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The Future of the Global Pharmaceutical Industry:The Quest for Value
Ian Morrison
www.ianmorrison.com
Page 2
Outline
Good News/Bad News The Quest for Value Long Term Scenarios for the Global Pharmaceutical
Industry
Page 3
Good News: The Top Ten
Healthcare is a superior good Innovation makes a difference in human health Powerful New Science Stem Cell Research Everywhere Global infatuation with technology The Obesity epidemic and the aging of the planet will
drive raw demand for drugs, devices, and healthcare services
The elderly now have coverage in the US Consumers and providers are swayed by sales and
marketing The marginal cost of the next pill is small Bush is in the White House
Page 4
The Bad News: Top Ten
Costs for everyone globally, focus on prices in the U.S (and therefore importation)
Losing the value argument in the US and elsewhere Big Ugly Buyers and Tiering Coverage for the Elderly in the U.S. and Elsewhere AIDS in the Third World: Capitalism run Amok R&D productivity:
Is bigger better or is it all a lottery $ 4 Billion Blockbusters or 40x $100 million Are these new drugs safe anyway? How many hoops do we have to jump through?
Intellectual Property under assault Marketing practices as asset or liability: DTC, detailing, rebates and sales force
productivity Losing Friends and gaining enemies Leadership finally coming out from the bunker of self-righteous, myopic,
isolationism
Page 5
Percentage of consumers who say each industry does a good job serving their customers
1997
% 1998
% 1999
% 2000
% 2001
% 2002
% 2003
% Change
since ‘97 Change
since ‘02
Hospitals 77 73 71 72 67 73 73 -4 -
Banks 75 72 68 73 71 74 72 -3 -2
Computer hardware companies 80* 78 80 76 78 59 71 -9 +12
Computer software companies 80* 77 80 78 80 60 70 -10 +10
Car manufacturers 70 69 70 67 67 64 64 -6 -
Airlines N/A 78 71 66 51 63 64 -14 +1
Telephone companies 80 76 67 64 61 58 57 -23 -1
Life insurance 64 63 61 62 60 55 56 -8 +1
Pharmaceutical and drug companies
79 73 66 59 57 59 49 -30 -10
Oil companies 59 64 55 39 27 38 42 -17 +4
Health insurance companies 55 48 41 39 38 51 40 -15 -11
Managed care companies 51 45 34 29 29 33 30 -21 -3
Tobacco companies 34 32 31 28 28 25 30 -4 +5
How U.S. Consumers Rate Industries
* In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately
** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002
Page 6
Health Care Tops List of Industries Public Wants to See More Regulated
20%
8%
10%
11%
21%
24%
26%
30%
31%
35%
35%
44%
52%
57%
59%
60%
None of these
Computer hardware companies
Supermarkets
Computer Software Companies
Banks
Car manufacturers
Packaged Food Companies
Telephone Companies
Airlines
Life Insurance Companies
Tobacco Companies
Oil Companies
37%
27%
40%
22%
35%
14%
23%
12%
20%
34%
11%
3%
4%
13%
7%
4%
Should Be More Regulated Generally Honest & Trustworthy
Hospitals
Managed Care Companies
Health Insurance Companies
Pharmaceutical Companies
Page 7
Medicare Drug Benefit
Catastrophic Coverage
No coverage
Partial Coverage up
to Limit
Deductible
5%
$2850 Gap
25%
$5100*
$2250
$250
Equivalent to $3,600 in out-of-pocket spending: $250 deductible + $500 (20% cost-sharing on $2000) + $2850 (100% cost sharing in the “gap”)
Source: Kaiser Family Foundation
Out-of-Pocket Spending
Medicare Part D Benefit+ ~$420 in annual premium
Page 8
Number of Medicare Beneficiaries Soars Beginning in 2010
40 42 4653
6170
7717%
15%15%14%
19%21%
22%
010
20304050
607080
90100
2001 2005 2010 2015 2020 2025 2030
Nu
mb
er
of
Be
ne
fic
iari
es
(M
illi
on
s)
0%
5%
10%
15%
20%
25%
Pe
rce
nt
of
US
Po
pu
lati
on
Source: HCFA, 2000; Census Bureau 2001
Page 9
Who Pays for Drugs?
