The Steep, Slow Climb
The most momentous day on the 2011 calendar may be in November when Ranbaxy begins flooding the market with generic Lipitor, long the industry's top-selling brand. The patent expiration of this superstatin marks the end of an era when pharmaceutical empires could be built and sustained by the production of one or two annual blockbusters for the primary-care markets.
Drugmakers will be casting about for strategies that free them from the current vicious cycle of cost-cutting, loss in productivity, sales shortfalls, and stock devaluations. "Fewer companies will make it without restructuring, moving into new businesses, major acquisitions for their pipelines—and just plain luck," says Murray Aitken, IMS's Healthcare Insight leader. "There still hasn't been enough cost cutting to provide companies with a base for future profitability."
The most dramatic trends in healthcare are toward market efficiency and the alignment of price with value. Pricing reform is inevitable with runaway healthcare spending finally on the nation's agenda. How each company responds to these new pressures will reveal its priorities, ranging from the bottom line to public trust. No one would be surprised if facing this profit-cramping market, pharma quietly raised prices by 10 percent or more in 2011 as it did last year in the months leading up to the passing of the Affordable Care Act. Longer term, the industry has little choice but to meet the growing demand for drug pricing accountability head on—by showing that the health outcomes provided by drugs are also economic benefits. "The question a pharma must answer in order to price its drug is no longer, Is it safe and effective?" says Carolyn Buck Luce, Global Life Sciences Sector Leader at Ernst & Young. "The new question payers are asking is, How do we know it is worth paying for?"
Industry leaders are in the unenviable (if well compensated) position of having to make the right decisions in the context of not only a disruptive 2011 market but also a transformation of the healthcare industry by decade's end. "Pharma is moving from being a product industry based on a drug to an outcomes industry based on the insight you get from all the information that went into making that drug," says Buck Luce. In this brave new world, pharma may generate the information as it designs the drug, but unless it develops new capabilities fast, it may lose control of that information—and its value—to more innovative players.
For an industry that has remained unprepared, year after year, for a well-known patent cliff, preparing itself for the only dimly grasped perils and potentials of a totally metamorphosed market is akin to trying to jump over your own shadow. But that is the state of pharma in 2011.
What follows are snapshots of the coming year's eight main events.
1. THE PATENT CLIFF
The 2011 and 2012 patent shreddings—six of the 10 top-selling US brands and a total of $30 billion in sales exposed to generic competition—have haunted pharma for so long that CEOs may find some relief in their arrival. Says Tollman: "The industry is so cash rich and its timelines are so glacial that reality never quite hit. It took a long time for companies to dig themselves into this hole and it will take a long time to dig themselves out."
The disappearance of multibillions of dollars in revenue at a bevy of world-class drugmakers is an unprecedented event, and not even the experts can safely predict the fallout. One thing is certain: A reliance on one or two big-ticket products will not save the future, given the rate at which Phase III failures and FDA rejections continue to mount. Consider AstraZeneca: With one quarter of its sales falling off the patent cliff by 2015, the British firm had pinned high hopes on its novel bloodthinner Brilinta, with proven superiority to Plavix (patent R.I.P.: 2012). But the FDA has put the brakes on approval with a request for more safety data. AZ's moves over the next 12 months will be carefully scrutinized.
The smart firms are on a long, steep climb toward the rationalized cost structure of any healthy industry. In their favor is the obvious but oft-overlooked fact that society needs them to succeed: The bankruptcy of companies that make lifesaving medicines is bad for everyone.
2. THE BUSINESS MODEL
The move to "grow lean" may come to mean more than just cost cutting. "I think companies will be taking a very close look at their organizational effectiveness—the many levels of bureaucracy, the low level of employee engagement—and linking it to the lack of innovation," says Tollman.
Some experts predict that big pharmas will get rid of dead weight by spinning off underperforming divisions—or rebranding them as "innovative collaborations," as GSK and Pfizer did with ViiV Healthcare. It is even possible that 2011 will see the first leveraged buyout of a top-50 pharma, with private equity then shutting down R&D and pocketing the cash flow.
