Forecast 2005

December 1, 2004

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-12-01-2004,

This is the time of year to not only reflect on the past, but to ponder the future.Forget soothsayers, prophets, and fortune tellers' crystal balls. Inside are predictions from some of industry's key thought leaders.

» Humphrey Taylor

Chairman of the Harris Poll, Harris Interactive

I have an IQ test for forecasters. If they are brilliant like the late Herman Kahn, they never make forecasts that can be proved wrong in their lifetime. If, like me, you conduct political polls, you make a forecast on Election Day morning that may be proved wrong that evening. That obviously indicates a very low IQ. So I am happy to raise my IQ level by offering 20 forecasts regarding the next few years:

1. President Bush will make good on some of his campaign promises for making healthcare more accessible and affordable, but they will not substantially reduce the number of people without insurance.

2. The number of uninsured and underinsured will continue to increase.

3. Congress will start work on ways to "fix" or "improve" the Medicare Modernization Act-especially its pharmaceutical benefit plan.

4.Washington will do little to reduce the rapidly increasing long-term costs of Medicare.

5. Medicare Advantage plans will increase their share of Medicare beneficiaries, but most beneficiaries will remain in traditional fee-for-service Medicare.

6. The ideological debate about roles of government and "the market" will continue. On the left: the proponents of universal coverage, single-payer systems, and healthcare as an entitlement. On the right: proponents of competition, choice, personal responsibility, and market forces. Bismarck, Beveridge, and FDR vs. Adam Smith and Milton Friedman. Neither side will land a knockout punch, but advocates of market forces will win some battles.

7. There will be better metrics to evaluate the quality of care provided by hospitals, physicians, and health plans, but they will not be good enough to persuade those being evaluated that they are fair.

8. The "pay for performance" movement will grow, led by third-party payers (e.g., Leapfrog and Bridges to Excellence), the Institute of Medicine, academics, and policy wonks. Many doctors and hospitals will complain.

9. Pressure will grow to create a new federal government agency to evaluate the cost-effectiveness of diagnostics, drugs, procedures, and other treatments, influenced by those in the United Kingdom, Australia, Germany, and other countries.

10. High deductible and "consumer-driven" health plans will grow rapidly-but from a small base-and will be described as "consumer empowerment" or "consumer choice" plans.

11. Out-of-pocket costs will rise even faster than total healthcare spending. This trend will be described as increased "personal responsibility." As a consequence, nonadherence/compliance will increase substantially.

12. The IT revolution will move forward (slower in the United States than abroad), but it will be too soon to know if it can deliver on its promise of improved quality, fewer medical errors, increased efficiency, and lower costs.

13. The insured public will respond positively to "choice" and negatively to higher out-of-pocket costs.

14. Healthcare costs will continue to grow much faster than the GDP (but more slowly than in the early 2000s). The main drivers: new technology, increased utilization, and hospital price inflation.

15. The "Vioxx effect" will cause more drug companies to fund clinical trials of approved drugs, following the example of Pfizer's new trial of Celebrex.

16. All major drug companies will list clinical trials of their new drugs in a register, whether this is mandatory or voluntary, and release the results, both positive and negative.

17. A drug importation (or "reimportation") bill will pass and be signed into law, but it will fall short of what many advocates are asking for.

18. If a drug importation bill-or the threat of one-does not reduce the price differential between US, Canadian, and European drug prices, Congress will look for other ways to do so.

19. Drug companies will start to take a tougher line with some foreign governments on drug pricing, including walking away from some countries.

20. Industry's pricing in the United States will be less aggressive as companies seek to diminish demonization.

Companies' pricing strategies will become less aggressive.

PHARM EXEC SAYS:

» Midsize players with targeted therapeutics may begin to merge and threaten the dominance of some big pharmas, which are struggling to prove that blockbusters are safe and are paying large sums to those who think otherwise.