48.2%
42.7%
39.5%
34.9%33.4%
32.0%
32.1%
37.1%40.0%
44.0%45.3% 46.2%
17.3% 18.0% 18.8%20.1% 20.6% 20.8% 21.2% 21.3% 21.8%
36.8%
54.7%56.2%
52.7%
59.1%
42.4%
27.3%26.5%28.5%
24.4%
16.6%
19.8%
10%
20%
30%
40%
50%
60%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data
Percent of Total National Prescription Drug Expenditures by Type of Payer
Private insurance
Out-of-pocket
Government programs
Page 10
The Five-Tier Formulary
Old Generic
New Generic
Rebated Brands
Non-Rebated Brands
Look Good / Feel Good
Lowest Copay
Highest Copay and/or
Coinsurance
Page 11
James Brown and Fernando Lamas Effect
Mortality
Morbidity
Mobility
Feel Good
Look Good
Quality of Life
Affluence of the Individual or Society
End-Point
Page 12
“Skin in the Game” Matters
Trading down twice as often as trading up Rapid increase in generic and therapeutic substitution Poor, chronically ill most effected Starting to lead to adverse health outcomes like the uninsured Simple cost shifting without sophisticated disease management is not the right
answer in the long-term
Page 13
1014
22
127 5
57
411
26
0
25
50
75
No out-of-pocket cost More than US $1,000
Out-of-Pocket Medical Costs in the Past YearOut-of-Pocket Medical Costs in the Past Year
Percent
AUS CAN NZ UK US AUS CAN NZ UK US
2004 Commonwealth Fund International Health Policy Survey
Page 14
Cost-Related Access ProblemsCost-Related Access Problems
Percent in the past year who due to cost:
AUS CAN NZ UK US
Did not fill prescription
or skipped doses12 9 11 4 22
Had a medical problem but did not visit doctor 17 6 28 4 29
Skipped test, treatment or follow-up 18 8 20 2 27
Percent who said yes to at least one of the above
29 17 34 9 40
2004 Commonwealth Fund International Health Policy Survey
Page 15
All Privately Insured*
%
All HDHP**
%
Had a specific medical problem but did not visit a doctor 17 33
Took a medication less often than I should have 14 29
Did not fill a prescription 15 28
Did not receive a medical treatment or follow up recommended by a doctor
17 28
Did not get a physical or annual check-up 19 25
Took a lower dose of a prescription than my doctor recommended 15 19
Treatment compliance problems
Across the board, HDHP consumers have more compliance problems
* Currently insured in employer-sponsored or self-purchased plan** Currently enrolled in high deductible health plan
Page 16
Formularies: Who Makes What Decision?
Sophisticated Formulary Decision-Making involves: 1. How severe is the underlying disease, or is it self-limiting? 2. What is the cost of treatment, comparing drug and non-drug alternatives? 3. What is compliance with therapy? This is important, because if patients do not comply with
certain therapies, the benefit of treatment falls off dramatically. 4. Is the treatment curative or is it palliative? First funding priority is for products which cure
disease. 5. What is the complications profile? 6. What percentage of patients do well on therapy?
Use these criteria for reimbursement coverage and sophisticated benefit architecture
A Hypothetical Example: Statins Crestor: 50% coinsurance Lipitor: $40 Allowance Generic Mevacor: $15 co-payment Porridge: $5 coupon from CMS and the Scottish Parliament
Page 17
The Key Challenges for Bio Pharma
Price Re-importation is a symptom Cost-effectiveness in formulary design Reference pricing World pricing
Innovation Show me the molecules! Show me the safe molecules!
