Pharmaceutical Executive | William Looney
2013 is the industry's year of
respite, a brief intermission that gives the C-suite extra time to adjust the
reel on that slow motion movie with the payer voiceover that says: "how's
that hopey changey thing working for you?" For Big Pharma, time moves in
small increments, set by the minute hand of the patent clock. It is unique
among sectors in being able to predict precisely when market dominance fades to
loss. Nevertheless, all that certainty about the endpoints of the product
lifecycle has done little to force company cultures to move faster in
reinventing their business models to keep pace with disruptive change.
This year provides one more
trial run to the future. Management can still hedge their answers about what it
takes to succeed in markets that face relentless pressures of commoditization,
where drug companies have to fight not just among themselves but with every
other health provider, for every incremental dollar of revenue. The question,
for every company, is more or less the same: I've scrutinized my assets, sold
off and restructured operations, slashed my SG&A/income ratio to single digits,
but now what? Where is my Act II, the forward plan that positions us to achieve
real top-line growth?
Multiply and differentiate
C-suite executives know that
the cloistered, country club approach to market evaluation is gone forever. The
massive global restructuring in the way healthcare is financed and delivered
also suggests there is no one path forward; every company is putting itself
under a microscope to identify what offerings will make it distinguishable from
others in a crowded, "show me the money" marketplace.
All that hopey stuff aside,
there are some real positives, including fresh evidence of disease relevance
and depth in the pipeline, particularly at the crucial late Phase II level; a
slow realignment of the clinical trial process to anticipate payer expectations
and obtain better terms for reimbursement; and technology advances that,
properly leveraged, can bring marketers much closer to untapped sources of
market growth, ranging from the non-adhering patient in the United States to
the rural poor in India. IMS data suggests that US companies may be leaving as
much as $30 billion in annual revenues off the table due to poor rates of
prescription compliance, while just one of those backwater Indian states, Uttar
Pradesh, has more potential patients than the entire population of Brazil. And
poor countries, as a group, do have disposable income to spend on drugs.
The industry can rely on a few
cushions to ease the transition. One is the mountain of cash compiled through
divestitures and restructuring: Pfizer alone is sitting on $23 billion,
followed by Merck and Abbott, with $18 billion and $11 billion, respectively.
But deciding what to do with the windfall is harder than it seems. Even small
acquisitions can prove a poor fit with an inflexible Big Pharma culture. Few
experts believe that buying your way to market growth is a viable strategy,
given discouraging precedents like Astra Zeneca's $15 billion purchase of
MedImmune in 2007. Called transformational at the time, it has had zero impact on
the company's deflated stock price.
Another cushion is the break
in the patent cliff, which peaked last year but eases off considerably in 2013,
with Eli Lilly facing the most significant exposure from LOE of its Cymbalta
anti-depressant and two leading insulin replacements, Humalog and Byetta. After
a moderate tick-up in 2014, when the last big tranche of primary care
blockbusters like Nexium and Celebrex go generic, the industry will be free to
focus on uptake of a new generation of targeted therapies drawn not from
traditional chemistry but from the networked science of molecular biology. Some
of these could be blockbusters, but many will carry smaller label indications
that must be expanded over time. This requires a re-think of how to allocate
clinical, manufacturing, and promotional spend, not to mention the substantial
post-marketing study commitments demanded by regulators—and, increasingly, by
payers.
Finally, the industry has a
little more time to assess the implications of a restructured US healthcare
system, since the expanded entitlements engine of the Affordable Care Act (ACA)
does not hit full throttle until 2014. The ACA symbolizes the thickening web of
regulation now found in all the mature markets and are beginning to enmesh Big
Pharma's prospects in the emerging countries. Maintaining that "license to
operate," with the goal of passing successive hurdles to obtain
eligibility for reimbursement, is today a permanent campaign, involving not
just sophisticated legal and regulatory expertise but globally-scaled
partnering and reputational investments—what might euphemistically be called
checkbook diplomacy.
Running from the rules
A few companies are pursuing a
niche model that avoids this world entirely, in favor of stakes in products and
geographies that are predominantly or exclusively private pay, with no
requirement to negotiate access. Valeant's recent move to downgrade its
presence in Europe is an amplification of what many other companies are
thinking. Like it or not, company product launches—and ultimately patient
access—are being re-evaluated and sequenced to minimize the impact of
cross-national reference pricing on global revenues. Last year, Eli Lilly,
Boehringer-Ingelheim, Pfizer, and GSK all decided to forgo launching new products
in Germany rather than risk finding that near-generic pricing mandated by the
country's AMNOG reform law might become the baseline for P&R decisions on
these drugs in many other markets.
