When a Health Care Business Model Disruption is Self-Destructive

November 13, 2015
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Some time ago, I wrote an article here on the Uberization of Healthcare and how silly that expression is. In essence, I tried to tamper the enthusiasm behind so many healthcare start-ups wanting to disrupt the whole system but having weak premises with which to do so.

Three companies have recently gained notoriety in the healthcare space. Each openly expressing their desire and plans to disrupt everything based on completely new business models – at least that’s what they said.

Valeant:

Some time ago, I wrote an article here on the Uberization of Healthcare and how silly that expression is. In essence, I tried to tamper the enthusiasm behind so many healthcare start-ups wanting to disrupt the whole system but having weak premises with which to do so.

Three companies have recently gained notoriety in the healthcare space. Each openly expressing their desire and plans to disrupt everything based on completely new business models – at least that’s what they said.

Valeant:

To be fair, Valeant is a hugely successful pharmaceutical company that seemingly came out of nowhere. They grew very quickly through a long and rapid series of acquisitions. The novelty in their model is that they don’t believe in or need to do any research, which is costly but considered a critical capability in the biopharma sector.

This model works well as long as you keep growing by buying other companies and products, by consolidating operations and cutting costs, by raising prices much faster than inflation and, as they have been accused of doing, by manipulating market channels to their advantage.

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The problem is that this is not sustainable in the long run. As we are seeing now and has been reported eslewhere, Valeant is facing huge headwinds as intricacies of their model and possible questionable practices, including pricing, come to light. In addition, at some point you do run out of companies and products to buy – at least at a reasonable price – and without any research, the house of cards starts to fall.

No, they have not invented a new pharma business model.  The model still requires product innovation, volume growth, transparency and respect for regulations.

Theranos:

This little company, started and run by a very smart and ambitious Stanford drop-out visionary with incredible political connections and no healthcare experience, is making a lot of waves. They promised a new business model for diagnostics based on a new proprietary and secret technology that allows many lab tests to be performed with as little as one drop of blood. 

Their model was to disupt the whole diagnostics market. Their approach included maintaining secrecy over their science and methods. Their strategy included not having a single senior scientific member on their board.

Well, sooner or later you do have to face external scrutiny.  The FDA and others, including their retail partners, have started asking questions, and the answers continue to be, “you’ll see, we’ll be releasing all that soon.” In reality, most of the tests that they have been running (all but one) have been done using the same old technolgies and methods.

No, they have not invented a new diagnostics business model. The model still requires science, peer review, and regulatory scrutiny.

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Turing

This start-up has become the face of greed, run by an ambitious former hedgefund manager with no experience in the industry or in anything resembling a business with a heart. His business model: buy old products sold for little money and turn around and sell them for a fortune. His model in action: taking an $18 pill drug and overnight change the price to $750.

Not sure if he expected to be able to do this under the radar and not be noticed, but he’s gotten a lot of attention, including from the U.S. Senate. In the process, he has attracted a lot of unwanted attention to the industry, undoing years of value-driven actions and communication efforts. 

No, Turing did not invent a new pharmaceutical business model. The model still requires a justification for prices and price increases as well as sensitivity for customers and patient.

These are three examples of industry disrupter-wannabes who, by ignoring fundamentals, have entered a path of self-destruction.