Value “Saving Lives and Stamping out Disease” Demonstrating Benefits that payers can detect and are willing to
pay for Value In use (in real life) not just in the idealized circumstances of
clinical trials
Page 18
Health Care Products & Services Rated on “Value For Money”
12%
14%
21%
24%
32%
35%
36%
36%
43%
63%
44%
31%
35%
38%
44%
39%
47%
45%
44%
28%
45%
55%
45%
38%
24%
26%
17%
18%
13%
9%
Nursing homes
Health insurance companies
Brand name prescription drugs
Hospitals
Pharmacies
Doctors
Vitamins and mineral supplements
Over-the-counter (non-prescription) drugs
Medical devices and equipment such as pacemakersand stents
Generic prescription drugs
Very Good or Fairly Good Value Not Sure/Average Value Somewhat or Very Poor Value
Page 19
Global Pharmaceutical Prices, 2001
0 50 100 150 200 250 300 350
Shanghai
New Zealand
Australia
Spain
Singapore
France
Germany
Sweden
Italy
Denmark
UK
Canada
US Fed Hosp
Japan
Switzerland
US HMO
US Pharmacy
International Price Comparisons, Australia =100, Fisher index
Source: Center for Strategic Economic Studies, Victoria University, Working Paper 19, Kim Sweeny, April 2004
Page 20
The Transformation of Pharmaceuticals
Discover a unique white powder Search for a therapeutic action Establish safety and efficacy Make sure it’s better than available
alternatives Promote to the profession Get a passive payer to pay for it
Design a white powder with a predictable therapeutic action
Establish safety, efficacy and cost-effectiveness
Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings
Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press)
Get an active payer to pay for it
Past Future
Page 21
% o
f P
atie
nts
Do nothing
Chronic pill popping
(Celebrex)
Me-too Fast Followers
& Generics
Higher PriceHigher Efficacy
InnovativeTechnology
$
Big Pharma Success
Heavy-duty traditional therapy
Evidence-based medicine
Consumer payment
Marketing
Demonstration of clinical efficacy
Traditional Pharmaceuticals vs. Advanced Therapeutics
Page 22
Happy Biotechnologist Scenario
We have the best stuff Sure it’s expensive, but it works Because it works there are savings elsewhere This is complex – do not try this stuff at home As generic competition makes costs go down for some
technologies, there will be more gross margin left for us Catastrophic drug coverage insulates consumers from caring
about price
Page 23
Biotechnologist’s Nightmare Scenario
Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom
It’s complex brewing not chemistry, but how hard could it be?
Big ugly buyers and providers incensed about price of technology
High efficacy focused on small sliver of needy, desperate patients
Can you pass the NICE/Kaiser Test? True Innovation will always be rewarded but payers
see innovation differently from pharmaceutical companies
Page 24
Scenarios for the Global Pharmaceutical Industry
High Technology for Human
Health
Harmonization
Division
High Innovation Low Innovation
Long Division
Consumer Empowerment
Global Harmonization
Page 25
High Technology for Human Health:Scenario Summary
Global acceptance of medical technology as the key to longevity and quality of life for the global baby-boom
Accepted definition of human health and well being extends to quality of life issues such as appearance, sexual function, and sense of well-being
The New Millennium belongs to molecular biology not silicon
The fruits of R & D creates new, innovative and cost-effective technologies
Page 26
High Technology for Human Health:How the Scenario Happens
Medical breakthroughs receive broad public acclaim Public opinion favors science and technology in creating
clinically superior outcomes that matter to individuals Proportion of population using and valuing health care
technology increases sharply Public health weaknesses exposed by bio-terrorism threats Growing understanding that pharmaceuticals, technology
and public health are the key Therefore, Aging baby-boom values both individual patient
interventions and broader population based societal responses such as public health (the selfish and the selfless) not just in the U.S. but around the world
Page 27
High Technology for Human Health:Industry Responses
R&D Intensive Pharmaceutical industry commits to using science, technology, and educational capacities to enhance human health and well being on a global basis Global Research Consortia (Sematech Model) established on basic
science, orphan drugs, AIDS and vaccines for the Third World Partnerships developed with public health stakeholders to measure,
monitor and manage chronic diseases (such as asthma and diabetes) and eliminate preventable diseases (such as tuberculosis)
R&D engine embraces new tools to create drugs faster, better, cheaper and works with global regulators to bring drugs to market faster
Promotion is based on science and clinical acceptance (pull model) not push model
The Public wants ScienceCare The Public wants science that is safe, effective and Green
Page 28
High Technology for Human Health:Industry Responses (continued)
Industry focuses DTC ads on compliance and public health issues as well as product marketing
Disease State Management reframed as a public health and compliance issue: optimal chronic care
Industry works with media, public opinion surveys and spokespersons to reinforce extended definition of health and well being to include end-points of well-being and quality of life. Focus on issues such as pain and cancer; appearance, anxiety and depression; mobility and active lifestyle enhancers, and sexual dysfunction.
