Forecast 2009: Up in the Air

Jan 01, 2009

If pharma execs start upping their consumption of antihypertensives and anxiolytics (all branded, of course) in the months to come, it won't be a huge surprise. As we head into 2009, two remarkable developments—the collapse of the global economy and the election of Barack Obama as president—may be leaving them a bit stressed out. "They should be stressed," says attorney Daniel Kracov from his office at Arnold & Porter, in the belly of the Beltway beast. "The industry faces a truly unprecedented number of political and policy challenges."

Healthcare reform has hit critical mass, and pharma is poised to play a positive role if it so chooses. At the same time, the unemployment is rate expected to soar to as high as 10 percent and with more than 2 million people losing private insurance Big Pharma's prices are poised to become the target of rage and rhetoric. Says Carolyn Buck-Luce, head of Ernst & Young's pharma practice: "Any time there is an opportunity to make healthcare more affordable and accessible, that is good for the industry. What is not good is when the industry is expected to solve all the problems."

In this new era of government intervention, Congress will move fast to strike deals favoring increased federal control. Everything is up for grabs, from pricing to preemption to patents. "Patients in the US know they're paying much more than the rest of the world for the same drug," says Arthur Daemmrich, a professor at Harvard Business School and author of Pharmacopolitics. "In the current economic climate, that's not sustainable."

Meanwhile, of course, drugmakers will continue dancing at the edge of the patent cliff. "2008 was a year to make important strategic decisions that will be transformative. 2009 is all about execution," says Buck-Luce. "The real innovation will be around operating models rather than business models."

No Conventional Recession

As the media count down to Inauguration Day, comparisons to the Great Depression, FDR, and the New Deal abound. The middle class, after a generation of wage stagnation, suddenly feels the bottom falling out of the $14 trillion economy. "2009 will be a rotten year—that much is in the bag," says Boston Consulting Group's Peter Lawyer. "I expect there to be voluntary price restraint as companies try to keep their heads down—and that means even slower growth."

The conventional wisdom is that pharma's products don't follow the same business cycles as consumer products, and that the industry's tendency not to leverage protects it in a recession—but this may not be a conventional recession. Bain & Company estimates that US consumers will reduce spending by $500 billion through 2010 in an effort to rebuild lost wealth. Health plans will increase premiums, leading employers to increase copays. Generics and OTC products will take a bite out of branded drug sales, as one in four consumers skip dosages, refills, or doctor visits.

Medicare Part D ranks will surely swell as employers abandon their retirees, according to The Amundsen Group's Mason Tenaglia. "GM and Chrysler reneged on paying money to the VEBA, a trust created to cover the healthcare of retirees, months before their CEOs went begging for a bailout," he says. "And with states and cities facing bankruptcy over retiree health benefits, they will have no choice but to dump them into Part D and even Medicaid."