The challenge is that many new treatments may not complete the move from 'bench to bedside' in time to plug the yawning revenue gap from a second record year of patent expiries. This year's drop off the patent cliff is the longest and steepest, with a $50 billion loss coming on top of the $30 billion ceded to generics in 2011. Most companies will struggle to play catchup, with margins under intense pressure due to the immediate fallout from genericization of the product base; in the U.S. alone, off-patent penetration has reached 80 percent of all scrip, and IMS forecasts this figure will rise to 86 percent by 2015.
Meanwhile, the fiscal crisis in Europe has voided the entire concept of patenting as a reward for innovation in providing a temporary period of price exclusivity. Therapeutic reference pricing is clustering brands with the cheapest generics, and some countries in the region are now moving toward a straight bulk procurement model for drugs reimbursed through state-sponsored systems. Quality? Innovation? These are yesterday's questions.Trade Winds Go Generic
The erosion of patent cover means that 2012 will be a golden harvest for the generics industry. While it is premature to condemn all new medicines to the slashing scythe of the grim reaper, innovators, at least for the near term, must adjust to a world where only slightly more than one out of every 10 U.S. prescriptions will be written for products with the potential to obtain a real price premium against the competition. Who will pay for innovation is a question deferred—but it will loom large as the cycle shifts back toward large biologics and the discovery payoff from the genomics revolution begins to empower the patient seeking a cure or a better quality of life.
So what is the preferred Big Pharma strategy to manage through this year of transition? Pharm Exec contacts with a range of industry players reveals that the dominant theme for 2012 is a relentless focus on managing costs. Pressures to cut back are mounting, not just in the expected areas such as R&D or field force management, but also through the rich incentives that companies are laying out to breach the access barriers and contract pricing ultimatums imposed by payers exercising their market clout. These payer tactics now incorporate the specialty segment, oncology, and other high-margin categories, which have, to date, been largely immune to pricing constraints.
Trim the Sails on Costs
As far as the investor community is concerned, one number counts. "Wall Street will be looking for evidence that companies know how to manage their expenses, and the best gauge of progress here is the difference between gross and net sales," says Amundsen Group managing director Mason Tenaglia. That view is echoed by St. Joseph's University Business School Professor Bill Trombetta, author of Pharm Exec's annual industry audit series, whose latest report in our September 2011 issue makes "lean management" a key theme. "2012 is all about the edge that will go to companies that achieve operational excellence against their peers. The logic is that the best way to cope with the uncertainties of a complicated business climate is by mastery of the internal environment, where management can exercise a stronger degree of control."
Slashing costs is necessary to minimize the immediate impact of the patent cliff on revenues. It also represents a welcome change in mindset, away from the complacency and tolerance for bloat that characterized the industry response to market churn in the previous decades. And as the pharma workforce is trimmed—a bloodletting long deferred—it provides fresh opportunity to revise the skill set required to prevail against the competition. Financial planning, manufacturing, competitive intelligence (the new costume for traditional market research), and IT have all been elevated to status as strategic functions rather than an operational activity.