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Pharmaceutical Executive Digital Edition - September 2012

Success for today's biopharma enterprise requires continuous education around a lesson plan guided by a simple choice: Grow your core, or die in place. Putting it more bluntly: sink or swim. The standard business model of frequent product introductions propelled by huge investments in promotion to plump up prescription volume is no longer delivering the rich returns expected by management and shareholders. Quite simply, the industry must adjust to a new era of lower margins. That makes strong organic growth—fueled by internal drivers like superior administration and a focused strategy to be recognized as a full partner in healthcare—more important than ever in maintaining a place at the top of the league charts. It's the signal message in our 11th annual Industry Audit of the highs and lows of performance among 24 of the largest publicly traded companies prepared by Professor Bill Trombetta of the St. Joseph University Haub School of Business.  

The objective of the Industry Audit is to furnish a snapshot of how well companies are doing in advancing shareholder value. This measure is open to interpretation, particularly because there is no other standard accepted reference point we can cite that looks at performance from this perspective. Our approach is idiosyncratic, but it does reveal the importance of metrics that often escape the attention of the major investor rating institutions. One example is the return on assets against profits, which allow for the valuation of intangibles like patent holdings. Shareholder value is also a good indicator of long-term success because of its association with stability: when the investment community is happy, there is less pressure for changes in the c suite and management has some leverage to place riskier bets on investments that may play out only over time.  

A historical attribute of the industry—revenue growth rates high enough to paper over a multitude of sins, such as tolerance for bloated sales and administrative expenses—has faded in the face of the patent cliff. Since 2007, the last year of the good times cycle for Big Pharma, growth across the industry has slowed. Although the R&D productivity lag and genericization of major brands are a factor, structural changes in the way companies must do business are arguably more important as drivers of lower growth. Chief among these changes is a radical transformation in the customer base, led by a vastly more heterogenous community of stakeholders and the dominance of payers over clinicians in determining treatment options for patients. The reality is that accelerating growth today requires a different mindset, with strategies geared to smaller, more differentiated revenue targets often requiring up-front commitments that impose high short term costs that eat into margins.  

Many high performing companies are pursuing that model, which is reflected in our survey group. Even in the midst of poor economic conditions, the 24 were still able to outperform the drugs sector as a whole on sales growth, posting an average 7.3 percent compared to a global expansion of 3 to 4 percent. Yet pressures on pricing are evident too, with a group-wide drop of 1.4 percent on gross margins as the  "proof of value" trend spreads to oncologics and other specialty segments.  

Given the trend, what this year's survey shows is the importance of efficient cost management. Reducing overhead through the productive deployment of assets, capital, and resources is crucial to ensuring that lower growth does not corrode competitive advantage—where the winner is the company able to squeeze more and sweeter lemonade, from fewer lemons.  

The survey relies on 2011 data to compare performance against 2010. As in years past, we use eight metrics to assess performance: sales growth; enterprise value growth; enterprise value to sales; gross margins; earnings before interest, taxes, depreciation, and amortization [EBITDA] to sales (an indicator of profit margin); sales to assets (or asset turnover); EBITDA to assets (a measure of the profitability of individual assets); and sales to employees (a ratio to assess productivity). Each metric is weighted, with the highest score of three given to enterprise value growth; enterprise value to sales; and EBITDA (profit) to assets. All the others are scored at two. The higher a firm places on the list, the higher its score relative to the 23 other companies. A company with the highest ranking on any metric would be ranked at 24, while a company performing at the lowest level would come in at one. Weights attach accordingly, so if a company came in at 21 on a metric with a rate of two, then its total points on that metric would be 42, for a standing of fifth best out of the 24 companies—this is in contrast to the scoring for golf, where a low score reflects high performance. If a company comes in next to last on a metric with a weight of two, then its place in the rankings would be second, with total points of two times two equaling four points, on that metric.  

From a macro perspective, the best way to evaluate the results is in comparison to trends in the economy overall. Generally speaking, a company should perform at least as well as the real growth rate in GDP and in range of the performance of other healthcare sectors. US GDP expanded by 1.7 percent in 2011, while the CPI rate averaged about 2 percent. Economic growth outside the United States clocked in at slightly more than 3 percent. Other relevant macro metrics are the Dow Jones Industrial Average, which grew 5.5 percent in 2011; NASDAQ, which contracted by minus 1.8 percent; and the Standard & Poor healthcare index, which shows comparisons against other health providers and ran up 10.2 percent. Together, these parameters are the minimum hurdle for companies to be perceived as successful enterprises. In that regard, 14 of the 24 outperformed the S&P benchmark, a ratio roughly the same as last year, where 11 of the 23 companies profiled did better. On average, the group posted a gain of roughly 12 percent, or nearly six times US GDP growth.  

Surprisingly, turmoil in the biopharmaceutical market has not forced a change in the revenue ranking of the 24 companies (Annual Sales table). In fact, we see a remarkable level of stability, with the specialty firm Shire and Abbott's injectable generics spinoff, Hospira, joining the group this year to replace Genzyme and Cephalon, which were acquired by Sanofi and Teva, respectively. Leadership in the top 10 of sales changed not at all, except for the inclusion for the first time of Roche in the survey, which pushed Bristol Myers Squibb down a notch, to number 11. Top-ranked Pfizer maintained its perch, with $67.4 billion in sales, or more than 25 times the $2.7 billion sales of the smallest of the 24, Endo Pharmaceuticals. Ironically, Pfizer was alone in recording a slight drop in sales against the previous year, while Endo, in spite of its small size, earned the top spot in revenue growth, gaining 58 percent over 2010. In fact, the biggest growth spurt took place towards the bottom of the chart, with Endo's blistering pace nearly matched by the niche players Celgene, Watson, and Shire. The contrast proves the adage that the bigger you are, the harder it gets to move the revenue needle forward. 

 It should be noted, however, that sales growth is not the most relevant element of performance. The numbers can be "gamed" depending on when and where you start to measure. In addition, its importance can be overstated if the numbers are driven by merger and acquisition activity, which creates inefficiencies, bloat, and strategic drift that leads to stagnation over time. The better growth is organic, achieved internally through a company's own process improvements and in-house labs and R&D. The paradox is that when sales reach way into the billions, bureaucracy takes over and organic growth becomes harder to attain. 

Enterprise value (EV) is a critical metric because it is a straightforward signal of shareholder value. You either create shareholder value—or you destroy it. The impact on the investor can be dramatic. To put it in perspective, what if in 2000 you chose to invest $1,000 each in two companies, Hewlett-Packard (HP) and Amgen. Five years later, the $1,000 spent on HP stock was worth only $500, while the $1,000 that went to Amgen could be cashed out at more than $30,000. 

Technically, enterprise value (EV) is comprised of market capitalization (total number of shares of common stock outstanding times the price of the stock on a given day) plus cash and cash equivalents minus debt. It is a mark of what the value of a company is if you considered buying it, plus or minus a competitive premium. It is close to market capitalization: valuing a company by its total common stock outstanding at a price on a given day. But when you buy a company you use cash/cash equivalents on the balance sheet to purchase and you also acquire the acquired firm's debt. These latter can be deceptive, so EV is the better measure. 

EV itself is similar to sales volume. One would expect larger sales revenues to correlate with larger EV ratios. As noted in the Enterprise Value table, Pfizer had the highest EV for 2011—a reflection of the recovery of its stock price due to CEO Ian Read's "back to the core" strategy—followed by J&J and Roche, all quintessential Big Pharma firms. Notwithstanding J&J's seemingly endless cycle of product recalls, it managed to plump up shareholder value by over 5 percent. Again, smaller players—Biogen-Idec, Endo and Shire—as well as Bristol-Myers Squibb, created the most shareholder wealth. But there are exceptions. Hospira posted the largest decline in EV from some unwelcome safety side effects of growth and the cost sensitivity of its hospital injectables business.  

Another key metric related to EV growth is the ratio of enterprise value to sales. We call this ratio the "equalizer" because it serves to normalize differences in size and scale. The absolute size of a firm's enterprise value tracks it sales volume and hence creating or adding to shareholder returns becomes a key indicator of overall value. EV/sales is similar to a ratio called the PEG ratio, or the relationship between the price to earnings multiple and estimated earnings growth. The higher the ratio, the inference is that things can only get better for a firm, i.e., "you ain't seen nothing yet." The lower the ratio relative to its peers suggests a firm's best days are behind it and growth and profit will be increasingly harder to come by.  

Although EV/sales decreased overall for the group compared to last year, where a firm places on the list (Enterprise Value to Sales table) is still a strong indicator of its future potential. Here, the biotechs rule: Celgene and Biogen-Idec, along with Novo Nordisk, continue to impress, while Endo rises in the ranks dramatically, from 20th in 2010 to 11th this year. Teva, in contrast, encountered a steep fall in the ranks compared to last year, mainly because of some costly acquisitions and investments. Interestingly, Forest Labs comes in last on the list, even though it boosted shareholder value by 20 percent. Investor maverick and Forest board member Carl Icahn should get some thanks for the spike in enterprise value despite the low EV/Sales ratio, which nevertheless suggests the company is going to face some big difficulties in the post Lexapro era. 

