How Pharmaceutical Companies Can Win in the Digital World (Part II): Redefining Business Models through Digital Transformation

As pharmaceutical companies shape their goals and future direction, fundamental changes are necessary, according to respondents. Companies must redefine the domains in which they operate. They need to obtain more specific information about their customers to validate solutions and accumulate experience, rather than merely providing products and drugs that customers truly need. They must also clearly understand how such solutions will capture the most valuable segments. Subsequently, they will need to realign their organizational structures to acquire valuable insights and establish new approaches to business operations.

How to Better Leverage Mature Technological Capabilities?

Our interviewees unanimously agree that the technology itself is already quite mature, and pharmaceutical companies can fully adopt digital health technologies. “Many people say that integrating different medical record systems faces technical challenges, but I don’t think that’s true,” said Dr. Krishna Yeshwant of Google. “At the technological level, I find it hard to see any tactical limitations.”

In other words, new technologies often face significant organizational barriers, such as resistance to changes in computer technology and entrenched mindsets stemming from a conservative culture that prioritizes risk-averse decision-making. These cultures often lack adequate incentives to encourage employees to pursue innovative initiatives beyond the existing core business. They also fail to promote risk-sharing among stakeholders. Most pharmaceutical companies’ performance evaluation metrics focus solely on current earnings and final outcomes, rather than being linked to innovation, customer engagement, and future strategy.

Therefore, these companies typically attempt new methods or technologies only when they see their peers doing so. Most leaders in digital technology accepted our interviews. Carla Dennis, General Manager of Medidata’s mobile health unit, stated: “Every technology we need either already exists or is nearly there, and for the most part, it is sufficiently robust. The challenge we face lies in integrating new technologies and processes into a comprehensive clinical trial, which will require life sciences companies to remove organizational barriers to drive change.”

Take data transparency and data aggregation as examples. Health data collected by multiple third parties provide information and insights to healthcare providers and payers. “If I owned a life sciences company, I would need to know all the adverse reactions associated with a drug before bringing it to market,” said Dr. Amy Abernethy of Flatiron Health. “For instance, if I experience certain adverse reactions to a drug, what might happen when it is used in other patients? As public monitoring identifies an increasing number of adverse events, you must learn how to respond to and manage this information promptly and report it to the U.S. Food and Drug Administration (FDA) in a timely manner. But this is not a reason to bury your head in the sand; rather, it is an important approach to improving drug quality that will be realized in the 21st century,” Dr. Abernethy predicted. An executive at a top-20 pharmaceutical company added, “When using social media data, the greatest concern is triggering alerts for adverse drug events due to fear of discovering such incidents. However, ignorance is no excuse. Companies like ours must take full responsibility for what we say.”

According to Sanjay Mathur, a data scientist in Silicon Valley, many companies are lagging behind on this issue. “The narrative should be ‘technology second, not first,’” he said. “Companies are so eager to adopt new technologies that they forget the most important thing: identifying the problem first. If you are well-prepared for real-time action, you do not necessarily need real-time insights.”

To gain distinctive insights, pharmaceutical companies must also determine what they truly need to do. These insights will drive their technology strategies, helping them integrate large volumes of data from diverse sources and leverage analytics or other tools to support the entire business.

Three Fundamental Shifts: Mindset, Culture, and Capability

Pharmaceutical companies must fundamentally transform their mindset, culture, and capabilities. Only in this way can they evolve into solution providers characterized by agile thinking and a capacity for experimentation. Themes emerging from our interviews indicate that, to achieve success, enterprises must pursue strategic shifts in three key areas:

First, shed the psychological burden associated with experimentation and risk.Pharmaceutical companies must meet consumers’ higher expectations, which stem from the experiences they have observed in other industries. “We are seeing significant changes in the consumer electronics sector,” says Dr. Krishna Yeshwant of Google. “Now, if we turn to the medical software and devices space, we can drive further change, such as more user-friendly devices or user interfaces. Users of pharmaceutical products often compare them with the best consumer electronics brands, and that has become the new standard.”

A lack of risk appetite appears to be hindering this change. “There is a significant psychological burden. Organizations will not change unless they see others doing so simultaneously,” said Dan Goldsmith of Veeva Systems. “This has led to sluggish progress and a lack of innovation across the industry for years. Essentially, pharmaceutical companies seek to control risks and avoid prominent exposures.” The reality now is that patients are regaining control over their health. “How many pharmaceutical companies are proactively engaging with patients?” he asked.

Some respondents believe that experiments can be highly effective if conducted in the right settings and accompanied by encouragement and rewards. Johan Grahnen, Chief Data Scientist at an advanced analytics firm specializing in machine intelligence, noted that attitudes toward “radical transformation” vary across different departments within pharmaceutical companies. “It is difficult to foster innovation in departments that are consistently compliant. One can only hope for strong leadership support,” he said.

