The Night Stalkers: Keeping CEOs Awake in 2011
The consensus is that 2011 will be a bad year for Big Pharma. It must confront a breaking wave of patent expirations, while fiscal retrenchment has created an innovation cycle in reverse as payers find new ways to curb the drugs bill. Risk-averse regulators are transforming old tools like the FDA 'complete response letter' into a registration parking lot, with no exit ramp to connect companies to a distracted — and increasingly impatient — community of clinicians and consumers.
So as the days of January tumble into early darkness, let's inventory a few of what I call the 'night stalkers — issues that are likely to keep members of the C-suite awake beyond a sensible 'lights out' time.
R&D: It's Your Dime! From both an economic return and societal point of view, the cost of new drug innovation is best shared — across companies and especially across markets. ÊIt is particularly important to maintain the principle that countries make a fair contribution to R&D, through national pricing practices that avoid a 'race to the bottom' where every payer seeks the lowest possible transaction cost with the industry. Ê Yet commitment to this ideal is eroding everywhere, including the US. A consultation paper on 'value based' drug pricing released last month by the UK Department of Health actually puts a clear metric down against sharing the global burden of R&D, calculating that any extra dividend the UK pays for innovation is economically irrational. ÊIt will neither stimulate more domestic R&D or lead to savings — in fact the report says there is no benefit but instead 'large costs to be borne exclusively by the UK public.' ÊSuch an argument is predictable had it come from a outlier country like New Zealand, where well-medicated sheep outnumber patients, but as an official statement of policy in the UK it speaks volumes on where this debate is heading.
Corruption and Compliance. Claims for malfeasances ranging from off-label promotion to deceptive pricing continue to mount, with more than $10 billion in compliance charges imposed on big pharma over the past five years. With a return on investment of more than 100 to one, in terms of what it costs to litigate, US and European regulators are pushing the extraterritorial reach of enforcement legislation to cover a potentially rich new vein of graft in emerging markets. Here, the industry is finding itself on the front line of a vast cultural disconnect: in most developing countries, medicines are sold through a web of interconnected relationships dependent on close ties to government. Hence corruption has an entire different meaning — it's called sharing the wealth — and parsing the cultural divide is going to prove a challenge.
In the US, the scope of action has quietly spread to include criminal charges against individual executives; eventually, a big pharma company will be barred from doing business with government programs that account for more than half the US market. Despite this, pharma has failed to address the problem from an industry-wide reputational, as opposed to a legal, standpoint. 'Tops in Fraud' is a ruinous moniker for a business so dependent on basic issues of trust like integrity, quality and safety — when will the industry, as part of a collective action, replace the gamey politicking with good policing?
Technology Transfer Mandates. Know-how and expertise is a tangible asset for pharma, one that should be allocated sparingly to partners who may one day be competitors. This dynamic is particularly evident in the emerging markets, where governments have emerged as formidable industrial policy negotiators in insisting that new innovations be shared with local partners as a condition for market access. When a drug multinational has to score a deal where it shares production with a local firm, transfers the necessary technology and after a fixed period hands over all remaining exclusive rights to the partner — as Merck recently did in Brazil — one has to ask: how really different is this from a compulsory IP license that the industry has always characterized as theft?
Conflict-of-Interest Vigilantism. Governments, academia, activists and the media — all skeptical of the profit motive as driver of a built-in bias — are applying conflict of interest rules to put industry on the defensive and marginalize its role in decisions on everything from publication of clinical trial results to participation in scientific panels that drive access to new medicines. This narrow view of conflict of interest, which fails to take account of the more diverse factors that motivate and often pre-determine the responses of other interest groups, is a powerful force behind the industry's eroding reputation. Yet little has been done to confront and reverse the perception that since drug companies have that simple motive to market, their input on virtually every issue cannot be trusted. Independent observers like former UN AIDS Program Executive Director Peter Piot have flagged this resistance as a key emerging issue in global health governance, which if left unresolved will limit real progress in disease outcomes.
The Margin Eaters. There is an emerging social contract that in many ways treats the industry as a quasi-public utility, with pressure to make costly commitments normally not expected of a private enterprise. These now include revenue and profit give backs that conform to fiscal targets set by government, or post-marketing surveillance activity [i.e. REMS] that can require extensive funding of work extending beyond the normal product life cycle marked by expiration of the patent term. Risk-sharing contracts and the outcomes-based company commitments unleashed by the 'total health solution' approaches of personalized medicines are another example. Such tools may all be positive in the abstract, but the net effect is going to be still more pressure on the bottom line in 2011 and beyond.
Breaching the Registration Firewall. The era where a marketing license was granted without consideration of cost or pricing is now a historic artifact. National registration agencies face significant political pressure to build the murky concept of 'value' into their scientific review procedures, even though there is no textbook available on how to do this well — because in the end 'value' is a matter of judgment and people assess it from different perspectives. This in turn erodes confidence in the scientific certainty and legitimacy of agency decisions. It is also helping to revive interest in the 'medical needs' clause, where regulators can remove existing approved medicines from the market on grounds that the real-world evidence of therapeutic gains fall short of expectations, or where a newer product proves superior. Predictability through the product life cycle suffers and companies simply grow more averse to risk by shutting down promising research leads prematurely.
Wellcome Foundation — or WalMart? The traditional business model of Big Pharma — with its heavy investment in in-house innovation — is being reconsidered through new approaches that emphasize the outsourcing of R&D: from research to 'search,' with the latter linked to external licensing and partnering. Taken to its logical extent, the new model could transform companies from innovators to distribution platforms that rely on marketing heft, size and scale to compete rather than science. Coupled with the ruthless drive for efficiencies that have led to large-scale layoffs of once cosseted professional staff, the trend raises an important reputational question: if the industry is no longer viewed as a wellspring of science and innovation, what strategy is in play to respond to a world that perceives industry as the WalMart of pills?
Divide and Conquer Marketing. Stiff competition within therapeutic classes has created unheard of rivalries among companies that once were happy to share the same watering hole. Some marketers are investing millions in brand-bashing 'anti-launch' strategies to limit the uptake of newer alternative products. The question is whether everyone loses when this logic is applied against the larger patient-first perspective that regulators and the public expect from the industry.
Supply Chain Strategy: Managing risk and opportunity in a changing global landscape