Gross margin (GM) represents sales revenue minus the cost of goods (COG) sold on the P&L statement. This metric is heavily influenced by the pricing conditions faced by each of our companies. The higher the GM and a track record of strong GM performance over time suggests a healthy degree of market power in obtaining good prices from the customer base. What is less well known—but increasingly important in this new era of biologics—is that GM also reflects the ability to get good prices on API and other materials required to manufacture a drug: the cost of goods sold.  

Here again, past is prologue, with companies having a strong specialty franchise and a selective customer base doing the best (Gross Margin table), where placement ranking goes from high (24) to low (1). Biogen-Idec, Celgene, Allergan, Amgen, and Shire take the top five spots because of their ability to wrest nosebleed prices. Significantly, we do see a slight drop in margins over 2010 for all of these companies, save Allergan. This suggests a slow market trend toward more crowded competition in the specialty space and thus greater price resistance from payers.  

The EBITDA (earnings before interest, taxes, depreciation, and amortization) to sales metric (Net Income to Sales table) is a simple way of demonstrating a company's basic profitability. It is the net income from operating the firm as a business before accounting and finance issues create more smoke and mirrors. Gilead comes in first with a ratio of earnings to sales ratio of over 49 percent—which is actually down from last year—followed by Biogen-Idec and then Pfizer, which benefited handsomely from aggressive cuts in operating expenses. Forest Labs had the steepest decline in profit performance of the group as it confronted the expiry earlier this year of the US patent on its biggest blockbuster drug, Lexapro.  

To put both the gross margin and EBITDA/sales rankings in perspective, compare our audit's high flyers to Apple, arguably the most innovative firm in the world. Interestingly, Apple spends only 2.2 percent of its sales on R&D, far less than the norm for Big Pharma. Apple's gross margin for 2011 was 40.5 percent with a profit margin of 35.6 percent; this is small change compared to Biogen-Idec's gross margin of 86.8 percent and an EBITDA to sales ratio of 42 percent. The data shows overall that biopharmaceuticals remains one of the most profitable business sectors, with consistent high returns close to the 20 percent range. However, it is an open question whether in the long term these big margins in pharma can be sustained, even for products with small eligible populations for which there is a real medical need.  

Building on the profit margin, which is facilitated by how well a company maximizes revenues while maintaining tight control of operating expenses, sales to assets (Sales to Assets table) is an indicator of the ways a company deploys its assets. It is vital to recall that a firm is in business to 

 them. The more a firm can keep assets off of its balance sheet, the higher the turnover on sales to assets. On this measure, Novo Nordisk comes in at the top, at 1.09, i.e., for every dollar Novo Nordisk invests in assets, it generates $1.09 in revenue. Roche, Lilly and Hospira follow, respectively. Amgen brings up the rear, with 32 cents spent on assets to generate every dollar in revenue. 

The EBITDA (or net profit before taxes) to assets ratio is a critical measure. It reflects how good a firm is at the two basic ways to make money: margin management and asset management. Novo Nordisk, AstraZeneca, Roche, Biogen-Idec, and Gilead shine in the Income to Assets table. All have a reputation for high levels of efficiency in using their in-house resources while working the customer base to maximize pricing opportunities. The surprise here is Teva, which scored lowest on this measure and appears to be having trouble absorbing the spate of recent acquisitions designed to diversify its offerings beyond generics.  

The ratio of sales to the number of employees is a basic measure of productivity: it links the revenue to the size of the company's employee base. The key is not necessarily to have the fewest workers but to maximize the revenue that each of these workers generates in the course of a year. The Sales to Employee table shows that Gilead generates about $1.9 million in revenue for every employee, followed by Celgene, Biogen-Idec, and Amgen. The differential between high and low is startling. The Gilead employee produces about eight times the revenue that a worker at Hospira or Mylan does—both are mired in commoditized business lines with low margins. It is another indicator of the importance today of smaller, highly trained, and focused sales teams able to target segmented therapeutic areas where there is the opportunity to charge premium prices because of the high unmet medical need.  

General sales and administrative expenses (GSA)

GSA has to do with the expenses a firm incurs day-to-day in operating. GSA includes marketing and sales spend but does not normally include R&D spend. We do not include it in the survey as a metric to be weighted because in any given year a company may be launching a new drug or retraining its sales force and these expenses will be outsized at pre-launch and early launch. But over time, GSA should not exceed sales growth or profit growth. The norm shows that significant progress remains to be made. While sales for the 24 companies increased by 12 percent, GSA expenses rose by an average 28.6 percent. Allergan spent the most on GSA, but this is expected given its reliance on aesthetic products based on cash out of pocket payments. Only five firms showed a decrease in GSA for the year: Pfizer, Roche, Watson, Hospira, and Celgene. Looking over the years, Gilead, Mylan, Watson, and Hospira do more with less than the other companies in the survey. 

Biogen-Idec, which came a close second to Novo Nordisk last year, emerges at the top of the list for 2012, followed by Shire and Novo Nordisk. Rounding out the top five are BMS and Celgene, separated by a cat whisker. Behind Biogen's success is its consistently high performance on our top graded metrics designed to tease out a company's underlying value to the shareholder: enterprise value growth, enterprise value to sales, and EBITDA to assets. Sales growth for Biogen, at a little more than 7 percent over 2010, was actually on the low side compared to the group as a whole. Yet its enterprise value growth rating, at 62 percent, was by far the highest of the 24, and way ahead of runners up Shire and Endo, at 41 percent and 48 percent, respectively. Likewise, on enterprise value to sales, it came in at second, after Celgene. All told, the readings indicate that the market feels Biogen-Idec has a lot of upside potential: the company's future is going to be even better than the present.  

The numbers make a larger point about strategy. Those who do best in our audit—Celgene, Novo Nordisk, Gilead, Shire and, increasingly, BMS—share several aspects of a superior business model. These include a strong focus on narrow market segments that are relatively price insensitive and tend to have active, engaged customers. Such customers do not require extensive and costly outreach through traditional marketing channels. Big sales forces are not required as a cost of doing business and there are rich opportunities to deploy new, low risk technologies through social media. With Shire as the exception, our top performers kept GSA expenses lower than average for the 24 while securing high levels of revenue growth.  

Conversely, the Big Pharma companies are saddled with the unwelcome burdens of size, such as a dependence on diversification and the blockbuster model, both of which impose enormous overhead charges. These behemoths must place equally enormous bets on new products just to generate the minimal growth rates that Wall Street expects.  

The bright spot is that the industry still remains highly profitable, with much additional room to manage expenses. Four of our 24 surveyed companies—Watson (16), Allergan (27), Celgene (31), and Biogen–Idec (35) made the 

50 top performers in profit potential for 2011. Biogen also placed fourth in the Fortune 500 return to shareholders metric, with a 64 percent rating, surpassed only by El Paso, an energy company, WellCare, a publicly traded managed care Medicaid company, and Mastercard; BMS returned 39.4 percent to shareholders for 2011, a tad better than one could get on a standard certificate of deposit. Other than Shire, our top performers kept costs lower than average in terms of GSA expenses with strong growth. 

Features

Shareholder value now depends on finding pockets of "good" growth, in segments with fewer players, and where expenses can be tightly controlled.

Pharm Exec's 11th Annual Industry Audit

If you're a pharmaceutical marketing professional today, you don't need special 3D glasses to see barriers and problems coming at you from all directions. REMS programs, accountable care organizations, Internet information (and misinformation) overload, aging populations, payer restrictions, tightening FDA restrictions, specialty product distribution, the relentless growth of generics...I'll pause here and let you continue the list for your brand. Every one of these issues adds another layer to the complexity of what was once a fairly straightforward transaction: 

Find the customer's unmet need and fill it.  

Here's how it worked. Patients had illnesses, physicians diagnosed and treated those illnesses, and pharmaceutical manufacturers supported them by creating and marketing products to treat those illnesses better, with greater safety, or (insert unique brand benefit here). We as marketers helped to solve the core unmet needs of physicians and patients and to support the moment of truth in the physician's office—that moment when our brand was chosen because it solved the unmet needs better than any other option. 

The job of the sales rep was to bring the brand story—data, mechanism of action, and brand benefits—into the physician's office. Probe for concerns, discuss the advantages, and ask for a trial.  

And in the days of thousands-strong sales forces, it worked. Company to physician, physician to patient, a successful model of modern medicine. Life spans have grown longer, diseases have been eliminated or contained, and for many, the quality of life has improved. 

Then the healthcare market began to change. More regulations, changes, and barriers coming soon to a market near you. Finding a customer's unmet need and filling it is just the starting point (in fact, exactly who the customer is now isn't always clear). To be successful, we have to look at the market differently, understand how multiple forces are creating a new dynamic at the point of care, and design our programs accordingly.  

