Drug supply professionals concur that the increasing use of comparator drugs and co-therapies in clinical studies acts as a strong counter to company efforts to rein in the rapid growth in drug development spending. TransCelerate Biopharma, a consortium of 10 Big Pharma companies committed to improving the overall efficiency of the R&D process, is putting new focus on the high cost and incidence of comparator drugs and co-therapies in clinical trials. 

The current climate reflects intensifying market competition and regulatory reform as more trials are being conducted to compare the safety and efficacy of investigational treatments against a standard of care. Although comparative effectiveness studies of new drugs are still relatively new, sponsor companies are including commercial comparator drugs in their clinical studies to position their drug against a competitor. In some cases, regulatory authorities still require comparisons with a placebo. However, as sponsor companies target more difficult chronic and terminal illnesses, comparisons with a placebo may be unethical, making a commercial comparator drug necessary. Moreover, many clinical trials now test the efficacy and benefits of co-therapies on diseases that have historically not responded well to single therapies (e.g., HIV and oncology).  

Based on a decade of experience, investigational drug supply chain professionals note that sourcing and managing comparator drugs and co-therapies is difficult, risky, and costly. The cost to acquire comparator drugs and co-therapy drugs is high as study sponsor companies often must pay retail prices instead of wholesale or discounted prices. In many instances, sponsor companies are unable to secure comparators and co-therapies directly from a competitor. As a result, sponsors must rely on vendors/wholesalers and the principal investigators at each research center to purchase comparator and co-therapies, and also through local pharmacies. As newer and more sophisticated therapies enter the market (e.g., biotherapeutics and stem cells), the cost for comparator and co-therapies is expected to escalate sharply. Also, the supply of these products will likely be curtailed due to the complex manufacturing processes. 

Sourcing comparator drugs and co-therapies often results in substantial delays and increased study cycle time. Planning and managing decentralized global sourcing activity poses logistical challenges—particularly with comparator drugs and co-therapies requiring unusual storage and shipping requirements. Obtaining comparator and co-therapy product documentation, handling resupply shortages and delays, and maintaining supply chain security particularly against counterfeit drugs are but a few of the many challenges introduced by comparator and co-therapy sourcing. 

Despite mounting concern and increased attention to the rising prevalence of comparator and co-therapies in clinical trials, little data exists that quantifies current practices and characterizes the current situation and key trends. In response, the Tufts Center for the Study of Drug Development (CSDD) conducted a study among 11 major pharmaceutical companies in late 2012 to gather benchmark metrics.  

A three-part data collection tool was designed by Tufts CSDD to collect general company information, overall perceptions about sourcing comparators and co-therapies, and company-specific study data and costs. Tufts CSDD researchers collaborated with participating companies in developing the data collection instrument for the study. Definitions for specific types of trials using comparators were agreed upon by participants and included with the data collection instrument.  

General company information included comparator function capacity; the overall reporting structure within R&D or commercial operations; and strategies typically used for sourcing comparators (e.g., the use of central, local, or mixed models).  

Participating company perceptions were gathered using open-ended responses and focused on the challenges associated with sourcing comparator drugs and co-therapies. Areas of impact that were explored included regulations concerning IMP versus non-IMP and the use of generics as standards of care. Company practices and approaches to sourcing comparators were assessed as well as strategies for purchasing products from third party buyers or other pharmaceutical companies. Cycle-time data—including the average lead time from order placement to product delivery—was collected. Data on the timing and frequency of receipt of CoAs and CoCs was collected and examined for global differences and by manufacturers.  

Specific study and cost data was gathered for clinical trials conducted in 2009, 2010, and 2011. Sponsor companies were also asked to estimate and forecast study time and cost data for clinical trials conducted and planned for 2012 and 2013. Data was gathered for head-to-head; co-medication; and standard of care trials. Study data was also examined for use of branded and generic drugs. Participating company budget data was collected including the total amount spent on clinical supplies and proportion of budgets spent on comparators and co-therapies.  

Tufts CSDD also sought to collect data on the total volume and cost of co-therapy and comparator drugs not used during the course of the clinical trial. Additional data included total number of studies and revenue received from other companies (through use of their company's drugs); and total full-time equivalents (FTEs) or number of hours per month dedicated to working with other biopharmaceutical companies and third party buyers. Company strategies regarding purchasing products from third party buyer services and other biopharmaceutical companies were explored, as was company receptivity to selling comparators directly for use in head-to-head clinical trials. Data on 370 studies was collected and analyzed. 

Comparator and co-therapy sourcing practices

Overall, the clinical supply function is managing varying levels of comparator sourcing using a variety of approaches. The average clinical supply chain function has 246 full-time employees with three full-time staff dedicated to comparator and co-therapy sourcing. Participating companies note that clinical supply functions typically report into clinical operations.  

Clinical supply functions have increased the number of personnel dedicated to working with other biopharmaceutical companies and third party buyers. Participating companies indicate that they have added on average one new FTE between 2009 and 2012 to work with wholesalers, for example. 

Participating companies indicate that there is wide variation year-over-year in their comparator and co-therapy sourcing costs. Few organizations are routinely collecting metrics on the specific use and expense of comparator and co-therapy drugs. Estimated participating company spending on comparators in 2012 alone ranged from as little as $10 million to as much as $120 million. On average, participating companies spent a total of $50 million per year on clinical supplies with half of the entire clinical supply budget spent on comparator drugs and co-therapies. For several participating companies, 2011 forecasts for budget planning purposes fell in the $150 or $200 million range, but 

 spending was typically lower. Participating companies were unable to breakdown spending by clinical research phase. 

Less than 40 percent of clinical trials did not include a comparator or co-therapy in 2012—a proportion that has been gradually declining during the past four years. During that same period, the proportion of studies involving head-to-head comparator drug trials has been rising to nearly 60 percent of clinical studies in 2012. (Figure 1). And the percentage of studies using non-commercial presentations (e.g., bulk supplied or active and placebo) supplied by the competitor and co-medication commercial comparators (e.g., HIV cocktail) has increased from 0 percent to 5 percent of clinical studies between 2009 and 2012. The total proportion of comparators and co-therapies represents nearly two-thirds of all clinical studies in 2012. 

 Figure 1: Percentage of studies conducted using various comparators from 2009 to 2013. 			

The study results indicate that a growing proportion of comparator and co-therapy drugs are centrally sourced (Figure 2). Whereas participating companies locally (via investigator) sourced 66 percent of their studies involving comparators and co-therapies in 2009, only 30 percent did so in 2012. At this time, participating companies report centrally sourcing comparators and co-therapies for 70 percent of clinical studies that require them. 

Figure 2: Percentage of studies conducted using centrally and locally sourced comparators. 			

A number of factors reportedly influence whether to source comparator and co-therapies locally or centrally. Commercial availability within a given market, risk of counterfeits, and local regulations and infrastructure are top factors dictating which sourcing strategy is required. 

Branded comparator and co-therapy drug use in clinical trials is far more common. Nearly 90 percent of all studies are sourced with higher-priced branded co-therapies and comparator drugs. This proportion has not changed between 2009 and 2012.  

Data on the amount of comparator and co-therapy drug wasted or unused in clinical studies could not be gathered. Participating companies are unable at this time to reliably provide this metric. But anecdotal reports based on conversations with senior sourcing managers suggest that a substantial proportion—ranging between 30 percent and 55 percent—of purchased comparator drugs and co-therapies are leftover and unused when clinical studies are completed or terminated.  

Participating companies indicate that one of the top challenges and a major cause of delays in sourcing comparators and co-therapies is associated with obtaining required documentation (e.g., equivalency documentation, certificates of conformity, certificates of analysis, and BSE/TSE statements) from the manufacturer and temperature excursion data (e.g., stability data).  

Comparator and co-therapy product availability is another top mentioned difficulty, especially for products that represent a sizable portion of a manufacturer's revenue and supply. Oncology products, rare disease products, and anti-inflammatory MABs, for instance, are closely monitored and protected by the manufacturer as they contribute a large portion of that company's revenue.  

Comparator sourcing managers note a particular difficulty in obtaining comparators when supply is limited or when expiry dates are of short duration. Other notable problems include increasing complexity of trial design, variation in approved indications globally, and increased regulation. These factors can lead to longer lead time in defining comparator requirements prior to purchasing the comparator drug. Multiple requests for proposals to third-party buyers may signal secondary markets to inflate drug pricing or limit availability. Sourcing managers also find that establishing reliable pricing forecasts can become an issue, as there is not always sufficient information on availability of a product within particular regions or countries. Counterfeiting, particularly in remote emerging regions with limited regulatory oversight and law enforcement, is another challenge of note. Another factor at play is rapid expansion of the market and the number of players involved in the pharmaceutical supply chains. The regulatory and law enforcement agencies are also responding in an effort to keep pace with this expansion. 

