Category: Healthcare Industry

Pharmaceutical Companies Can Help Support Trump’s Vision of Make America Great Again | Sherpas in Blue Shirts

When U.S. President Donald Trump met with the CEOs of a host of major pharmaceutical companies in late January 2017, one of his primary declarations was that drug makers should bring manufacturing and production, much of which is done in countries like India and China, back to the United States.

While moving FDA-certified production factories and establishing new supply chains back onshore is an extremely difficult, years-long ordeal, failing to take some type of proactive step to appease the Trump administration could open the door to potentially unfavorable actions for the major pharmaceutical companies. Think patent reforms, price lock-downs, consumer advertisement bans, and import/export tax mandates, all of which could wipe out the lucrative margins from U.S. consumers.

But there’s one easy step pharma companies can take to mollify the administration’s overarching agenda: start moving services jobs – such as IT, finance, and HR – back to U.S. turf.

Aprrox. 110k to 140k pharma industry services jobs have been offshored, with the majority residing in India

Trump and the pharma industry services jobs

If you look at the dollars, cents, and sense of doing so, it really is win-win. Consider:

  • Services jobs are the least likely to disrupt core business operations if brought back onshore
  • They’re comparatively easy to move, as they’re essentially labor-based and mostly centralized in offshore service centers
  • Doing so would not only provide gainful employment to more U.S. workers, but also signal a commitment to invest in the U.S. workforce and worker productivity
  • Pharma companies could avoid a negative impact to their bottom lines (i.e., a 50-70 percent labor arbitrage) if they effectively leverage digital technologies and capabilities to transform their delivery models as they repatriate the services.

Let’s take a deeper dive look at this last bullet point. True that India’s and other low-cost regions’ skilled workforce and cheaper labor made them attractive locations for offshoring pharmaceutical services jobs. This labor cost advantage has shielded pharma companies from having to take the painful and arduous path towards step-change improvements in workforce productivity, which requires significant investments and service redesigns. After all, why automate if you can get two or three offshore workers for the price of one U.S. worker?

But the world has changed. Digital service models are transforming how services are delivered and consumed. For example, when was the last time you filled out a deposit slip at a bank? Mobile deposits rule the day now. These transformations are happening across the services functions, and are opening the door to operational savings and productivity improvements.

Higher US labor costs can be mitigated by leveraging digital capabilities to transform the service functions being migrated back

Trump and the pharma industry services jobs

By moving and transforming their services, pharma companies wouldn’t bring back all of the jobs they initially offshored, but would create higher paying, higher skilled, and highly productive U.S. services jobs. And, this could be done relatively quickly and on a cost neutral basis with no impact to their bottom- or top-lines, while simultaneously leveraging digital technologies to transform their service delivery models.

It’s true that uncertainty abounds around what levers the Trump administration will pull to entice or force the pharmaceutical industry to align to its core tenant of creating U.S. jobs and “Making America Great Again.” But wait-and-see is a dicey game to play when it comes to the pharmaceutical industry’s most lucrative market.

Everest Group’s advice is to get ahead of the game – starting today. Take a fresh look at your company’s global talent management strategy and shared services construct to identify your degrees of freedom. Then start engaging your technology and services organizations to assess how you can bring some or all of these services jobs back to the U.S., and at the same time offset the higher labor costs with digital technologies and delivery models. It might just save your CEO from seeing an early morning Tweet from President Trump stating, “Horrible company!”

Learn more about the importance of bringing pharma jobs to the United States in Stephen Chen’s executive viewpoint, Will Big Pharma Heed the Call to Bring Jobs Back Home?

Hot Healthcare Start-ups: Dawn of a New World Order | Sherpas in Blue Shirts

The United States healthcare system suffers from systemic issues of cost, access, and quality, providing significant whitespaces for innovation. The key factor driving disruption is the pressure to contain costs and improve care quality amidst rising healthcare expenditures. (In 2014, The United States’ spending on healthcare was 17.1 percent of its GDP, and in 2022 it is expected to touch 20 percent.)

