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Pharm Exec’s annual report highlights the key scientific, commercial, and reputational trends shaping the industry in the year ahead.
Following a year where a phenomenal cure was met by pricing outrage, the march of new products, including vaccines for malaria and dengue fever, and promising immunotherapy cancer combos will continue in 2015. As pharma and tech jell, how will the industry live up to its value supposition while pricing and profiting in the developed and developing worlds?
From strengthening the fight against Ebola to facilitating the take-up of Obamacare exchange premiums, from tempering the renewed buoyancy in M&A with deference to the US Treasury Department to bringing practices further in line with the demands of transparency, pharma in 2015 will be defined as much by attempts to tackle the crises and trim the excesses that characterized 2014 as it will by the exciting new developments in disease treatments and healthcare technology.
Remaining steadfast are questions that have dominated the industry debate in recent times: How does pharma replenish the drug pipeline and maintain value through the full product life cycle? How does the industry achieve global operational efficiencies? Improve its societal reputation? Secure market access? As pharma company executives struggle with these enduring questions, they may take solace from the notion that their operating context remains broadly the same. But for how long can that operating context be taken for granted?
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For Pharm Exec's European correspondent Reflector, "2015 will see demands intensifying as further innovations with the merit-and prices-of [hepatitis C virus drug] Sovaldi provoke payers and governments into forming common fronts against what some of them have started to openly depict as drug-industry exploitation."
With the cost of capital remaining low, and the appetite for deals in the biopharma market continuing, 2015 looks set to be another interesting year from a consolidation and strategic opportunity perspective. Discussions with numerous investment analysts indicate that the scarcity of attractive assets will continue to keep valuations high, particularly for biotechs with mid-stage drug candidates that represent an advance in therapy and encounter few upfront competitors in the field. To thrive in this competitive environment, acquirors need to keep focused on two essentials: (1) how they intend to monetize these assets and (2) stay disciplined in their approach to negotiations. In an era of sharply curtailed product life cycles, any residual gain from paying too much is subject to a much bigger set of risks.
Following the since-cancelled AbbVie–Shire sales transaction, the US Treasury Department made it clear last year that they're not in favor of tax inversions; accordingly, says Les Funtleyder, managing director of Poliwogg, we'll see "a lot less of that in 2015." But pharma has long been a consolidating industry, "so it wouldn't surprise me to see more large mergers taking place, despite them having a poor track record of long-term value creation." For Peter Tollman, senior partner and managing director, Boston Consulting Group, "it's tough to predict big deals, but look at the big players who have had success reshaping and strategizing their portfolios" in 2014. Tollman expects "similar smaller deals, asset swaps, and ecosystem manipulation" to continue into this year.
However, for Elys Roberts, president of Ipsos Marketing North America, one of the issues with the proposed deals involving Pfizer, AstraZeneca, Actavis, and Allergan is that the potential for R&D is being crushed. "While operational synergies are huge drivers of financial value, the industry's raison d'être is to develop and deliver much-needed therapies," says Roberts. It's arguable that, in the current cycle, where investment dollars flow freely, the investor community's involvement is diametrically opposed to the target company's original therapeutic goals at a potentially significant-but as yet unknown-long-term cost to the industry and the patient population.
The Pfizer acquisition of Wyeth provides a revealing illustration, explains Roberts. In 2008, the combination of the R&D investments of the two companies was close to $12 billion. In 2013, Pfizer spent $6.5 billion in R&D. Clearly, R&D over the years can become bloated, but $5.5 billion in R&D savings is not only the result of consolidating overlapping capabilities, but also the elimination of research sites, programs, and scientists.
"Isn't the irony here that the very patent cliffs that are stimulating these deals, and that these firms are so desperate to avoid, are actually interfering with and eroding the future innovation that our industry keenly needs?" says Roberts.