The results of this Tufts CSDD study indicate that a surprisingly high proportion of clinical studies now involve comparator drugs and co-therapies and that these drugs are typically branded products. Based on average spending levels per company, we estimate that the industry overall is spending $1.5 to $2 billion annually to include comparators and co-therapies in their clinical studies.  

Participating companies anticipate that the operating challenges and costs associated with sourcing comparators and co-therapies will continue to worsen and they are eager to identify improvement opportunities.  

This Tufts CSDD study is an important first step in compiling and presenting metrics that begin to characterize the prevalence and cost of sourcing comparator drugs and co-therapies. The conclusions drawn in this study are based on a limited sample of clinical studies. More data, from a larger number of companies, should be gathered to establish more robust measures. 

Through metrics and the identification of shared challenges, pharmaceutical and biotechnology companies would be advised to begin a discussion about potential solutions to be implemented across the drug development enterprise. To date, organizations have had limited opportunities to establish long-term sourcing arrangements with a single peer company. Some companies have indicated that they are entering into discussions between company R&D functions—particularly those where there is therapeutic area alignment—to establish a more direct exchange of drug supply. In most companies, however, the commercial division is responsible for handling and fulfilling requests for approved drug products.  

Among participating companies, senior sourcing executives have indicated high receptivity to establishing a pre-competitive comparator consortium that would create a transparent, centralized forum for companies to be paired efficiently when one is seeking the other's comparator or co-therapy drug. Such a consortium might have its members agree to adhere to standard documentation and supply practices in addition to preferred pricing levels. A consortium model—although often suggested at industry meetings and conferences—has yet to be formally embraced and championed by a pharmaceutical or biotechnology company.  

Concerns about competitive pricing, antitrust, and collusion have prevented the precompetitive consortium concept from gaining momentum. Overall patent expiries and challenges in R&D productivity make some companies reluctant to partner, as there is a perception that it may erode sales of marketed drugs faster. TransCelerate BioPharma has established a working subcommittee to consider how to build and launch a reliable, rapid source of commercial products for use in clinical trials. A pilot is planned for this year. Tufts CSDD is committed to working with TransCelerate and others to measure the impact of new solutions to address this costly challenge.  

 is Senior Project Manager at the Tufts Center for the Study of Drug Development (TCSSD). She can be reached at 

 is Director of Sponsored Research Programs and Associate Professor, TCSSD. He can be reached at 

 is Head of Comparators, Investigational Material Supply, GlaxoSmithKline. He can be reached at 

Articles

Features

New research from the Tufts Center for the Study of Drug Development identifies a significant contributor to the rising cost of clinical trials-the first step in meeting a growing strategic imperative to help senior management and the regulatory community craft new approaches to make trials more efficient in delivering results to clinicians and patients.

Tracking Trial Cost Drivers: The Impact of Comparator Drugs and Co-Therapies

The news in late March this year that NICE will be responsible for the "full value assessment" of medicines under the United Kingdom's proposed new value-based pricing (VBP) system came after growing concerns that the government has remained worryingly unclear—and is betraying a lack of confidence—about how VBP will ­actually work.  

VBP is set to launch when the United Kingdom's existing Pharmaceutical Price Regulation Scheme (PPRS) expires in January 2014. The PPRS, established over 55 years ago, is a voluntary agreement between the UK government and the pharma industry that controls the profits made by pharma companies from selling branded drugs to the National Health Service (NHS), but allows them to set their own prices within the constraints of the profit cap. It aims to serve both industry and NHS procurement policy, while allowing patients access to the best medicines. The flaws of the system have come into sharper focus in recent years; as well as suffering under the weight of—in the words of Mike Birtwistle of MHP Health Mandate—the "inherent conflict between the role of purchaser and champion," (August 24, 2011) there is the fact that the PPRS does not focus its price cuts on drugs that are deemed to deliver less "value." The new system aims to address this by setting prices that reflect the value of the drugs to society.  

But, despite VBP in the United Kingdom being talked about as far back as 2007 (and formally presented in 2010 by the current coalition government as a replacement for the PPRS), by the beginning of this year critics were still accusing the government of failing to make any progress on it.   

In January, MPs on a House of Commons Health Select Committee declared that it was "unacceptable that the arrangements for VBP have still not been settled and that those who will have to work with those arrangements are still unclear about what [it] will mean in practice." The committees called for a decision on VBP to be taken "no later than the end of March." This call was honored—but only just. 

				On March 21, the Department of Health (DOH) announced that the new VBP system will build on NICE's existing appraisal processes but will also be "capable of incorporating a broader assessment of a medicine's benefits and costs, taking into account factors such as burden of illness and wider societal benefits."

But while this "last minute" confirmation of NICE's role within VBP may have satisfied the short-term demands of the Health Select Committee, it has not done much to clarify the key issues surrounding VBP.  

The desire on the part of the DOH to demonstrate progress on VBP is understandable, says Birtwistle, but genuine progress isn't apparent. He adds that much of "the running (and thinking) remains to be done," (March 27, 2013).  

For one, the term "value" itself remains elusive. As Meir Pugatch of Pugatch Consilium asserts:  "Value is perceived very differently by the different players involved in the process, namely policymakers, producers, and, not least, patients." 

Policymakers have displayed a tendency to attach a "more static meaning" to value, says Pugatch—"defined narrowly as value for money at a given point in time and in light of the desire to reduce or control costs." Such an approach to VBP, he goes on, "presumes 

 that a new drug has already been created. Payers do not attach value to the time, costs, and risks associated with the creation of the new drug, but rather only to its therapeutic outcomes compared with other treatments."  

For Pugatch, the decision to place VBP firmly within NICE suggests that "the traditional 'realpolitik' approach to value is most likely to hold sway." The result will be that the United Kingdom is less well placed to become the source of the next new wave of innovative medicines. 

NICE itself hasn't exactly helped to soothe the ongoing VBP anxiety; two weeks after the DOH's announcement, its own chief executive, Sir Andrew Dillon, told reporters: "I don't know very much more than what is in the public domain and the statements that have been made."  

				He went on to speculate that if VBP is to be "a radically different system, then whoever is involved in it is going to have to move very quickly." On the other hand, if it is "more of an evolution of the current arrangement, then it may be easier to see how 2014 is a more realistic prospect."

Such comments are unlikely to placate those calling for transparency and urgent clarification of the VBP process. Indeed, "evolution of the current arrangement" suggests that those predicting VBP will simply be a modified version of the PPRS may be right. Certainly, Dillon's uncertainty gives rise to the argument that a delay to the proposed January 2014 start date for VBP is inevitable. 

For health economist Leela Barham, however, delaying VBP "could make a lot of sense." It would allow for efforts to improve access through innovation, health and wealth, such as automatic updating of formularies, to become established. Unfortunately, the opportunity to delay VBP "quietly" is impossible now following the Heath Select Committee's high profile criticisms. There is a chance though, she adds, that VBP could be introduced "in a phased way, tested on a few new products rather than all new products from January 2014." But one of the problems with this method is how to decide "who gets to be the guinea pig!"  

A delay would however mean further uncertainty with regard to medicines funded by the Cancer Drug Fund (CDF), which, like the PPRS, is set to close in 2014. The fund covers the cost of cancer treatments that NICE has either rejected or not yet decided on. (By December 2011 the fund had made around 10,000 treatments available to patients in England, covering 34 products.) "The CDF is supposed to be a 'bridge' to VBP," says Barham. If VBP solves the perceived problems with NICE in making recommendations on new ­medicines, then such a fund would not be needed. But the current lack of detail on VBP again leaves this situation unclear.  

Whatever the progress (or lack of it) on VBP, NICE's future, at least, seems assured. With effect from April 1, its status changed from a strategic health authority to an executive, non-departmental public body, with new, added responsibility for developing "guidance and quality standards for social care" and encouraging the "better integration of health and social care services." The acronym remains the same, but NICE now stands for National Institute for Health and Care Excellence (after eight years as the National Institute for Health and Clinical Excellence). And with the new remit comes new blood; Sir Michael Rawlins, NICE's chair since its formation 14 years ago, has stepped down to make way for Professor David Haslam, who, alongside more elevated positions, spent 36 years at the coalface of general practice as a primary care physician. 

