Unlike marketers in other industries, many. How Much Is Your Patient Worth? Using Patient Lifetime Value to Sharpen Your Marketing Strategy

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1 S A L ES & M A R K E TI NG I N SIGHTS How Much Is Your Patient Worth? Using Patient Lifetime Value to Sharpen Your Marketing Strategy Dan Frey and Jean-Jacques Raoult Unlike marketers in other industries, many pharmaceutical marketers have a limited understanding of patients value. As a result, patient marketing investments may be set improperly, leaving potential profit on the table. Unless patients are not influential in brand selection and persistence, pharmaceutical marketers should be rigorously quantifying patient lifetime value (PLV), the present value of the cash flows that a patient brings in over his or her lifetime for a targeted disease area. More precise valuation of patient segments enables marketers to move beyond unreliable benchmarks and rear-view mirror analytics to set direct-to-consumer and direct-to-patient budgets and plan campaigns that can maximize profits.

2 Table of Contents 3 Introduction 3 The Problem 4 The Solution 6 Customer Value Beyond Pharma 8 Embracing Patient Lifetime Value 2 ZS Associates

3 Introduction For good reason, pharmaceutical companies have increased their focus on marketing to patients. More patients are entering the physician s office with information about their condition and potential treatments. As of 2010, 76% of all adults had gone online to find information related to health, and 62% of all adults had gone online within the previous month to find health information 1. With payers pushing higher co-pays onto them, patients have an increasing stake in prescribing decisions and they are exercising more influence. Unfortunately, many pharmaceutical companies have a limited understanding of patients value. As a result, they set patient marketing investment levels improperly, and occasionally focus on the wrong segments. This contrasts with many other industries, which rigorously quantify the value of the end consumer. If a company does patient marketing, it needs to understand patient lifetime value (PLV): simply, the present value of the cash flows that a patient brings in over his or her lifetime for a targeted disease area. A good patient segmentation along with PLV analysis enables appropriate valuation of patient segments and offers greater precision in direct-toconsumer (DTC) and direct-to-patient (DTP) budgets. The Problem Case 1: Poor budgeting A brand manager based her DTC budget largely on historical budgets, while looking at competitor spending and historical ROI analyses to confirm these budgets. The ROI analyses looked at change in NRx versus DTC budgets over time. The approach captured the short-term boost of DTC, but undervalued the long-term benefits of acquiring a patient, leading the manager to underinvest in her patient marketing efforts. Competitive benchmarks were also of little help. Not only were her brand sales considerably different from the competition, the benchmarks gave little insight into the marginal value of slight budget increases or decreases. 1 Source: The Harris Poll #95, August 4, 2010, HarrisPolls/tabid/447/mid/1508/articleId/448/ctl/ReadCustom%20Default/Default.aspx 3 ZS Associates

4 Unfortunately, as the product approached loss of exclusivity (LOE), the historical budgets pointed her to maintain spending when it should have been reduced. New patients would have been on therapy for such a short time that their value was no longer worth the acquisition cost. Case 2: Misguided segment focus Another brand manager was responsible for a therapy that had three years of exclusivity remaining. His team thought that young women (18- to 25-year-olds) were the best targets as they were likely to be on the therapy for much longer than other age segments. Brand positioning, marketing investments and messaging were then geared toward this segment. In reality, because of high switching rates, more drug holidays and lower compliance in young women, as well as the impending loss of exclusivity, the next age cohort (26- to 35-year-olds) was actually more valuable. If the company had focused its acquisition efforts on naive patients within that group, it could have grown revenue without additional cost. As both of these stories illustrate, brand managers often struggle to set appropriate budgets for patient marketing and they may have a false sense of confidence in their segment focus. Fortunately, several companies have found a solution from outside the industry. The Solution Several leading pharmaceutical companies have embraced the concept of PLV. Let us see how PLV could have helped the brand managers above to sharpen their brand strategies. Case 1: Using PLV to refine DTC budgets In the first example, PLV analysis illustrated exactly how much a naive patient acquired next year would be worth. The next questions were how productive would advertising be and what would be the right budget. That required defining a forward-looking relationship between spending and patient acquisition. Physician research showed that patient requests were typically fulfilled, so identifying drivers of patient requests was important. The two compo- 4 ZS Associates