If this pattern continues into
2013, and indications are that it will, the result will be a widening of drug
access discrepancies among countries in Europe—a trend that EFPIA appears
determined to raise as another source of the health inequalities that the EU
Commission wants to target as a legislative priority. There may also be a
spillover effect as the EU Parliament begins its assessment of a revision to
the 1989 Price Transparency Directive, which includes new measures sought by
industry to penalize national authorities when they delay decisions on
reimbursement beyond the 180 days set forth in the directive. Member states are
decidedly cool about the revision, even though it gives them more leverage to
demand, disclose, and share essential price information.
Reimbursement rocks
So, after years of bemoaning a
cumbersome and risk-averse licensing process for drugs, the industry is
discovering that the real challenge is reimbursement. The language of
engagement has changed. Innovation defined around the merits of the science is
insufficient; it must offer value to the user as well, relying on metrics of
performance against existing therapies, clinical standards of practice, and
patient-payer preferences. The problem is that, outside of Italy and an
elaborate set of algorithms devised by its national drug regulator, AIFA, no
one has bothered to define what "value" is; payers by and large want
this definition to rest vaguely, in the opaque eyes of the beholder.
A breakthrough on this front
is likely this year in the United Kingdom, where the Department of Health is
finalizing an effort to refigure the 50 year-old Pharmaceutical Price
Regulation Scheme (PPRS) with a new system of value-based pricing that depends
heavily on metrics linked to disease states and unmet medical need. While many
in industry welcome the idea of greater clarity and transparency to bind the
concept of value, precedent suggests that the prudent advice is to be careful
what you wish for.
Bending the data glut
A particular concern is the
scope and quality of the evidence base, which requires a consensus on how to
make sense of mounting volumes of raw data. "We are still data rich and
information poor," Neil De Crescenzo, SVP of Oracle Health Sciences, said
in an interview with Pharm Exec. However, he contends this great
disconnect is gradually being breached, as industry comes to recognize that
information, constructively applied, has amazing untapped potential to change
patient and provider behavior, while regulators strive to make up lost ground
in exploiting IT to speed drug approvals and anticipate and resolve problems
once a new drug is introduced to clinical practice. "The desire of
regulators to collaborate with industry in applying information to enhance the
integrity—and thus the credibility—of the drug approval process is a trend that
has been little noticed, but it is decisively important in easing the way to
integrating medicines with better public health outcomes," he said.
"That's the sweet spot, where both sides should want to be."
Groupthink registration
Over the longer term, FDA and
the EMA have to think carefully about how the registration decision will
facilitate—or hinder—ultimate access to the patient through reimbursement. The
gap between the two has already been partially bridged in Europe through the
EMA mechanism of parallel review, which includes not only the regulator and the
applicant but national authorities responsible for establishing reimbursement
eligibility through clinical and cost effectiveness studies. The next step is a
pilot project in 2013 on "adaptive licensing" to consider how a
system of periodic checks of a product's performance against its label,
throughout the lifecycle, might work.
In the United States, the new
Patient Centered Outcomes Research Institute (PCORI) is funding research to
create a national infrastructure for the conduct of outcomes studies as well as
their application in real-world clinical settings. While PCORI—for now—has no
mandate to look at cost, it is relevant to point out exactly who is financing
the group and its work plan: insurance companies and the big self-insured
employers, who under health reform must pay a special tax as a ratio to the
number of people they cover.
Tying registration to the
broader perspectives of a community that worries about value and cost can be
lauded as a time-saving end to duplicative data dumps, or as a concession to
reality in forcing rigor on companies to develop drugs that payers really want.
But there are inherent dangers too, the most important of which is the
premature rendering of "no go" judgments about promising early stage
therapies, even turning science into a game show for budget-obsessed
politicians. The expert advice to Big Pharma? Get in and help shape that
process, or the process will shape you.
The new competitor: Prepping to do harm
Combined, these trends lay out
the terms of battle for Big Pharma—even if the true day of reckoning has yet to
arrive. "2013 is the Year of Competition," Pharm Exec editorial
advisory board member Dr. Stan Bernard told Pharm Exec. "Companies
will have to start adapting to three aggressive and sophisticated types of
competitors: rival brands, numerous generics, and the 'budget holders,'
consisting of cash-strapped PBMs vying with drug-makers to control increasingly
limited funding for prescription reimbursements."