L.J.SELLER, SENIOR EDITOR

» Jane Sarasohn-Kahn, MA, MHSA

Management consultant and health economist

In 2005, the driving forces shaping the outlook for inrormation technology in the pharmaceutical marketplace include the demand for monitoring and measuring healthcare quality and patient outcomes; growing concern about a safer pharma supply chain; and the global demand for transparency. Together, these drivers converge toward the following events:

E-prescribing comes of age. Health plans-both private and public-are arming physicians with PDAs and personal computers to enable e-prescribing (eRx). CaféRx, an alliance of Allscripts, Cisco, HP, Microsoft, NCPDP, NDCHealth, and others, will provide end-to-end eRx capability. This initiative could be eRx's tipping point. Health plans and payers will benefit as physicians have formulary information, including available generic substitutes, for each patient at the point of prescribing.

Integration across silos. Payers and providers are increasingly able to marry patient data from different sources. As claims data can be integrated with patient outcomes data (for example, employer's return-to-work statistics with patients' perceived quality of life), payers and plans will be able to compare the true cost-effectiveness of various treatments. Groups such as the National Business Coalition on Health have begun to study this process.

RFID goes beyond Wal-Mart. Importation of pharmaceuticals in the United States has gained bipartisan support in Congress. To ensure a safe supply chain, pharmaceutical manufacturers, distributors, and retail pharmacies will come together to adopt the first stages of RFID across the supply chain.

Clinical trials online. The call for greater transparency of clinical trials influential peer-reviewed medical journals will usher in a new phase of online clinical information that can be used by patients, clinicians, and others interested in delving into greater details learned in trials. The level of details published online has yet to be negotiated, which will happen in a careful dance involving publishers, researchers, and their respective lawyers.

Public and private health plans will offer end-to-end electronic prescribing.

PHARM EXEC SAYS:

» Cost consciousness will rise again and again-not only among consumers. Pharma will tighten its belt to compensate for the squeeze on profits.

MICHAELD. LAM, ASSOCIATE EDIOTER

» Toby Jane Hindin, EdD

Editor-in-Chief, Applied Clinical Trials magazine

While profits in the pharmaceutical industry have slowed over the past few years, the clinical trials outsourcing market has grown by leaps and bounds. The industry has witnessed some unexpected divergences and paradigm shifts over the last year. This is reflected in sponsors now rethinking how partnerships and alliances with CROs, laboratories, IT firms, public and private research organizations, and academia can fit together to maximize their resources. Future trends will include innovative partnerships, the incredible evolution of diagnostic tools, amazing strides in pharmacogenomics, and specific disease treatments in the development and marketing of new drugs.

Clinical trials: Outsourcing is still on the rise. Look for new approaches to partnerships.

» Jon Resnick

Senior engagement director, Cambridge Pharma Consultancy

Everyone is talking about Canada...

Over the past few years, the battle over US pharmaceutical prices has focused on importation. There is a widespread perception that importation is the primary threat to free pricing. But that perception is not supported by analysis of how importation is likely to play out over time, or by the European experience of parallel trade. Nor does it take into account other threats to US prices.

...But Medicare reform looms large.

The largest of these threats is the Medicare drug benefit. Though language in the act bars the government from direct price negotiation, precedents from Medicare and other federal programs suggest that lawmakers will be pushed to reconsider these "noninterference" protections. If that happens, the real battle over US pricing in the medium term will emerge not from importation-but from Medicare.

The rest of the world can't supply the US.

One obstacle to controlling US prices through importation is supply. Even if all the drugs currently parallel-traded in Europe and Canada were made available in the United States, they would meet only 3 to 5 percent of existing US demand. And parallel trade tends to focus on selected, high-volume categories. Just three classes constitute more than 40 percent of imports from Canada, leaving many categories in short supply.

"Savings" won't reduce prices to payers and patients.

Would substantial cost savings from importation be passed on to consumers? That hasn't been the case in Europe, where savings to payers from importation have been moderate; parallel traders absorb most of the gains, and prices gravitate toward local market levels. Add in proposed user fees, liability exposure, and distribution costs, and intermediary margins are likely to be squeezed further, reducing the potential to pass gains on to payers.

