The evolving value chain in life sciences


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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

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The evolving value chain in life sciences

  1. 1. 22nd Annual Health SciencesTax ConferenceThe evolving value chain in life sciencesDecember 4, 2012
  2. 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
  3. 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For moreinformation about our organization, please visit presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or byany means, electronic or mechanical, including by photocopying, facsimiletransmission, recording, rekeying, or using any information storage and retrievalsystem, without written permission from Ernst & Young LLP. Any reproduction,transmission or distribution of this form or any of the material herein is prohibited andis in violation of US and international law. Ernst & Young LLP expressly disclaims anyliability in connection with use of this presentation or its contents by any third party.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 The evolving value chain in life sciences
  4. 4. Presenters ► Jeff Holtz ► Peter Anderson Johnson & Johnson Ernst & Young LLP New Brunswick, NJ New York, NY +1 212 773 3720 ► Karen Holden Ernst & Young LLP New York, NY ► Sanjeev Wadhwa +1 212 773 5421 Ernst & Young LLP Iselin, NJ +1 732 516 4183 sanjeev.wadhwa@ey.comPage 4 The evolving value chain in life sciences
  5. 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 ► CollaborationsPage 5 The evolving value chain in life sciences
  6. 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 RetailPage 6 The evolving value chain in life sciences
  7. 7. Meeting the challenges — examples of supplyand demand side rationalization strategies Active pharmaceutical Opportunities across the supply chain InactiveSuppliers 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 rationalizationsupply ► R&D and IP managementchain Lean manufacturing processesprocesses ► Clinical trial processes and management Logistics management Inventory/capacity management Sales Protect and develop brands Coordinated IP management and brand development strategy FinishedEnd users goods Management of issues re generics Adapting business models to the new outcomes-based, patient-centric worldPage 7 The evolving value chain in life sciences
  8. 8. Center-led principal and value-addedservices for pharma and life sciences
  9. 9. Centralized business models implemented for pharmaand 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 impactPage 9 The evolving value chain in life sciences
  10. 10. Full principal model for global pharma and life science companies Profit Profit Ownership of products Ownership of products Invoice InvoiceContract manufacturer IP principal Limited risk distributor Invoice Product Ownership Deliver WarehousingInvoice 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. 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. 12. The value-added services model within CLPIt is essential that the CLP has full control over the risks it assumes, substance behind thefunctions 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 transactionsConsequence: party controlling risk should be compensated by an increase in expected return.Page 12 The evolving value chain in life sciences
  13. 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. 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. 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. 16. Overall risks and benefits — incrementalvalue-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 serviceBundled or split return Split (per service) Bundled BundledExpected risk of challenge Medium risk Medium risk High riskImplementation difficulty Low difficulty Medium difficulty Medium difficultyExpected benefits Medium benefits Medium benefits High benefitsSubstance 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. 17. Bundled or separate payments? WHTconsiderations 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 treatiesPage 17 The evolving value chain in life sciences
  18. 18. Bundled or separate payments? WHTconsiderations 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. 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. benchmarksPage 19 The evolving value chain in life sciences
  20. 20. Types of value-added services for lifesciences/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
  21. 21. Strategic business processes
  22. 22. Using strategic business processes toimpact operating performance► Sales and operations planning (S&OP)► Principal governancePage 22 The evolving value chain in life sciences
  23. 23. Using strategic business processes toimpact 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. 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 ManagementPage 24 The evolving value chain in life sciences
  25. 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. 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. 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. 28. S&OP process cadence Weekly view Activity Month 1 Month 2 Month 3 Demand review and exception process Supply review process Integratedreconciliation meeting MBR meeting EBR meeting Process Month 1 Month 2 Month 3 Meeting Page 28 The evolving value chain in life sciences
  29. 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 reviewPage 29 The evolving value chain in life sciences
  30. 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. metricsPage 30 The evolving value chain in life sciences
  31. 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. 32. Supply chain governance activitiesCompliance guidelines and operating metrics are aligned to key activities that are critical for governanceand oversight.# Supply chain governance activity Compliance guidelines Operational metrics ► Demand plan submitted to principal monthly ► % in stock ► Master Production Schedule (MPS) submission ► Forecast error1 Finished goods planning/manufacturing guidelines ► Forecast bias ► MPS adherence guidelines ► MPS/Material Requirements Planning (MRP) ► Forecast error submission guidelines ► Forecast bias2 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 SRM3 Direct materials sourcing ► Purchase price variance report submitted to principal monthly ► Excess and obsolete inventory management ► Budget variance costing performed at principal ► Inventory value4 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 shipped5 Logistics monthly ► Shipments not delivered on time (%) ► Transportation plan adherence ► Shipments not delivered full (%) ► Quality parameters met ► Right first time6 Quality ► Quality reports submitted ► Board of Health (BOH) commitments ► Critical findingsPage 32 The evolving value chain in life sciences
  33. 33. Supply chain governance — metrics,agreements and S&OPKey activities that help achieve business objectives and support the principal structure Supply chain ► The principal to review the agreements and1 MSA planning parameters currently used planning parameters for select products ► Compliance The implementation of S&OP ► A key process for decision2 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 business3 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 controlsPage 33 The evolving value chain in life sciences
  34. 34. Industry trends and drivers
  35. 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 practicesPage 35 The evolving value chain in life sciences
  36. 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 WagesSource: OECD Health Data 2008; EIU. x HC cost per capita 2006 (€) Index: 1992 = 100 Page 36 The evolving value chain in life sciences
  37. 37. Higher spend doesnt 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 StatesExpenditures ($) 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. 38. Value-based interventions — how do we definethe 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. 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. 40. In fact, several partnerships and pilots arepositioned 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 AssociationPage 40 The evolving value chain in life sciences
  41. 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. 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 arrangementsCapabilities 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. 43. Supply chain and operations management is thesourcing 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 PatientsKey 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. 44. Collective disease networks enhance physician Future state exampledecision 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 solutionsPage 44 The evolving value chain in life sciences
  45. 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 medicationPre-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
  46. 46. Questions?Page 46 The evolving value chain in life sciences
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