On the brand side, 2013 will
see more crowding in major therapeutic categories, especially in the
high-margin specialty drugs segment, resulting in negative pricing pressures
and bigger investments to defend against the now ubiquitous counter-launch
campaigns. Meanwhile, the race to "genericize" continues: 80 percent
of all scrip in the United States is now written for generic medicines, while
most European governments are deliberately skewing reimbursement away from
brands.
At the same time, generic
companies are more formidable competitors to Big Pharma, not only as a
consequence of consolidation (Teva alone supplies nearly one of every five
drugs prescribed in the United States) but also as they build a pipeline
franchise in innovative medicines, combinations, complex therapies, and
biosimilars—strangely enough, all hard to copy. JPMorgan analysts predict that,
by the end of this year, diversification will set root and the top three
generic companies in the United States will each generate less than half their
sales from INN generics.
Expect no truce in the
industry's battle with PBMs over their effort to limit prescription choices for
patients participating in contract formulary networks. This month, United
Health Care (UHC) begins barring member pharmacist acceptance of drug company
coupon cards offered directly to patients to help them meet the high tiered
co-pay fees on six widely prescribed branded drugs for which there are cheaper
available alternatives. The ban eliminates an incentive that UHC—and other
leading PBMS—says is being used by half of its enrolled patients to frustrate
formulary management objectives through choice of medicines that are not as
cost effective as recommended off-patent alternatives.
Health reform weighs heavily
on this dispute, since the PBMs claim that what they are doing conforms to a
longstanding rule prohibiting couponing for patients in Medicare, Medicaid, and
other federal programs. It also carves out a new front for Big Pharma in the
political debate about rationing—how PBMs are limiting choice of therapy by
short-circuiting the physician-patient relationship.
A world of hurt
Churn on the product and
customer fronts is accentuated by the unraveling of the geographic map that
once drove strategy on everything from launch sequencing to manufacturing. The
familiar neighborhoods for Big Pharma are changing—and the industry is not
trading up.
In the United States, market
forces are shifting toward an overt government role in the financing and
delivery of care; some observers contend that the current flexible,
employer-based system will start to morph into a European-style social
insurance model after 2018, when the ACA is fully phased in and the first big
employers calculate that it costs less to pay fines for not providing employee
coverage than incentivizing their workers to move out to the government-run
insurance exchanges. It is also hard to see how market pricing for a new
generation of costly branded biologics is compatible with a scenario calling
for expansion of the government Medicaid program that subsidizes medicine at
below market rates as well as extensive new regulations on all providers
seeking to access and serve the working uninsured population, a significant
portion of which will be at incomes just above the federal poverty level.
"Most observers agree
that under reform there will be more revenue coming into the system, on a net
basis," Les Funtleyder, investment analyst for Polliwog Inc., told Pharm
Exec. "The key issue is who captures that revenue; whether pharma can
do it is an open question, even though the evidence shows when people are
insured, utilization of medicines goes up." This returns us to the basic
strategic dilemma of whether more volume can substitute for the certainty of
lower margins—it was not irrational that those specialty medical practices
dependent on big-ticket oncology drugs were among the most ardent foes of the
2010 reform bill.
States: A bureaucratic muddle
It is already evident that
2013 will not create much structural clarity around reform. Some 32 of the 50
states have either refused or delayed action on setting up the health exchanges
that are designed to help the uninsured obtain subsidized coverage, which means
Washington will have to step in and manage the process—meaning big delays,
especially because there are no funds in the reform law to help the federal
government expedite this task. The June 2012 ruling by the Supreme Court to
uphold the constitutionality of key elements of the ACA also bars Washington
from withholding the federal contribution to Medicaid in those states that
refuse to accept subsidizing the large numbers of new Medicaid-eligible
patients under the law. This subverts a key plank in the drive toward universal
coverage.
What is clear is that
execution of the ACA will significantly raise federal and state expenditures on
health while doing virtually nothing to reduce costs for the system overall. It
is probable too that Big Pharma will have to pony up more of the bill. The
annual fee the brand name industry must pay, in the form of individual company
assessments based on revenues, rises from $2.8 billion this year to $3 billion
in 2014 and then to $4.1 billion in 2018. There is also the 50 percent discount
manufacturers will pay, beginning this year, to help close the "doughnut
hole" for Medicare patients facing loss of drug coverage, as their
out-of-pocket costs rise.