Most patients will continue to pay the same.

More than of 85 percent of patients' scripts are paid for by a third party. These payers are unlikely to pass along savings to patients. Payers buying in bulk would consume the majority of the imported supply, leaving little for retail consumers like our proverbial senior citizen in Buffalo.

Hard choices are on the way.

Even under the most optimistic of scenarios, it is difficult to believe that the Medicare drug benefit can be sustained within its budget. Updated analysis from the Office of Management and Budget assumes that actual costs may be 40 percent higher than budgeted. Faced with market failure or cost overrides, legislators will have four options: modify eligibility, reduce benefits, seek extra financing (or take money from other programs), or control prices. The first three are difficult political decisions with direct implications for voters. The fourth, taking pricing action, is the least painful way to deliver a sustainable benefit, although it entails a policy cost (it discourages investment in R&D) and a political one (damage to the pharmaceutical industry).

Setting price or reimbursement levels has a precedent. Since the introduction of DRGs (diagnosis-related groups) in 1983, Medicare has regulated prices in every sector it touches-hospitals, physicians and Part B drugs. It has also directly set prices under the health programs of the Department of Veterans Affairs and Department of Defense through the Federal Supply Schedule and through "best price" rebate legislation under Medicaid.

Our advice:

Don't ignore importation-it will have an impact on the industry-but keep an eye on the real game, which is the application of a Medicaid "best price" type solution in Medicare.

PHARM EXEC SAYS:

» The Vioxx withdrawal and increased focus on persistence and compliance-rather than public discourse and debate over DTC advertising-will influence companies to start moving away from the blockbuster marketing model. In general, the industry will struggle to make that transition, but companies and agencies with excellence in integration and marketing insight are more likely to be successful.

JOANNA BREITSTEIN, SENIOR EDITOR

» James Karis

Chief Executive Officer, Entelos

In 2005, the pharmaceutical industry must finally come to grips with the unsustainable economics of its current research and development paradigm. It takes too long and costs too much to develop drugs.

For every 13 drugs that start out in animal testing, only one makes it to market, compared with one in eight during 1995. Fewer drugs and biologics are making it from the lab to the marketplace, which has dramatically pushed up the cost of drug development. The cost of getting drugs to market has been estimated to be $800 million, and some estimates take it as high as $1.7 billion when you include commercialization costs.

I believe technology can be the key to reinventing the pharmaceutical R&D process. But if you want to get to the moon, you can't take a submarine. In other words, achieving significant efficiencies in pharmaceutical research and development will require the right technology. The industry is going to have to be more willing then ever to borrow from other industries.

One critical step will be embracing technologies that begin to solve the predictability problem inherent in the discovery-to-development phase of the R&D process. This preclinical phase is the critical point at which targets (and their therapeutic compounds) are transitioned, or translated, into human in vivo disease states. This preclinical phase can be better characterized as the predictability gap between in vitro and animal experimentation and human clinical response.

While some believe that simply advancing technology the industry already knows or has (like genomic/proteomic databases, data mining, or visualization) will close this gap, it will not; the experiences of the last 10 years are evidence of that. What is required is exactly what FDA has called for in its white paper on innovation: "A new product development toolkit . . . is urgently needed to improve predictability and efficiency along the critical path."

In 2005, the pharmaceutical industry will have to look at the lessons learned from other R&D intensive industries, such as telecommunications, aerospace, and automotive. They must use technologies that are developed using disciplines that lie outside traditional pharmaceutical R&D (i.e., mathematics, physics, and engineering) and use the right technology to close the predictability gap. So what we learn in discovery is immediately translated into development, and ultimately, into an effective therapy in the clinic.

Drug development takes too long and costs too much. It’s time to learn from other industries.

