In today’s hyper-connected, cost-pressured, health-driven environment, there’s no shortage of ideas and issues impacting the health care value chain. Understanding which disruptors are true issues or opportunities and which ones are distractions is a critical element in developing a business strategy.


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Inside This Issue - Opinion

One manís disruptor is another manís growth driver

April 28th, 2014
by Bob OíMeara & Adam Pressman

In today’s hyper-connected, cost-pressured, health-driven environment, there’s no shortage of ideas and issues impacting the health care value chain. Understanding which disruptors are true issues or opportunities and which ones are distractions is a critical element in developing a business strategy.

Most of the discussions regarding health care today in the retail pharmacy sector have focused on the Affordable Care Act and the surge of new customers entering the system with insurance and previously unmet needs. Retail pharmacists are focused on tending to customers’ medical conditions, helping them understand their diseases, recognizing the side effects of their medications and ensuring compliance.

Consumers also need the assistance of the drug retailers in understanding the dynamics of health care. Community pharmacies are introducing these consumers to a whole new set of terms, such as co-pays, consultations and formularies. Retail pharmacists are energized and laser focused on caring for the newly insured and demonstrating to their health care colleagues what it means to practice at the full extent of their license.

But it is also important to be vigilant to the changes that can be just over the horizon. The pharmacy profession is exposed to disruptors driven by technology, economics and innovative thinking. Disruptors are emerging forces that can destroy aspects of the business model or dramatically change the economic assumptions that fund the full range of services offered in the community setting. There is the potential that innovation coming from outside of the industry can be grasped and scaled effectively to accelerate growth. If missed, it can create a situation that puts the retail drug business model at risk.

We will tell our grandchildren tales of going to the store, where we would rent or buy a movie on something called a VHS tape, or going to a bookstore to buy something called a hardcover book. The looks we get will undoubtedly be comical. While they listen to us, they likely will be holding their electronic book reader or will have streamed a movie to their tablet. It is still possible for us to ensure that when the future stories are told about community pharmacies they do not include quaint tales of stores long gone where we stood in line to buy our medicine.

While the drug retail industry is enjoying its growing role in the health care continuum and tending to the throngs of new patients, it is imperative that executives embrace the idea of disruptors so that they are the drivers of innovation, not the victims. As our A.T. Kearney research paper “Recasting the Role of Stores in an Omnichannel World” highlights, it is important to understand how customers seek to interact with retail brands and how retail locations can be leveraged to meet those needs.

It will not be a one-size-fits-all solution. This is also not a time to simply focus on justifying a physical store model, but a time to truly understand the role of the store and what adjustments are needed to best align it with the new model.

Over the rest of the year and across a series of articles in Chain Drug Review, we will discuss potential disruptors to the retail drug industry across a wide range of topic areas. To set the table, here is a quick summary of key disruptors with the potential to dramatically impact the retail drug industry, and how customers may be ­engaged.

Last-mile solutions

What’s more convenient than a retail establishment on every corner in America, within three miles of 85% of the U.S. population? Answer (maybe): A drone that can deliver to every front porch in America the same day.

Despite Federal Aviation Administration restrictions, there is currently an active pilot under way on Native American reservations testing operational aspects of this very idea in the pharmacy space.

While drones cruising around dropping off products might be too science fiction for some, the innovations in last-mile delivery can radically, if more prosaically, transform the landscape. Indeed, companies such as Deliv are trying to disrupt the retail industry by offering crowd-sourced, same-day delivery service. The U.S. is on the verge of flipping from the “customer to product” model that has driven expansion to a “product to customer” model that will drive a new wave of innovation.

In the next decade convenience retailers will find themselves asking the same questions about last-mile delivery that they did regarding drive-through 20 years ago. What happens if convenience means customers don’t come into my store? What if they don’t even drive to my store? What if the products come to them? Even a modest reduction in door turns and basket size could devastate the retail network the industry has developed over decades.

Personalized medicine

Innovation in medicine gets complicated. While drug retailers are distracted with prescription volume driven by affordable generics, just over the horizon is personalized medicine — medications tailored to a consumer’s specific genome — that requires compounding and more elaborate tests to dispense. The “production processes” drug retailers use today just won’t cut it with this new dynamic.

Many new therapies are specific to a particular group of people. But in the future an increasing number of therapies will be tailored to an individual’s genes. Can drug retailers survive selling old and tired generic short-chain molecules in the exciting world of personalized medicine?

How will the pharma supply chain deliver on this innovation? It likely won’t be through the supply chain we have today or today’s centralized manufacturing structure of big pharma. But will this new form of medicine be from the bench of the local “apothecary” or the centralized dispensary, or will a new player emerge?

In this back-to-the-future view, will pharmacies need to closely partner with manufacturers and innovators to not only dispense and provide counsel to consumers, but create the complex drugs of the future? Compounding will become a revitalized skill set for pharmacists, and collaboration a core capability for ­pharmacies.

Video or virtual pharmacy

Virtual health care is here: Smart, nimble telemedicine start-ups have taken off, and they are partnering with major medical groups to bring credibility and capable capacity to their business model. Patients can Skype with an MD, even a specialist, 24/7, over their laptops and smartphones, and they can even share video of physical symptoms.