Still, pharma innovation abides, even if not powerfully enough to meet Wall Street expectations and its own bottom line. A handful of important therapeutic advances will come to market in 2011, including the first treatments for triple negative breast cancer and malignant melanoma, oral drugs for hepatitis C and multiple sclerosis, new drugs for stroke prevention, and the first new lupus treatment in 50 years (see "Ride the Wave: Pipeline Report 2011," Pharm Exec Dec. 2010). All are expected to reach blockbuster status or better, some rolling out with restricted REMS.
Yet the majority of new drugs remain, at best, incremental advances. Their prospects of success are diminishing as generics come to define the market. "Most new branded products will be fighting for a third-line rather than a first-line position. Even a new brand that is first-line is much less likely to be used," says Aitken.
3. COST CUTTING AND DEAL MAKING
Large layoffs show no sign of letting up in 2011, even after a year in which some 50,000 people lost their jobs as drugmakers slashed payrolls. "There will be more layoffs in sales and marketing, a general downsizing in manufacturing, and R&D will also come under the lens," says Aitken.
Pharma is cutting back on marketing spend even in high-profile areas like cancer, says Jan Heybroek, president of the Arcas Group. "The model is changing, too. The company is the commercialization chief and will outsource the rest—strategy, implementation, and compliance."
Megamergers and other consolidations resulted in the closing of research sites in the US and across Europe—with more to come this year. Wave after wave of job losses have improved the bottom line, but the larger effects of cyclical layoffs will be an increasing source of concern for managers. "The cost to employee morale is terrible. I worry that it's death by a thousand cuts," says Tollman. Determining what the company's long-term cost structure will be and then doing one massive layoff may produce a more competitive, engaged base from which to grow, he says.
Following 2009's two monster mergers, pharma deals now focus mainly on strategic transactions in the $100 million to $200 million range. But with diversification and globalization the playbook for growth, pharmas will continue to spend big to acquire firms with key assets, regional access, or revenue streams in 2011. Currently, the spotlight is on the $8.5 billion hostile takeover bid of Genzyme by Sanofi-Aventis, likely to conclude in the French firm's favor in the next few months.
"The velocity of M&As will increase to build pipelines and gain access to new markets," says Terry Hisey, Deloitte's US Life Sciences Leader. With venture capital having abandoned biotechs, Hisey predicts that Big Pharma will form new partnerships with academia from which the still-unfulfilled paradigm-shifting promise of genomics, gene therapy, and gene silencing will give signs of progress in 2011.
4. EMERGING MARKETS
Most of pharma's growth potential lies in emerging markets, and 2011 will be a year of applying lessons learned. "The industry is being much more realistic about what the market potential and price points actually are, what the product portfolio should be, and even if they should be in the market at all," says Hisey. "It's not about protecting their brand—it's about building, borrowing, or lending a brand."
Buck Luce agrees: "China and India need essential medicines, not innovative ones. Most emerging markets are dominated by generics," she says. "This is creating a different way of building businesses, such as big pharmas and small in-country companies collaborating on OTC sales of an essential drug or a branded generic." In fact, branded generics are expected to expand widely in 2011—they offer consumers the promise of quality and safety in markets where counterfeit products are common, and that promise is something consumers will pay more for. The only flaw in this strategy is governments are beginning to apply breaks on pricing in this segment.
Pharma is not only building brands, it's building markets from the ground up by opening manufacturing plants and R&D centers—especially in China, which became the world's third-largest pharmaceutical market last year, with predictions of growth in sales of 25 percent in 2011 to more than $50 billion, according to IMS.
5. US HEALTHCARE REFORM AND POLITICS
"This year will be all about healthcare reform implementation," says Matt Giegerich, Chairman and CEO of Ogilvy CommonHealth. "The emergence of 30 million new patients—and another 30 million whose coverage will be expanded—will obviously provide pharma with a big opportunity. Many are poor people or minorities with multiple chronic care needs."