Promote “Clinical Patient Bill of Rights”: pain free, optimal medication,compliance with prescribed treatment,and responsibility for healthy lifestyle
Page 29
Global Harmonization:Scenario Summary
20 year Global convergence of health systems: around universal tiered coverage with consumer payment
Healthcare R&D processes are globalized as regulators are harmonized and plug compatible in Europe, Japan, and U.S.
Pricing and costs more harmonized as global budgets in Europe and Canada are supplemented by consumer willingness to pay
In U.S. universal tiered coverage, and reference pricing by private payers leads to lessening of cost and price differentials with the rest of the world
Page 30
Global Harmonization:How the Scenario Happens
European Community harmonization of currency and regulation including pharmaceuticals leads to further globalization of R&D, pricing and finance
U.S. begins to adopt technology assessment and budget controls as inevitable components in the base programs of Medicare, Medicaid and basic private coverage
Europe, Canada and Japan accepts limits to social/mandatory insurance and embraces (reluctantly)a greater role for consumer payment and supplementary insurance
Page 31
Global Harmonization:Industry Responses
Pharmaceutical industry becomes a globally integrated business with global scale and cost structure Consolidation of the industry into four or five major companies R&D economies of scale particularly on development and
commercial market launches Global outsourcing to achieve economies of scale and scope U.S based experience with DTC, tiering, and pluralism pays huge
dividends in the emerging tiered markets of Europe and Japan The industry responds to a global healthcare business
Page 32
Five Industry Giants 2014
The Initial Company GSKBMSJ&J
The Latin Root Company AstraAventiNovarticus
The Mother of All PBMs Advanced MedcoExpress Care-Scripts
AmgenaMerck Biotech Baby eats an Adult
Pfizer
Page 33
Global Harmonization:Industry Responses (Continued)
Industry pushes for DTC ability in other countries
Industry leads and supports efforts to standardize and harmonize global regulatory processes
Industry supports tiering and public policy initiatives globally that make markets similar
Industry focuses on global efficiency and scale in all key areas finance, marketing, DTC, regulatory affairs, and R&D
Page 34
Long Division:Scenario Summary
Healthcare systems globally are caught between an unwillingness to raise taxes and consumer resistance to paying out of pocket for care or for supplementary healthcare insurance
Growing division between countries and within countries based on individuals ability to pay
Technology is very unevenly distributed based on the specifics of coverage and income
Desperate stakeholders such as poor countries, payers or patients use desperate measures such as electronic smuggling, ignoring IP rights, and rigid price controls or reference pricing to limit exposure to rising costs of drugs
Page 35
Long Division:How the Scenario Happens
Ability to pay for pharmaceuticals becomes a key issue for government, business and households around the globe in tough economic times
Consumers unwilling to pay much out of pocket for supplementary insurance or co-payments
When pushed to pay more, consumers trade down more often than they trade up
A cascade of “best pricing” responses take place: Large payers in U.S. want VA prices, governments like Canada want Indian prices
Many countries simply ignore patent and intellectual property claims
Page 36
Long Division:Industry Response The Pollyanna Alternative
The Pharmaceutical industry commits to making necessary drugs available to the neediest and to promoting the value of pharmaceuticals Industry supported drug coverage for the neediest groups particularly the
low-income elderly in the U.S. Free medicines for certain low income patients with chronic diseases DTC and marketing efforts concentrated on segmenting the population
based on need and ability to pay Industry unites to make the value of pharmaceuticals case and forestall
states, private payers, and nations who want to usurp intellectual property rights and pricing freedom
Global effort by industry and humanitarian groups to focus on providing AIDS drugs to the global community
Page 37
Long Division:Industry Response The Tough it Out Alternative
The Pharmaceutical industry fiercely defends their intellectual property rights using legal and macro-economic defenses Industry strongly supports intellectual property rights globally and
