Significant economic shifts. Continued supply chain disruptions. International political turmoil and ongoing extreme weather events. Many organizations are looking ahead with trepidation because of the uncertainty that all these occurrences created. But it’s not all doom and gloom. Many trends in the life sciences and high-tech spaces point to opportunities that promise good things ahead for firms that pay attention and take appropriate action.
Here are a few trends which promise to impact life sciences and high-tech firms’ margins and profitability in 2023.
Life sciences trends
Three life sciences trends to keep an eye on include real-world evidence, supply chain transparency, and government policy.
Real-world evidence & value-based pricing
Digital transformation in healthcare is finally returning real results after playing catch-up to other industries for years. The most significant catalyst of change: data. Digital operations are generating massive volumes of so-called “real-world evidence” (RWE), which uses analysis of data gathered from actual patients to indicate the effectiveness – and the associated risks – of medical products being brought to market.
While RWE has many uses, most notably, it will dramatically affect pharmaceutical and medtech manufacturers in 2023 and beyond related to value-based pricing and contracting. Rather than creating a drug price based on the assumptions that insurance will always negotiate the price down and demand discounts, manufacturers could leverage value-based pricing, which attempts to link the cost of a drug or medical product to how well it works on actual patients in the real world. In other words, using RWE to determine the price of products and agreeing to value-based contracts could significantly simplify the process.
This may sound straightforward, but it will require a lot of work on the part of manufacturers. According to Deloitte, manufacturers trying to implement value-based contracts will run into numerous operational, regulatory, and legal challenges.
For starters, accurately assessing patient outcomes requires comprehensive and precise data collection and analysis. Control of clinical conditions is also always a question when evaluating medical outcomes. For example, how will manufacturers and insurers know whether a product fails because of substandard quality of care or the product itself? Plus, who should be responsible for paying for the collection and analysis of all the patient data?
One must also think about patient privacy considerations because of all the information sharing.
That said, think of all the merger and acquisition (M&A) activity in the market. Many health plans/insurance companies have merged with healthcare providers that have also merged with pharmacies. All this interconnectivity within the end-to-end healthcare spectrum puts all the data under one organizational umbrella. This allows those organizations to analyze patient outcomes at the micro and macro levels. At the micro level, you can track the care the patient is getting and whether they’re taking the medicine as directed. And at the macro level, they can track the efficacy of a product.
Supply chain transparency
According to consulting firm ZS, pharma firms, in aggregate, leak more than $15 billion in bottom-line revenue due to supply chain issues such as duplicate rebates, abuse of chargebacks, saleable returns, and other issues.
The solution? Using cutting-edge technology to perform item-level tracking to gain real-time visibility into supply chains. According to IDC, this will provide pharma manufacturers with dramatic improvements in transparency into both contracts and prices as products move through the exceedingly complex pharma supply chain.
Here’s one (simplified) example of how transparency can help pharma companies. Say that during a six-month period when a pharma product sat on a distributor’s shelves, the pricing increased from $100 to $150. If the distributor decides to return that product, the manufacturer wants to be able to track when the product was purchased so it doesn’t overpay for the refund. This technology-driven capability, called “track and trace,” helps plug leaky supply chain processes by ensuring that the refunds provided are fair and accurate.
Government policy
In August 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law, representing the biggest changes to government payment of drugs in nearly 20 years.
What changed? For one, the Part D “noninterference clause” is gone. The Secretary of Health and Human Services (HHS) will negotiate prescription drug prices directly with manufacturers. Moreover, manufacturers of qualifying single-source drugs – the 50 products with the highest Part B and D spend in any given year – must agree to a “maximum fair price” for the medications assigned by HHS. This doesn’t begin until January 1, 2026. But the bill’s wording makes it difficult for pharma firms to feel confident about their strategic plans for 2023.
For example, some experts warn that the “maximum fair price” language is problematic. That suggests the HHS will impose “take-it-or-leave-it” conditions on drug pricing rather than negotiating based on clinical RWE and the value of the drug itself.
If this is going to be the case, drug makers might shift their investment priorities away from collecting RWE, as it won’t influence the price of a drug. If negotiation is still going to be part of the pricing process, however, an RWE investment could be a valuable one.
That’s not until 2026, however. Closer is a provision for prescription drug “inflation” rebates. Starting in 2023, pharma manufacturers will have to pay rebates to the government if the Medicare payment rate for Part B, or the average manufacturing price for Part D, increases more than inflation.
And two years after that, in 2025, pharma companies must give 10% discounts on drug costs in the initial coverage period and 20% discounts in the “catastrophic” coverage period. This is in place of the current 70% discounts that pharma companies are responsible for once the “donut hole” gap in Medicare coverage is met.
Questions that Model N recommends every drug company should ask themselves as they navigate through the changes wrought by the IRA:
- If I’m bringing high-price drugs into the market, will my drugs be on the government’s list of 50 that will have a “maximum fair price”?