Whether the new Republican majority follows through on promises to repeal Obamacare is up in the air. Some of the most consumer-friendly reforms have already kicked in, increasing public support. The individual mandate and its constitutionality is an issue that will play out in the courts.
"All the political uncertainty around the healthcare bill is causing havoc for pharma," says Michael Santoro, a professor at the Rutgers Business School. "The reality is, What can the Republicans target to cut back? The big-impact items—accountable care organizations, electronic records—are driven by larger trends. The only thing they can argue with is coverage of the uninsured, and even that has an economic benefit."
As the heads of committees, the Republicans have many procedural means to block rollout of the law's new initiatives, not least by refusing to fund them. Some Republicans have pledged to devote the next two years entirely to investigations into the Obama administration. FDA Commissioner Margaret Hamburg is expected to be summoned to Capitol Hill in the spring to discuss the agency's oversight of pharmaceutical manufacturing plants. CMS acting director Donald Berwick, who will be implementing the many pilot projects upon which the fee-for-outcomes model is based, is also expected for a grilling. In this way, the GOP can stall the daily business of the two federal agencies whose predictable operations are most critical to pharma.
Two targets industry lobbyists may take aim at are the Independent Payment Advisory Board for Medicare (IPAB), whose cost-cutting recommendations may morph into de facto price controls, and the Patient Centered Outcomes Research Institute (PCORI), the public/private nonprofit in charge of furthering comparative effectiveness research.
Yet partisan politics is ultimately merely a sideshow. "The transformations in healthcare are market driven," says Hisey. "We need to get front of mind the fact that Washington is only an influence in global markets. What's happening in the UK and in China is just as important."
6. PRICING AND VALUE
In the UK and Europe, the financial crisis has unleashed new austerity measures, likely to tighten the screws on national drug budgets. Many eyes in 2011 will be on Germany's new policy: Drugmakers will have one year to negotiate a price with insurers, but if an agreement cannot be reached, the health ministry will step in, setting a maximum reference price. This ceiling will likely be adopted as a benchmark in other EU markets. How long will it be before the US adopts or adapts similar measures, turning pricing pressures into a uniform global network of price controls?
PCORI may attract industry ire and Republican fire, but industry leaders have come to accept that comparative-effectiveness is a done deal. "Where we are with comparative effectiveness right now is where we were with safety about eight years ago," says Dr. Richard Gliklich, CEO of Outcome Sciences. "Pharma wants to know what the rules of the road are so that it can start investing in the research, but there is still a great deal of uncertainty and debate about what is the best study design."
With three seats at a PCORI table of more than 20, pharma has a voice in these debates, but the inevitable influence of comparative effectiveness on drug pricing is a source of industry anxiety.
Head-to-head trials will become an expected part of drug development in order to get payer reimbursement, if not FDA approval. "We are going to see the start of applied comparative effectiveness in three areas: with current products and lifecycle management, with development and launches of new products, and with the licensing of potential new products," says Hisey.
Heybroek agrees. "Pharma is going to devote more resources to becoming expert about the entire payer community," he says. "A payer could care less about a clinical trial unless the drug shows a clinical benefit that translates directly into an economic impact."
Meantime, the market will continue to gain sophistication in assessing how patients should be treated and by which regimens, says Mike Wokasch, who blogs at PharmaReform.com. "Individual providers are already building data systems trying to correlate outcomes with treatments. We will see increasing pressure on pharma to demonstrate the value of its products in terms of outcomes."
The FDA and CMS will also advance plans for so-called parallel reviews of new drugs for simultaneous approval and coverage. The agency also will push drugmakers to do quality-of-life studies to evaluate the real-world benefits of new cancer drugs.
7. FRAUD AND ABUSE
As The New York Times reported last month, over half of all state and federal fraud settlements in the last two decades have involved just four drugmakers, earning pharma a dubious distinction that once belonged to the defense industry. The crimes are typically overbilling Medicaid, bad manufacturing practices, and pushing pills off label.