Secondly, if pharmaceutical companies intend to maintain their leadership in the digitalization of healthcare, a collaborative approach is essential.It is evident that some individuals have recognized the necessity of incentives and communication, and they support innovative ideas across business units and regions. “This is key to grassroots experimentation,” said Bruno Villetelle, Chief Digital Officer at Takeda Pharmaceutical Company. “We have established an internal digital accelerator and innovation fund, and we hold regular ‘Dragons’ Den’-style competitions to identify and foster the development of the best ideas. These competitions help us avoid waste and channel speed and energy into digital innovation. When a pilot demonstrates its value, we are prepared to invest additional resources to scale the concept across other parts of the enterprise.”

As previously mentioned, pharmaceutical companies should also recognize that if they wish to access data owned by others, they must make their own contributions. However, as Sanjay Mathur and Chris Geissler acknowledge, “there are currently no genuine mechanisms or incentives in place to promote this type of sharing behavior.”

Inder Singh, CEO of Kinsa, put forward another request: “To strengthen close collaboration with regulators, pharmaceutical companies must reimagine their legal and regulatory functions as they creatively explore innovative business models.” Singh said, “Health information is highly regulated, yet the regulatory landscape has not kept pace with innovation. Pharmaceutical companies need to proactively engage with regulators to chart a path forward.”

Kristy Junio, Senior Director of Oracle Marketing Cloud for Healthcare and Life Sciences Industry Solutions, believes that pharmaceutical companies need to establish new, trust-based personal relationships with consumers. “Technology is a way to create such relationships—for example, by providing patients with more personalized information about their health and treatment.”

Finally, pharmaceutical companies have the option to develop digital solutions either in-house or through partnerships.Some of our interviewees, including Dr. Todd Johnson of Noble.MD, believe that it is preferable for these companies to collaborate with third-party technology providers through innovation funding or joint ventures. “Solutions from pharmaceutical companies are often presented in distributors’ offices, whereas third-party partners can offer more objective and impartial representation,” said Johnson. He believes that objectivity, neutrality, and lack of bias are crucial to building trust between vendors and their patients.

Act Quickly, Rather Than Wait and See

Reshaping the company by establishing non-traditional functions and embedding new operational models. To attract and delight consumers, it is essential to gain a deep understanding of customer product experiences, which extend far beyond merely selling products, pharmaceuticals, or diagnostic tests. “The problem is that most healthcare innovations stall once they impact the bottom line,””Aimee Jungman stated that she had previously worked at Frog Design, Genomic Health, and Pfizer.。She stated, “Elevating the corresponding levels of healthcare for patients and physicians offers no guarantee of short-term returns, which may disrupt existing cash flows and undermine certain long-standing foundations.” Corporate transformation is difficult to achieve unless pharmaceutical companies unlock new potential, revitalize existing operations, optimize their business models, conduct more trials, and adopt bolder strategies.

Transitioning from selling products to selling digital solutions requires adopting entirely new processes and ways of working. As Dan Goldsmith of Veeva Systems stated, “In some respects, it is easier to talk about the digital revolution in terms of technology, data, and analytics. But the more difficult question is: what fundamental organizational changes are truly needed? Over the past five years, as technology has advanced, the only aspect that has been easy to change is the technology itself.”

Our conversations and customer experiences reveal a prevailing view that executives have not yet fully embraced digital technologies. They typically adopt a “wait-and-see” approach, which will stifle innovation and hinder organizational transformation.

Nevertheless, nearly all thought leaders agree that the traditional business model of pharmaceutical companies must change, and fresh perspectives must be injected into the system. The good news is that they are observing some pharmaceutical companies beginning to value non-traditional skills—recruiting marketing professionals from other industries, such as retail, and establishing strategic partnerships with creative agencies.

Dr. Amy Abernethy of Flatiron Health stated that pharmaceutical companies need to double down on recruiting talent who truly understand science and health data. Are examples needed? “Clinical informaticians who know how to work with electronic health records, clinicians grounded in science who do not leave academia, or data scientists who are not merely programmers working in isolation but rather serve as business partners to senior leadership.” Whether pharmaceutical companies choose mergers and acquisitions, strategic partnerships, or organized cultivation and experimentation related to digital operations, they must find appropriate ways to adapt to and accelerate development in this area. If they fail to do so, third-party players will be more willing to take risks, devise strategies to enter the field, listen to consumer feedback, and ultimately replace them.

Even in the early stages of digital healthcare, it has had a certain impact not only on doctors but also on how patients manage their own health and how pharmaceutical companies conduct business. However, digital innovation still faces challenges, such as the lack of clarity regarding who bears the cost of digital solutions; nevertheless, digital technologies and data analytics should be included in the agenda of top management. To maintain momentum for continued growth, pharmaceutical companies must take bold actions with a decisive and proactive mindset. They must innovate their business models, invest in new capabilities, and transform their organizational culture.

Compiled by Chen Kun

Editor: Bu Yan

(Authors: David Champagne, Amy Hung, and Olivier Leclerc. David Champagne is an Associate Partner at McKinsey’s London office; Amy Hung is a Specialist at McKinsey’s New Jersey office; and Olivier Leclerc is the Office Manager for McKinsey’s Southern California office.)