The Future of the Global Pharmaceutical Industry: The Quest for Value

1
The Future of the Global Pharmaceutical
IndustryThe Quest for Value
Ian Morrison
www.ianmorrison.com
2
Outline

• Good News/Bad News
• The Quest for Value
• Long Term Scenarios for the Global Pharmaceutical
  Industry

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

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
• RD 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

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
6
Health Care Tops List of Industries Public Wants
to See More Regulated
Should Be More Regulated
Generally Honest Trustworthy
Managed Care Companies
Health Insurance Companies
Pharmaceutical Companies
Hospitals
7
Medicare Drug Benefit
5
Catastrophic Coverage
5100
Out-of-Pocket Spending
2850 Gap
No coverage
Medicare Part D Benefit
420 in annual premium
2250
Partial Coverage up to Limit
25
250
Deductible
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
8
Number of Medicare Beneficiaries Soars Beginning
in 2010
Source HCFA, 2000 Census Bureau 2001
9
Who Pays for Drugs?
Percent of Total National Prescription Drug
Expenditures by Type of Payer
Private insurance
Out-of-pocket
Government programs
Source Kaiser Family Foundation and Sonderegger
Research Center analysis of CMS data
10
The Five-Tier Formulary
Highest Copay and/or Coinsurance
Lowest Copay
11
James Brown and Fernando Lamas Effect
End-Point
Look Good
Feel Good
Quality of Life
Mobility
Morbidity
Mortality
Affluence of the Individual or Society
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

13
Out-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
14
Cost-Related Access Problems
Percent in the past year who due to cost AUS CAN NZ UK US
Did not fill prescription or skipped doses 12 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
15
Across the board, HDHP consumers have more
compliance problems
Treatment compliance problems
Currently insured in employer-sponsored or
self-purchased plan Currently enrolled in high
deductible health plan
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

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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

18
Health Care Products Services Rated on Value
For Money
19
Global Pharmaceutical Prices, 2001
International Price Comparisons, Australia 100,
Fisher index
Source Center for Strategic Economic Studies,
Victoria University, Working Paper 19, Kim
Sweeny, April 2004
20
The Transformation of Pharmaceuticals
Future
Past

• 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

• Discover a unique white powder
• Search for a therapeutic action
• Establish safety and efficacy
• Make sure its better than available alternatives
• Promote to the profession
• Get a passive payer to pay for it

21
Traditional Pharmaceuticals vs. Advanced
Therapeutics
Big Pharma Success
Higher Price Higher Efficacy Innovative Technolog
y
Do nothing
of Patients
Me-too Fast Followers Generics
Chronic pill popping (Celebrex)
Heavy-duty traditional therapy

Evidence-based medicine
Marketing
Demonstration of clinical efficacy
Consumer payment
22
Happy Biotechnologist Scenario

• We have the best stuff
• Sure its 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

23
Biotechnologists Nightmare Scenario

• Public, physicians, policymakers could care less
  about large molecules we dont buy drugs by the
  atom
• Its 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

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Scenarios for the Global Pharmaceutical Industry

High Innovation
Low Innovation
High Technology for Human Health
Global Harmonization
Harmonization
Consumer Empowerment
Long Division
Division
25
High Technology for Human HealthScenario 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

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High Technology for Human HealthHow 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

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High Technology for Human HealthIndustry
Responses

• RD 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)
• RD 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

28
High Technology for Human HealthIndustry
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

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Global HarmonizationScenario Summary

• 20 year Global convergence of health systems
  around universal tiered coverage with consumer
  payment
• Healthcare RD 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

30
Global HarmonizationHow the Scenario Happens

• European Community harmonization of currency and
  regulation including pharmaceuticals leads to
  further globalization of RD, 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

31
Global HarmonizationIndustry Responses

• Pharmaceutical industry becomes a globally
  integrated business with global scale and cost
  structure
• Consolidation of the industry into four or five
  major companies
• RD 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

32
Five Industry Giants 2014

• The Initial Company
• GSKBMSJJ
• The Latin Root Company
• AstraAventiNovarticus
• The Mother of All PBMs
• Advanced MedcoExpress Care-Scripts
• AmgenaMerck
• Biotech Baby eats an Adult
• Pfizer

33
Global HarmonizationIndustry 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 RD

34
Long DivisionScenario 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

35
Long DivisionHow 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

36
Long DivisionIndustry 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

37
Long DivisionIndustry 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 RD yields
  off-setting health benefits

38
Consumer EmpowermentScenario 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

39
Consumer EmpowermentIndustry 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

40
Consumer EmpowermentIndustry 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?

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 RD
• R D Productivity and the only 2 problem

42
Little R, Big D, Enormous M
R
Physicians
Big Pharma
R
Patients
R
R
Marketing
Development
Payers
R
R
PBMs
R
Selected Partnerships
Pharmacists
R
43
Innovation Imperatives

• Consumers love new technology
• Innovation is your ace in price control debates
• But if you dont 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?

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

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
• Payers 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