In Haslam's first announcement as chair he admitted that tough challenges lie ahead for the expanded NICE.  Forging ahead with workable approach to VBP will be just one of them. 

Column

Value-based pricing in the United Kingdom is getting closer, but it remains out of focus.

Is That VBP on the Horizon, or a Mirage?

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Historically, Austria was the dominant political power in Central Europe under the Habsburg dynasty which ruled until World War I. Although the 20th century has been marked by significant shake ups and power shifts between countries in Europe, Austria remains today a key strategic market thanks to its steady economic development and inclination for innovation. Because of its dynamics and ideal location, it is often argued that Austria is still a gateway for the Western World to Central Europe. But to what extent? What other roles does Austria play in the regional and global pharmaceutical landscape?

Bella Figura’ Wiener Staatsoper. www.leostopfer.com			

It only takes a matter of minutes walking down the streets of Vienna to envisage a time when the city, placed at the center of Europe, was the focal point of an entire empire steeped in rich and magnificent history. From the premiere of Mozart's most recognized works to the decisive Congress of Vienna, the city has had a wealth of cultural, political, and scientific experiences that make it truly stand out. While the entire country today is a different place compared to centuries ago, life for the average Austrian has consistently been excellent. 

The standard of well-being in Austria is second-to-none. Vienna was rated by Mercer in 2012 as the number one city in the world for quality of living. Overall, Austrians enjoy very high standards in terms of infrastructure and public services, and healthcare could indeed be described as outstanding. 99 percent of all Austrians are protected by statutory health insurance as a result of the General Social Insurance Act of 1956, which created a simple insurance structure that promoted solidarity and social cohesion. 

Alois StÃ¶ger, Austrian Federal Minister of Health			

Alois Stöger, Federal Minister of Health, believes that good health is considered a truly invaluable asset in Austria, which is reflected in healthcare spending and health system resources. "In 2009, about 11 percent of gross domestic product was spent on health, of which 78 percent was generated from public sources," comments Stöger. "A high density of easily accessible health care facilities exists, and patients have considerable choice of provider. Access to high quality medical care is ensured for all citizens. Equitable health care for all patients is of great importance; services provided by social health insurance do not depend on social status or income." An example of this high quality care is demonstrated through the implementation of the "electronic health card" in 2006, whereby citizens' information on medical history and insurance are electronically stored on a personally issued card that can be used by physicians for a variety of purposes ranging from diagnosis to billing. In the coming years, Stöger will be working hard to increase the lifespan of the average Austrian by two years. 

Net health insurance expenditure for medicines 2005 - 2011			

In order to create reform, the Ministry of Health, which oversees all of the social security institutions in Austria, established the Federal Health Commission, which is composed of representatives of the Federal Government, the social insurance institutions, the federal states, the physicians' chamber and other advocacy groups. Stöger is excited about the efforts that these various associations have recently made in an effort to improve the quality of healthcare in Austria.  He explains that they have "agreed to negotiate a common and co-operative governance system for all relevant levels of health care delivery based on public health goals as well as financial targets for in- and outpatient care on a national as well as regional level." Therefore, the Ministry plans to "raise the effectiveness of the health care system via the further development of the regional health care structure in line with public health needs and to enhance the efficiency of the system by adopting an integrating care perspective and ensuring health care delivery at the best point of service," remarks Stöger.  

Jan Oliver Huber, General Secretary, PHARMIG			

The macroeconomic environment for the Austrian pharmaceutical industry is quite positive: economic recovery is strengthening, with modest GDP real growth projected in 2013. With its 8.5 million people, Austria sits amongst the largest pharmaceutical markets in Europe, ranked 12

  in 2011, with a market size of EUR 3.2 billion (USD 4.3 billion). The pharmaceutical industry in Austria represents between 10,000 and 11,000 individuals working for roughly 220 companies. Additionally, Austria serves as an important research hub. Vienna alone has 22 research institutes, five universities, two technical universities, and an impressive life science student population of around 35,000. 

Frank Wartenberg, President Central Europe and General Manager Germany and Austria, IMS Health			

Austria's entire pharmaceuticals market is expected to grow in the next few years. According to the Austrian Federal Chamber of Commerce, business volume is estimated at EUR 1.9 billion (USD 2.54 billion) and rising. More than 60 industrial pharmaceutical companies operate in Austria. Multinationals such as Sandoz, Eli Lilly and Roche not only have production facilities in the country, but have set up research and competence centers. However, despite Austria's reputation of wealth, it is one of the more low-price countries for pharmaceuticals in Europe. Baxter Healthcare's managing director in Austria Andreas Kronberger laments that "in terms of per capita sales for each product line, Baxter is selling more in other countries than in Austria. In the end, the commercialization of our R&D and production strengths ends at the price level of the European market." 

Top 20 ranking pharma companies in Austria by 2011 Revenue			

The principal challenge facing the Austrian healthcare system is an increase in costs due to a growing population and the uptake of new, more expensive pharmaceuticals. Many countries around the world face similar issues resulting from their ageing population. According to various sources, an additional 30,000 to 40,000 people join the 60+ age group annually in the country. Austria's health system therefore follows an increasingly price sensitive model, which is becoming the number one criterion for health stakeholders. Additionally, as Frank Wartenburg, president of IMS Health Central Europe points out, "Loss of Exclusivity and the patent cliff are impacting the Austrian pharmaceutical industry in general. We expect the market to lose 250m Euros in revenues in the next two years, and half a billion in the next five years." 

Robin Rumler, Managing Director and Business Unit Director Primary Care, Pfizer Corporation Austria			

Elisabeth Prchla, managing director of Merck Austria, points out that "the pharmaceutical industry has been the prime target for cost containment measures which has meant that patient access to innovative medicines is difficult." Prchla believes that, together with the Austrian industry associations, it is fundamental for companies like Merck "to cooperate with politicians and payers in order to develop conditions that allow easier patient access to innovative medicines." 

Elisabeth Prchla, Managing Director, Merck GmbH			

One way in which pharmaceutical companies are dealing with this is by voluntarily paying back EUR 82 million (USD 111.1 million) into Austria's health system until 2015, which will then be reinvested by the Austrian government into various pilot healthcare projects, mainly focused on prevention and child healthcare. This historic deal involved all stakeholders in the pharmaceutical industry consenting unanimously to this agreement, which is rarely seen in other countries. 

Karl Peter Schwarz, Managing Director, Leo Pharma GmbH			

In 2004, a new "traffic light" system for reimbursement was implemented that significantly altered the way in which pharmaceutical companies are reimbursed for their products. Essentially, products can be placed in one of three boxes. The green box includes all drugs that are automatically reimbursed by the government. The yellow box consists of drugs that are only reimbursed under special conditions that meet tightly defined rules for reimbursement, and the red box contains drugs that are highly unlikely to be reimbursed.  

Karl Nikitsch, Country Manager, A.Menarini Pharma GmbH			

According to Jan Oliver Huber, general secretary of the Austrian pharmaceutical association PHARMIG, this change in the system caused slower growth rates in subsequent years because of stakeholders' natural cautiousness and the time needed to adapt to this new structure. Like other European countries, Austria's population is ageing. "Considering two thirds of all prescriptions paid by the reimbursement system are destined for this age group, there is a natural, organic growth in Austria because of the demographics," remarks Huber. "But this growth has not been steady: in 2005, the market grew by 1.65 percent whereas it grew by 8.29 percent in 2007 and by 7.41 percent in 2008." 

Savings in Austria for generics in 2011			

Entering this reimbursement system is not an easy process either. Karl Peter Schwarz, managing director of LEO Pharma Austria describes the system as being rigid. "It is very difficult to discuss the added value for patients, which is reflected in any product price," he notes. "The maximum price of a drug within the reimbursement system in Austria is the EU average price," continues Schwarz. "If your product is already on the reimbursement list in other European markets, you have to inform the Minister of Health, after which a price commission gives you clearance." Karl Nikitsch, country manager of Menarini Austria, notes that "the market shares of some products are relatively high compared to other, much bigger, European markets. In spite of the hurdles Menarini faces in terms of market access, such as new products instantly falling into the yellow box category with many restrictions, there are green lights once this difficult stage has passed. In other countries, companies may need to renegotiate the presence of their product in the reimbursement system, such as Germany," Nikitsch says. 

