Missing Link: A Growth Strategy

Few observers see day-to-day management efficiencies as a solution to the industry's larger problem, which is reviving organic growth. This requires an understanding of how profound the forces remaking the overall market for healthcare really are. "The strategic driver for Big Pharma today must be a sense of urgency; the tectonics of change—mainly involving the customer base—are rapid and unyielding," says Carolyn Buck Luce, global pharmaceutical sector leader at Ernst & Young. "Healthcare is transitioning to a different business, which we characterize as 'the third place(s) in healthcare,' where drugs and other health services are manufactured, delivered, consumed, and paid for by a far wider nexus of stakeholders than currently reside in the hospital and the physician."

Evidence suggests the industry is moving in this direction, although in the incremental manner typical of a sector that for years has had it good. One has only to observe the play-out from hundreds of individual company transactions, all taking place without much media scrutiny. Their imprint may be low compared to the giant M&A deals of the past five years, which itself evidenced the conviction—now in disrepute—that organic growth could be delivered through consolidation. Collectively, these smaller deals could prove a more consequential and enduring stimulus to growth due to their focus on moving the industry beyond the pill to that of an integrated information, process, and service provider—with the ultimate goal of improving outcomes for the patient.

Aging and Public Debt—The Perfect Storm

Unlocking new sources of growth will be complicated by the convergence of two contradictory forces this year. The first is acceleration of the demographic transition toward an aging society. In many OECD countries, pensioners are beginning to outnumber able-bodied workers, a trend that will gather pace through 2025. In Belgium and Italy, fewer than half of males over age 50 are still working, while in the U.S. the first wave of the 77 million baby boomers became eligible for participation in Medicare last year. Enrollments in the program are slated to nearly double through the end of this decade.

The second is the unexpected revolt of the lender community in servicing government debts on social entitlements, including healthcare. The OECD forecasts that member states will need $1.5 trillion in fresh borrowing to fund entitlements this year, or almost twice as much as in 2005. Promises that governments would "ring fence" healthcare, protecting it from the budget axe, have been abandoned, and cutbacks in drug spending are spreading throughout Europe. Currently, the industry is owed nearly €10 billion in unpaid bills by payers in high-debt markets led by Spain, Portugal, Greece, and Italy. A significant portion of this debt is being repatriated to manufacturers in the form of government bonds, the face value of which begin to depreciate from the date of issue.

In the U.S., another "contribution" from PhRMA member companies to help push deficit reduction around health reform is likely after the coming November presidential election, regardless of which party wins. It will push Big Pharma's total givebacks to more than $100 billion through 2019, when "Obamacare" is scheduled to be fully phased in. Actually, the final bill will probably never be known—another blow to the predictability required by an industry facing unusually long development time frames.

Politics, Politics

The fiscal crisis will scuttle the industry's optimism about the impact of aging on demand for innovative medicine and healthcare overall. With budgets facing unprecedented pressure, how to pay for drugs is becoming a prominent function of—guess who?—the government. It is no surprise that price regulation, rather than market-friendly instruments like patient contributions, is the preferred policy response. Even emerging country markets are moving in this direction, as the bill falls due on required investments in basic health infrastructure (China, India, and Turkey are cases in point.) And the imperative to pay down debt is jeopardizing activities where governments can play a positive role, such as tax incentives for basic research and investments in public health infrastructure.

There is an added element: Politics will be front and center this year, with potentially game-changing elections slated in key markets, including the U.S., Russia, France, Mexico, and Korea. China, which is midway toward extending basic health coverage to 900 million people (300 million over age 60), will undergo a generational leadership transition at year end amid signs the domestic economy is slowing. Sharp regional variations in living standards and the escalating expectations of the middle class are already on the table for the new regime. Health reform is one tool that the government can apply to address these challenges, which is why many China observers expect a more aggressive regulatory approach to pharma and biotech, already singled out as one of seven "strategic sectors" of the economy deserving government attention.

To put it bluntly: Is the China star shining so bright it keeps you up at night? Then perhaps it's time to pull the shade down a bit—and that goes for other emerging markets as well.