Pharma claims that its stepped-up internal compliance programs have reformed bad habits, and many legal experts agree. PhRMA has also tightened its own guidelines. But efforts by prosecutors have also been stepped up, forcing 10 drugmakers to dole out a total exceeding $4.5 billion last year to end lawsuits. GSK topped the list with a $2 billion bill, partly to settle hundreds of violations at its biggest manufacturing plant as well as flagrant practices leading to the production of substandard, contaminated, and even counterfeit drugs.
In 2011, prosecutions of traditional fraud and abuse may further increase, possibly reaching smaller companies, says Virginia Gibson, a former assistant US attorney and current partner at Hogan Lovells. "There may also be new kinds of prosecution, including cases in which companies—and even CEOs—are alleged to have misrepresented the data from post-marketing research that was published in journals, which are then used as sales tools."
The criminal lawsuit against a GSK assistant general counsel last fall in a case related to off-label promotion was widely perceived as a shot across pharma's bow. Most legal experts predict that there will be more prosecutions of corporate executives this year. The smart money is on repeat offenders, such as Johnson & Johnson, which recorded, in 2010 alone, recalls (and "phantom" recalls) of more than 70 products. Whether longtime head William Weldon can survive as CEO remains to be seen.
8. TRANSPARENCY AND E-TECHNOLOGY
Online content is grabbing more and more of pharma's marketing spend, even if most surveys show that only about one in 10 consumers clicks to a pharmaceutical company's site in order to find information about a drug. In 2011, the FDA is expected to release pharma guidance about the use of the Internet and social media, focusing on the legal boundaries distinguishing information exchange from product promotion.
"Every company is rapidly reinventing its commercial organization due to profit pressure—incorporating new digital media, analytics, and data in the backend," says Matt Giegerich.
But healthcare IT is about more than commercial performance. The patient medical data aggregated and analyzed by the technology provide the material from which decisions about health outcomes, the value of drugs, and the cost of care will ultimately derive. Consumer use of digital media to access healthcare information is growing at a staggering rate: Since last February, the number of health-related apps on smartphones has increased by 78 percent, and Apple has more than 7,000 health-related apps for iTunes, iPads, and iPhones.
"Pharma has not yet figured out how to be part of a new business model created around this data and technology," says Carolyn Buck Luce. "Industry leaders need to find a way to collaborate with nontraditional players such as companies that make channels to customers or social media websites." Even more important, says Buck Luce, is to seize the opportunity presented by these disruptions in drug pricing and healthcare IT. "Even if a drugmaker embraces health outcomes, the payer's decision about which drug will make a person healthier is still a very narrow field to compete on," she says. "Pharma is ignoring the rest of the knowledge in the value network stretching from lab to bedside."
That information, which likely cost close to $1 billion and 10 years to accumulate, remains stuck inside the drug, and efforts to recoup the investment through high prices are in vain. All that knowledge beyond the drug's package insert—about the disease, clinical data, reimbursement, adherence, etc.—can be turned into education, support, and other services to improve patient care in real time. With a sustained commitment to transparency and accountability—by cleaning up its act, in other words—pharma might even recover sufficient public trust so that patients value this lab-to-bedside information as essential.
If this forecast is a real downer, at least no one can call us Little Mary Sunshine. The industry will continue on, in some iteration or other, until there are no more diseases to treat and human suffering ends. The confluence of certain demographic and technological trends may signal very bright days indeed for pharmas that make it to the other side of the patent cliff.
The global population is aging at an unprecedented rate—a public health success credited partly to pharma's continuous innovations. In East Asia, the average lifespan has grown from less than 45 years in 1950 to almost 75 today. And the Baby Boomer generation is only a fraction of the current estimated total of 500 million—a population whose complex health needs will increasingly push essential providers like pharma to the limit. Meantime, the global spread of information technology is advancing consumer awareness of all aspects of health and disease, prevention and treatment, risks, benefits, and, of course, cost.
As for the challenge of innovation, many experts predict that the application of the genome discovery chain, however frustratingly slow at the moment, will produce a leap, if not a revolution, in drug development. A series of such advances may not only overcome pharma's productivity drought but transform it into an industry that produces more cures than treatments.
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