5 nents of patient requests were awareness and intent to request. Without awareness, there could be no request. Fortunately, consumer tracking studies enabled managers to derive the relationship between historical DTC expenditure and naive patient awareness, as well as intent to request product. Simulated media plans then allowed the brand to model the prospective relationship between budget and changes in awareness, incorporating decays in awareness. Figure 1 shows the expected diminishing returns to DTC spending. If the budget were increased, it would be less productive. But as Figure 2 illustrates, there was still significant room to grow the budget as the current figure was delivering patients at a marginal cost that was far below their value. Figure 1. DTC impact Figure 2. Marginal patient acquisition cost FIGURE 1 & 2 Incremental patients (000s) Fig 1. DTC Impact DTC Budget ($M) Fig 2. Marginal patient acquistion cost Marginal Acquisition Cost ($) Brand PLV Current Budget Ideal Budget DTC Budget ($M) In this case, the company could have nearly tripled its DTC budget, which would have nearly doubled patient requests for the brand. This would have increased the brand s annual revenue approximately 20%. Case 2: Using PLV to refine segment focus The belief that younger patients were better targets seemed logical. For lifestyle products, the earlier a company acquires patients, the more prescriptions one would expect. However, PLV analysis produced a segment portrait that revealed PLV was actually lower for the younger segment. Several factors drove this counterintuitive insight: The impending loss of product exclusivity prevented the younger segment from reaching its maximum potential, and the younger segment actually had more brand switching and more breaks in therapy than some of their older cohorts (see Figure 3). 5 ZS Associates

6 Figure 3. Segment patient lifetime value FIGURE 3 PLV for Naive year old Females PLV for Naive year old Females Time on Therapy Patent Expiration Impact Brand Switch Impact Breaks in Therapy PLV Time on Therapy Patent Expiration Impact Brand Switch Impact Breaks in Therapy PLV In this case, the brand manager should have refocused marketing efforts as LOE neared by targeting a cohort that had earlier in the brand s life cycle been heavily marketed to, rather than continue to try to attract younger patients. Customer Value Beyond Pharma The concept of customer lifetime value is not new. Many industries, including automotive, hospitality, retail, consumer banking and even fast food have long quantified customer value to identify insights that can boost revenue and profitability. Customer value analyses can suggest ignoring certain customer segments in which customer lifetime values are below acquisition costs, or focusing on segments where acquisition costs are lower than their current or potential value. Analyses can identify the importance of customer satisfaction as a vehicle to create loyalty and repeat purchases. They can also highlight opportunities to drive additional customer value by upselling additional products or services. For a variety of reasons, the concept has not been common in the pharmaceutical industry. For companies that have emphasized patient marketing, executing a patient lifetime value analysis has not been easy. Robust patient-level data did not exist several years ago. And even now, using the 6 ZS Associates

7 data to derive customer value is not straightforward. Rudimentary approaches for evaluating customer value often grossly underestimate the actual PLV because they provide a limited window of history for any one patient (see Figure 4). Figure 4. The graph illustrates the difficulty of calculating PLV with only patient-level data. Figure 4. Patient A Drug Consumption PLD Window Patient B Drug Consumption Time In both customers shown, the data in the PLD window (the period in which patient-level data are available) reflect a fraction of the product they consume over their lives. If only three years of patient-level data are available, identifying customer values beyond three years is possible, but requires advanced analytic approaches that leverage projections or string together cohort behaviors. In addition, a meaningful analysis illustrates what customer value would be moving forward, not what it has been in the past. Basing DTC investments on historic customer values when a product nears patent expiration makes little sense. Embracing Patient Lifetime Value All the dynamics that have prevented pharmaceutical companies from embracing the concept of customer value are changing. PLV methodologies and data have gotten better. The capture rate and quality of anonymous patient-level data have improved. ZS has used 7 ZS Associates