Even with added influencers and barriers, we can safely say the key players in terms of core pharmaceutical marketing communication are the pharma manufacturer/marketer, the healthcare practitioner, and the patient. What we can't say is that they need the same things from a brand and a company that they used to or are impacted the same way. 

Let's start with you, the pharma manufacturer and marketer. Frankly, your needs haven't changed all that much. You still need to deliver to your shareholders and stakeholders—revenue, profit share, innovation, and satisfied customers. And you still need to deliver on your mission to contribute to the health and well-being of patients (which is why you got into this business, anyway).  

Physicians, however, are another story. They now practice in an environment that's radically different from just a few years ago. New discoveries have made the science of disease treatment more complicated and the drugs in the physician's armamentarium more complex. Regulations and payment issues have added more than paperwork to their practice, and keeping up with it takes more and more of their already limited time. Patients walk into their exam room with stacks of articles downloaded from the Internet—some helpful, some misleading, some downright wacky. And they might not be alone—their caregiver is often in the office as well, expecting their fair share of the physician's time. If you ask today's physician what they need, you may hear something like this: "I'm not as comfortable treating many of my patients. I can't always treat their condition the way I'd like to or the way I've been trained to. I don't have the time to sit with each patient, explain their condition and treatment over and over, and correct the misinformation they have found or heard. I need more time. I need more help." 

Add to that the fact that the prescriber isn't always the physician anymore. Physician assistants and nurse practitioners continue to grow in influence and bring a whole new set of needs into the equation. Patients have changed as well. They no longer salute the doctor's white coat and do exactly what they are told. They have multiple sources of information, loads of questions, and help from family, friends, and caregivers, and they expect to play a major role in treating their health problems (in spite of their lack of medical training, experience, or credentials). Led by the large, diverse generation of Baby Boomers, today's patients expect more from their physician and healthcare practitioners. They now see themselves as partners in treating their disease. And what do they need?  

"I expect to play a role in this process. I can think for myself and don't take everything my doctor says as gospel (because quite frankly, my doctor doesn't give me all that much time). I need to be in control of my body, my situation, my disease." 

Doctors are getting more frustrated, patients more assertive, and marketers more challenged. Discomfort and disconnects are everywhere. But so is opportunity...for companies and brands that are willing to embrace and work within this new dynamic in this multidimensional marketplace.  

Our comfort zone is finding and filling the unmet medical needs of patients with new and innovative products—that, we get. But with a shape-shifting market, added influencers, empowered patients, and beleaguered prescribers, how much do we know about the new dynamic that influences the decision to use those new and innovative products? 

At a minimum, we know that the relationship between prescribers and patients has changed forever. And addressing that change takes a new approach to your professional brand marketing program.  

First, listen to patient conversations in depth. It's not news that patients are on the Internet talking to each other about their conditions, their physicians, and their treatments. They're forming opinions about your brand (based on both accurate and inaccurate influencers) long before they are even written a script. Unless you're listening to patients—using any one of the monitoring tools out there and in-depth research with patients, family members, and caregivers—you're missing out. 

Stop thinking about just your brand, think about their practice. The bottom line is that doctors can find your brand's data at the click of a mouse. What they can't find as easily are information and resources to help them communicate about treatment decisions with the patients in their practice. Information to help them combat the misinformation they're often presented with during patient visits. Build that into your brand program and you'll build a renewed fan base.  

Go through, not around, the physician to reach the patient. The web, smartphones, and tablets opened up opportunities for brands to talk directly to patients like never before. But we can't forget that the most critical conversation about your brand is the one that happens between the physician and the patient. So don't ignore the physician as a channel to the patient. Programs that go through the physician not only help patients, but contribute to the credibility of both your brand and your company.  

Realize that adherence programs are no longer a nice-to-have. You know success doesn't come when the script is written. It's when it's filled, and refilled. Patient adherence can be affected by everything from drug performance to pricing issues to patient habit and behavior. Get programs in place that help patients stay on their medication, and you'll help both patients and the physicians who treat them. 

Even with all the complexities in today's market, there's still a moment of truth for your brand. The moment at the point of care that happens between the prescriber and the patient. So take a close look at each of the dimensions and influences that impact that moment and decide what your brand can do to help that prescriber help his or her patient. 

 is President of Topin & Associates, and a member of 

 Editorial Advisory Board. He can be reached at 

Column

In the digital age, physicians don't call the shots when it comes to healthcare guidance, writes Al Topin.

Doctors' Words No Longer Gospel

An important third party is pressing to make its voice heard in the European debate on pharmaceutical policy and pricing.  It's no longer just a matter of manufacturers battling with the national health ministries—patients, as the end users of medicines, are demanding a larger institutional role in decisions on the services they receive. Over and above the questions of costs and bureaucracy, the more important issues of equity and patients' rights are at stake. And these, according to patient groups, are critically threatened by delays in access to treatment. 

Patient associations have waded vigorously into the intense debate now starting on how to update the 20-year-old European Union regimen for pricing and reimbursement. Their intervention brings an additional dimension to the concerns voiced so far about this review of fundamental EU rules—notably pharmaceutical companies' fears that the outcome may mean tougher assessments of relative efficacy, or warnings from national health ministries that demands for faster decision-making are unrealistic. "The revision of the rules is important for patients," too, says the European Patients Forum (EPF)—which represents more than 50 diverse patient organizations. 

For all its diversity, EPF runs a tight ship. It has already drafted a position on the proposals that emerged from the European Commission last February, and it set a deadline of the end of July for its members to comment. It wants to be sure it is equipped to maximize patient input into the formal debates on the new legislation that will start in the European Parliament and the European Union's Council of Ministers after the summer break. So EPF is liaising with the commission, key members of the European Parliament, and what it loosely refers to as "other stakeholders" to prepare the ground for influencing the debates as proposals are turned into laws.  

The starting point of the draft EPF position is that "there are currently wide and unjustifiable delays in access to new medicines across the European Union." Accordingly, it is offering strong backing for the commission's recommendations of tighter time limits for national decision-making. "A revision should not result in any lengthening of the existing time frames," says EPF, which is even urging that sanctions should be imposed to ensure that member states move faster.  

One of its targets is the inconsistency displayed by national drug pricing and reimbursement regimes in Europe, which it blames for leading to inequalities in access to high-quality medical care. Patients with chronic diseases are particularly vulnerable, it says, because of decisions based on national and regional assessments of the effectiveness of medicines. "This type of discrimination is inadmissible in the European Union", declaims the EPF. It goes on to argue that delays in treatment "also have a societal and economic impact," in that they ignore the benefits of early diagnosis and treatment, and neglect the potential for avoiding complications of illness and unnecessary interventions or hospitalizations. 

EPF has been busy in many other areas too. In early July it took part in a dialogue with industry on EU policy in health and medical innovation—an event known as the Patients' Think Tank, organized by the European Federation of Pharmaceutical Industries and Associations. This focused particularly on the big themes of ensuring access to medicines in the context of budget constraints and the current economic crisis, and patient groups emphasized the risks from the European tendency to undervalue medical care and to overstress the importance of cost containment. 

It is moving increasingly into boosting the capacity of its member organizations, too, by providing training in advocacy and campaigning. Thirty patient organizations from Bulgaria, Hungary, and Romania and eight pan-European disease-specific patient organizations will take part in a pilot scheme later this year.  

Some of this pressure could be good news for pharmaceutical firms. The argument for wider patient access to treatment is a long-standing demand of drug companies frequently unable to persuade cash-strapped health ministries to grant reimbursement status for innovations.  

The update of the rules is also described by EPF as an opportunity to introduce "more genuine transparency and public access to information on decisions taken by national authorities." It points out, sardonically, that the title of the European Union's legislation on pricing and reimbursement—the "Transparency Directive"—alludes only to ensuring that national rules are transparent to pharmaceutical companies. Patients and the public are, it says, left out in the cold.  

In addition, information about pricing and transparency decisions, procedures, and criteria should be readily available to patients and citizens, as well as the identities of the people or bodies that make the decisions. For EPF, the objective of the review should be to create what it terms a genuine culture of transparency. This means, it says, bring more clarity into the way that medicines prices are decided on. As it points out, there are currently wide discrepancies in the price of some medicines across the European Union. But its solution includes not only opening up the bureaucratic processes to wider public scrutiny. "Consideration should also be given to how transparency is handled by the pharmaceutical industry," it says, in a tone that will set alarm bells ringing in many corporate headquarters.  

The EPF ambitions also include patient involvement in health technology assessments. This too ventures into sensitive territory for drug firms that are already nervous that health technology assessment could be used as a weapon to keep new products off the market. EPF is making a strong bid for giving patients more of a say in this area. But patient groups could prove to be less-than-reliable allies of drug firms in these complex negotiations. Even EPF is aware that access to the decision-making process is not the only issue: patient groups currently lack the competencies and skills to make a real contribution to the assessment process, it acknowledges.  