Bernd Leiter, President, Austrian Generics Association			

This new reimbursement scheme and price referencing system has resulted in a lower generic market share. The clash between originators and generics is an unusual situation in Austria. In 2005, the Austrian Sick Funds put into place a new system for generic market entrance. If a product is to be reimbursed, generics companies have to lower the price of a product by 48 percent compared to the originator. The second generic that enters the Austrian market subsequently has to reduce the product's price by an additional 15 percent and the third ­generic product a further 10 percent. To make matters even more confusing, three months after the third generic hits the market, originators have to decrease the value of their product to the price of the third generic. 

Martin Spatz, General Manager, TEVA Austria			

In 2000, the Austrian Generics Industry Association (OEGV) was created to represent the interests of generics companies in Austria. Compared to many other countries in Europe, the penetration rate of generics in Austria is still relatively low; although compared worldwide Austria finds itself in the middle of the road. IMS data from 2010 indicates that generics only had 26 percent of the market share, putting Austria as one of the lowest in Europe. Bernd Leiter, president of OEGV, notes that until recently, most Austrians were not even aware of the existence or the role of generic drugs. His main task as President is to "raise the awareness of the other stakeholders in the pharmaceutical industry about the existence and actions of an association entirely focused on defending the interests of generics companies in Austria." Leiter feels that through convincing authorities, physicians and patients about the quality and safety of generic drugs, the potential savings by switching to generics in the future could equate to roughly EUR 256 million (USD 344 million), which represents a 55 percent difference in price between patent-free originators and third generics. 

Alexander Papanikolaou, managing director Austria, Czechia, Slovakia & Switzerland, HOSPIRA Austria GmbH			

Dr. Martin Spatz, general manager of generics company Teva Ratiopharm is optimistic about the future of generics in Austria. "Whereas the total pharmaceutical market in Austria is expected to grow by 1 or 2 percent, the ­generic market could grow by 5 to 7 percent. If it is not spoiled by voluntary price cuts and by fully exploiting the potential, it could even grow by 10 to 15 percent," remarks Spatz. "If your brand is not known, you will need huge upfront investments; if you are here as an established generic player, the market is rather protected. Barriers to entry are rather high because it is a branded market." 

BOSTON CONSULTING GROUP: A Fresh Perspective			

Dr. Robin Rumler, CEO of Pfizer Austria and president of PHARMIG, is also aware of the shift towards generics that is gradually taking place. "With respect to the cost of drugs, Austria belongs to the low cost countries in Europe," Rumler ­remarks. "Drug costs are approximately 18 percent below the EU-15 average. Nevertheless sick funds and payers still put pressure on drug cost to decrease health care expenditure. The so called 'block-buster' era is over; the future belongs to more targeted therapies. The industry is talking about the patent-cliff, which means that many of the block-busters are losing their patent these days." 

Alfred GrÃ¼n managing director, SchÃ¼lke & Mayr GmbH			

Additionally, there has been some evidence in Austria that biosimilars tend to be treated as generics. Alexander Papanikolaou, managing director of Hospira for Austria, Czech Republic, Slovakia & Switzerland, says that "the biggest development in the future lies in monoclonal antibodies. If these are treated as generics, we start to destroy a future market that has huge potential for hospitals and for patients. You will not launch a product if you do not have the potential to get a return on investment. If you do not launch these products in the first place, there will be no 'generic' solutions for the market." 

Michael Norman, General Manager Austria, Czech Republic, Hungary, Romania, Bristol-Myers Squibb GmbH			

Following the end of the Second World War, Vienna served as an important hub that connected Western and Eastern Europe for many industries. However, following the end of the Cold War, and particularly in recent years, the emerging markets of Eastern Europe may give the impression that Vienna's status as a hub or gateway is becoming somewhat obsolete. 

Robert D. Lefebvre, Vice President Commercial Operations Europe, Middle East and Asia, Kedrion International			

Gerald Schrot, managing director of Biotest Austria, believes that "centralizing talent in Vienna is good for Austria. With competence comes a network of talented individuals as well as capital, particularly in the financial world, where Austrian companies have been very successful in former Soviet satellites. Austria is a small country with a history of diplomacy, and I believe that resonates with individuals when doing business in other parts of the continent." 

Such an example of this success can be seen with hygiene specialists Schülke and Mayr. Alfred Grün, general manager of the company's Austrian affiliate, says that Austria is "the leading ­country in the Schülke group, by 40 percent more than the next country. This is important as the mentality in Austria is very sensitive and flexible, which allows it to cover the Eastern European market successfully." 

Country Report

While Austria experienced significant political and economic shake-up throughout the 20th century, the country has remained a key strategic market for the pharmaceutical industry thanks to its steady economic development and inclination for innovation.

Country Report: Austria

PE, May 2013 Cover Image

While it is widely known that the biopharmaceutical industry is confronting disruptive changes to a business model that dates back well into the last century, less is said about the generational shift taking place among managers at every level of today's pharma organization. Knowledge transfer—the handing down of substantive skills and process awareness, combined with individual learned intuition—has never been more important to successfully charting a new path forward. One key source of insights for this next generation of c-suite climbers is "Reinvent: A Leader's Playbook for Serial Success," written by former Schering-Plough CEO Fred Hassan, whose long career as the driver of no less than six well executed business turnarounds was punctuated by three successive slots on the cover of our magazine. His book's advice is written in the active tense, and is neatly categorized into the three elements of "Me"—authentic, purposeful, and connected—and "We"—leading, raising expectations through example, and winning, not just once, but often. As part of our planning for this year's latest crop of Emerging Pharma Leaders, 

Editor-in-Chief William Looney met last month with Hassan in his new role as non-executive chairman of Avon Products Co., whose own customer-centric business model might just be one fragrant shoot for reviving Big Pharma's tired brand. The following is an edited version of our discussion. 

Based on your 30 years of experience in biopharmaceuticals, do you believe that the ebb and flow of the business cycle is the driver of ultimate success—how much does leadership intervention count? 

Hassan: Industries and companies are not fixed objects but living, breathing organisms that must continuously adapt to survive. All industries evolve; the biopharmaceuticals business is no exception. The classical model of the lifecycle of a business runs from the embryonic stage, to the growth spurt, to maturing competition, and then finally to commoditization. Most observers today see our industry at the competition stage. We are not yet a commoditized business, but growth has faded and we are certainly no longer in an embryonic state.  

In my view, the peak era for growth started to fade after the year 2000, coinciding with the fading of the small molecule therapy platform focused on serving a mass market of patients with chronic diseases. Much of this segment of the business is headed toward outright commoditization. What we fail to realize, however, is the very process of decline opens new corridors of growth. Science is going to succeed once again in providing new and lucrative markets for those companies that recognize opportunity and seize it first. I recall how, in the 1980s, monoclonal antibodies were praised for the science but panned for their commercial potential—too many potential side-effects and too hard to manufacture, it was said. But industry found ways to surmount these hurdles, resulting in a flood of new breakthrough products, from Rituxan and Remicade to Humira and Enbrel. That success has spurred more competition, and a new cycle of growth. Entirely new product segments, like targeted medicines with companion diagnostics, will take the industry in different directions. Shaping and directing change in a way that creates new opportunities depends entirely on the human element—a strong leader, by definition, is never a mere captive of the business cycle.  

Successful leadership depends on the larger context in which it is exercised. Can you identify some of the external challenges that confront today's CEO—and how they might be different than 10 or 15 years ago? 

A key skill required of today's CEO is securing first-mover leadership in these new corridors of growth. The CEO and his team must have the strategic vision to look where others have not. Doing that in large organizations, where there is no danger in simply upholding the status quo, requires a high tolerance for the discomfort zone and for risk. That tolerance for risk has to be passed down the ranks. Because if it was true in the past, it is truer now: no single person has the capabilities to pursue a vision that will transform the business. A CEO must surround himself with people whose talents compensate for his or her own weaknesses. To find those people, you have to start by knowing who you are, and who you are not. It is harder than it sounds: self-awareness is a character trait that can fall into disuse after you have made it to the top. For example, many CEOs today don't know what they don't know about the economics of drug reimbursement. The value of medicine equation is very important in winning prompt access to the market. So it pays to keep that source of expertise close at hand. 

Your book spends little time on the topic of creating a winning strategic vision. Is this because strategy is hard to teach? Is it because there are no set lessons: every set of circumstances a company faces is unique? 

I chose to focus on executing around a strategy. Implementation is where most companies and their leaders fail, even when the strategy is appropriate. Nevertheless, strategy is vital. A good strategy builds a line of thought that punctuates good decisions. If I write another book, it will be geared toward strategy, which I define as a structured exercise ­designed to help a company play in the right places and deploy resources so it can win. Good teams that leave nothing off the table in terms of frankness are critical to a strong strategy. Building such a team, where the strengths and weaknesses of each member combine to form a well-balanced whole, is probably the biggest challenge facing a new CEO today. Individual hubris is still the number one reason why CEOs fail.  

