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Outside of raising prices, pharma can generate new revenue from just three other sources, write Tom Kottler.
It’s no surprise that pharmaceutical giants Pfizer and Merck raised drug prices once again. While the companies may take a bit of political heat now, they know that in the long run this approach will do what it has consistently done before. After all, why give up on the strategy directly responsible for 100 percent of your earnings-per-share growth in 20161and more than 20 percent of the $320 billion you’ve made in the first three quarters of 2018?2
The pharmaceutical industry has arguably saved more lives than any other, turning diagnoses that were once death sentences into manageable diseases, and developing cures for some of the cruelest, most deadly ailments. But the industry’s dependence on price hikes to increase revenue is the wrong strategy, the story is getting old, and both the public and government are no longer going to accept it. Pharma’s reputation with the public has hit an all-time low, reflected by its 13-point drop this year from 51 percent to 38 percent on Edelman’s annual Trust Barometer survey. And scrutiny into pharma’s pricing strategies will only intensify now that the Democrats have taken over the House of Representatives. The early effects of pressure from the Trump administration are already being felt. According to Leerink analyst Geoffrey Porges, the number of drug price hikes this year decreased by 31 percent, and the average overall size of the hikes decreased by 40 percent. But pharma isn’t ready yet to discontinue the strategy: according to Porges, 2017-2018 sales growth hit just 1 percent, but without price hikes, it would have declined by 6 percent. Pharmaceutical companies have a business responsibility to their shareholders to increase revenue, but they also have an ethical responsibility to patients and the overall healthcare system to develop effective drugs and deliver improved health outcomes. And, as the healthcare industry expands adoption of outcomes-based payments, pharma needs to find new sources of revenue that also contribute to improved health outcomes. Outside of raising prices, pharma can generate new revenue from just three other sources. It can bring a new product to market or get a new indication for an existing product; inspire physicians to write more prescriptions for their medications; or get patients to take more of their prescribed medications. Bringing a new product to market is more expensive and difficult today than ever before. Today, it costs nearly $2.6 billion to bring a single new product to market, while returns on investment in research & development continue to fall to just 3.2% in 2017, down from 10.1% in 20103– a rate of return below their cost of capital. Moreover, while pharma has discovered treatments for many vexing diseases, it now faces some of its most difficult challenges in developing treatments for complicated and devastating diseases such as Alzheimer’s, ALS and cancer. While these conditions represent significant opportunities for the life science industry, efforts to develop treatments for Alzheimer’s for example, have a long and costly history of failure. Nearly half of all US physicians place restrictions on visits from pharmaceutical sales representatives. And, with a new focus on specialty care medications intended to treat smaller patient populations with more serious medical conditions, pharma simply cannot get more prescriptions written as they could when the focus was on larger, primary care conditions. This leaves adherence – getting patients to stay on their prescribed therapy – as the final financial frontier for the pharmaceutical industry. Pharmaceutical companies lose an estimated $637 billion globally and $250 billion in the US each year from patients not taking their medications as prescribed.4
Medication non-adherence affects pharma’s ability to help the patients it serves, be a stronger partner to its constituencies in the healthcare system and provide higher returns to its shareholders. Improving medication adherence offers the best and most achievable way to deliver more and higher margin revenue for pharma, better patient outcomes as a result of more effective drug therapy, and lower costs to the healthcare system. Research and real-world examples have shown that education-based adherence programs, when delivered in the right context and at scale, can materially improve adherence-based revenue. Credit Suisse analysts Vamil Diwan, MD, Michael Morabito, PhD, and Barbara Kotei, estimated that these adherence programs could contribute to up to 30 percent annual increases in earnings per share for some companies. Additional research by HealthPrize, with CEEK Enterprises, estimated that adherence programs can deliver an average of $2 billion in additional revenue per year for each of 21 pharmaceutical companies assessed. Adherence is both a challenge and an opportunity for the pharmaceutical industry. Success will come to companies that focus on developing at-scale adherence programs to educate patients about their disease and the importance of staying on medication. Pharma should embrace partnerships with providers, payers and pharmacies to provide better education and support for patients at the point of care and beyond. And it must embrace technology from digital health companies to make better patient engagement, education, motivation and improved adherence an easier lift. In an environment in which 73 percent of Americans want the government to do more to control the cost of prescription drugs,5pharma would be wise to course correct now and take an enterprise approach to adherence before their course is corrected for them. Time is running out for pharma to change the way things are done.
Tom Kottler is co-founder and Chief Executive Officer of HealthPrize Technologies, an adherence and patient engagement platform for life science companies. @HealthPrize
1. Vamil Diwan, Michael Morabito and Barbara Kotei. “What if Patients Actually Took their Drugs? Assessing an Underappreciated Opportunity,” Credit Suisse, March 15, 2018.
- Ed Silverman, “Pharma Sales Growth Is Being Crimped as Price Hikes Diminish,” STAT, December 14, 2018.
- “A New Future for R&D. Measuring the Return from Pharmaceutical Innovation 2017,” Deloitte Centre for Health Solutions, 2018.
- Timothy Moore, Sheetal Chawla, and Katrina Firlik, “Estimated Annual Pharmaceutical Revenue Loss Due to Medication Non-adherence,” Capgemini Consulting and HealthPrize Technologies, December 2016.
- “Top Health Industry Issues of 2019: The New Health Economy Comes of Age,” PwC Health Research Institute, December 2018.
- Vamil Diwan, Michael Morabito and Barbara Kotei. “What if Patients Actually Took their Drugs? Assessing an Underappreciated Opportunity,” Credit Suisse, March 15, 2018.
2. Ed Silverman, “Pharma Sales Growth Is Being Crimped as Price Hikes Diminish,” STAT, December 14, 2018.
3. “A New Future for R&D. Measuring the Return from Pharmaceutical Innovation 2017,” Deloitte Centre for Health Solutions, 2018.
4. Timothy Moore, Sheetal Chawla, and Katrina Firlik, “Estimated Annual Pharmaceutical Revenue Loss Due to Medication Non-adherence,” Capgemini Consulting and HealthPrize Technologies, December 2016.
5. “Top Health Industry Issues of 2019: The New Health Economy Comes of Age,” PwC Health Research Institute, December 2018.