|Rita E. Numerof
Several signs already show us that the old formulas for success aren't going to work that well anymore. One of the most significant signs is the growing complexity of the buying decision for healthcare products. What was once the sole domain of the physician has now become a decision reflecting the various needs of payers, hospitals, regulators, and a more involved consumer regarding product efficacy and cost.
Business indicators also portend a need for new strategy. Revenue and market share growth have stagnated for most healthcare product manufacturers, as an increasing number of new product developments seem to at best just retain share. Margins continue to erode as the price-setting power shifts from manufacturers to payers. Despite these business challenges to the industry's traditional leaders, the market continues to attract new competitors lured by the financial potential of the largest component of our national GDP.
These market dynamics have conspired to change the basis for competition. The winners in this market will be those companies that offer the strongest economic and clinical value (ECV).
Some of the most critical decisions a business makes are about its lifeblood—the stream of products it develops to generate revenue. Decisions on this product portfolio have traditionally been the functions of the R&D and Marketing departments in most companies. R&D introduces new product ideas in terms of what is possible from a technological perspective. Then, Marketing helps select the best projects by determining the upside potential for the new product concepts.
This approach works in stable markets lacking any disruptive new technology or new variables that affect buying decisions. However, it has some potentially fatal flaws in a more turbulent market, such as the one we're facing today. The biggest flaw is the assumption that the market will continue behaving as we have known it to behave. Sales projections are based on expectations that the demand for the company's products will remain the same. They tend to disregard the potential for disruption by nontraditional competitors or the possibility of “watchful waiting” as a product care option.
Customers will continue to pay what they did last year. The demographics of the market—as we have known it—are used to extrapolate future business and financial decisions for new products, which themselves are often just an extension of existing technology. As a result, product portfolio decisions can become a fictional exercise increasingly disconnected from a market heading in a different direction.
In fact, it is already a very different market. The escalating cost of healthcare has reached the breaking point. This economic reality underlies the Obama administration's healthcare reform push. Suddenly, economic and clinical value is the new the basis for business competition. Payers want hard evidence that new products are worth a premium over comparable, older products. Hospitals are standardizing those products that best enhance the ECV of their service line offerings. Even consumers are demanding value and price information as they take on an increasing burden of paying for healthcare out of their own pockets.
Bring Back-End Forward
This is the new world your company is competing in. To make the best decisions for your product portfolio you will need much more insight into this world and the implications for your products.
Because the basis for competition in the market is shifting, the base assumptions for making product portfolio decisions must change. There are three functions that can provide invaluable insight into the shifting needs and demands of the healthcare market and the implications for your company's portfolio of products. They are clinical affairs, regulatory affairs, and health economics and reimbursement.
These functions have traditionally been back-end resources for developing and launching new products. These company functions typically are used to conduct the clinical research necessary to get regulatory approval and carry the sales message to payers. In the current climate, though, they should be at the forefront of portfolio decision-making as well. These functions can provide invaluable insight into the shifting needs, new buying decision considerations, new evidence expectations, or hidden costs that could lead to very different portfolio decisions.
By using these functions solely as tactical resources, companies risk giving insufficient consideration to key issues such as:
• The likelihood that customers will arbitrarily reduce payment for existing products or reject new technology in favor of older, less expensive care therapies in the absence of any economic and clinical evidence to the contrary.
• The need to operate within an overall clinical strategy that manages predictable cost, leverages a collective body of disease state and technology research, and ensures that the evidence needed for commercial success can be feasibly generated.
• Consideration of realistic regulatory paths, time frames, and comparative evidence expectations beyond traditional efficacy and safety requirements.
In addition to ensuring decision-making consistent with shifting market demands there is another reason for moving these functional perspectives to the forefront of your discussions for new product strategy. In this market no company can afford to waste its resources. Considerable infrastructure, resources, and expense go into the work of clinical affairs, regulatory affairs, and reimbursement. These efforts must be efficiently leveraged over the entire product portfolio. Without an integrated view of product portfolio needs, companies are likely to overextend themselves. This leads to approving one-off, new product projects that seemingly are justified on their own but in fact collectively require resources beyond the company's capacity to provide them.
It is not enough to give clinical, regulatory, and reimbursement functions a seat at the strategy table. Without changes in how company executives view these functions they are unlikely to deliver on the reason they've been invited to pull up a chair.
Typically utilized for tactical purposes, the capabilities of these functions have been developed accordingly. In order to contribute to up-front strategic market analysis and portfolio decision-making, these functions will need to build new capabilities or infrastructure.
Global Information Required
For example, most companies will need to build a global information system, one that defines and captures data about the constantly changing clinical, regulatory, and economic evidence requirements across established and emerging markets. Currently, many global companies have people on the ground in their chosen markets but no structure in place for these assets to consistently capture the data needed.
To utilize this information, companies need to use these key functions for planning new product strategy. Performing well in this role will require employees capable of discerning trends in the data and inferring the strategic implications for the company's portfolio management. These global strategists will also require a high level of business acumen that will enable them to articulate how using these formerly back-end processes will influence the development of the product portfolio and overall business strategy.
Finally, global strategists must be able to lead their own functions in the development of an integrated, wide-ranging strategy that efficiently and effectively addresses clinical, regulatory, and reimbursement needs for commercial success.
Defining these roles, developing the skills of people to perform them, and developing supportive processes make up the infrastructure necessary to enhance strategic portfolio management with critical guidance from these functions.
Optimize Limited Resources
In summary, there are three requirements to improve your company's ability to compete in a market demanding better healthcare outcomes at lower cost.
The first requirement is to establish a truly strategic process for managing your product portfolio, one that can optimize the use of limited resources to produce a stream of product lines and growth platforms that compete based on ECV. This is the strategy table.
The second is to put all the right resources at that table, including clinical, regulatory, and reimbursement perspectives that can ensure decisions are made in light of a comprehensive understanding of the market's requirements.
And the third is to build the capabilities in these functions so that they can provide their important market perspective as intended with their seat at the strategy table.
Rita E. Numerof, Ph.D., is president and William F. Ott Jr., MBA., is a senior consultant at Numerof & Associates Inc. (NAI). NAI is a strategic management consulting firm focused on organizations in dynamic, rapidly changing industries. Information: www.nai-consulting.com
. Numerof can be reached at email@example.com