The transition from defined benefits to defined contribution, employer-based purchasing to the individuals market, and fee-for-care to fee-for-outcome are some of the structural changes that are driving cost optimization and better patient outcomes.

healthcare-start-ups-image

Technology: the harbinger of change
However, with the rising adoption of digital services by healthcare buyers, technology is proving to be the biggest catalyst in transforming the entire healthcare ecosystem. Technology enables both cost reduction and consumerization. Most of the modern healthcare doctrines such as remote healthcare, 24×7 vitals monitoring, seamless claims management, and integrated health records are powered by technology tenets such as Internet of Things (IoT), robotics, Artificial Intelligence (AI), mobility, analytics, and cloud computing.

Incumbent players have started providing digital services to meet the demands of customers. However, they are a little hesitant to make huge technology investments as they must balance already thinning bottom-lines, shrinking in-patient volumes, and tightening regulatory controls. Additionally, in-house investments have longer go-to-market cycles, higher risk of failure, and stretched pay-off duration.

Start-ups: catalyzing innovation
Stakeholders have been trying to tackle endemic industry issues through technology use. At the same time, consumer expectations are fundamentally changing from their healthcare experiences. Stakeholders are trying to evolve healthcare’s operating model in the new normal. Start-ups have a fertile ground to reap benefits through innovative solutions that address these challenges.

This is reflected in the differential investment interest in healthcare. While the overall funding climate has begun to show signs of correction, healthcare is witnessing a resurgence in investment activity. Global funding for start-ups went down by more than 20 percent in Q3 2015, whereas funding for digital health companies shot up by nearly 10 percent in 2015.

Healthcare start ups

Uncovering the healthcare start-ups landscape
In order to understand the extent of disruption that start-ups bring to the healthcare market, Everest Group Research conducted an in-depth analysis of start-ups in the healthcare landscape (see Hot-healthcare Start-ups: Dawn of a new world order).

We took a discovery-based approach, and analyzed more than 200 start-ups on three major levers:

  • Technology disruption
    • To what extent has the start-up addressed existing challenges through technology?
    • To what extent has the start-up created new channels via technology?
  • Business disruption
    • To what extent has the start-up transformed existing business functionality?
    • To what extent has the start-up created a new market?
  • Market buzz
    • How much trust have investors shown in the start-up?
    • What kind of market recognition has the start-up received?

Our analysis resulted in five leading investment categories, and five top players in each.

Hot healthcare start ups

Key findings from the study included:

  • Given the valuations and impact they create, start-ups have the potential to unseat some of the incumbent companies. Therefore, it is imperative for payers and providers to partner with them or acquire them to remain relevant in the healthcare value chain.
  • Associations with start-ups will significantly reduce time-to-market as they provide ready-made plug-and-play solutions. This can also convert capital expenditures to operating expenditures and maintain a leaner cost structure.
  • Start-ups have built the agility required to withstand changing industry dynamics, as they have tried and tested multiple use-cases. Hence, association with them will be helpful to mitigating competitive rivalry and adapting to regulatory changes.

Access the full report entitled “Hot-healthcare Start-ups: Dawn of a new world order”.

Looking Beyond the Hype – Healthcare in the Trump Era | Sherpas in Blue Shirts

Healthcare is one of the principal areas facing upheaval after Donald Trump’s U.S. presidential win last week. Beyond being a major socioeconomic issue (it does consume close to 20 percent of the U.S.’ GDP, which is ~2x that of any other developed country), it is also President Obama’s key legacy given his championing of the reform through the Affordable Care Act (ACA, dubbed Obamacare). Broadly, Trump’s proposed healthcare plan is likely to feature the following changes:

  • Partial repeal of the ACA (complete repeal is more likely to be political posturing)
  • More decentralization of public healthcare spending
  • Ceasing Medicaid expansion and changes to funding
  • Medicare reform
  • Broad implementation of free market principles to let “animal spirits” prevail
  • Prescription drug reform
  • Increased push for price transparency
  • Use of Health Savings Accounts (HSA), and allowing states to regulate health insurance
  • Ability to purchase insurance across state lines
  • Allowing premium deductions on  tax returns

