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Modern values in healthcare

Understanding the new concepts and processes of value will be the first steps towards adapting to a new healthcare environment

Modern Values

If there is one word that has become dominant in the discussion between pharmaceutical companies and their customers, it is value. Payers and prescribers demand it and the word crops up everywhere in brand plans. And yet, as recent high profile rejections by health technology assessors like the UK's National Institute for Health and Care Excellence (NICE) and German's Institute for Quality and Efficiency in Health Care (IQWiG) imply, there is a mismatch between how value is understood by each side of the market and the industry has not yet adapted well to its new, value driven environment. 

Such evolutionary lags are not unusual. The industry faced similar issues in the 1960s and 1990s, when first regulation and then clinical trial harmonisation represented significant changes and challenges to how business was done. In both those cases, and others, management scientists observed an adaptation process in which early, faltering efforts to meet customer demands gradually evolve into more practised and effective processes. In my work, studying how pharmaceutical companies develop and implement competitive strategies, I am observing a similar evolution of new capabilities.

Most payers now define value in terms of health economic outcome

To understand and hopefully accelerate this process of adaptation, it is necessary first to grasp a few key concepts from management research. The first is the concept of the organisational routine, which simply means that complex organisations work by developing systematised habits and techniques and that doing everything ad hoc, from scratch, is inefficient. The second is the idea of the value proposition, a fundamental marketing concept that simply means the offer made to the customer and embodied in everything the customer experiences, from product to service to brand perceptions. The third is the idea of displacement of concepts, which means that organisations rarely invent wholly new ideas but instead borrow and adapt ideas from other contexts. Armed with these three important ideas, we can begin to understand how pharmaceutical companies are adapting to their value driven world. 

A history of value
Of course, it is not strictly true to say that pharmaceutical purchasers have only recently begun to care about value. There are decades of evidence that governments and other payers have worried about pharmaceutical expenditure and demanded value. But what has changed in recent years is how they define value. When I started in the industry, in 1978, the value of a new drug was defined almost exclusively in terms of its clinical outcome and superior outcomes equated to superior value. But, driven by economics and demographics, most payers now define value in terms of health economic outcome. No one working in the sector will need examples or explanation of this reality. What is valuable to understand is how leading practice is adapting to this fundamental market change and that understanding begins with organisational routines. 

In the 'old world' of clinically defined value, pharmaceutical companies developed a routine that allowed them to specify how the product should deliver such value. It was, of course, called the Target Product Profile and most readers of this article will be familiar with its content of hoped for claims, side effect profile and other product features. Importantly, the organisational habits and techniques for developing the Target Product Profile, and for using it to guide activity, became embedded in industry practice and served both companies and customers well.

Evolutionary economists often equate organisational routines to genes and, in the old world of clinically defined value, the Target Product Profile gene was very successful and spread throughout the industry. And the evolutionary analogue takes us further. When the market environment changed to one in which value was defined in health economic terms, that gene became less successful. Like dark skinned early humans who found themselves in higher latitudes with insufficient sunlight to create vitamin D, pharma companies find themselves faced with needing to develop new genes (i.e. organisational routines) to survive in the new world.

It is at this point that the displacement of concepts idea helps us to understand how firms are adapting to the new, health economics-driven world. It is rarely effective and never efficient for firms to develop new ways of doing things from absolute first principles. It is always better to look around for an existing practice and carefully adapt it to the new conditions. For example, the modern matrix structure of a brand team was borrowed and adapted from project teams in research and development. In other cases, companies tend to blend or integrate two or more existing routines. In our observations of how some leading firms are adapting to a value driven world, we observe that they are displacing and blending two concepts; the concept of the Target Product Profile from product development and the concept of the Value Proposition, which has its origins in marketing strategy. This adaptation involves keeping combining the core principles of each concept, specifying what the customer wants while recognising that value is created not just by clinical outcomes but also by price level, price structure, risk sharing and impact on the customers' overall cost of use.

As firms perform this 'displace and blend' process, what is emerging is something better described as the Target Proposition Profile, which is clearly a descendant of the Target Product Profile but better adapted to today's value driven market environment. For management scientists, this finding answers the question of how pharmaceutical companies are adapting but it opens up two more important questions: What does the Target Proposition Profile look like and why are some firms adapting more effectively than others? It is these questions that our research is currently addressing. 

The first question – what does a Target Proposition Profile look like? – cannot yet have definitive answer. It is an evolving entity and no one form has yet to dominate. However, we can discern an emerging structure, as outlined in this figure: 

Target proposition profile structure

As this figure shows, a Target Proposition Profile specifies rather more than its ancestor. In particular, it specifies the value attributes in clinical, economic and systemic terms. The clinical specification is similar to the traditional Target Product Profile, but in our observations it is noticeable that the comparators used are often not only the leading branded rival, but also the main generic competitor. This of course reflects the default prescribing practice that is now common in most payer systems.

The economic value specification begins with price level but extends far beyond that to include how the pricing is structured and how it allows for risk and any cost offsets, for example when the new product displaces other products. Finally, more advanced Target Proposition Profiles extend into systemic value. Here, firms specify the value that might be created by, for example, creating efficiencies in treatment pathways (for example, with combined drug/diagnostic offers) or even destroyed by indirect cost impacts (for example by causing some fixed assets to be underutilised). In sum, the aim of the Target Proposition Profile is to specify the overall value created by the company's offer, not simply the immediate value of the drug. 

Organisational differences
The final question in this phase of our research explores why, as we observe, pharmaceutical companies vary so greatly in their ability to develop and act on Target Proposition Profiles. Ultimately, the reasons for this seem to lie deep in their organisational cultures; product-oriented companies seem to lag more than customer oriented-companies when it comes to creating effective Target Proposition Profiles. But that answer doesn't provide much guidance in improving practice and so we have explored the more immediate, practical reasons for the difference between firms. There seem to be three key factors:

1. Market segmentation. The essence of a compelling offer is specificity and Target Proposition Profiles create value when they are built around the specific needs of the target market segment. However, many pharma companies have yet to master this strategic segmentation and rely instead on simplistic, data-driven operational targeting. As a result, their target markets have heterogeneous needs and motivations and it is impossible to build a specific Target Proposition Profile around those needs. 

2. Financial capabilities. A core capability in designing Target Proposition Profiles is to understand and act on the customers' economic context, which is often quite complex. Many pharmaceutical companies lack this capability, especially in the marketing function where it is most needed. Without financial capabilities, it is very difficult to create a strong Target Proposition Profile. 

3. Product effectiveness. The final, most fundamental reason that firms have weak Target Proposition Profiles lies in their product. Despite their claims, many products are 'me too' with little real claim to differentiation within clinical or economic performance. Intelligent design of the Target Proposition Profile can turn a good product into an excellent offer, but it is much harder to begin with product that is identical or inferior in performance. 

So, like the evolution of bigger brains and opposable thumbs, Target Proposition Profiles seem to be emerging as a key characteristic of pharmaceutical companies that are well adapted to the value-driven world.

Article by
Professor Brian D Smith

visiting research fellow at the Open University Business School and adjunct professor at SDA Bocconi. He welcomes questions and comments at

29th July 2013

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