When you get to that place where you have a strong team in hand, the group should be guided by three actions: analyze, test, and act. I first had the opportunity to apply this approach when I took over as CEO of the failing merger between Pharmacia and Upjohn in 1997. The combined business was mired not only in internal fights among different groups, but also there was an impasse around competing strategies. Upjohn, a leader in primary care, had just lost exclusivity for its key product, Xanax, while Pharmacia was convinced the future lay in specialty drugs. The team I established was purposely balanced around both contrasting views, forcing each side to learn to think differently. One of the first things we did was to take a Pharmacia specialty drug—Detrol, prescribed for a very narrow urinary incontinence indication—and expanded its positioning to serve a much larger potential treatment population, for what we called the "overactive bladder" market. In other words, we took a Pharmacia therapeutic innovation and harnessed it to Upjohn's marketing expertise in primary care, resulting in the combined company's first blockbuster. There was a big risk involved here, because we had to move from the "analysis"—where we could only hypothesize the market potential—to the "test," which required substantial up-front investments in expanding the primary care field force to be able to sell the repositioned Detrol. 

The positive result we got from leveraging two apparently contradictory capabilities to score a convincing market win gave our team confidence to pursue the third action, to move forward. We did that with Monsanto, where we able to acquire the rights to Celebrex, which was the first Cox 2 product in the arthritis and pain market. We had the expanded field force already in place to hit the ground running with Celebrex, which became our second blockbuster.  

What was distinctive about these examples is the reliance we put on testing and acting. Strategists tend to over-analyze, which can force people to focus on the wrong questions and lead to decisions that are overly complex, resulting in a muddled mess of execution. Too much analysis becomes an end in itself; it means that people aren't making decisions. On the other hand, I am suspicious of the CEO who relies too much on intuition. That often becomes an excuse not to seek out the expertise of other colleagues. The notion of the CEO as a sole strategist is the ultimate anachronism. The group mindset, and the positive energy it generates, is critical to everything drug companies want to accomplish today.  

How do you foster that sense of esprit at the top? How do you spread its benefits throughout the entire organization? 

The most important task of a CEO is to build a management team that pulses with the force multiplier of collective energy. This is an intangible, almost spiritual asset. It cannot be achieved through an organization chart, divided into boxes that say "this is what you do." At this level, functional responsibilities are really beside the point. What matters instead is the dynamic energy that comes from contributions as a group, where the CFO is not there just to provide accounting advice but has something to say about reputation management as well. The strategy is richer because it is grounded in diversity. This is a point that many experts in organization management have missed.  

Has company "culture" become a cliché? Is an effective business strategy possible without CEO leadership in building out the roots of a distinctive culture, one that can be understood by every employee? 

Companies do have distinctive cultures. Awareness of this is vital to CEO success in executing around strategy. In all the corporate turnarounds I have been involved in, changing the culture played a huge role. A positive culture attracts talent and serves as a motivator of superior group performance. Unfortunately, the tendency in recent years has been to treat culture as a "soft" topic, one that can be safely relegated to the human resources function. This is a mistake. Today's most effective CEOs consider their HR representative a full partner in business strategy. But your HR leader has to be someone who understands the workforce beyond the "c suite" and can promote a culture that is geared to helping every individual win. Culture must be communicated as something positive and jargon-free. Too often, it is mistakenly applied as part of a PR exercise, filled with empty messaging. People will apply themselves if they believe in what you, as CEO, are saying. Yet most companies are falling short, on that score. Surveys show that more than half of the workers in corporate America are disengaged, with little regard or understanding of where management seems to be taking them, and many workers don't feel free to speak up. This festering alienation is a drain on initiative and leaves a lot of spare capacity sitting on the table; when companies address it and fix it, productivity rates go up considerably.  

Is the human resources function ready for an overhaul to place it higher in the "c suite" pecking order?

It is rare to find in any CEO today a background that has exposed him or her to the HR function. That is a pity. The emphasis in HR today is very passive: recruiting talent, calculating benefits, and providing information to employees. What is really needed is a function that leads at the right hand of the CEO in shaping a productive, positive culture, assessing talent [not just finding it], building succession plans at every stage of the decision-making chain, and finding ways to engage and make colleagues feel valued for being part of an amazing organization, poised to profit from the future. Big Pharma needs to pay even more attention to this skill set than other industries because we are a talent driven industry. Instead, we often let patent driven product exclusivity cycles make us more complacent than we should be. That attitude must change because keeping top talent in place is going to take more effort in the future. The best people have more options and the younger generation no longer believes in lifetime employment.  

Moving beyond organizational dynamics like culture, what in your experience are the characteristics that determine individual success in pharma today? 

Nothing has changed. Attitude is key. I am often asked if my background growing up in Pakistan and studying in the United Kingdom helped me succeed in the United States. My answer is only partially—what really mattered is that, in moving from a very distinctive culture like Pakistan to the West, I was forced to work outside my comfort zone. I had to adapt on the fly rather than just move along at cruising speed. This had an impact on my attitude toward work. At periodic stages of my career, I was always ready to try something different. I had a built in corrective from my life experiences that prevented me from assuming that something could not be done, just because I was not familiar with it. Attitude is also about being positive. Over the years, I have seen that people who simply point out problems without suggesting a solution rarely gain traction. No matter how dire the circumstances, your personal brand is burnished when you stay constructive and avoid tearing others down.  

What insights about our industry have you uncovered in your current role as non-executive Chairman of Avon Products? Is it true that consumer goods companies have a much better grasp of what the customer wants?

As a heavily regulated industry, pharmaceuticals are characterized by a strong process discipline. Getting the details right is the pre-condition for our license to operate. Companies like Avon are more focused on a continuing brand identity as the guarantor of a strong market position. In pharmaceuticals the right to exclusivity tends to make that a given; once a patent expires, brand identity tends to fade due to the intense generic competition. We can learn from Avon how valuable a good branding strategy is to stretching out the lifecycle of a product and keeping our customers loyal and engaged. Avon has also much to teach us about building share in the emerging country markets, which it treats with a distinct attitude and where it has been active for decades. For new medicines, the United States will continue to dominate, but the BRIC countries and others are going to be critical in giving a second wind to our mature brands. These markets are also sources of reverse innovation and thus a good way to keep tabs on future competition. For these reasons, when I was CEO of Schering-Plough, I was directly involved in concurring with the selection of almost all our country managers in the emerging regions. 

Finally, Avon has taught me to look at the field force in a new way. All their sales people are independent vendors and the company looks at them as their first line of customers—you must win their hearts to succeed in selling to the masses. In our industry, sales people are paid mainly through a base salary, plus a bonus usually weighted against the performance of others in the group. It is interesting how the mindset changes when you treat each rep as accountable and trusted ambassadors for the brand. If you look at them as the first line of customers, their results in the marketplace will be quickened and their feedback link to marketing will be sharper. 

What's needed to invigorate the drug pipelines of the major pharma companies?

There is no single answer and in many ways it depends on the imponderables of organization dynamics. In the late '80s, I was at Sandoz (now Novartis) when oncology was our next gleam in the eye after our successful reinvention into immunology with the launch of the transplantation drug Cyclosporia. Novartis has now succeeded in creating a successful franchise in oncology over a 20-year period. From the beginning, there was a commitment to working in small groups around specific projects based on a clear medical need and potentially enriched populations from genetic science and biomarkers. They also mix people very easily, so that there is less disconnect between the researchers and commercial development teams. The premise has always been to lead with the science; if the science is good, the market will follow. The Novartis story suggests you can build a big business around small opportunities, without having to chase after the premise that every success means a blockbuster. Small bets can add up, and spread through multiple indications. 

Much has been written about the barriers to innovation in big Pharma, but one I have not heard is mentioned in your book: "forestalling victimhood." What does that mean? 

In the large R&D cultures that still characterize the industry today, there is a cultural signal to play defense rather than strive for a positive outcome. Job security in these R&D organizations is better assured if fewer risks are taken. Managements have to stop the productivity drain where people think less about innovation and more about keeping their job. People must be taught through example that you can be an innovation leader and also a strong matrix player, and be rewarded for seeking out that area of common ground, working as a catalyst rather than a critic. Again, small groups can help drive this mindset better than more bureaucracy. Scientific leaders able to instill a positive sense of purpose are a prized commodity. They are especially needed now as the R&D enterprise adjusts to a long period of transition toward new modalities such as personalized medicine. 