On current projections, the discussions in the European Parliament should last through to November, and culminate in a vote by the parliament as a whole in January 2013. Initial discussions in the council—tentatively started by the current Cypriot presidency of the European Union— are judged likely to gather speed and substance from the beginning of 2013, when Ireland takes over the presidency.  

The ambition and energy of patient groups is evident. The question it all provokes, however, is how much influence patient groups have. They may make a lot of noise. But with the big battalions of drug firms and health ministries manoeuvring for this latest European confrontation, who is going to hear the shouts from the sidelines? 

A report released in July attempts to quantify the impact of the patient movement—and suggests that these latecomers to the healthcare debate should not be underestimated. It sees them as quick learners with growing clout. According to PatientView, a UK-based consultancy, "the patient movement is proving to be an exception to the rule that change is slow in healthcare systems." It observes that patient groups and other non-governmental health organizations are expanding rapidly, and acquiring new influence. One of the factors crucial to this evolution, it argues, is "the damage inflicted upon mainstream national healthcare systems by tough new doses of fiscal austerity, and by ever-increasing patient demand for services." This is fuelling their growth, and "patient groups have never been so popular." The PatientView analysis concludes that patient groups are acquiring enhanced status and are winning high regard. One of the striking findings is that campaigning activity by patient organizations is now widely perceived as driving government prioritization in healthcare.  

Like it or not, European drug firms are going to have to adapt to dealing with patient groups not just in tactical areas of medical specialities, but as a growing force in the broader political debate on healthcare and, over the next few months, on the vital question of pricing and reimbursement rules. 

's anonymous columnist, a commentator so close to the action in Europe that his identity must be secret.  

Europe's fiscal crisis is becoming a new rallying cry for patient groups-but regional unity is still elusive.

Patients Wade Into the Pricing Debate

Healthcare costs are soaring and fingers can point to a multitude of causes: the aging population, technological and clinical advances, a more-is-better philosophy, to name  just a few. In 2011, the United States spent $2.7 trillion—nearly 18 percent of GDP—on healthcare. On a per capita basis, that amounts to $8,400 for each citizen, up from $4,700 in 2000. The single largest payer, Medicare, paid over $549 billion of these 2011 costs, one-quarter of which were incurred during the last year of life. The quest for the miracle treatment or cure does not come cheap. And a solution to the emotionally and politically charged issue of dying will not be easy.  

The debate is highly charged. Rhetoric flies about "death panels" while the "R word"—rationing—is invoked to halt any discussion about managing the cost curve. But the problem is not unique to our side of the pond. In the United Kingdom, the National Institute for Health and Clinical Excellence (NICE) recently rejected Roche's melanoma drug Zelboraf, saying the cost is too high for the limited benefit it provides to patients with few other options. Zelboraf does not stand alone in the NICE category of end-of-life drug rejections. But cancer patients in England, unlike their brethren in Scotland, Wales, and Northern Ireland, have been granted a temporary reprieve. Drugs rejected or not yet evaluated by NICE may be accessed through the Cancer Drugs Fund, a short term fund launched in April 2011 and scheduled to run through March 2014 when a value-based pricing plan for NHS reimbursed medicines is to be implemented.  

Might this piecemeal approach be a panacea to the problem of paying the high cost of treatments for those with severe, terminal stage conditions? It's doubtful. Even in the unlikely event a plan could be developed to satisfy all stakeholders, the confusion about valuing end-of-life care requires more than just a single bandaid, or a better way of building a better diagnostic coding base for the major killers in cancer. More issues have to be addressed. For the sake of simplicity, let's bucket these issues into three: communication, compensation, and constructive innovation.  

Communication: the doctor-patient relationship 

It's easy to focus on the high price of goods and services, but communication seems a fitting place to begin a discussion about cutting costs. Certainly the issue of patient preference has made the news, and it pertains to all patients, all states of disease and wellness, and all stages of care. Bottom line: Quality care must incorporate patient preferences. With the creation of the Patient-Centered Outcomes Research Institute as part of the Patient Protection and Affordable Care Act of 2010, we've put patients front and center where they belong. Hopefully this will improve awareness of the needs of the sickest patients, because when it comes to end-of-life care, the patient is most often left out of the equation. 

Indeed, the Agency for Healthcare Research and Quality has estimated that fewer than 30 percent of Americans have advanced health directives, including millions of people with debilitating chronic disease. Among vulnerable elders, only 15 percent to 22 percent had preference information recorded in their medical records. Without knowing patient preferences for aggressive treatment versus palliative or supportive care, it's tough to try anything less than the full basket of miracles. Physicians and hospitals don't wish to be sued for failing to go the extra mile.  

It's not only about advance directives, however. It's about receiving information and making informed choices. Peer-reviewed literature indicates that patients tend to be too optimistic about their prognosis and response to therapy. Perhaps the underlying problem is that fewer than 40 percent of cancer patients, even those for whom death was believed imminent, are told of their prognosis or even the possibility of death. In one study, half of the patients with metastatic lung cancer who were within two months of dying had not had a discussion with their doctors about the option of hospice care. With hope so fixed on the horizon, starting a new chemotherapy regimen within a week or two of death is not unusual.  

While education will likely not shift the situation entirely, there is reason to believe that better information will move patients and families to more reasonable and less expensive choices. Choosing less aggressive treatment may result from the new reality that comes with education, or as some research suggests, the choices may change if the patient's fear of abandonment is mitigated. Knowing care plan alternatives and understanding that other care providers will be involved even if the patient opts out of chemotherapy can result in lower costs.  

Many doctors, however, say it's difficult to initiate conversations about prognosis and end-of-life decision-making. This type of communication is not part of their skill set; they were trained to cure people, not let them die. Doctors need to acquire this skill, for the sake of their patients and the national budget. Research indicates that patients who have had conversations with their doctors experience less anxiety, receive less aggressive end-of-life care, and are unlikely to die in an intensive care unit.  

In her 2012 memoir, journalist Amanda Bennett writes of her marriage and her husband's end-of-life care. Terrance Foley died in 2007 and both he and his wife clung to the hope offered to them by his oncologist. Pouring through medical records after Foley's death, Bennett learned that many in the hospital disagreed with the oncologist's optimism, and the well-meaning staff continued testing and treating although they knew Foley would soon be dead. Less than a week before Foley's death, a resident spoke to Bennett about end-of-life choices and her husband's imminent passing. This was the first-ever conversation of this sort she had. Foley was in the intensive care unit, slipping in and out of coma, and husband and wife never had a chance to say goodbye. The emotional cost was high, and years later, while reviewing his records for her memoir, she learned about the charges paid by insurance and wondered if they would have made different choices if only they had been informed.  

As difficult as communication is, the issue of compensation may be a stickier one, requiring major system change. Oncologists are among the highest paid medical specialists and studies based on Medicare data have indicated that some practicing oncologists select chemotherapy for their patients to maximize income. Services coded as "evaluation and management" do not reimburse as generously. To help solve the problem, some organizations are experimenting with new approaches. United Healthcare is testing an episode management program in which oncologists are not financially incentivized for choosing chemotherapy, while McKesson's US Oncology has implemented a pathway-driven care process. Hopefully these experiments will result in findings that can lead to best practices that other organizations can adopt. 

There are times that aggressive treatment is warranted. Over the past century, life expectancy in the United States has risen from 49 years to 79 years because of innovations in public health and improvements in patient diagnosis and treatment. "Miracles" have occurred because of scientific breakthroughs. Scientists and pharma companies must be realistic when it comes to "miracles," however.  

Hope is an emotion but it also must be rational, effective, and cost-effective. It must prove that an innovation is worthy of registration, and, importantly, reimbursement, based on evidence that a treatment improves outcomes at a price that can be justified. This means research that includes the target population. Many diseases are age-related and disproportionately affect persons 65 years of age and older, the group least likely to be included in randomized clinical trials. Scientists and drug companies need to creatively identify options for the conduct of rigorous and scientifically valid studies that will improve decision-making for this group, which is growing larger every year. And that means thinking outside the box.  

To sum it up, just as any given disease may be associated with multiple risk factors, so does the policy disease called skyrocketing healthcare costs. There is no single cure for the economic chaos, but a focus on three other C words—communication, compensation, and constructive innovation—could help mitigate the problem and improve patient outcomes and satisfaction at the same time. 

PhD, an epidemiologist and specialist in comparative effectiveness and  outcomes research, is principal at Observational Outcomes LLC. She can be reached at  

Bending the cost curve back to valuing the cycle of life.

The Endless Treadmill of End-of-Life Care

Patient voices are increasing in volume, along with patients' share of voice in treatment decisions. Specialized knowledge about disease and treatment is no longer the exclusive province of practicing physicians. Not every patient will be able to parse every academic article on clinical pharmacology or complex biological systems and their correlates, but then again, neither will every physician. The point is that a lot of patients in 2012 will have access to medical grade information, will conduct in-depth, independent research on their disease and potential treatment, will communicate with other patients and will be able to, with surprising frequency, tell their physicians something the latter didn't already know.   

