How Pharma is transforming for the Future Boris Azaïs Director Public Policy, MSD Lisbon, January 29, 2014

The views of the author are his own and do not necessarily reflect the views of Merck & Co. and its subsidiaries.

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Introductory remarks

TOGETHER SUPPORT

SCIENCE POLICY

HEALTHCARE POLICY

INDUSTRIAL POLICY

Investments in

Science

Investments in

Public Health

Favorable Business

Environment

We are successful together

New Drugs

Rapid Uptake

Sales

Cash Flow

R&D

⇒ Better Health ⇒ Human capital creation ⇒ Higher productivity ⇒ Economic growth

Outcomes

Pharmaceutical innovation is the result of a strong partnership between science, healthcare and industry.

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The Situation

The life cycle of pharmaceuticals is faced with various pressure points

The Evolution of the Innovation Life Cycle in Biopharmaceuticals

Number of New Medical Entities per $B R&D spent (inflation adjusted)

Delayed uptake of new products

Uncertain science Cost of clinical development

Earlier and faster generic entry

Cost-containment measures Greater in-brand competition

Various sources, including Pammolli et al. 2012,; Grabowski & Kyle, 2007; DiMasi et al. 2003; Pammolli et al. 2011;

R&D productivity is under question

Pharmaceutical innovation is facing a fundamental productivity challenge Investment in R&D has outpaced sales growth, but this has not increased output of new

medicines.

Number of New Medical Entities per $B R&D spent (inflation adjusted)

The uptake of pharmaceutical innovation in Europe has declined

Between the time periods 2003/7 and 2008/12, NCE # and uptake decreased for all countries except Norway and Bulgaria. Movements of the top 5 European markets shown for illustration. Source: IMS Health MIDAS, September 2013

New Chemical Entities launched vs. Market Share achieved

“The last five years in Europe have seen greater adoption of generics and more restrictive policies that have made patients in almost all European countries less likely to gain access to innovative medicines.”

Additional Graphs

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Source and ©: Wall Street Journal, January 2014, available at http://online.wsj.com/news/articles/SB10001424052702304281004579222362098933226

… and new drug launches are not as successful as before

Source: "The Global Use of Medicines: Outlook through 2017", IMS Institute, November 2013 http://bit.ly/1eWBiaT

Additional Graphs

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International price comparison compounds the challenges…

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Source: CRA analysis based on relationships reported in Global Insights. Again, it should be noted that the impact on profits is proportionately larger as although revenues fall as result of PT, there is no reduction in costs.

Spillover effect of a 10% price drop in Greece

Between 2012 and 2018, loss of exclusivity will wipe about $148 billion off the industry’s revenues.

Sources: EvaluatePharma, ‘World Preview 2018’ (June 2012)

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Numerous products will lose exclusivity during the current decade

Expected sales losses (US$ billions)

Additional Graphs

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In 10 years, European pharma moved from double digit growth to decline

Source: IMS Health December 2002 MAT Growth rate

Source: IMS Health November 2012 MAT Growth rate

2002

2012

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The Impact of Austerity Measures

Impact of the financial crisis on health budget

Source and © OECD, 2013; “Recent Health Expenditure Trends”, November 7, 2013

Average OECD health expenditure growth rates 2000 to 2011, public and total

Total Health Expenditure Public health expenditure

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The sustainability of our health systems is crucial for pharmaceutical innovation

Because austerity measures target predominantly pharmaceutical costs

Source: OECD Health Data 2012.

According to OECD data, pharmaceutical spending has been overwhelmingly targeted for cost-containment measures in order to balance health budgets

IMF originally didn’t see value of targeting pharmaceuticals for long-term improvement

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“Recent cost-containment efforts in Europe have focused on pharmaceuticals and are unlikely to have a major effect on the long-term outlook for spending” “These developments are projected to have positive effects in the short term, but are unlikely to have a major effect on the growth of spending over the longer term, especially given the modest share of pharmaceutical outlays in total public health outlays” (page 56)

Fiscal Monitor Fiscal Exit: From Strategy to Implementation November 2010

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The Industry Response(s)

Multiple approaches to revitalising research and development

Source: : Deloitte: Change and disruption in the pharmaceutical industry (2007).

Level 3

Level 2

Level 1 Increased R&D

Spend

Industry Consolidation

Biotech In-licensing

R&D Reorganisation

Outsourcing

Cooperative Tech development

Open Source

Timeline

Ease of Implementation

Simplifying R&D

Decoupling R&D

Managing the R&D interface

Accessing global knowledge

Virtual R&D processes

Exploring more open and collaborative R&D approaches

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Science drives pharmaceutical innovation towards new therapeutic horizons

Source: IMS Institute for Healthcare Informatics, September 2013 in “The Global Use of Medicines: Outlook through 2017”. Report by the IMS Institute for Healthcare Informatics

Disease Area

Rheumatoid Arthritis

Cystic Fibrosis

Melanoma

Breast cancer

Ovarian cancer

Multiple sclerosis

Heart Failure

Hepatitis C

“The majority of the new launches will address unmet needs in specialty disease areas, orphan diseases, and target smaller patient populations.”

