Most people saw data as the oil of the 21st century, but IMS Health began drilling it long before then. Founded in 1954, IMS Health creates value through purchasing prescription drug data from pharmacies and physician offices. It captures value by selling that data to pharmaceutical companies. Essentially, IMS Health won as a middleman, buying sales data and selling it back to the original manufacturer! And it won big – in 2014 it did $2.65 billion in revenue. But the landscape is changing. Given the recent rise of direct-to-consumer digital healthcare apps, IMS Health is in a losing position.
IMS Health’s lucrative, near-arbitrage opportunity comes from a unique set of circumstances. The data generated by an individual pharmacy or physician’s office is too small and limited to be of great value. In addition, privacy regulations prevent the pharmacies and physician offices from selling these data streams without anonymization. Pharmaceutical sales reps find the aggregated insights regarding the demand, pricing, and prescribing patterns of doctors incredibly valuable. And they happily pay IMS Health for access to it.
Over time, IMS Health defended their market position by developing exclusive relationships with pharmacy chains, widening the breadth of data captured, and expanding their customer base. They built technical integrations to move from collecting paper records, to directly plugging into EMR and CRM software systems. But the fundamental business model stayed put: (1) buy fragmented datasets on the cheap; and (2) sell aggregated, anonymized datasets for a hefty premium.
However today’s landscape is different. Healthcare has moved online. End consumers are increasingly interested in using apps to manage drug adherence, wellness programs, diet, and doctors appointments. As a result, consumers will readily insert their own prescription data into the apps for free. And the app developers monetize through anonymizing and selling these datasets. Therefore, while the cost of data is free for digital health apps, IMS Health is still paying pharmacies and doctors for it. The means by which IMS Health creates value is more expensive than the approach of modern, direct-to-consumer digital health apps.
IMS Health is increasingly recognizing this industry shift. In its 2015 annual report, IMS Health flagged the following risk: “increased competition from firms that may have lower costs to market (e.g., no data supply costs)” and noted that the rise of these firms “could result in a material adverse impact on our operating results and financial condition.” Last month, IMS Health announced a merger with Quintiles, a health contract research organization that assists in clinical trials and laboratory research. The move seeks to move IMS upstream towards selling more high margin, service based offerings. However the merger offered no premium to either company’s stock price, and both stocks declined in value after the announcement. Increasing use of electronic medical records, patient portals, and HL7 (health data interoperability standards) will continue to commoditize created healthcare data, once the core of IMS Health’s value proposition.
IMS Health is just another example of a data provider that loses as end-users do the legwork of data-entry, by putting their personal information into mobile apps and online presences. LinkedIN aggregated professional and career related data, and now sells datasets on professional and SMB to recruiters or sales organizations, which put Dun and Bradstreet in the losing category. The once venerated, end-all business model of “data moats” is beginning to be less valuable as the cost of collecting data falls to zero. The general commodification of data will demand newer, more innovative business models. Data will certainly not be the oil of the 22nd century.