Getting the gist of an academic article or reading about a specific biological process on Wikipedia doesn't mean you're ready to go on rounds at Johns Hopkins or Mass General, of course. But the fact remains that individual patients, with their unique genomes, environmental circumstances, and symptoms, can be one of the most important resources in determining which treatments will work, which ones won't, and why.  

For biopharmaceutical manufacturers, patient feedback can help to elucidate an unmet need. With rare exception there's almost never a perfect cure, and with the biggest sellers forever marching toward a genericized demise, it makes sense to look closely at where improvements can be made for the next generation of therapies. Treato, an Israeli tech firm, has identified 160,000 English language websites containing user-generated information about specific medications and symptoms, and has indexed over one billion blog posts covering 11,000 pharmaceutical brands. Currently in beta, the site (

) lets visitors search Treato's big data patient compendium by brand, to find out what people are "saying" online. With the goal of identifying product weaknesses, or headspace for innovation, 

used Treato to survey some of the best selling drugs across a handful of therapeutic areas. Here are the results:  

» Top concern: weight gain—referenced in 8.04 percent of 62,239 posts  

» Top concern: hypoglycemia (low blood sugar)—referenced in 4.67 percent of 66,437 posts  

» Therapeutic area: cholesterol/heart disease 

» Top concern: muscle pain—referenced in 6.73 percent of 10,995 posts  

» Top concern: thrush—referenced in 3.4 percent of 20,949 posts 

Specialized knowledge about disease and treatment is no longer the exclusive province of practicing physicians. Patient voices are increasing in volume, along with their roles in treatment decisions.

The Power of Patient Feedback

 pharmaceutical competitor, one with  the power to allow or deny drug approval and access; regulate and restrict indications, promotions, and utilization; demand rebates and force price cuts; ignore patents and transfer licenses; prevent corporate acquisitions and licensing deals; and support rival companies and products. This is not a pharma nightmare but rather an industry reality. Over the past 15 years, payers have evolved from their traditional role as one of the industry's three main customers to pharma's most formidable competitor.  

Payers are neither "direct competitors" like manufacturers of innovative or generic products nor "indirect competitors" like suppliers of substitute offerings like OTCs, supplements, medical devices, procedures, or technologies. Payers have become  "budget competitors," an entirely new form of competition marked by conflict with pharmaceutical companies for an increasingly limited amount of funds and resources. Understanding why and how this payer shift to dominance  occurred is critical for pharmaceutical professionals in adjusting their business model to manage threats and opportunities from this new landscape of supply and demand.   

Four interdependent forces have transformed the pharma-payer relationship: the aging of the industry; novel information technologies; the multi-faceted roles of payers; and growing economic pressures. Over the last 15 years, the pharmaceutical industry has transitioned from the commercial stage to the competitive stage of its lifecycle. As in other mature industries, companies in this stage are selling to very experienced, sophisticated buyers who choose among numerous competing brands and generics or, in some cases, do not purchase at all. New information technologies enable these payers to capture and leverage extensive, real-world product data that is better than the companies' own research data. For example, the 15,000 physicians at Kaiser Permanente, the largest private payer-provider in the United States, obtain more drug usage information from Kaiser's integrated information systems than from pharmaceutical companies.  

Unlike most other industries, pharmaceutical payers are not simply buyers. As third-party purchasers of highly regulated products on behalf of patients, these payers—usually government entities—have a myriad of roles which they can exploit in their pharma relationships (see Payer Power over Pharma chart). The combination of these three forces with the global recession and other pricing pressures, especially in European countries like Greece and Spain, has created a "perfect payer storm" for pharmaceutical companies. As a result, desperate but empowered payers are using the full range of their capabilities and controls to place more extreme demands on innovative pharmaceutical companies and products.  

Swelling payer power has recently been demonstrated globally in a number of  ways:

 In June, the German government required pharmaceutical companies to provide a 16 percent rebate to public health insurers and instituted a price referencing system tied to low-pricing countries including Greece, which significantly depresses innovative drug prices. Separately, the Spanish government has enacted new measures that will require patients to pay the full price for 450 prescription medicines. According to the European Federation of Pharmaceutical Industries and Associations (EFPIA), price cuts and mandatory discounts levied by Greece, Ireland, Italy, Portugal, and Spain cost drug companies nearly $9 billion in 2010-11. After threatening to cease supplies of discounted drugs to Greece following additional government-mandated price reductions, CEO Gitte Aabo of Leo Pharma stated, "In my 18 years in the pharmaceutical industry, I have never experienced anything like these price cuts. It's much more severe than the impact of US healthcare reforms."  

In China, the government announced plans in August to extend the number of products on its price-controlled Essential Drugs List from 307 to 700 by the end of 2012. In line with China's policy to reduce healthcare costs, this announcement signifies further price reductions on the more expensive drugs available from hospitals, which typically provide manufacturers with higher margins.  

India has enacted a $5.4 billion policy which provides free generic drugs to patients and requires doctors to select from a generics-only drug list or face punishment for prescribing prescription drugs. "The policy of the government is to promote greater and rational use of generic medicines that are of standard quality [and that] are much, much cheaper than the branded ones," stated India health official L.C. Goyal.  

 In the United States, 16 states have imposed monthly drug limits on Medicaid patients. For example, Mississippi and Illinois restrict coverage to two or four prescriptions drugs per month, respectively.  

 The National Institute for Health and Clinical Excellence (NICE), the United Kingdom's primary health technology assessment group, has rejected reimbursement for nine of the last 10 end-of-life cancer drugs proposed by pharmaceutical companies, including Roche's melanoma treatment Zelboraf. Various forms of government agencies responsible for valuing and/or making nationwide coverage decisions on medical therapies have been established in: Canada, The Canadian Agency for Drugs and Technologies in Health Care or (CADTH); Germany, the Institute for Quality and Efficiency in Health Care (IQWiG); Australia, Pharmacy Benefits Advisory Committee (PBAC); and recently in the United States, the Patient-Centered Outcomes Research Institute (PCORI), which could evolve in that direction.  

According to Decision Resources, the Russian government is implementing policies to help modernize and double the size of its domestic pharmaceutical industry by 2020. Russia wants to reduce drug prices and spending by 20 percent to 30 percent by substituting imported drugs with locally-produced medicines. The country is requiring foreign drug importers to invest millions of dollars in domestic manufacturing and to transfer knowledge and technology to local manufacturers as a quid pro quo for continued market access. In Brazil, the government has long supported local manufacturers by requiring global pharmaceutical companies to pay for product development and distribution and profit-share with local subsidiaries. This policy has resulted in sizable investments by global pharmaceutical players, such as Sanofi's acquisition of Medley Pharmaceuticals; GlaxoSmithKline's co-development deal with the government's parastatal firm Oswaldo Cruz Foundation; and Novartis's construction of a local manufacturing facility in the Brazilian state of Pernambuco.  

 US pharmacy benefit managers are rapidly consolidating to gain competitive advantages and negotiating leverage. Despite anti-competitive concerns, US Federal regulators in April approved the merger of two of the nation's three largest pharmacy benefit managers, Express Scripts and Medco Health Solutions, to form a $116 billion colossus.  Together with CVS's recent acquisition of Caremark, these two merged entities now control nearly 75 percent of the pharmacy benefits market in the United States, creating tremendous leverage in negotiations with pharmaceutical companies. 

 In March, several health plans and Community Catalyst, a non-profit consumer advocacy group, filed class action lawsuits in four US courts against eight major drug manufacturers for illegally subsidizing co-payments for expensive brand-name prescription drugs such as Lipitor and Nexium through the promotion of co-pay coupons. In July, Walgreens, Kroger, Safeway, and other retailers sued Pfizer in US court for conspiring to delay the launch of generic Lipitor for two years and forcing the pharmacies to overpay for the world's best-selling cholesterol drug.  

 In March, India forced Germany's Bayer to grant a compulsory license for the cancer drug Nexavar, which costs $5,700 for a month's supply. According to the 

, Indian patent regulators stated that local generic-drug maker Natco Pharma Ltd. had pledged to sell Nexavar for $178 a month. 

Reflecting on the multitude of recent payer challenges, GSK's CEO Andrew Witty announced at the annual EFPIA  meeting in June that the pharmaceutical industry is "adapting to a new [payer] reality." To contend with the increasing power and control of payers, pharmaceutical companies are experimenting with a variety of approaches, which I refer to as the nine "C's" of pharma's competitive payer responses: 

 In 2010, Novartis announced plans to invest $500 million in Russia over five years, including construction of a manufacturing plant in St. Petersburg. Similarly, Teva, Novo Nordisk, and Nycomed are each investing $80-100 million to build local manufacturing and other facilities in Russia to try to satisfy the government's new manufacturing requirement.  

