Forecast 2007: At Sea - Pharmaceutical Executive


Forecast 2007: At Sea

Pharmaceutical Executive

The hottest-button issue is pricing. Industry leaders like Tauzin can be expected to fly the banner of "consumer freedom of choice," but that may be a mistake, according to Lehman's Frederick Frank. "With the Democrats taking aim at drug prices, pharma is finally going to have to explain itself," says Frank."Pharma complains a lot about how it is held to a higher standard than other industries. Well, it should be held to a higher standard because what it produces is unique"—uniquely beneficial and uniquely dangerous. Instead of whining about it, he says, "pharma should make the case that being held to a higher standard is precisely why it deserves higher profits."

Frank also advocates talking up the fact that drug costs, while making up only 10 percent of total healthcare spending, are the most cost-effective part of the system. By contrast, a 2006 Harris Poll found that six in 10 Americans believe that the cost of prescription drugs is somewhere between 40 and 80 percent of total healthcare spending. That represents an education gap just begging to be filled.

Jane Sarasohn-Kahn, head of the Think Health consultancy, adds that the sooner pharma gets out in front of its current pricing issue, the sooner it can start laying the groundwork for dealing with is next pricing problem. "Industry needs to get the message out that we have hit the end of innovation based on the old model," she says. "The new model of personalized medicine will mean smaller markets—and higher prices—for specialty drugs. Pharma will have to work even harder to prove the value of these innovations to health plans and patients."


Central to the pricing debate, of course, will be Medicare Part D. Part D has received high grades from the 22.5 million seniors who enrolled in the first year. Fewer than one in five seniors landed in the doughnut hole—a stat that may help account for the plan's 80 percent satisfaction rate. That may persuade Pelosi and other Dems who campaigned on Medicare reform to back off: Why fix what ain't broke?

But the number of plans has risen by a third to 1,850 nationwide, and with a growing number cutting their product menu, many seniors are shopping around again. Consumer unrest may give traction to Medicare reform and even drug importation.

A bipartisan Senate bill repealing Medicare's ban on direct government price negotiation with pharma companies is ready for prime time as soon as the new session convenes. And though leading Dems agree that price deals won't fill the doughnut hole, the party may risk messing with success to score a scalp from pharma for the 2008 campaign.

Still, Part D wasn't going to be a bed of roses for pharma this year, reform or not. "In 2007 we're going to see Part D in its true colors—the good, the bad and the ugly," says Mason Tenaglia, managing director of the Amundsen Group. "And the good—induced demand—is pretty much over. The bad—increased price pressure—is getting worse. And the ugly—the fact that interpreting performance in Part D is nearly impossible—you don't even want to go there."

The windfall pharma got last year from the initial uptake of enrollments was a one-off. What's ahead are the consequences of the doughnut hole and, more important, of the shift from defined benefits to defined contributions, placing the burden of healthcare costs squarely on the consumer. And because of the system's built-in price transparencies, public and private payers, wholesalers, and consumers will be demanding better deals, even as they move to cheaper generics.


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