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


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

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

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
  • The marginal cost of the next pill is small
  • Bush is in the White House

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
  • 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

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
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
Medicare Drug Benefit
Catastrophic Coverage
Out-of-Pocket Spending
2850 Gap
No coverage
Medicare Part D Benefit
420 in annual premium
Partial Coverage up to Limit
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
Number of Medicare Beneficiaries Soars Beginning
in 2010
Source HCFA, 2000 Census Bureau 2001
Who Pays for Drugs?
Percent of Total National Prescription Drug
Expenditures by Type of Payer
Private insurance
Government programs
Source Kaiser Family Foundation and Sonderegger
Research Center analysis of CMS data
The Five-Tier Formulary
Highest Copay and/or Coinsurance
Lowest Copay
James Brown and Fernando Lamas Effect
Look Good
Feel Good
Quality of Life
Affluence of the Individual or Society
Skin in the Game Matters
  • Trading down twice as often as trading up
  • Rapid increase in generic and therapeutic
  • 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

Out-of-Pocket Medical Costs in the Past Year
2004 Commonwealth Fund International Health
Policy Survey
Cost-Related Access Problems
2004 Commonwealth Fund International Health
Policy Survey
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
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
  • 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

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

Health Care Products Services Rated on Value
For Money
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
The Transformation of Pharmaceuticals
  • 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
  • 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

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

Evidence-based medicine
Demonstration of clinical efficacy
Consumer payment
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

Biotechnologists Nightmare Scenario
  • Public, physicians, policymakers could care less
    about large molecules we dont buy drugs by the
  • 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

Scenarios for the Global Pharmaceutical Industry

High Innovation
Low Innovation
High Technology for Human Health
Global Harmonization
Consumer Empowerment
Long Division
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
  • The New Millennium belongs to molecular biology
    not silicon
  • The fruits of R D creates new, innovative and
    cost-effective technologies

High Technology for Human Health How the
Scenario Happens
  • Medical breakthroughs receive broad public
  • 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
  • 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

High Technology for Human Health Industry
  • 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
  • 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

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
  • Promote Clinical Patient Bill of Rights pain
    free, optimal medication,compliance with
    prescribed treatment,and responsibility for
    healthy lifestyle

Global Harmonization Scenario Summary
  • 20 year Global convergence of health systems
    around universal tiered coverage with consumer
  • 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

Global Harmonization How 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

Global Harmonization Industry Responses
  • Pharmaceutical industry becomes a globally
    integrated business with global scale and cost
  • 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

Five Industry Giants 2014
  • The Initial Company
  • The Latin Root Company
  • AstraAventiNovarticus
  • The Mother of All PBMs
  • Advanced MedcoExpress Care-Scripts
  • AmgenaMerck
  • Biotech Baby eats an Adult
  • Pfizer

Global Harmonization Industry Responses
  • Industry pushes for DTC ability in other
  • Industry leads and supports efforts to
    standardize and harmonize global regulatory
  • 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

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

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

Long DivisionIndustry Response The Pollyanna
  • 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
  • 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

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
  • 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
  • Industry makes the value case, that RD yields
    off-setting health benefits

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
  • 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

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
  • Industry supports supplementary coverage
  • Industry comes to terms with open-access tiered
  • Industry supports efforts to increase the
    information available to consumers e.g.
    multi-company disease-specific websites

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?

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
  • 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
  • Regulatory and reimbursement hurdles become more
  • Research
  • New science versus traditional RD
  • R D Productivity and the only 2 problem

Little R, Big D, Enormous M
Big Pharma
Selected Partnerships
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?

  • 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
  • The Industry will need to radically redesign its
    own strategy and business processes

The New Business Model Some Final Thoughts
  • Demonstrated Scientific Innovation will always
  • Payer sensitive innovation
  • Novel Clinical pay-off compared to all available
  • Payers dream reduction in PMPM cost for
  • Radical restructuring of the sales and marketing
  • 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
  • It is still a great business