 In June, Novartis announced collaboration with the Malaysian Health Ministry to establish a $700 million fund to support new healthcare ventures to help enhance its stakeholder relationships and selling opportunities in Malaysia.  

 Roche is significantly cutting the price of MabThera (rituximab) and the breast cancer agent Herceptin (trastuzumab) in India and giving the cancer therapies new names. The company hopes to boost patient access and prevent a compulsory license transfer, resulting in potential generic competition. Roche spokesman Daniel Grotzky stated in a 

article that "there is the expectation that companies should do more to improve access to drugs. One instrument that has been used unilaterally by the Indian government was use of the compulsory license. We'd like to provide solutions to that, rather than be in a situation where you see unilateral action." Roche is also reducing the price of its non-Hodgkin's Lymphoma agent MabThera/Rituxan in Egypt and South Africa as part an overall emerging markets strategy in highly price-sensitive markets. 

 In 2009, Merck and the US health-insurer Cigna signed a performance-based contract which provided higher discounts on Merck's diabetes agents Januvia and Janumet if Cigna's members achieved specified clinical outcomes and adherence measures. "Merck should be recognized as the first major pharmaceutical company to offer increased discounts on its oral anti-diabetic products, supporting Cigna's efforts to reduce A1C levels for individuals with diabetes, regardless of what medication they may be taking," said Eric Elliott, president of Cigna Pharmacy Management. "Improving people's health comes first for both Cigna and Merck. We hope this agreement will become a model in the industry." In 2010, GSK agreed to provide the United Kingdom's National Health Service  a partial, retroactive rebate if the company's  kidney cancer drug Votrient did not match up to Pfizer's rival Sutent in a head-to-head clinical trial to be completed in 2012. This special "guaranteed" pricing approach compelled NICE to recommend Votrient for NHS coverage.  

 To help ensure US approval and reimbursement, Pfizer coupled its $100,000 per year cancer drug Xalkori with a companion diagnostic test from Abbott Laboratories to help physicians identify the 5 percent of patients whose non-small cell lung tumors expressed a specific ALK gene mutation.  The goal is to ensure that the cost of the medicine is justified by targeting it only for those patients most likely to benefit. According to consulting firm PricewaterhouseCoopers, there were over 25 companion diagnostic deals in the United States in 2010 and 15 in the first half of 2011, up from only seven in 2008. A key question is whether drug inventors like Pfizer will have to continue to fund the cost of co-developing these diagnostics without any contribution from payers or patients.  

 In the past, pharmaceutical companies rarely conducted head-to-head trials against rival agents. However, with dramatically increasing competition for provider prescriptions and payer funding, many large pharmaceutical firms are conducting variations of "comparative effectiveness" studies, typically pitting their new medicine against other widely-used medications. Companies are also investing heavily in observational studies—real-world evidence—to protect their franchise against the growing tendency of payers to revise prices downward if exposure to the market suggests a medicine does not perform as expected in advancing therapeutic outcomes.  

 Companies are using their global presence to pinpoint instances where payers may be denying access where others do not. In April, GSK executive Simon Jose publically criticized NICE stating that, "By denying access to benilumab [Benlysta], which is the first treatment specifically licensed and developed for lupus in over 50 years, UK patients are being left behind those in other countries, including the United States, Germany, and Spain who already have access to this medicine."  

 Novartis is legally challenging the Indian government's refusal to grant a patent for its leukemia drug Gleevec, which has patent protection in over 40 countries, but which is facing a potential generic onslaught in India.  

 In Germany, Novartis recently pulled its anti-hypertensive Rasilamlo from the market three months after launch, while Lilly and partner Boehringer Ingelheim bypassed the German market for the launch of its diabetes drug Trajenta. Novo Nordisk refused to give in to price cuts in Greece and Spain by threatening to keep several new agents off the markets until both countries relented in later negotiations. In response to public criticism, Novo Nordisk CEO Lars Sorensen said, "I think actually it ought to be the [Greek] government who faces the patients and talks to the patients about why we cannot afford to buy the products that you have been used to getting because we didn't manage our finances well enough."  Statements like these are controversial and represent just how seriously companies are taking the pressure from governments to serve as "lender of first resort" once public finances go bad.  

Worldwide financial pressures will mount as national economies face low rates of GDP growth, mounting public debt, ageing populations, and the demands of growing middle classes in emerging markets seeking greater access to medicines.  At the same time, pharmaceutical companies must work to maintain traditionally high margins on existing products to fund investment in higher-priced biologics. Consequently, the competition between pharmaceutical companies and payers—their long-standing customers—for funding will become dramatically more intense. Pharmaceutical professionals better get ready to handle the ultimate competitor.  

MD, MBA, is President of Bernard Associates, LLC, a global pharmaceutical industry competition consulting firm. He can be reached at 

"Payers have evolved to become powerful global contenders with pharma for increasingly limited funding of drug budgets."

The Payer C Change: From Customers to Competitors

 is a good time to present our annual post on how well the industry is doing in harvesting value for shareholders. Our diverse list of 24 companies, drawn from Big Pharma to the established biotechs, presents a similarly mixed picture on returns: smaller firms with a distinct customer base and tight oversight of costs are by and large proving more adept at delivering the strong growth that investors still expect from this business.  

A closer look at the numbers suggests that the trend line on performance is changing fast. Gross margins for all the surveyed companies dropped in 2011, a sign that a consolidating payer base is finally asserting real market power. The critical EBITDA metric, covering net profits before taxes, was up by more than 6 percent on average, but this fell far short of the 24 percent gain for the Fortune 500 companies as a whole.  

 results confirm a recent comment by Biogen-Idec CEO George Scangos, whose company also earned the Audit's number one spot in shareholder value this year. "What is fundamental about today is that we are becoming an industry of lower margins," he said. That's blunt confirmation of a trend that many industry insiders are reluctant to talk about. While the Audit data doesn't provide a proof point as sweeping as what Scangos said—it simply acknowledges that "nosebleed" high margins are encountering resistance, and only in some market segments—the implications of an overall decline are worth exploring.  

Casting our gaze toward the future, what might a world of lower drug margins look like for Big Pharma? Certainly, the self-correcting rigor of the market will discourage putting more resources behind a commercial development strategy that relies on big promotion budgets to create blockbusters around conventional science, in low-risk therapeutic areas. The evolution of R&D budgets toward a precisely calibrated pipeline portfolio must continue apace.  

It follows that a key management imperative in this new environment will be to maximize revenues through better operational efficiencies—accounting in advance for every dollar spent. Likewise, increased therapeutic competition and payer power will only accelerate the rush to demonstrate value, with the performance marker of choice being superior health outcomes against alternative products. The upheaval this has caused in the once static division of labor among manufacturers, clinicians, and benefit providers has been identified by Editorial Advisory Board (EAB) member Stan Bernard in his on-going 

 series on "creallaborations." One sure aspect of a lower margin business climate is the necessity to dilute the cost of commercialization through collaboration; finding good partners improves the chances of securing a preferential market position, where it is easier to negotiate a premium price.  

Drug companies will also need to act more like a consumer business, where an internal culture of "continuous learning" is required to keep pace with the morphing contours of a more discerning customer base. Novartis, among others, has touted the cross-over potential from having a strong OTC franchise alongside the innovative business, but the management cultures of the two product streams are distinct. Realizing opportunity from these synergies still remains elusive. Those companies that can do it will not only build market share. There is an added element in encouraging innovation on what surrounds the product. In fact, lower margins make process innovation, which is focused on service and performance commitments, a potentially important way to generate extra value, beyond the pill itself. It can generate extra revenue and raise the profile of the brand. The key is finding customers willing to pay for it. Otherwise, declining margins will result in fewer services, as in oncology, where medical practices are still chained to the "buy and bill" model.  

Ultimately, this year's Industry Audit shows that those smaller "stealth" companies nipping the heels of Big Pharma are redefining how we assess growth. Growth from pile-on M&A's is almost always bad, while "good" growth stems from smaller bets on narrow market segments that are price insensitive and carry an active patient voice, which create opportunities to tap flexible, cost effective social marketing channels as an alternative to the traditional fixed sales force. It's simple: low margin or high margin, know thy customer is the best way to get the notice that builds business in a show-me-the-money world. 

From the Editor

Autumn is a good time to present our annual post on how well the industry is doing in harvesting value for shareholders. Our diverse list of 24 companies, drawn from Big Pharma to the established biotechs, presents a similarly mixed picture on returns: smaller firms with a distinct customer base and tight oversight of costs are by and large proving more adept at delivering the strong growth that investors still expect from this business.