We are hearing about existing pharmacy companies integrating this technology into their clinic and service offerings. Retailers are responding in form, integrating the new technology into their stores.

But there is an alternative model that is potentially patient-centric, not store-centric. Rather than taking a trip to the doctor’s office or urgent care center or the clinic in the local pharmacy, a consumer — sick and uncomfortable in bed — schedules a Skype or FaceTime appointment with a doctor or nurse practioner, resulting in no clinic visit. Combine this with direct delivery to bring customers’ prescriptions right to their door, and we have a retail infrastructure that bears a striking resemblance to the video stores of years gone by.

To what extent could this kind of offering reduce the market for in-store corner clinics, projected to now grow quickly? Certainly these types of virtual medical solutions are not intended to cover or even triage every potential symptom a patient may have. But if patients become more comfortable with virtual medicine and even a slice of the clinic visits are diverted, clinic economics could take a giant step backward. What are the implications for convenient health clinics and for pharmacy?

Big data

Big data is powerful, and it is growing more so every month. The importance is in the enormous potential as retailers are salivating at the thought of all the things that will be improved in stores with big data — better promotions, improved margins, greater consumer relevance, improved consultations and better disease management.

The power of technology is enabling this potential, but big data alone is not the prize. In fact, the disruptor comes in viewing information the same way as Google or Amazon or Facebook: Information doesn’t improve the product, it is the product.

The key is to translate “big data” to “big insight” and “big value.” The best way to realize value from the information generated in the pharmacy is through patient intimacy — being able to track behavior, decisions and rationale to understand patients better and then use this insight in real time to tailor and personalize patient and customer interactions.

These types of patient-level insights — not focus groups or patient surveys, but data on actual outcomes and behaviors, and on how and why patients react to their therapies — are potentially game-changing opportunities for drug retailers. Combine the core pharmacy data with other information sources and you can begin to weave the tapestry of a consumer’s daily life.

In the future, pharmacy power will not be in size, scale and sourcing, but rather in the ability to shape behavior. Companies that can collect data, drive insights and influence behavior with these deep insights on a given patient (or better yet, tens of millions of patients) will differentiate their brands and deliver value to their customers. Harnessing this data to drive insights and value will require the necessary infrastructure — both information technology and organizational skills — to combine these new data sources (for example, loyalty data) and deploy the appropriate analytical methods and tools (such as data scientists) to truly extract ongoing insights and drive strategies.

Role of apps

For the most part, apps have been developed to bring convenient and timely information access to the consumer’s fingertips, disintermediating vast swaths of human interactions — not the least of which was the dreaded stop at the gas station to ask for directions. Now, we have the friendly map on our phones or on the dashboard.

Indeed, A.T. Kearney’s Integrated Channel Engagement survey highlights that 66% of shoppers believe their access to information and mobile capabilities is similar to or better than that of than store staff. In an era where the pharmacist’s role is evolving from pill dispenser to dispenser of information, are we at risk of being disintermediated by an app?

Just one example of a“killer” app for pharmacy: A payer app that allows doctors and patients to determine, at the time of prescribing, the pricing of various therapies; the most cost-effective pharmacy to use for the prescription; the pharmacy with the highest Yelp scores or on the most direct route home; or crowd-sourced views of wait times and service levels, similar to how Google Maps and Waze are integrated to provide users a view of real-time traffic and accident updates. All done on an app on the customer’s phone.

A recent report from Cisco highlights that mobile data traffic is expected to reach an annual run rate of 190 exabytes in 2018 — or the equivalent of every person on Earth sharing 14 Instagram photos every day for a year. Customers will be connected and will use their devices more than we can even imagine. The risk of disruption will be magnified as information becomes commoditized. How does retail pharmacy differentiate when pharmacist knowledge becomes a commodity and pricing is so transparent?

DTC ­disintermediation

With the overwhelming prevalence of low-cost generics, does the current multitier supply chain for drug retail make sense? In an era of lifestyle drugs for everything from erectile dysfunction to wrinkles, does the current public dispensing model make sense? In this age of cost pressures and counterfeit drugs, do multiple points of diversion make sense? As a producer, why not go direct to the consumer, even if it’s for just a slice of the drug spectrum? Patient intimacy is an issue for big pharma companies, particularly as they move forward in the consumer health care arena, and one option to drive patient intimacy is to go directly to the retailer or directly to the patient.

Pfizer, maker of Viagra, announced last year that patients with a prescription can order the drug directly from viagra.com. The opportunity ensures that patients receive Viagra and not counterfeits. What if this idea took flight more broadly in the industry? As big pharma seeks to get closer to patients and better understand their needs and behavior, how plausible is the disintermediation of retail pharmacy?

Over the rest of the year we will share a series of articles to probe in depth each potential disruptor. New disruptors will continue to arise. In fact, by definition, it will be the disruptor that we don’t see or don’t react to that will do the most damage.
By further understanding the disruptors in play, the retail drug sector will be in a better position to lead the revolution, rather than being pushed to ­extinction.

BOB O'MEARA, a partner with A.T. Kearney, focuses on the retail drug sector and is based in Chicago. He can be reached at bob.omeara@atkearney.com. ADAM PRESSMAN, also a partner at A.T. Kearney and based in Chicago, focuses on the retail sector and strategic IT. He can be reached at adam.pressman@atkearney.com.

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