There are two contrasting futures for the industry. The first is that aging demographics combined with strong science will require more medicines and thus keep revenues and profits high. The second is that the industry has lost control of the pricing and value equation to payers and thus faces a decline through relentless commoditization. Where do you stand on this?

Payer power is the big issue right now. However, I am optimistic that the industry has the answer to this challenge—new and better drugs. Even in those therapeutic categories subject to commoditization, such as cholesterol, hypertension, and diabetes, the gravity of the public health threat means that society requires continuous improvement in treatments just to keep up. And this doesn't even address the conditions where there are still no effective treatments at all, led by Alzheimer's and Parkinson's. There is no other industry right now where society has that level of unmet need.  

The other response to the payer community is the value of medicines in terms of the overall cost burden from healthcare. In most countries, drugs constitute a relatively small share of total costs, well behind hospital charges, physician fees, and long-term care. What is most exciting is how much of the new medicines innovations coming on stream in the next 10 years will actually contribute to reducing costs through less reliance on these other health services. Personalized medicine is finally beginning to show its mettle through precise targeting of drugs around an individual's unique genetic profile, for a superior therapeutic effect that prolongs life and is cost effective through lower rates of therapy failure and institutionalization. More important, there are major spin offs from this revolution in the biology of disease and the processes that underpin it: R&D becomes more cost efficient in linking a compound to a specific disease target; the long haul of drug registration becomes faster and more focused, because it is easier to identify and assess the population most likely to benefit from a NME (new molecular entity); payers are positioned to obtain better evidence of real-world outcomes; and the patient experience is individualized rather than subject to the hit or miss randomization of a population effect.  

This last point is very important. The reason why payers have the upper hand is that they can treat us as manufacturers of products for big populations; for many in this population, there is no clear evidence that our products even work as intended. As long as that mindset continues, payers can commoditize us. However, if we succeed in making this a purchase that carries a measurable value unique to each patient, the conversation changes. With the increased information about the clinical effectiveness of our drugs, the initiative moves back to the patient's interest in receiving the most appropriate therapy for his or her clinical condition, rather than just what a formulary says. I think we are getting to that point now, where payers will be forced to give ground.  

Do you believe that the new science and personalized delivery will give industry a greater measure of pricing freedom?

What I am saying is that we will have more pricing discretion when the momentum shifts back to the informed patient. At the same time, we need to remain sensible in our pricing behavior. We all can cite examples of egregious pricing decisions that tainted the industry's reputation. Oncology products, in particular, have to be priced strictly in line with the value they deliver. I am a strong believer in the market as providing the necessary discipline. When someone overprices, the market will make a noise, providers will shut you out, and then you have to go back and adjust it—with an extra levy imposed on your reputation. 

You were involved in a total of six major corporate turnarounds in your career. Looking back, what was the one skill that mattered the most to your success? Alternatively, in which areas did you feel you were deficient? 

The trait that made the most difference was figuring out the "how" behind the "what." The strategy could be set; what was hard is making it all happen. What I learned is to sequence actions so that one would reinforce the other to move things forward. For example, if I concluded that culture change had to drive the strategy, then I would take deliberate steps to demonstrate the need for change and to convince people they were ready for it. Every statement had to be reinforced with action—repeatedly and in a way that everyone from the receptionist on up could understand. Yes, there are some negatives in a turnaround but I have always been careful to put the emphasis on what success down the road would look like. Getting the foundation laid and seeded was something I did well in every restructuring plan. Once the green shoots came—the carefully staged "early wins"—it actually became easier to move the flywheel and launch a chain reaction that would eventually start humming on its own, because the sparks came not from me, but the entire company.  

With regard to what I might have done better, the most important was a failure to move early to correct mistakes I made about people being right for the job. I was sometimes slow to act. The worst players in any turnaround situation are the passive aggressive personalities. I could have done a better job in rooting them out quickly, because passive aggressive behavior is probably the biggest single drain on culture change.  

To conclude, what advice do you have for younger managers in building a career in the midst of a business model that is morphing in so many unpredictable ways? 

You will find most of your peers have the right credentials, beginning with a good education and exposure to others with a similarly competitive nature. But what is often lacking—and is certainly missing from business school curricula—is learning how to be more self-aware and connected; do you understand how people may view you differently than you do yourself? This is a trait that develops as you grow older in life, when the scars start to show. If younger people can learn to drink from that well of self-awareness earlier, they will do better in coping with the ups and downs that accompany any successful career. When I was recruiting people, I rated "EQ" as important as IQ. In fact, I developed at Schering-Plough what I call the "knockout" assessment system: if a candidate scored perfectly on all the surface attributes, like big titles and a prestigious degree, he or she still failed the cut if we uncovered just one instance of hubris, or rudeness to staff, refusing to work in teams, or taking energy out of the system through self-promotion. Great organizations only survive when we work just as hard for others as we do for ourselves. It requires traits of human character that I believe are permanent and immutable.  

What is industry icon Fred Hassan's management formula for staying fresh in an era of market churn?

The Friendly Persuasion — An Interview with Fred Hassan

The best comedians can seamlessly transition from one subject to just about any other, but it was jarring to go from Larry Hausner, CEO of the American Diabetes Association, and the harrowing statistics he presented—along with silhouetted patients entering the stage every 17 seconds, symbolizing the frequency of new diabetes diagnoses—to New York comedians Colin Quinn and Jerry Seinfeld. Luckily, the ever-ebullient Fox New York television anchor Rosanna Scotto, and Novo Nordisk's Camille Lee, SVP, US diabetes marketing (Novo sponsored the concert, and a pre-party held nearby) helped keep the packed theater from getting too depressed before the comedians took the stage. 

It was the third time Seinfeld has performed at a Stand Up for a Cure show (SUFAC), and the April 17 event at The Theater in Madison Square Garden represented the first of a series of shows happening under the SUFAC name this year. The Seinfeld/Quinn double bill for charity brought out famous and not so famous celebrities, including Martha Stewart, Sasha Cohen (the Olympian figure skater, not Borat), and several Real Housewives of New York, in addition to diabetes activists and bloggers. Neither Quinn nor Seinfeld did any jokes on diabetes specifically, although Quinn worried about New York City Mayor Michael Bloomberg's legacy, which is lamentably switching from the guy who cleaned all the guns off the streets of New York, to the guy who took away extra-large sodas.    

Left to right: Camille Lee, SVP, US diabetes marketing; Diana Blankman, director, US corporate giving and social impact; Jerry Seinfeld; and Antonio Coppola, director of corporate relations, ADA.			

The evidently soda-loving Quinn also had some choice remarks on how much Brooklyn has changed since he was a kid: "It used to be tough Italian guys with tattoos and wife-beaters...now it's young women with tattoos and wife-beaters." Seinfeld riffed on being married with children, and dusted off a couple of old digs on televised drug ads. After viewing an ad for Lilly's erectile dysfunction drug Cialis with his children, Seinfeld said he had to explain that an erection is "like an erector set." Seinfeld said he understood why the couple in the Cialis commercial was having intimacy problems; they'd just carried two extremely heavy cast iron bathtubs all the way up a hill to watch the sunset, without plumbing. On the oft-japed four-hour erection warning, Seinfeld worried about the awkwardness of the hospital waiting room in that situation (he advised wearing a parka), and then, what a physician would actually do about it.    

Jerry Seinfeld performing at Stand Up for a Cure.			

From all appearances, the event was a success, and the idea of employing comedians to help raise funds for research into cures for deadly diseases is a good one. Chronic disease isn't funny, of course, but laughing beats crying. 

A night of comedy in support of a chronic disease.

Whistling Past the Graveyard

Disruptive market change in the biopharmaceutical industry is a given—but individual company performance is rising to the occasion through efficient deployment of a still considerable inventory of product, process, and knowledge assets. If anything, uncertainty has helped push the Big Pharma players to put their own houses in order, chiefly by slowing the hemorrhage in R&D costs, which has deflected the negatives from the transformation of healthcare as a budget buster—for both households and governments. True to form, 

 2013 ranking of the top 50 pharma companies worldwide finds few variations from last year, with the notable exception being the Rx success of global generic firms as they benefit from innovative portfolio diversification: Teva is nipping at the heels of Eli Lilly, at just one slot short of the top 10, while Ranbaxy joins the Pharma 50 list for the first time. Overall, however, only a relatively small set of companies—BMS, in particular, which drops to 17th in global Rx sales, from 11th last year—have been affected by the rush of patent expiries, contributing disproportionately to the weaker industry sales performance over the past several years. 