The Margin Call

 As the mature markets in the United States and Europe continue to wrestle with economic and political uncertainty, drug manufacturers are hunting for new sources of growth. The US medicines market, burdened by a more powerful payer base and a protracted economic slowdown, is projected to grow at only 3 percent to 6 percent between now and 2014, and even that slow pace remains vulnerable to the potential shock of the so-called fiscal cliff. Growth in Europe will be even slower, hovering between one and four percent as the region falls back into economic recession. Policy changes in France, Germany, and the United States, combined with broader economic and budgetary pressures in Italy, the United Kingdom and—most ominously—Spain, will further slow market growth, exacerbating the effects of looming patent expiries.  

All the major pharma companies are revising their growth plans and developing new ways to maintain traditionally high margins through this period of market uncertainty. At the top of the playbook is accelerating the commitment to emerging country markets, where Big Pharma has had varying levels of success—the challenge lies in transforming volume sales into sustainable profits. It is also becoming apparent that additional progress in these diverse and highly complex markets requires large investments in time, resources, and people.  

Even if lower than forecast second quarter results from major players like GSK and Pfizer represent a corrective to past optimism, the headline growth rates in many emerging markets present a dramatic contrast to those in the United States, Japan and the "submerging markets" of Europe. According to data from IMS Health, drug sales in emerging markets are still growing at more than twice the global rate. China, expected to be the world's second largest pharmaceutical market by 2015, will expand at an annual rate of 22 percent to 24 percent through 2014. The other components of the BRICs—Russia, India, and Brazil—will grow at between 9 percent and 16 percent. Elsewhere, countries like Argentina, Turkey, Venezuela, Vietnam, and South Africa all exhibit substantial potential, driven by rapid economic expansion, rising incomes, and growing populations.  

Many manufacturers have sought to get into these markets quickly, in order to leverage broad portfolios of mature brands and capitalize on the remarkable growth of the middle class. Research from the McKinsey Global Institute projects that by 2025 emerging markets will be home to more middle class households than in the developed economies. In countries like China and India, the size of emerging "middle class" populations may actually be double the population of the entire United States, a number that stirs drug marketers to flights of fantasy.  

The reality is more complicated, however. The vast majority of emerging market growth consists of sales of INN generic and branded generic compounds. Manufacturers have made significant efforts to extend the life cycle value of mature brands by introducing them outside their core markets, often with impressive results. Notwithstanding the relative success of this strategy, the growth potential of branded innovators remains limited, and there is a bigger question about the potential for many higher-priced innovator molecules, particularly biologics and targeted cancer compounds. Despite economic growth that has lifted hundreds of millions of Chinese from poverty, the monthly cost of a biologic cancer therapy like Avastin (bevacizumab) still exceeds the median monthly income in China. In other words, without a functioning insurance scheme that allows for reimbursement at low out-of-pocket cost, most of these products will remain beyond the reach of the average consumer. 

To better understand the market potential for biologics and other high-priced innovators, we have devised a multivariate econometric model designed to isolate the factors most strongly predictive of growth. We included a variety of economic and demographic measures, health expenditure data from WHO and country governments, and sales data from IMS Health. Some modifications had to be made: for example, data were not available for every time period, and in some cases data from a different source had to be used to fill in gaps in official data sets. Taiwan (the Republic of China) is not a UN member, which means that UN agencies such as the World Health Organization do not capture data on the country. As a result, we relied on data from the Taiwanese government and assumed broad comparability of measures. To adjust for wide variation in population size, we normalized the dependent variable by converting top line sales numbers to per capita figures. Using standard statistical techniques, we modeled growth dynamics across emerging markets in Eastern Europe, Latin America, Asia, the Middle East, and Africa.  

Our research identifies three factors that explain the majority of the observed variation in per capita biologics sales. First, per capita total expenditure on healthcare highlights the ability to pay for premium-priced innovator molecules. More investment in health correlates with better opportunities for higher-priced innovator products.  

Second, we found that as per capita government expenditure rises, so too do sales of premium-priced products. Higher government expenditure generally signals the presence of at least some formal reimbursement mechanism facilitating access to therapies otherwise out of reach for the majority. The third factor—the percentage of the population living on less than $2 per day—is sensitive not only to incomes but a number of other development indicators. Where the poverty rate is low, not only are incomes higher and more equitably distributed, but populations are more urbanized, making the distribution of biologic products more feasible. We also believe that where the poverty rate remains high, governments will continue to prioritize health sector investment in primary care and the elimination of transmissible diseases.  

Applying our model to a basket of emerging markets, we find that the opportunities for high-cost products differ from those for small molecule, generic products, with important implications for manufacturers. Most notably, India essentially disappears from the list, reflecting its low median income ($3,472), low per capita investment in health ($109), and very high poverty rate (75.6 percent living on less than $2 per day). Moreover, given India's predominantly rural population, access issues are significant (as they are in a geographically divided Indonesia). As a consequence, India, despite the presence of an emerging biosimilars industry, appears unlikely to represent an attractive near- or medium-term opportunity for large molecule biologic products. The cash market is untested at the high price points of these products.  

China shares some of the same traits, but income and investment levels are more than double those in India, translating into a somewhat better opportunity. As China's government expands coverage to medicines, the market for biologic products will expand. Even today, the market exceeds $1 billion in sales, driven largely by province- and city-level reimbursement programs, often aided or augmented by thoughtful manufacturer access programs.  

In contrast, a number of other countries, including many in Latin America, represent near-term opportunities, characterized by comparatively high median incomes and rapidly expanding formal subsidized coverage. These countries include Mexico, Brazil, Colombia, Russia, and Argentina, among others. And although the global economic slowdown has affected growth rates, especially in Mexico, Venezuela, and Russia, stated government objectives include broader coverage for biologics in high-profile conditions like cancer. 

Our analysis suggests some reasons that emerging markets growth has proven more challenging than many manufacturers had hoped. The role of governments in healthcare financing, for example, appears a critical determinant of market potential. While higher per capita investment in healthcare remains important, where the government finances the majority of healthcare consumption, sales of innovative biologics are higher. Looking at it another way, as patients' out-of-pocket costs rise as a share of total expenditure, total per capita expenditure falls, reinforcing the importance of reimbursement. We can, as a result, conclude that the expansion of the middle class itself does not lead automatically to increased volume sales of Western innovator products. Indeed, even in the West, sales reflect insurance coverage, the majority of which, even in the United States, is financed by governments.  

Our finding that the poverty rate represents an effective brake on market potential is also significant. Since government financing is so important to market potential, where there are critical competing priorities—both within the health sector or more broadly, such as poverty alleviation—the allocation of scarce budgetary resources may not be optimized to support Western product sales. Indeed, in low income countries the majority of deaths in children under five result from some combination of measles, malnutrition, malaria, chronic diarrheal disease, and acute respiratory infections—all of which can be alleviated or eliminated with low cost interventions such as vaccination, bed nets, and basic caregiver training. Many organizations providing advice and financing to emerging market governments—from WHO to the Gates Foundation—rightly continue to focus policymakers' attention on these pressing needs.  

Against such a backdrop, biologic opportunities in some therapeutic areas may be limited, even in the face of steadily "Westernizing" epidemiologic patterns. For instance, the prevailing Western model of oncology product development may be less relevant in emerging markets. Whereas in the US and Europe, manufacturers have grown accustomed to commercializing—and commanding significant price premiums for—sophisticated new technologies that offer modest incremental benefit, it is not assured that health sector decision-makers in emerging countries will value these products in comparable fashion. In addition, major differences in how health services are paid for can influence the incentives to include biologic drug therapy in treatment. For example, advanced medicines that help keep patients out of hospitals may not be valued as much when hospital charges comprise a smaller portion of total health care spending. Among advanced oncology therapeutics marketed in Brazil, only Glivec (imatinib) enjoys full coverage under the prospective payment system, a testament to that product's strong clinical value proposition.  

Our model did not explicitly focus on the competitive dynamics between Western and non-Western manufacturers, but these, too, represent an important consideration for comparatively high cost, innovator products. Data from IMS Health indicate that Western brands generally represent less than 40 percent of volume in emerging markets. While much of this volume comprises low-cost generics, in countries like India and the Republic of Korea, nascent local biosimilar industries have emerged not only as viable local producers but increasingly important global competitors.  

Research conducted across multiple industries shows that emerging markets present distinct segments of opportunity. A small, wealthy segment of "global" consumers, generally concentrated in major cities and exhibiting consumption patterns and brand preferences comparable to consumers in developed countries, sits atop the pyramid. At the opposite end of the spectrum lies the much larger "bottom of the pyramid," with limited income and purchasing power. Historically, manufacturers of high-cost therapies have concentrated on the "global" segment, maintaining Western price levels and capturing whatever revenue could be generated. In the middle, however, lies the emerging middle class.  

As noted, without some form of health coverage, the middle class cohort will remain limited in commercial value. Nonetheless, it bears watching because this is an important "battleground" segment, one in which local companies will compete directly with Western manufacturers on price, quality, and possibly even indication and product features. Moreover, as in India, local governments may pursue policies designed to support the continued growth and development of local manufacturers, conceivably at the expense of Western innovators. At minimum, steadily rising local regulatory hurdles—ironically designed in part to keep out cheap Chinese imports—will, over time, translate into locally manufactured products that can match Western innovators on quality and safety. 