Here’s how the cards stack up

Trumpcare

The good…

Commercial payers
Any kind of partial repeal or change to the ACA will actually be in line with what leading commercial payers have stated, given how broken and unviable the current HIX model is. Most C-suite execs indicate that such a repeal will make health insurance companies more competitive and more influential. This should bode well for large national payers such as Aetna, Cigna, and UHG, which have been bleeding money. This could provide a spurt to discretionary spend, which had seen a pause following mega mergers in the industry, Department of Justice injunction, and HIX losses. At a broader level, the Trump camp has proposed “following free market principles and working together to create sound public policy…” Some early reactions are calling this a welcome change that will allow free enterprise back into healthcare, and let patients, not government agencies, manage their health.

Medicaid-focused payers (states and managed care organizations)
Another key element will be the decentralization of healthcare, as Trump’s plan focuses on giving more Medicaid and other public spending power to states. Combined with the modularity mandate, (essentially breaking down state’s Medicaid Management Information Systems into smaller reusable components,) this is likely to give state health departments more bargaining power as prices decrease and competition – which in the MMIS market has been restricted to players such as CNSI, CSRA, HP, Molina Information Systems, and Xerox – intensifies. Also, managed care organizations (MCO) will benefit from the continuing shift away from state Medicaid.

Consumers
Trump has also recommended that Congress break down state barriers to allow insurance companies to offer plans in any state, as long as the plans are in compliance with state requirements. This should increase choices for consumers, and result in more competition. However, such an environment has not found much favor with payers struggling to manage the risk on their books, and will likely not find much with the challenge of entering new markets.

Life sciences firms
Most pharma and biotech stocks have soared in the past week, driven by Trump’s lukewarm stance on price regulation, as compared to Hilary Clinton’s more hawkish position on drug price reforms. Throughout her campaign, Clinton repeatedly vowed to limit the power of drug manufacturers, and suggested introducing monetary penalties to punish price gouging. The industry’s much maligned tax inversion practices have also ranked rather low on the president-elect’s agenda.

The not so good…

ACA
Despite the political posturing in the run-up to November 8, Trump/the GOP is unlikely to be able to fully repeal the ACA. It’s more likely that they will pursue a partial repeal through the budget reconciliation process, which allows bills related to spending and revenue to be passed by a simple majority, without being subject to a potential filibuster. Trump is likely to sign a bill similar to the one GOP lawmakers passed earlier this year as a counter-measure to the “failings of Obamacare/ACA.” Broad-based changes are likely to be equally, if not more, unpopular than the perceived problems with the ACA. Most of the market has invested considerable resources in reinventing their fundamental business models, and rolling back the clock is not really an option. The market will be forced into a period of uncertainty as stakeholders evaluate options amidst upheaval. While HIX plans have been value-dilutive for most payers, some such as Molina have made it work as a viable business model. However, the movements toward value-based care won’t be affected as the Medicare Access and CHIP Reauthorization Act (MACRA) and other reform tenets will continue it.

Consumers
Repeal of the Individual mandate may result in truncated consumer choices for coverage of pre-existing conditions, premium hikes due to reduced competition, and limited-benefit plans.

Medicaid
Any repeal would likely include the elimination of the ACA’s Medicaid expansion, insurance subsidies, individual and employer mandates, and several taxes that help fund the law, effective two years after the bill’s passage (this was vetoed by President Obama after the House and Senate earlier this year passed a partial ACA repeal bill through the reconciliation process.) Depending on how block grants play out, providers could experience a shortfall in government spending, and may need to rebalance their exposure to commercial payers.

Medicare
If the current GOP plan to transition it to a premium-support plan continues, there is likely to be a rise in financial uncertainty as payers’ reimbursements get linked to average versus submitted bids. This will further sharpen the focus on payers’ cost efficiency and optimization efforts to manage business models.