PHARM EXEC SAYS:

» Pharma will increasingly target employers with their marketing and educational initiatives as more restrictive formularies force workers to be more responsible for paying for medicines and, consequently, less likely to take them.

SIBYL SHALO, SENIOR EDITOR

» Matt Giegerich

President and CEO, CommonHealth

The next 12 months will bring a continued high-pressure front in pipelines, patents, politics, and profits. As the industry continues its grudging evolution toward a nimbler, more efficient business model, there will be accelerating volatility and challenge to the status quo. On the radar screen will be overall cost-cutting-including sales force right-sizing and supplier consolidation-and deft navigation of the new landscapes of public scrutiny, Medicare and managed care, regulatory guidelines, and OIG lawsuits. Intensity, creativity, collaboration, speed, and efficiency will be required on every front. As always, rewards will go to those who consistently innovate and add value. Existing brands will need even more clutter-busting insight and creativity, and a more complex and rapidly coordinated menu of approaches; sales forces will require more innovative methods to secure physician access and attention; managed markets will need a more decisive argument for pricing and formulary inclusion; and consumers and patients will need ongoing courtship and cajoling toward diagnosis, treatment, compliance and persistency.

Given the complexity and specificity of the emerging world of medicine, new pipeline brands will require all this and much more, including a more-refined scientific platform and a new communications model to support more and more targeted therapies.

It’s a year to cut costs, consolidate, move toward a nimbler business model, and dodge a lot of bullets.

» David Blumberg

Partner, health and life sciences practice, Accenture

The need to do more with less has become reality within sales organizations across the industry. Almost every pharmaceutical company now recognizes that the strategies that propelled sales force success in the past may not measure up in the future.

Pharmaceutical sales and marketing activities are under a microscope as never before. The industry has become a political lightning rod, as new medications are increasingly perceived as drivers of national healthcare costs. Additionally, the physician/sales rep relationship is strained, as demonstrated by decreasing amounts of time to discuss the advantages of medications, access restrictions, and a growing negative perception of reps among physicians.

Doing more with less: pharma’s future sales model

Moreover, price pressures continue unabated, driven by generic competition, an awareness of lower-price pharmaceuticals abroad, and the abundance of similar branded products in blockbuster categories. Payers, too, play a role, as they push for more consumer decision power and reduced price protection for all drugs. In addition, the pharmaceutical companies' traditional customer base continues to evolve: Providers, armed with electronic medical records, integrated health networks, and more stringent formularies, are challenging sales reps as never before. Finally, with the introduction of Medicare Part D, the government is becoming an even more significant customer.

Pharma executives understand that they will need to search aggressively for sales force cost efficiencies and enhanced effectiveness. The quest for cost efficiencies will drive a range of approaches, the simplest of which may be an overall reduction in the number of sales reps. In fact, anecdotal evidence indicates that companies are already starting to reconfigure their sales forces. Another approach-lowering the cost of the primary-care sales force-will require executives to think differently about sales force structure, including territory coverage, customer responsibilities, compensation, and new sourcing strategies. Companies will also look carefully at their operating efficiency and will adopt new approaches to their commercial support infrastructure, including cutting layers of management and outsourcing noncritical functions.

Enhancing sales force effectiveness will push companies to pursue new operational models and leading capabilities. Many will work to ensure that the physician/sales rep interaction becomes more valuable and longer lasting. Indeed, some are already using tools such as the TabletPC to segment and deliver their physician presentations more effectively. Others will turn to specialty categories where the ground isn't oversaturated and where they are targeting new drugs. Still others will take an organizational view of the customer, redefining both the way they sell to individual physicians at a facility and their approach to the facility as a whole. For most, such changes will require an upgrade in their account management capabilities and skills.

Clearly, these moves to enhance efficiency and effectiveness will go beyond the sales force to involve larger commercial implications and marketing mix components. But as long as sales reps continue to be one of the largest components of the overall budget-and a point of focus at many organizations-the future sales model will embrace new ways to do more with less.