As a consequence, the potential competitive challenge presented by local manufacturers will continue to grow, especially as these companies begin to enter other emerging markets, as Dr. Reddy's has recently done with its version of Rituxan (rituximab) in Peru.  

Although the developers and marketers of innovative biopharmaceuticals increasingly acknowledge the presence of meaningful challenges in emerging markets, they nevertheless present real opportunities. Realizing these opportunities will, however, require a nuanced understanding of the complexities on the ground. While topline growth, buoyed by dynamic macroeconomic expansions across most emerging countries, will remain robust, the majority of this growth will reflect sales of low cost generics, often manufactured locally. As implied in our findings, we see that economic growth, by itself, is not a predictor of the market potential for high-cost innovator products. Rather, the increase in government financing for health care, usually a by-product of economic growth, that signals increased opportunity. As in the United States or Japan, few potential patients can afford a product like Herceptin (trastuzumab) or Neulasta (pegfilgrastim) without insurance. The rapid expansion of an "emerging middle class" will not, in the absence of good reimbursement schemes like those in Taiwan or Venezuela, translate into significant market expansion. 

Can Emerging Markets Emerge Fast Enough? 			

Governments must also seek to manage a broad range of competing priorities and stakeholder demands, which will further influence the pace and scale of market expansion. Governments still struggling to eradicate the most extreme poverty and its associated health consequences will be less likely to devote scarce resources to paying for biologic therapies that offer only incremental improvements in progression-free survival. Similarly, governments hoping to foster the continued growth and development of a job-creating local biopharmaceutical industry may not automatically assume that Western products offer the most meaningful advantages in terms of quality and safety.  

Nevertheless, the rapid economic growth across Asia, Latin America, and, increasingly, Africa represents both an unqualified advance in human development and an important commercial opportunity for manufacturers. That capitalizing on this opportunity will be complex and challenging simply reinforces this: Anything as valuable as a growing market representing billions of potential customers will be hotly contested. A realistic, on-the-ground assessment of underlying incentives and the culture of medical practice are a critical first step toward realizing the potential of biologics as a global asset, with market potential across all regions.  

 is Senior Principal at IMS Consulting. He can be reached at  

High priced biologics may have a bright future in emerging markets, but winning access in the short term will be a hard sell.

The Big Sell: Biologics In Emerging Markets

There are a number of highly innovative US companies, many of them in the information technology (IT), electronics, and software industries. What is interesting is that these companies were at one time fully-integrated entities—companies that made mainframe computers, wrote the software, and sold you the paper on which to print. Essentially, they did everything from soup to nuts. That model in the IT and electronics area has changed dramatically over the last 30 years. Many of the biggest names in those fields claim that their adoption of an open innovation model led to this result and saved their businesses. So, what is open innovation?  

Open innovation can be categorized three ways: 

 is pure outsourcing, often touted as open innovation, or R&D activity pursued by external entities, such as contract research organizations (CROs) and universities. 

 consists of licensing and its variations—collaborations, joint ventures, even in some cases technology transfer, and perhaps what is called "crowd sourcing;" where a number of innovators come together to address a problem and solve it. 

 is R&D in the space beyond IP—an interesting concept, but which doesn't really help us much with what this means as applied to pharmaceutical innovation. 

Rather than digging further into the jargon, we need to ask what caused certain companies to adopt what is called an open innovation model. Did it just dawn on those companies to decide "Oh, we need to create common platforms and technologies to arrive at new products, and thus must collaborate with others?" Or did companies deliberately embrace it as a behavior they should adopt, a culture they should push forward? Or was it vice versa—did the external environment intervene to force their hand? The answer appears to be that because the high tech environment changed over the past 30 years, companies had no choice but to adapt. 

What happened in the electronics industry is instructive. By the early 1990s, IBM was on the verge of bankruptcy. The Taiwanese and the Japanese manufacturers in the 1970s and 1980s began making chips that were competing with IBM's products. IBM had to do something with the last few million dollars in its bank account to bring the company back to viability. Its solution was to open up its patent portfolio to outsiders in a systematic way, as a means of generating income.  

Today we are enjoying the fruits of a dizzying number of collaborative endeavors started decades ago that have resulted in the launch of many new products in the last few years. The products combine the strengths of a number of different independent companies coming together to create an innovative array of handsets, tablets, GPS devices, and computing devices. A fact worth noting is that the intellectual property environment for these business sectors remains very vibrant. Successful open collaborative frameworks were not the death of IP. Patents were and continue to be actively sought, licensed, sold, and litigated by these industries—probably more so than ever. 

Are there similar dynamics at play in the pharmaceutical sector that will push our industry toward an open innovation framework? If so, what can we expect these frameworks to look like?  

A key influencing issue is the volume of R&D assets that are not being pursued simply because of the enormous risks and costs of developing new drugs. Are too many companies all chasing the same target drugs or the same cures? Should the industry collaborate more to get to a more efficient outcome? Would this be considered a cultural change? Or is it a question of at what point does the competitive balance lower the cost for new entrants and we are forced to collaborate? It is worth noting that the pharmaceutical sector remains more fully integrated than many of the other industry sectors.  

This deserves further exploration. Unlike the high-tech and software industries, the information imbalance in the pharmaceutical sector might be the culprit here. Scientists in the pharmaceutical industry will all agree that in order to get to the next generation of drugs, greater access to the best information is needed. Yet there are still many barriers to getting the most helpful kind of information for drug discovery. Optimally, what a research scientist wants is information on health outcomes, mortality, health conditions of patients, and their behavior in the context of the disease. He/she also wants information from gene banks or tissue banks from those patients for whom a history is known. Back at the beginning of the 1990s, many thought that mapping the human genome was the answer. But it only told us part of the story. What is needed is more data that informs us about what the genome means for the individual. We must learn more about why different individuals treated in the same environment have so many different health outcomes. 

is. Yet the most critical information is often protected by privacy concerns. It's all locked up in insurance companies, academic and research centers, and government health agencies, and it is very difficult to get because there is no conduit by which this information consistently reaches the research community. If society is serious about lowering barriers to understanding health, the relationship with the genome and other factors that would help us generate new cures or at least new therapeutics, the barriers to information access will have to be lowered in some way. Access to the right set of information may be the key environmental factor to lowering the risks and costs for those engaged in drug discovery. But when will it happen? 

Only once there is a better flow of the right information among pharmaceutical companies on disease, health outcomes, and genetic information, will there be a real race to develop new drugs and therapeutics. The difficult part is figuring out the biological and therapeutic pathways, which were not as simple as earlier thought. The great misconception has been that the pharmaceutical industry is interested in patenting the genome and owning your genes. Rather, the industry is primarily interested in owning the intellectual property to the therapeutics they develop and sell.  

Hence this brings us to the earlier question of whether external pressures are creating a flatter, more equal world for information in the pharmaceutical sector. Does the narrow sequestering of critical information somehow prevent the formation of such an environment? Without that informational equality, will the industry ever be compelled to adopt behavior that would result in a more open innovative world? 

We are today seeing more willingness to collaborate, or at least there is now an established culture in pharma where Type 1 outsourcing activity is frequent. And increasingly there is Type 2 licensing and collaboration activity, but perhaps probably not as much as one would like to see, and certainly not as much as in the software, electronics, and IT industries. The pharmaceutical sector needs to spread those costs and risks in an environment where there is limited access to the right kinds of information.  

There are a number of examples of companies seeking to gather and access the right information on genetic information on specific disease states. For example, the Asian Cancer Research Group founded by Pfizer, Merck, and Eli Lilly as a not-for-profit company seeks to accelerate research on new medicines to treat the most commonly diagnosed cancers in Asia (gastric, lung, and other forms cancer) via the creation of the "most extensive pharmacogenomic cancer databases known to date" over the next two years.  

A further example is the Structural Genomics Consortium, a joint effort of Pfizer, GSK, the University of Toronto, NIH, Oxford, Umeå University, and other academic laboratories to develop small molecules that can stimulate or block the activity of proteins involved in epigenetic control. Here, industry gets access to genomic expertise in return for placing biologically-active compounds in the public domain for research use.  

But such approaches are only piecemeal and answer just a few of the questions for some diseases and probably don't provide sufficient information to understand what is going on in human biology. So in the end, the question is whether the creation of a culture of collaboration as evidenced by the above noted consortia will be enough to create successful environments for the pharmaceutical sector. Or must industry await a flatter world of information access via some form of a high societal-level regulatory intervention aimed at liberating information? The answer is that we need to do both. 

There is much talk today about "open innovation" in business and research forums-but what exactly does it mean? How does open innovation as a concept apply to the pharmaceutical sector? Does it signal a change in the way pharmaceutical companies approach research and innovation?

Pharmaceutical Executive-09-01-2012