Are drugs, which comprise about 10 percent of overall health-care costs,1 part of the health-care cost problem? Or are they part of the solution? Critics of the pharmaceutical industry often point to the rise in spending on pharmaceuticals—which doubled between 1995 and 2002—as a major culprit in the unsustainable increase in health-care spending during these years.2 Others assert that while they are expensive on a per-ounce basis, pharmaceutical solutions are much cheaper than other alternatives for care.
Both views have merit. Some drugs have helped to transform historically fatal acute diseases into chronic ones, allowing us to live longer with reasonable qualities of life. While extending both the length and quality of our lives, these drugs have played a major role in driving up the world's health-care bill—not just through the cost of the drugs themselves, but through the cost of complications that arise as patients live with, rather than succumb to, these diseases.
Other drugs drive down the cost of care, however, because they're the technological enablers of disruption.3 Little by little and layer by layer, scientists and physicians are peeling away the shrouds that have masked true understanding of diseases, leading us toward greater precision. Many of those who lead this transformation of knowledge are academic scientists ensconced in or adjacent to our best medical schools, funded through grants from our National Institutes of Health. However, much of the applied science and nearly all of the commercialization technology in this transformation is being developed and implemented in pharmaceutical and medical device companies. Indeed, the most recent victories in the march toward precision medicine have emerged from firms like Novartis (Gleevec), AstraZeneca (Iressa),4 Genentech (Herceptin), and others. The pharmaceutical and medical device industries must play a pivotal role in the disruptive transformation of health care, because they supply the technological enablers that allow lower cost venues of care, and lower cost caregivers, to do more and more remarkable things. In this chapter we'll consider the role that pharmaceutical companies will need to play in transforming health care, and then turn toward devices in Chapter 9.
The disruptive transformations in health care will profoundly affect the structure of the pharmaceutical industry itself—posing extraordinary managerial challenges to the leaders of these companies. The disruption that threatens today's "big pharma" companies is of a different sort than was mounted by steel minimills, personal computer makers, Wal-Mart, and Toyota. Those disruptors started with simple, affordable products that were sold to the least-demanding customers. They then marched up-market, market tier by market tier. We call the disruptive threat to pharmaceutical companies a "supply chain disruption," and it is already under way in the industry. Its form: many of the vertically integrated pharmaceutical companies that have long dominated the business began actively outsourcing many of their functions to specialist companies, ranging from the discovery and development of new drugs, to the administration ...