- What’s my negotiation strategy if that’s the case?
- Will I need to prove value? What am I doing to track the data that can demonstrate value?
High-tech companies
The high-tech trends to watch for in 2023 include: expanding channel ecosystems, enhancing partner experiences, and coping with evolving supply chain and macroeconomic outlooks.
Expanding channel ecosystems
High-tech firms are radically revamping their channel partner strategies. Specifically, they are growing their channel ecosystems. For example, they’ve started looking at expanding their compensation programs to include nontraditional partners who aren’t directly involved in the transactions that form the basis of traditional compensation plans.
These programs are works-in-progress. Our most recent Model N channel research shows that although there is broad interest (93%) in compensating non-transacting entities at partners, less than a third of high-tech companies currently have programs in place. More than half have plans to get started in the foreseeable future, while 11% are interested but haven’t yet developed a plan to proceed.
Two circumstances are driving the expansion of channel ecosystems. First, we see a generational leadership change within the channel and partner ecosystem as current executives retire and Millennials take their places. The new leaders are seeking more ways to deliver value in the process of selling tech solutions – and earning a bigger piece of the revenue pie as a result.
Second, high-tech manufacturers are exploring different business models, moving to direct and marketplace fulfillment and product-as-a-service, necessitating a change in the roles that channel partners play. A case in point: Today, 64% of all sales go through the channel. With a bigger focus on direct fulfillment and product-as-a-service, this will decline to 30% by the end of the decade.
Our recommendation to approach this trend is to pay attention to your channel data. Make sure it’s clean and reliable. There’s a massive difference between manufacturers that possess very high-quality data and those that don’t. Also, new data types will be available. In addition to traditional point-of-sale and inventory data, you’ll be able to collect other key performance indicators (KPIs) aligned with customer data, such as presales or retention behavior. And you’ll need new channel management systems to capture this data meaningfully.
Enhancing the partner experience
Because partners are becoming so much more involved in high-tech manufacturers’ market success, it’s essential for firms to nurture and enable partners to succeed themselves. Especially as partners will be dictating how revenue will flow into high-tech companies in the next few years. Plus, incentives will change from a traditional transactional per-unit-sold basis to much more collaborative models. This will radically impact revenue recognition practices.
According to recent Model N research, 67% of the high-tech market has more than 5,000 channel partners, and 70% of high-tech companies’ revenues come from the indirect channel. And partners want their interactions with manufacturers to be easy, personalized, speedy, and transparent.
This means that partners need the following:
- A unified experience to reduce friction in the channel
- Easy-to-understand programs that guide them toward revenue opportunities
- Processes tailored to each partner’s journey, from onboarding to renewals
- Self-service tools to drive interaction and effectiveness
To achieve this, manufacturers must take four actions:
- Align experiences to the partner journey: This includes aligning activities, rewards, and access so that partners can drive customer satisfaction, succeed at demand creation, and enjoy targeted incentives.
- Enable a unified partner experience: Make it easy to find information about products, performance, and programs through a partner portal.
- Guide partners to maximize the value they contribute and receive: Provide quick access to contextualized help, how-to videos, and best practices to maximize return.
- Help partners drive their businesses forward: Integrate tools to get buy-in and drive growth.
Coping with an evolving supply chain and macroeconomic outlook
Demand is trending down across high-tech markets, impacting production and inventory. Concerns about a global economic downturn are constantly in the press. Companies will be keeping their eyes on market signals to figure out how best to manage their businesses.
In our 2022 State of Revenue Report, 57% of executives expected obstacles related to the supply chain, material availability, and logistics would have a crucial impact on revenue management throughout the year. Our recent survey showed that this expectation had become a reality. Supply chain and logistics were significant factors impacting innovation for 59% of companies this year, and supply-chain disruptions and manufacturing capacity were listed as the top two factors that were expected to impact revenue management in 2023.
However, there is hope that the CHIPS and Science Act (H.R.4346), passed by Congress in the summer of 2022, will help ease some of the pain. The CHIPS and Science Act provides just under $300 billion in new funding to boost domestic research and manufacturing of semiconductors. Its goal is to stimulate both production and inventory across the semiconductor industry, which in turn will impact numerous other industries within the technology sector.
According to 98% of high-tech executives surveyed by Model N, the CHIPS Act will help counteract supply chain and even macroeconomic downturn fears. Many (41%) think that they’ll see a difference as early as 2022. As perhaps would be expected, executives at semiconductor companies are even more bullish, although they expect recovery to take longer, as 55% expect results in 2023. While 41% of high-tech and semiconductor executives are slightly more pessimistic, expecting the change to take a few years to have an impact, even they believe benefits will be seen within five years.
Much to celebrate looking ahead to 2023
Despite projected challenges, opportunities abound for life science and high-tech companies. Innovations around people (a new generation of leaders emerging), processes, and technologies, especially cloud-based and as-a-service products, will help savvy firms weather whatever transpires in 2023 and beyond.