And, of course, there are
potential new financial burdens on Big Pharma as part of the ongoing
negotiations to reduce the federal deficit, the biggest of which is extension
of the 23.1 percent rebate for drugs paid for through Medicaid to all
low-income eligible patients on Medicare. Reduction of the 12 years of data
exclusivity for biologics to seven years, and even removal of the tax deductibility
of promotional spend are on the table. There is also the indirect impact of
major cuts to the budgets of key agencies like the FDA and the National
Institutes of Health.
The IPAB show
The irony is that, while the
industry may succeed in its insistent messaging to prevent Medicare from
assuming the power to negotiate down drug prices, advocates of controls could
eventually achieve the same outcome, not only with these initiatives but also
if the ACA's new health spending review panel, the Independent Payment Advisory
Board (IPAB), moves forward on schedule this year, with nomination of its 15
members by the President. IPAB, assuming it becomes functional—still a big
if—is charged with responsibility to keep Medicare spending within a
pre-determined per capita growth rate; if growth exceeds this rate, it must
introduce specific cuts to bring it back in line, subject only to a
congressional veto. Ludicrously, under the ACA, IPAB cannot consider any
reductions to Medicare beneficiaries directly or in Part A hospital
charges—meaning that what is left are doctor bills…and drugs.
Wipeout in Europe
Meanwhile, in Western Europe,
government payers are shutting the fiscal spigot that used to finance generous
drug benefits under national health insurance, more than three quarters of
which is subsidized from the public purse. Beginning in 2010, the annual GDP
per capita rise in outlays for medicines in the EU ground to a halt and has
slipped into negative terrain since then. Not only are company balance sheets trending
red, so too are patient out-of-pocket costs. According to the OECD's latest
Health at a Glance report, the volume of such payments have increased by half
in the 27 EU states since the recession began in 2009.
Public debt loads at more than
100 percent of GDP, budget austerity, and the unsustainable social charges that
feed it have spawned predictions of a "lost decade" of revenue and
profitability declines for Big pharma in Europe that will in turn choke off any
new biotech innovation, permanently sealing the region's fate as a marginal
player in the global medicines market. IMS forecasts that by 2016 only three
European countries—Germany, France and Italy—will have a ranking on the top 10
world markets list, down from five today.
"It's hard to be optimistic
for any turnaround when the majority of the payers in Europe are technically
bankrupt," says Peter Tollman, senior partner and managing director of the
Boston Consulting Group. Half of the world's spending on social transfer
payments takes place in Europe, while the region's economic output is only 25
percent of the world total. These numbers cannot move farther apart without
crowding out high-return public investments in research and
innovation—investments that underpin Europe's ability to compete against
"cheap science" in the emerging markets. It is already happening,
with possible withdrawal of EU Commission funding for the Innovative Medicines
Initiative (IMI), a novel, €2 billion discovery and development partnership
program—the largest in Europe—between governments and the industry.
Bloom off the BRICs
Prospects are brighter in the
BRICs, yet their appeal has dimmed as the high-rent alternative to downsizing
mature markets. Under pressure to manage the expectations of a growing middle
class, governments are responding by managing healthcare, with foreign
originator drugs a prominent target. China is dismantling preferential pricing
for branded foreign drugs and moving more products into a WHO-style essential
drugs formulary; India and Indonesia have joined Thailand in actually enforcing
that "nuclear option"—compulsory licensing; and Turkey actively
discriminates in holding up foreign drug maker certification for local
manufacture and distribution. Restrictive IP, price controls, and preferential
"national champion" industrial strategies are all geared to making
domestic generics firms more competitive against the foreign multinationals.
This is one compelling reason for Big Pharma to stay active in the
"pharmerging" countries, for the opportunity it provides to get
intimate with the future face of global competition.
However, learning to compete
effectively in emerging markets is proving more costly than expected. To expand
sales beyond the traditional private-pay elite customer segment requires big
ticket investments: in local manufacturing and distribution; better on-site
science; marketing that can tailor products for a diverse consumer base, often
outside established urban centers; new stakeholder outreach and partnerships;
and in finding—and keeping—top performing talent. Because the fundamentals of
big populations and relative gains in disposable income are still there, 2013
should see continued uptick in Big Pharma sales to the emerging bloc. The best
performers will be the so-called "below the BRIC" countries like
Indonesia and Saudi Arabia. But the larger question remains: will bigger volume
sales yield the profits companies need to counter Europe's price implosion and
continued regulatory uncertainty in the United States?