… and the uncertain

In most of these scenarios, we can only make an educated guess about what the Trump era means for healthcare. The next few months will be crucial in setting the tone for the changes to come – leadership appointments, policy moves, etc. The ACA seems to be the most contentious piece, and likely the first to be tackled by the administration. However, Trump’s public posturing will need to contextualized with the complexities of the legislative process to fully assess the material impact.

We would love to hear your views on how this will play out.

Teva Buys Allergan’s Generics Business to Consolidate Pole Position | Sherpas in Blue Shirts

On July 27, Israel-based Teva Pharmaceutical announced the acquisition of Allergan’s generics business unit for US$40.5 billion in cash and stock, consolidating its position as the leader in off-brand drugs. The deal which becomes the latest in a wave of high-profile consolidation in the pharmaceutical industry, combines Teva, the world’s largest generics drug company with its third largest competitor. The acquisition gives Teva enhanced scale in the intensely competitive generics market (over 20% market share) with cost savings potential due to product overlaps and economies of scale (through operating synergies of nearly US$1.4 billion) as it looks to cope with end of patent expirations. The deals comes at a time when the entire healthcare and life sciences continuum is witnessing rapid consolidation moves including large payers teaming up.

Core Competence – the New Life Sciences M&A Mantra

The deal is another indication in a long line of recent transactions as life sciences firms undergo a realignment of strategic focus and choose to concentrate on business of core competence. Following the big bang “acquire all” days of Big Pharma, pharmaceutical firms have realized that they need to reorient strategic goals and narrow down their focus to specific service lines and markets. This was the principal driving factor in the seminal Novartis-GSK asset swap announced in April 2014, which typified the new normal.

For Teva, this wraps up an increasingly messy four-month long pursuit of another generics rival, Mylan. The company withdrew its latest US$40.1 billion hostile offer to acquire Mylan as the deal prospects became bleak. Mylan itself is busy chasing rival OTC drugs company, Perrigo, which has so far snubbed Mylan’s attempts. The deal also has interesting implications for Allergan. The company has been at the center of major M&A activity in the last two years. This sale allows it to pay off debt from the US$70.5 billion integration with Actavis in 2014. That deal also signaled the end of one of the intense takeover struggles as Actavis beat Valeant Pharmaceuticals for Allergan. The sale to Teva allows Allergan to focus on building its branded drugs business. It could also mount an effort to purchase large peers such as Amgen or AbbVie.

Implications for Service Providers

As with any major consolidation exercise, the primary beneficiaries will be service providers with exposure to both merging entities and account-level relationships as they help with the integration initiatives. A natural consequence of such an exercise is the tendency to go for vendor rationalization as enterprises look to trim the sourcing pie. Demonstrating value across the life sciences value chain will emerge as a crucial differentiator in retaining presence across accounts. Given the diversified operational footprint of pharma firms, global presence becomes an important qualifying criteria for large scale deals, especially when it comes to areas such as infrastructure management. As the spotlight shifts on pockets of core competence, mapping enterprise-specific business outcomes and challenges to technology/process solutions will be key in getting management buy-in for forthcoming sourcing initiatives. The following image illustrates the current exposure of key service providers across major life sciences firms. As you can see, these mergers will lead to overlapping accounts for several services providers.

Account exposure across life sciences firms

The Road Ahead

Life sciences buyers stand at interesting crossroads right now. They seek technological preparedness to tackle multi-faceted challenges arising out of stifling R&D efficiency, dwindling margins, increasing M&A/restructuring, and evolving customer profile. Blockbuster-drugs-led growth has paved way for more pragmatic business models in this new reality. While the digital Kool-Aid continues to sweep the landscape, life sciences firms tend to struggle with digital enablement due to factors such as fragmented service provider landscape and non-standardized internal structures. How they navigate this challenge while digitizing operations will be crucial. Our recent report on IT Outsourcing in the Life Sciences Industry focuses on how global life sciences organizations need to enable their systems for digital enablement through a well-thought out services integration strategy. Pharma is in a continually evolving state of flux and these changes are only going to intensify. Service providers need to up their game to ride this wave.

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