Pharma spin-offs need an ecosystem play to realize their targeted benefits

Pharmas have been in the news lately, not for the diseases they cure but for their many high-profile spin-offs. Any time enterprises reconfigure by shedding businesses it creates the need and opportunity to erase tech debt and reinvent operations in the newly formed entity; ignoring the opportunity will replicate the sins of the past. Spun-off companies must craft service provider partnerships and create ecosystems to meet the business case supporting the spin-off and address opportunities such as process reengineering, digital transformation, and associated rationalization. They must ensure their service provider partners bring sophisticated digital capabilities, mature operations, and deep domain experience in their approach to addressing pharma’s dynamic needs.

High-profile spin-offs highlight the many flavors of spin-offs and expose opportunities

Large pharmas have routinely spun off parts of their businesses to address their financial priorities and market opportunities. Each spin-off archetype identified in Exhibit 1 exposes different enterprise (parent and de-merged entity) needs and drives unique requirements for their suppliers. It is likely that while some needs will be routine, addressing the separation of entities, there will be other strategic needs to drive innovation, process reengineering and automation, and new product support services.

Addressing the genesis of spin-offs will shine a light on the success attributes

Pharma’s have a bias toward “returning to the core,” given their value proposition is primarily to cure diseases. This bias differs from other healthcare enterprises, such as hospitals, health insurers, and digital health, that are always exploring adjacent markets to exploit financial opportunities. Consequently, spin-off entities must ensure cultural alignment and commercial altruism that reflects the need to do good—but for a profit—with their service providers.

Another key driver for spin-offs is to focus on specialization, optimizing a portfolio to deliver high-quality therapeutics in specific areas. This concentration is key to operational efficiency, regulatory discipline, and go-to-market.

Exhibit 1: Spin-offs’ distinct flavors drive different types of value

Source: HFS Research, 2023

Last, financial priorities will remain the bedrock of spin-off decisions, irrespective of the spin-off archetype. The desire to drive higher margins and increase earnings per share (EPS) is fundamental to long-term viability, given the many bets pharma’s tend to make in their quest to develop the next blockbuster.

Newly spun-off companies (NewCos) have an opportunity to set up for success

Despite the strength of the business case to support spin-offs, the operationalization of NewCos will require partnerships and the development of a synergistic ecosystem, such as the HFS OneEcosystem™ in Exhibit 2. Strong management is tantamount to effective execution, but there are additional critical success attributes for operationalization:

• Process reimagination: The NewCo will have an opportunity to structure contemporary and forward-facing processes that are not likely to be encumbered by legacy pressures.
• Technology enablement: Reimagined processes must be anchored by efficient workflows. Workflow efficacy will be determined by the level of intelligence of the available data and the right types of technologies to drive an autonomous organization.
• Innovation: An organization must remain dynamic to sustain success. Consequently, an innovation framework encapsulating ideation, technology enablement, and continuous improvement will be critical.

Exhibit 2: An effective ecosystem optimizes synergies, minimizes capital investments, and accelerates go-to-market

Source: HFS Research, 2023

The Bottom Line: Spin-off success requires partnerships and ecosystems of best-in-class suppliers that can bring the 3Es of expertise, experience, and enthusiasm.

Domain expertise is a critical differentiator for suppliers to be able to make an impact and that expertise is often a function of time spent doing it (experience). However, more and more it is also important that suppliers are passionate about the objectives, attract talent that finds purpose in the work and takes pride in the delivery. The level of enthusiasm can be the difference between table stakes work and exceptionalism.

While parent entities will likely have the bulk of the talent, financial resources, and technologies to weather any separation challenges, spun-off NewCos will not have the same luxuries. Consequently, they must form partnerships and invest in developing sustainable ecosystems of the right cadre of suppliers (service providers, technology enablers, innovators, etc.). Going it alone is no longer possible in a hyper-competitive marketplace that demands better therapeutics and products, speed to market with products that cost less and is easily accessible.

Suppliers should eschew their traditional verticalized organization if the pharma spin-offs create an entity in an industry other than life sciences. The industry knowledge will still be relevant but the NewCo can benefit from the broader industry expertise many suppliers possess.