finds common cause with other high technology industries such as software and semi-conductors
Appeals to governments (particularly in Europe) that pharmaceuticals is a key element of the economic base for the 21st century
Industry defends right to set prices for new products Industry makes the value case, that R&D yields off-setting health
benefits
Page 38
Consumer Empowerment:Scenario Summary
Consumer Empowerment means the consumer has to pay more out of pocket
Globally consumers embrace the principle you get what you pay for in healthcare
But, drugs have become insurable events and consumers prefer implicit and explicit subsidies for their drug insurance coverage by employers and government
While some healthcare systems remain more socialized than others, healthcare consumerism grows globally
Consumers recognize the value of and demand access to specific healthcare technologies and brands
Consumers are willing to pay for care that they see as valuable (both as taxpayers, premium payers, and patients) provided the costs are shared among stakeholders
Page 39
Consumer Empowerment:Industry Responses
The Pharmaceutical industry commits to supporting the empowerment of consumers including consumers being asked to pay more (albeit with significant subsidies) for better health care technology, information and service
Industry works with consumer advocacy groups to encourage a larger patient voice and better insurance coverage for the care of chronic diseases
Industry supports supplementary coverage initiatives Industry comes to terms with open-access tiered formularies Industry supports efforts to increase the information available to
consumers e.g. multi-company disease-specific websites
Page 40
Consumer Empowerment:Industry Responses
Individual companies compete fiercely for hearts and minds of segments and individual patients
Disease State Management retooled for either genomic-based mass customization or public health improvement
Industry encourages market-based, consumer pay models globally
Industry accepts continued movement of potent medications to OTC? If not why not?
Page 41
Meeting the Business Challenge
Marketing Increased consumerism: reaching the patient Sales force Productivity Doctors as economic gatekeepers for patients Tiering will continue: positioning products in tiers Coverage and contracting: PBM negotiations become more complex
Development Global role of payers in the development process e.g. NICE and reference pricing Embedding market understandings in go/no go decisions Regulatory and reimbursement hurdles become more complex
Research New science versus traditional R&D R & D Productivity and the only 2 problem
Page 42
Little R, Big D, Enormous M
PBMs
Pharmacists
Payers
Patients
Physicians
Marketing
R
R
R
R
R
R
R
R
Development
Big Pharma
Selected Partnerships
Page 43
Innovation Imperatives
Consumers love new technology Innovation is your ace in price control debates But if you don’t truly innovate in a way consumers appreciate
and pay for……. The new environment shifts responsibility for payment
increasingly and transparency of pricing to consumers Delivering innovation to an end user consumer that has value
they are willing to pay their own money for Do not overestimate (even) Americans willingness to trade up Are we comfortable with overt tiering?
Page 44
Implications
Value needs to be demonstrated everywhere but increasingly in the US
Cost-effectiveness in end use will be a hurdle that payers will use to decide on reimbursement
Patients will be engaged through benefit design and incentives The Coming Development Paradox
Even though we are all moving in the same direction the development process will become more complex and pluralistic because payers are demanding more and more sophisticated information
None of this will make drug development any cheaper The Industry will need to radically redesign its own strategy and
business processes
Page 45
The New Business Model: Some Final Thoughts
Demonstrated Scientific Innovation will always win Payer sensitive innovation
Novel Clinical pay-off compared to all available therapies Payer’s dream: reduction in PMPM cost for therapy
Radical restructuring of the sales and marketing function Focus on evidence and guidelines Consultative selling Reduction in traditional channels Making the value case to end user consumers Focus sales effort on compliance, adherence and persistence
among chronically ill not just new Rx Conditional Approval to Market Entry
Monitoring in real clinical use Reference Pricing
Global Scale, Global Pricing, Global Product Launches It is still a great business