So goes Japan
And then there is the
forgotten market: Japan, the aging, Asian Canada, but still the world's third
largest in sales. The biannual price plunge next appears in 2014, but there is
an interesting story in the government's lavishly funded effort to jump start a
strong domestic vaccines business, capable of competing globally in research
and production. Will it begin to pay off in 2013, or is the picking winner
model an anachronism?
Now, the good news
The last, best refuge of this
industry is science—and after a spotty drought it looks like companies are once
again delivering the goods. The FDA approved a near record 39 new medicines in
2012, while the EMA is set to receive 54 new drug applications this year, up
sharply from 34 in 2010. More important, many of these products represent a
significant therapeutic advance in hard to treat areas like MS, rheumatoid
arthritis, cancer, and hepatitis C. Likewise, the generic business is itself
emerging as a source of innovation in drug formulation and delivery, with complex
generics that combine drugs in novel ways; Teva is also a good bet to deliver
the first biosimilar product approved by the FDA, sometime later this year.
Applying the science gets better
A key factor behind the
success is the growing ability of the industry to translate academic insights
about the origins of diseases into development pathways that lead to
commercialization. "The entire cycle of development for anti-tumor agents
has been reversed, because today we start with only those patients who we know
have the abnormal mutation we are seeking to target," Novartis Oncology
president Herve Hoppenot tells Pharm Exec. "The practical result is
that time beyond proof of concept is reduced and the probability of success is
significantly increased." Quintiles SVP for early clinical development
Oren Cohen notes that today's "holy grail" for success is a better
proof of concept, which is facilitated by reliance on "enabler"
technologies: biomarkers, gene expression analysis, and major application
breakthroughs in modeling and simulation. "The renewed focus on proof of
concept is no surprise, because it gives us firmer evidentiary ground for
making that essential go/no go decision in product development. There is real
reason for optimism about the pace of the development process, as we see
continued improvements in all the enablers that allow you to define and target
your decision-making," he said. "And bad decisions cost money."
Money too is driving the
change in how companies manage clinical trials—complex science, tough disease
targets, and risk-averse regulation has sent their cost soaring. The Tufts
Center for the Study of Drug Development has been monitoring protocol design
practices among drug companies for more than a decade. "What we are now seeing,
for the first time, is widespread adoption of new internal review committees to
critically evaluate these designs and remove procedures that unnecessarily
complicate the execution and cost of trials," said Ken Getz, Center
director for sponsor research. This is good news, as failure to wrest more
efficiencies from trial management puts industry squarely at odds with the
pressure that regulators are facing to raise the scope, quality, and
objectivity of the evidence on which they base drug approvals.
Manufacturing's Back
Manufacturing is the
proverbial pumpkin turned princess; a function that was non-strategic, humdrum,
and marginal has now become essential to seamless global integration. It's a
proven cost-saver for companies looking for new ways to do old things.
Technology and custom engineering are unleashing a revolution in process called
continuous manufacturing, which is reducing the number of steps and locales
required to transform basic raw materials into a safe and effective drug. Such
turn-on-a-dime flexibility is a real asset in an era where regulatory and payer
restrictions can lead to steep variations in market demand for medicines across
countries. A big competitive differentiator will be among those companies that
succeed first and consistently do best in crossing the "execution
gap," between what's in the standard operating plan (SOP) and actual
performance on site, in the field. This is a matter of necessity for the top
generic suppliers, who are seeking leadership in manufacturing excellence, not
only as an add-on business opportunity but also to remove the sector's historic
taint of inferior quality against branded medicines.
A final word: Give me growth!
In many ways, 2013 marks
another year of transition away from the stubborn complacency of an industry
used to margins that other sectors might call nose-bleed high. The industry now
embraces the concept of partnership with gusto; the clannishness of the past
has been silenced. "Thinking in systems," is how John Doyle, SVP for
Market Access at Quintiles calls it. " Every company today must begin by
framing their market as a network of interconnected products and add on
services."
Yes, there is change and there
is hope –even if the balance sheet on the business of illness has shifted a bit
to the night side. The best news the Big Pharma giants of the United States and
Europe could get this year? Five percent real growth in GDP. When the tide is
running in, you no longer have to see who's been swimming naked.
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