Another enduring truth is the startling lack of concentrated market power in pharmaceuticals. What has not changed since we began compiling the Pharma 50 in 2000 is the top 10 still comprise less than 50 percent of the global market (their 2012 global share is 42 percent, compared to 43 percent in 2007). Other industries less reputationally vulnerable than pharma see much more concentration at the top; certainly this is true in the payer community, where governments increasingly hold sway. Even in the patent protected market, the core competency of Big Pharma, the top 10 players' share remained at 52 percent in 2012, the same level it was in 2007. The bottom line? For pharma, business is still an intensely competitive game of chance. ­

To identify what's driving the numbers, we examined the top 50 as a group and in comparison to companies outside the top 50. We see five trends shaping current sales performance across the geographies where the pharma group competes:  

Perhaps most notable is the contraction in the US market—the first in more than 50 years. This contraction comes not only from several patent expiries of billion dollar blockbusters—including Plavix, Seroquel, Lipitor, and Zyprexa—but also from increased scrutiny by payers for reimbursement and regulators for approval. The negative growth is driven by a few companies, each of whom had exposure to over $5 billion in revenue loss due to patent expiration of their major products. In the United States, there were 13 such companies in the five year period of 2008 to 2012: Pfizer, GSK, Takeda, Merck, J&J, BMS, AZ, Novartis, Sanofi, Lilly, Forest, Boehringer-Ingelheim, Eisai, and Roche. Thus, in Figure 1, we see that year-on-year growth for the entire market was negative for the first time.  

 Figure 1: Performance of US pharma market by company type.  			

For the 13 companies, year-on-year performance for 2012 amounted to a close to 10 percent contraction in revenues against 2011. Excluding these companies, we see that US growth performance for the remainder of the top 50 was actually slightly higher compared to last year. The 13 companies thus represent the brunt of the loss to the industry, with the remaining companies in the top 50 performing fairly well. The top line in Figure 1 represents the growth of all other companies with revenue in the United States, comprised of over 600 companies outside of the top 50. The growth in these companies is significantly more than the top 50, and includes companies with extremely varied portfolios, including branded products and generics. In many ways it is not surprising to see such growth, given that they are starting from a smaller base of revenues than the top 50 and that some are posting new revenues from newly launched generics, at the expense of those facing patent expiries. 

The second trend is the impact of the recession in Europe, where we see a zero growth situation rather than an outright contraction. The lagging performance of the pharmaceutical industry in the five major EU countries is due more to austerity and government fiscal issues rather than inherent company dynamics. In these countries, patent expiration does not have as striking an effect on company sales after loss of exclusivity (LOE) because the branded product's retention of sales is much higher compared to the United States. Many companies retain significant sales from off-patent products in the EU five as government reimbursement treats off-patent brands and generics similarly. Nonetheless, policy changes in the last five years have changed this pattern substantially and there is significant reduction in sales for off-patent brands as well as steeper erosion of new patent expiries.  

In the European countries, industry performance is thus a bit better than in the United States, with sales relatively flat and zero growth. Once again, a handful of countries are driving stagnant growth of the industry overall. In this case, by splitting the performance of the companies that had over $5 billion in patent exposure in the European Union alone—Novartis, Pfizer, Sanofi, Merck, GSK, AZ, and Takeda—we see that as a group these seven contracted by about almost 6 percent in 2012 (Figure 2). The remaining companies in the top 50 actually had an uptick in growth compared to 2011 with almost 3.5 percent growth in 2012, which is also stronger than the growth experienced by all the other companies with sales in Europe outside of the top 50. These remaining companies constitute about 1,600 small companies spread through all of the EU five markets. 

Figure 2: Performance of EU pharma market by company type.			

Third, in the other lead mature market, Japan, we see more positive growth for the industry, albeit at low single digits. The every-other-year mandatory price cuts on pharmaceutical products imposed by the government, defines the zig-zag nature of Figure 3. We can see, though, that by separating the performance of those five companies that had patent expiry revenue exposure close to $5 billion—Pfizer, Merck, Sanofi, Dainippon Sumitomo, and Eisai—performance of the other members of the top 50 was slightly higher than the group as a whole. Once again, performance of companies outside of the top 50 was even higher given the small base for growth. 

Figure 3: Performance of Japan’s pharma market by company type.			

The relatively higher growth in Japan for these five against their global norm was attributable in part to better performance of new launches and to the lower price cuts applied to protected brands under Japan's current NHS price control system. The Japanese government imposes a 5 to 6 percent price cut every other year, in April. In 2010, a revised policy provided lower price cuts for protected branded products, and steeper cuts for off-patent products and generics, amplifying the impact of more recent patent expiries and providing a boost to innovative companies, many of whom are responding by launching products in Japan earlier in their global launch sequence than they had in the past. Vaccines are another bright spot, aided by more government support for immunization and access.  

Fourth, the strong economic growth platform provided by the emerging country markets are helping to differentiate revenues for those companies with a solid commitment to establishing a local presence (Figure 4). Not all the top 50 are playing in the emerging markets; the sales performance of those who are competing in these markets has been in the double-digits. Many of the top 50 are selling both original and branded generic products since growth in both of these sectors has been exceptionally strong in the past five years. However, despite the promise of continued double digit sales growth in many emerging markets, the gains have not been able to offset weaker performance in the United States and Europe.  

Figure 4: The performance of the companies within the top 50 compared with performance of all the other companies selling in emerging markets. 			

In Figure 4, we see the performance of the companies within the top 50 compared with performance of all the other companies selling in emerging markets. The top 50 companies primarily are selling innovative brands along with branded generics and annual growth in these two segments has been close to 10 percent over the past five years. Companies outside of the top 50 are primarily selling branded generics (non-original brands that have some unique branding and where the company marketing the products is not the originator) and regular generics. The "other products" category includes OTC medicines as well as products like homeopathic or traditional Chinese medicines as well as vaccines. For companies outside of the top 50, the growth in all these segments has been incredibly strong, although the innovative brand growth is off a smaller base. 

The fifth and final trend on performance of the Pharma 50 is the broad move away from relying on mergers, acquisitions, and divestitures to replace or supplement organic growth (Figure 5). The pace of mega-mergers since the start of the century has begun to slow—Pfizer/Pharmacia (2003), Sanofi/Aventis (2004), Roche/ Genentech (2009), Merck/Schering-Plough (2009), and Pfizer/Wyeth (2009). One might argue that Sanofi-Genzyme (in 2011) could be the last of the mega-mergers.  

Figure 5: More new molecular entity drugs were approved in the United States last year than in any year since 1999.			

Looking ahead, although industry performance in the mature market countries is slowing compared to historical rates, a trend moderated by the growing support from emerging markets, there is still a silver lining. More New Molecular Entity (NME) drugs were approved in the United States last year than in any year since 1999, continuing a rebound in approvals that started in 2011 and appears set to continue. 

The relative stability of the top 10 companies and the fact that many in this set have a predominant impact on the slow industry performance overall provides insight into the current discussion over alternative business models to drive future success. As companies look to fill the gaps in their portfolios by patent-expired blockbusters, most are finding that it takes several mid-sized products with appeal to a well-defined disease segment in the specialty class. This is because it is becoming increasingly difficult for drug makers in the small molecule, primary care markets to demonstrate the benefit of new drugs against the existing standard of care. A strength in specialist-driven markets provides better prospects up front, especially for those therapies that initiate use in the in-hospital setting. Regardless of whether it is a recent strategic choice, or if the company was one of the early few who began with a rationale to serve this segment, a visible presence in specialty seems to be ­working in the current environment. 

 Strategic choices aside, the extent and pace of future growth depends on a great number of factors including if and how those who pay for pharmaceuticals around the world make provisions to afford the wave of innovations that is coming from researchers' greater understanding of molecular biology and the genetic origins of disease. The signs of this rebound are there to see, so don't get too distracted by the industry-wide slowdown currently underway—this is one cycle that, like all others in the industry, will eventually play itself out.  

 is a Vice-President with IMS Consulting Group and leads the global strategy and portfolio analysis team. He can be reached at 

 is Director of Research Development at the IMS Institute for Healthcare Informatics. He can be reached at 

Patent expiries dampen revenues for some of the biggest Big Pharma, but growth continues unabated for a few nimble "stealth" players moving steadily up the list.

