCMH collaboration, Camden Coalition of Standardized
and revenue streams
Healthcare Providers and Alliance to Reduce
Disparities in Diabetes, Maryland multi-payer Transformation rooted in
Confidence in capitation critical mass; clinical practices
PCMH funded by Merck, Pfizer and Sanofi-
and risk pool viewed as leading practice
Aventis
arrangements
Capabilities
Clinical councils expand to broader membership
Multiple payment bundling of PCPs and selected specialists; reduction in
Narrow network products based arrangements; material “at disparity of treatment practices among staff; J&J and
on Accountable Care risk” revenue — UHC and 5 VUMC collaborating in “systemic medical care”
Organization (ACO) panel; ACO oncology practices expanding EHR and decision support
products offered on exchanges
Payment neutral constructs to Maturing teams of primary care physicians (PCPs), case
Form and operate ACO and support experimentation and navigators and analysts; recurring comparison of outcomes to
PCMH pilots infrastructure development standardized evidence-based practices; e-health information and
education resources created and sponsored by multi-disciplinary
Market teams, including HCPs, payers, pharma and technology firms
engagement Payment models
Newly established clinical councils Installation of enterprise
of selected medical staff focus on tools complete; data
quick wins Population and governance and
Clinical outcomes reporting
Today: navigation
Stabilized process for data management produce
collection and reporting; matures; roadmap “single source of truth”
Fee for service Multiple desktop
implementation
applications roadmaps for mature
Episode-based care Automated enterprise tools and data underway
aggregating and
Clinician focused in silos reporting analyzing data management
Individual context
High variability
Evolutionary Revolutionary Disruptive
Page 42 The evolving value chain in life sciences
43. Supply chain and operations management is the
sourcing and delivery arm of collaborations
Pharma
1.0
Drivers of change:
Drugs ► Health care reform
Academia CROs ► Health IT
2.0
► Super consumer
Food cos.
Biotech Medtech
Retail cos. ► Value mining
Diversified
drug portfolios
Health insurance
Telecom cos.
cos.
3.0
Social media Health record
Delivering healthy outcomes:
cos. cos.
► Managing patient outcomes
Health
Information outcomes Health care ► Expanding access to health care
cos. providers
► Meeting unmet medical needs
Payers Physicians
Patients
Key consideration supply chain management:
► What manufacturing, operational and packaging assets are part of the collaborative operation?
► How will service-level, quality, compliance, risk and liability sharing agreements be handled?
► Who contributes the methods and tools that power the collaboration’s success?
Page 43 The evolving value chain in life sciences
44. Collective disease networks enhance physician Future state
example
decision making and improve patient outcomes.
Pharmaceutical — patients for life Payer — enroll and deliver intervention
► Funding Patient Centric Medical Home (PCMHs) National Committee for Quality
► Enroll patient (20,000 pilot members identified through claims analysis)
Assurance (NCQA certification) + procuring patient visit time
► Initial outreach conducted by both pharmacist and Primary Care Physician (PCP)
► Outcome dev./measurement (VBID)
► Initial baseline screenings (using biometrics)
► Longitudinal observational data — epidemiological patient stratification
► Create incentives to align P4O with 10 NCQA measures to ensure better health
► Metrics for Rx (medication possession ratio), patient and provider adherence
outcomes (4 PCP visits)
► New relationships with patients for life (patient care experience)
► Developing clinically nuanced VBID
Leveraging community networks
► KOLs and community physicians (branding and Continuing Medical Education (CME) ► Risk metrics (Harm per 100 patient days, readmissions
VBID
► Identifying patients with diabetes
within 30 days, adverse events per patient days, % of
► Patient literacy — paid pharmacist time
Big Pharma Payer patients with lab values outside therapeutic ranges, cost
► Behaviors (CSAT) — predictive patient profiling
(J&J/Merck/ NYS (BCBS Highmark) per inpatient case, delivery of evidence-based care
Health Foundation) 100% of the time)
► Predictive Key Opinion Leader (KOL) profiling — EY solution model
Pharmacy Benefit Manager (PBM )— manage Pharmacy — patient stratification of risk
risk/cost ► Health Effectiveness Data and Information Set (HEDIS)
measures
► Claim analysis retrospective, predictive,
► Condition specific (hyperlipidermia, Chronic Obstructive
avoidable
Pulmonary Disorder (COPD),
► Outcome development + measurement
►hypertension, asthma)
► Improving recruitment and removing barriers
PBM Pharmacy ► Quantitative:
Pharmacy and providers sharing EMRs
to care
(Medco) ► Consumer satisfaction,
► Patient stratification based on personalized
► Consumption profile (i.e., high utilizers, patients with
medicine
multiple co-morbidities)
Manage risk/cost
Patients and
► Claim analysis (retrospective, predictive, avoidable)
families
► Outcome development + measurement, diagnostics
self-manage
Honest broker — manage incentives/savings after discharge
PCPs — Deliver interventions
► Business model: sustainable prevention programs
► Physician interventions — based on severity
in community — self mgmt., support and counseling
Honest broker, Provider ► Rx adherence + metrics (e.g., pharmacist monitoring)
► TPA (third-party adjudication)/bank
PMO, network, (Northwestern ► Lifelong consent + baseline health risk profiling
► Bundled payment model/capitation on risk/savings
coordinator Memorial ► Incorporating community health workers into primary care
► Incentive management (benefit and quality credits)
(Ernst & Young LLP) Physicians Group) homes to liaison between physicians and communities
► Calculation of cost/savings and understanding of losses
► VBID layers on incentives to steer individuals to high-value practices and adopt
► Risk management (monitoring)/validate risks transferred
treatment and behavior change recommendations offered by physicians — continuous
► Observing customers, conducting surveys — adjusting for Hawthorne effect
FMEA (Failure Mode Effect Analysis) of high-risk areas
► Design of similar protocol/care across all settings (community by community)
► Ernst & Young LLP IP and solutions
Page 44 The evolving value chain in life sciences
45. Diabetes-related hospital admissions and interventional outcomes —
Chicago heat map
► Combine zip code boundary files from Census Bureau Hospital
with graphing capabilities of statistical software to create admission
heat maps of the Chicago area. rates Potential predictors
► Colors are based on hospital admission rates. Red zip
codes indicate high admission rates compared to yellow White
zip codes. ► In initial testing we found the following
potential predictors to be significant:
► Lower right section illustrates possible effects of ► Age, gender, income/poverty, race,
diabetes intervention approaches on admission rates. number of hospitals
This step can be fine tuned with patient level information Male
related to interventions. ► There appears to be a negative
correlation between education level
► Although the model does not show high incidence distribution and hospital admission (top
Education
of diabetes for the white population, EY’s deeper level — row last column). This means the more
analysis revealed that the areas dominated by high- graduate educated the population in a zip code,
earning professionals and white-dominating the lower the hospital admission rate.
communities have a higher number of people at risk
of developing diabetes.
Effect of lifestyle modification Effect of medication
Pre-intervention model of hospital admission rates
Based on
national
averages
Chicago Chicago
Chicago
Chicago diabetes — related hospital admissions
Chicago diabetes — related hospital admissions post-intervention heat map — lifestyle and
pre-intervention heat map medication adherence
Low High
Page 45 The evolving value chain in life sciences