8 patient segmentation in concert with patient-level data to create a robust data-driven simulation of patients over their entire lifetime. In these simulations, each patient is different, but behaviors are based on real distributions. For example, the average patient may be on therapy for 24 months, but one patient picked at random from the simulation could be on the therapy for eight months and another for 40 months. This is important because events that are months beyond the average length of therapy can still affect the tails of the distribution. Consequently, they would affect the PLV. Simulations reveal how patients consume products over their lifetime rather than just within the PLD window, and they can capture a complex pattern of drug holidays, switches and returns. At the same time, simulations allow a forward-looking view of patient value as scenarios can be readily created to integrate future events, such as patent expiration or competitive entry, to provide insights that diverge from historical analyses. For example, a patent expiration in three years would shorten the value of the simulated patient who would otherwise have been expected to remain on therapy for 60 months, but would not affect the patient on therapy for one month. Competitive entry, too, could affect patient lifetime value, particularly if the competitor positions itself for first-line usage. In some ZS work, we have observed simulated PLVs that are higher than internal estimates, which were based on the narrow patient-level data window. We have helped organizations realize that PLV is not a single number. Rather, it differs by segment and typically declines over time particularly as patent expiration nears. Reliance on historical calculations would have led to inappropriate brand investments. As the case studies illustrate, PLV analyses can provide significant brand benefits. They can improve the segment focus as well as help optimize patient acquisition investments. Brand managers who operate in categories in which patients exert significant influence ought to know how much those patients are worth. Even outside of evaluating patient-driven decisions, the concept of PLV is still important. Even if the physician is driving many of the decisions, there is still an acquisition process to get a patient, and understanding the return on that acquisition can guide smarter investment decisions. Moreover, understanding 8 ZS Associates

9 PLV allows companies to evaluate it as a leverage point. Specifically, they may want to consider how they can increase their PLV by improving adherence. Brand managers in other industries have long used rigorous customer valuation. Given the advances in data and methodologies, the pharmaceutical industry should think seriously about adding it to their brand managers tool kits. 9 ZS Associates

10 About the Authors Dan Frey is a Principal with ZS Associates in New York. He is responsible for ongoing development of ZS patient marketing capabilities and dedicated client work. Dan chaired the 2009 Eyeforpharma conference entitled Patient Adherence and Engagement and co-authored Drivers of Change, an article on the future of pharmaceutical sales forces, published in Pharma Times in February Prior to ZS, Dan was a strategic consultant for several firms, and founded two companies. He has a Bachelor of Arts degree in the Woodrow Wilson School of Public and International Affairs from Princeton University and an M.B.A. from Northwestern University s Kellogg Graduate School of Management. Jean-Jacques Raoult is a Principal with ZS Associates in New York and is responsible for the firm s opportunity assessment practice. His experience is in portfolio and brand strategy, and has led the development of a new market simulation approach at the individual patient and physician level (MarketLive). Jean-Jacques has helped develop and implement PLV solutions with pharmaceutical marketers. He holds an engineering degree in geology and geophysics, a Ph.D. in computer sciences and an M.B.A. from INSEAD. 10 ZS Associates

11 About ZS Associates ZS Associates is a global management consulting firm specializing in sales and marketing consulting, capability building and outsourcing. The firm has more than 1,500 professionals in 19 offices around the world, and has assisted more than 700 clients in 70 countries. ZS consultants combine deep expertise in sales and marketing with rigorous, fact-based analysis to help business leaders develop and implement effective sales and marketing strategies that measurably improve performance. As the largest global consulting firm focused on sales and marketing, ZS Associates has experience across a broad range of industries, including medical products and services, pharmaceuticals, biotechnology, high tech, telecommunications, transportation, consumer products and financial services. For more information on ZS Associates, call or visit 11 ZS Associates

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