IMS Institute, Nov. 2013

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Focus on unmet needs with specialty products and biologics

Source: IMS Institute for Healthcare Informatics; Therapy Forecaster, May 2011

“There are 641 products in the late stage pipeline, a third of which are biologics and more than half are specialty drugs.” Source: "The Global Use of Medicines: Outlook through 2017", IMS Institute, November 2013 http://bit.ly/1eWBiaT

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The future success of our industry will depend on how successfully we can build alliances and collaborate today.

Kenneth Frazier MSD’s Chairman, President & CEO

More collaborations across the industry, but also with regulators and payers

- Number of in-licensing on the increase

- EC/EFPIA Innovative Medicines Initiative

- FDA Consortia

INCREASED COLLABORATION IN

DRUG R&D

INCREASED COLLABORATION

WITH REGULATORS

- Early dialog with regulatory authorities

- FDA “Breakthrough designation”

- UK Industry / NICE partnership

Coverage with evidence devt

Conditional licensing

No cure no pay

Pricing review

Try before you buy

Population payments

Price-Volume Agreement

Price holding

Dose/Quantity limits

Pricing by diagnosis

Type of risk Innovation and com

plexity

Outcomes

Financial

Temporary approval

Exploring new pricing and reimbursement models through risk sharing

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Source: Ernst & Young ; Chart copied from KMC Life Sciences “Global Pharma Outlook 2013” prepared for Heidrick & Struggles; May 2013

Exploring new business models focusing on the patient

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What next?

Additional Graphs

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Source and ©: Science, January 2014, available at http://news.sciencemag.org/breakthrough-of-the-year-2013

The future of R&D remains promising thanks to scientific progress

The annual number of new medicines continues to increase

Over several decades, the number of new chemical entities is stable While there are dips and peaks during specific time periods, the longer term trend

contradicts the widely held view that pharmaceutical innovation is declining, suggesting that the annual numbers of newly launched drugs may have increased since the early 1970s

Num

ber

of n

ew d

rugs

laun

ched

Year

New drugs launched in the UK from 1982 to 2011.

Ward DJ, Martino OI, Simpson S, et al. Decline in new drug launches: myth or reality? Retrospective observational study using 30 years of data from the UK. BMJ Open 2013

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As the cost of DNA sequencing is going down, precision medicine will become routine

SOURCE: McKinsey analysis

Cost of genome sequencing

Real-world data and integrated care will transform healthcare

Illustration of the spectrum of technologies to support healthy ageing

Source: “ICT & Ageing - European Study on Users, Markets and Technologies”, European Commission (2011) 28

Source: A.T. Kearney analysis

Health information

Care services

Coordination of care

Drugs MedTech

Patient & Health Professionals

Outcome Value =

Cost

Our health systems are moving toward a patient-centric model, focused on value

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Source: What Value-Based Health Care Means for Pharma, © BCG (2012)

Companies are moving ‘beyond the pill’ by increasing their service offering

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MSD’s EVIDENCE into PRACTICE™ in the UK

Partnership with NHS Greenwich • Pilot sites using EiP services saw a 12% and

8% decrease respectively in the number of diabetic and CVD outpatients over a year

• The local PCT estimated that by extending EiP services to all practises, it could generate over $1mn in savings p.a.

• It has also been estimated that over a ten year period, EiP can deliver a 11.9% increase in life expectancy and a 13.3% increase in QALY

http://arms.evidence.nhs.uk/resources/qipp/899089/attachment

Purpose: Help people with diabetes and those at increased cardio-metabolic risk to receive optimal care based on national guidelines. Status: Around 2.5 million patients are benefiting from this program.

Published in NHS Evidence

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Concluding Remarks

Need to find common solutions to secure the health of our citizens and our healthcare systems

Invest in Health Prioritize growth and health outcomes rather than short-term cost-containment

measures. Better health outcomes cannot be achieved without converging health

spending to OECD average across Europe.

Support the most affected Wealthy countries should refrain from referencing prices to bailed out

countries, as it decreases affordability in lower-income countries. European authorities should help countries take temporary action against re-

exports.

Promote Stakeholders Dialogue and Health Expertise Governments should involve all stakeholders, including patients and industry

when designing austerity and reform programs that may impact access to healthcare for patients.

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Fique Bem!

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© 2011: Worth1000.com

Boris Azaïs Director Public Policy, MSD

boris_azais@merck.com

Active & Healthy Ageing is w ithin our reach! (*)

(*) Authenticity of the picture not guaranteed!