2013 Pharm Exec Top 50

US drug manufacturers face significant risks from a trend toward a more controlled approach to the operation of pharmacy benefit networks (PBNs) that deliver medicines to patients. Instead of letting patients choose to fill their prescriptions from an open network that includes a wide range of pharmacies, these benefit designs use financial incentives or explicit restrictions to direct consumers to specific pharmacies that agree to meet the PBN's conditions. The popularity of these new pharmacy network models is exploding in both commercial and Medicare Part D plans. 

The risk is the shift in the balance of power to payers in the decisions on if, how, and when patients get access to medicines provided under their pharmacy benefit plans. These so–called narrow networks will give more control to third-party payers, alter promotion and marketing activities, and shift market share between different payers and pharmacies. Payers' use of the more tightly controlled pharmacy network model will keep growing as they seek additional drug spending savings. Over the past two years, plans have taken further steps to enforce formulary control and limit manufacturer marketing practices, such as copay offset programs. More important, consumers are accepting the new plans, encouraged by the out-of-pocket savings opportunities on their prescriptions. Likewise, community retail pharmacies are willing to accept lower reimbursements in exchange for the increased store traffic. 

To preserve market position and access, manufacturers must start by recognizing that the economic interests of payer-defined pharmacy channels are diverging from traditional branded drug makers. It is thus important to analyze this crucial trend, highlight its economic appeal to payers and pharmacies, and outline how manufacturers can best prepare for and respond to the challenge.  

For consumers with third-party insurance, pharmacy benefit managers (PBMs) assemble networks of pharmacies. In an open pharmacy network, a consumer's out-of-pocket costs and copayments are identical regardless of which pharmacy in the retail network dispenses the prescription.  

An open pharmacy network, which remains the most common network design, includes nearly all of the approximately 62,000 US retail pharmacies. Network pharmacies compete on service, convenience, and location to attract consumers within a particular plan. Under this approach, there are no financial incentives for a consumer with third-party coverage (and a flat copayment) to shop at the pharmacy with the lowest cost per prescription for the payer. 

Today, payers are rapidly adopting networks that differ significantly from the traditional open network design. More than four out of 10 seniors are now enrolled in a Medicare Part D Prescription Drug Plan (PDP) with a narrow pharmacy network design. A survey by the Pharmacy Benefit Management Institute reports that one out of five employers have started utilizing narrow networks. For instance, more than 1,000 commercial plans with 14.5 million covered lives use the Maintenance Choice narrow network program of retail chain and PBM CVS Caremark. Walmart, the third-largest retail pharmacy, estimates that nearly 25 percent of its 2012 prescription volume derived from its participation in narrow networks, compared with less than 1 percent in 2009. 

There are two types of narrow networks. A preferred network gives the consumer a choice of pharmacy, but gives consumers financial incentives to use the particular pharmacies that offer lower costs or greater control to the payer. In other words, a consumer with a preferred network benefit design retains the option of using any pharmacy in the network. However, the consumer's out-of-pocket expenses will be higher at a non-preferred pharmacy.  

One of the first commercial preferred retail networks was the trial program between Walmart and Caterpillar, which began in September 2008. As part of the pilot program, 70,000 Caterpillar beneficiaries (employees, retirees, spouses, and dependents) had a $0 copayment on 2,500 "tier 1" (lowest priced) generic drugs that are filled at any Walmart pharmacy. However, the copayment was $5 if the beneficiary chose to fill a prescription for one of these drugs at any other pharmacy in the network. Caterpillar has subsequently broadened its preferred network to include Walgreens, Kroger, and a group of independent pharmacies. 

Medicare Part D beneficiaries, for example, annually choose their own new plan, rather than having a benefit administrator or insurance plan provide a few choices for them. Thus, preferred network adoption directly demonstrates consumer appeal. According to the Center for Medicare and Medicaid Services (CMS), preferred pharmacy networks are permitted under the law that created the Medicare Part D benefit. 

Table 1 highlights the largest payers that sponsor Part D prescription drug plans. In plans administered by such large payers as UnitedHealth and Humana, the vast majority of seniors are now enrolled in plans with preferred networks. For the 2013 benefit year, plans with preferred pharmacy networks enrolled 9.5 million people, or 42 percent of the total 22.4 million seniors in a Medicare PDP. 

 Table 1: Enrollment in Medicare Part D PDPs, by parent organization, January 2013. 			

The Humana Walmart-Preferred Rx Plan illustrates the popularity and rapid adoption of this network model. In October 2010, Walmart and Humana launched this PDP with 4,200 preferred pharmacies (including Walmart, Sam's Club, Neighborhood Market, and Humana's RightSource mail pharmacy) and 58,000 non-preferred retail pharmacies. In 2013, Humana Walmart-Preferred Rx Plan is the fourth-largest PDP, with 7.8 percent of total PDP enrollment. Compared to 2012, total enrollment grew by 355,279 seniors (+25.5 percent). 

The second type of narrow network is a limited pharmacy network. This more restrictive model designates the particular pharmacies or dispensing formats available to a patient when filling her prescription. A limited network gives a payer the greatest degree of economic control over prescription fulfillment. Payers will include only those pharmacies with the lowest costs of dispensing and/or the highest service levels. In exchange, the pharmacy becomes one of the selected members in the network and increases its market share.  

A typical limited retail pharmacy network is 50 percent to 80 percent smaller than an open network. Thus, the consumer can choose any pharmacy within the network, but the network has only 10,000 to 30,000 pharmacies (versus more than 60,000 total retail pharmacies). An example is Restat's Align network, which includes national chains (Walmart, Target, and many supermarkets) and a number of regional chains. In 2013, Express Scripts, the largest PBM, launched the Express Advantage Network, a limited network with about 20,000 pharmacies. Payers also establish limited networks for specialty drugs by restricting pharmacy choice to just one or two payer-designated specialty pharmacies. 

Figure 1: The number of participating pharmacies in narrow retail pharmacy networks broken down by category. 			

Mandatory mail benefit designs are the most common application of limited networks. They require consumers to fill 90-day prescriptions through a mail pharmacy without the option of using a retail pharmacy. About 25 percent of employers require that some or all maintenance medications be dispensed by a mail pharmacy. 

CVS Caremark's Maintenance Choice program is the most prominent limited network model for commercial plan sponsors. Under the Maintenance Choice program, a beneficiary can obtain maintenance medications from a CVS retail pharmacy or a CVS Caremark mail pharmacy. This model lets consumers choose the pharmacy channel (mail or retail) but limits that choice to CVS Caremark outlets. 

With the exception of the Maintenance Choice model, limited networks have been much less widely adopted than preferred networks. We speculate that commercial plan sponsors may believe there are bigger savings opportunities in other areas that have less potential beneficiary disruption, such as increasing cost-sharing requirements. 

Many interrelated factors are supporting the adoption of narrow networks: 

» Plan sponsors save money with narrower networks. An independent analysis conducted for the PBM Restat concluded that an employer would achieve savings of four percent to 13 percent. Walmart claims that employers achieve average savings in the 13 percent to 18 percent range from its limited network models, but savings can go as high as 45 percent. CVS Caremark recently stated that its limited Maintenance Choice model will save payers four percent of drug spending. Almost one out of five Managed Medicaid plans now uses a limited network, driven by intense cost pressure due to state government shortfalls.  

» Consumers have access to many alternative community retail pharmacy outlets. More than nine out of 10 Americans live within five miles of a retail pharmacy. Consumers in a core based statistical area (CBSA)—an urban center of at least 10,000 people and its adjacent areas—live within 1.2 miles of a community retail pharmacy. In many major metropolitan markets, up to 50 percent of market share is held by pharmacies beyond the largest four retail chains—CVS/Pharmacy, Walgreens, Walmart, and Rite Aid. Given the ready availability of pharmacy outlets, plans can establish narrower networks with minimal consumer disruption. 

» Consumers are willing to switch pharmacies to reduce out-of-pocket expenses. A preferred or limited network causes the consumer some degree of inconvenience. However, surveys demonstrate that consumers are willing to shift pharmacies for even very small monetary rewards. In a recent national survey, 85 percent of consumers said they would switch pharmacies to avoid higher copayments at their usual pharmacy.  

» Pharmacies are willing to boost store traffic in exchange for accepting lower prescription reimbursements. Since overall prescription growth remains very low, pharmacies are trying to remain competitive and attract consumers in a relatively saturated market. Consequently, they have been willing to accept reduced reimbursement rates in exchange for participation in a preferred or limited network. A majority of these savings comes from reduced pharmacy margins, because pharmacies compete to be in a payer's narrower network.  

New approaches to managing reimbursements for pharmacy benefit programs are testing Big Pharma.

Pharmaceutical Executive-05-01-2013

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