The point appears to be reinforced by the recent asset swap between GlaxoSmithKline and Novartis, in which Novartis receives GSK's oncology assets in exchange for Novartis' vaccine business, in effect, reducing GSK's oncology investment and focus. "While we do not know what the plans are for the R&D teams, wouldn't it be better in the long term for cancer vaccine research if both organizations had teams of scientists pursuing cancer and vaccine R&D?" says Roberts.
Last summer, Ireland's Mallinckrodt plc agreed to pay $5.6 billion to absorb Questcor Pharmaceuticals Inc., the company behind a popular and controversial product for hard-to-treat autoimmune and inflammatory conditions. One day earlier, Sun Pharmaceutical Industries Ltd. outlined a $3.6 billion merger with Ranbaxy Laboratories Ltd. that will form India's biggest drug manufacturer. For Roberts, these deals, the much publicized $66 billion megadeal between Actavis and Allergan, and the news late last year of a $9 billion deal between Merck and Cubist all represent an opportunity to nurture the technology and R&D potential that has brought them together in a more innovative manner by voraciously protecting development assets and human capital, while aligning with and striving for greater operational efficiencies.
Roberts says: "As the dancing continues, hopefully, as an industry we can take a moment to consider the intrinsic value of these terrific companies, while finding a balanced approach to protecting current and future innovation."
If you think Obamacare navigated rough waters in 2014, this year will continue to offer choppy seas, says Tom Norton, principal at NHD Smart Communications. Particularly for those Rx firms hoping to access the Bronze and/or Silver insurance plans markets, the combination of more younger patients signing up for these coverages, the increased maximum out-of-pocket (OOP) spending, and the large increase in the number of insurers participating in the market, can only translate into heightened pricing tensions for the industry.
The personal mandate requiring all Americans to have minimum essential healthcare coverage on their 2014 IRS filing means that, come April 15, for the first time, "all individuals must pay up, one way or the other, lest they face penalties on their 2015 IRS return." With millions of lower income, younger, and healthier Obamacare patients swept into the program, "the likelihood of the success for American innovator Rx's in Obamacare for 2015 will only get more difficult," says Norton.
The impact of the new, mandated implementation of higher maximum OOP charges appears to be greater in the more established private sector plans. Beginning on Jan. 1, 2015, all "minimum essential health benefits," including Rx's, must operate within these mandated OOP limits. The maximum deductible/OOP costs for an individual is $6,600; the total for a family is $13,200. "What is not clear is how the pharmacy benefit managers (PBMs) and private health plans are actually going to cooperate in administering this," says Norton. According to the law, the PBMs and health plans can either "co-mingle" or "separate" the application of the medical and Rx deductibles. Ultimately, this determination will be made by the private employer.
Another Affordable Care Act development has been an increase in insurance offerings. "More insurers will lead to competition, which is good for the Obamacare patients, but will also put increased pressure on Rx manufacturers to provide ever lower prices on individual and, in particular, bundled product offerings," notes Norton.
Three topics for 2015 weigh heavily on the minds of senior clients who attended IMS's Managed Markets Executive Forum in October, said Mason Tenaglia, vice president, payer and managed care insights, at IMS Institute for Health Informatics. The Express Scripts formulary block of 47 products is completing its first year. The impact of this move will be interesting to see, and the question for 2015 will be, what other commercial plans will emulate it by moving to more restrictive formularies, noted Tenaglia.
Second, how will the Office of Inspector General (OIG) come down on manufacturers who may have sidestepped antikickback laws. For example, subsidized patients like those on Medicare Part D should not be permitted to use co-pay cards, but they figure out ways to do it, Tenaglia explained. There's a chance that the fallout from OIG's report could result in reversal in the trend toward using co-pay support in product launch.
And third, the increasing exposure of patients to high deductible plans could have a major impact on branded drugs. As more and more employers move to high deductible plans, patients will start seeing the full price of their medications after a first and second fill, according to Tenaglia. With these increases, many patients could look to flip to a generic or stop taking their medications altogether.
As the industry sees years of research coming to fruition, 2015 could be "the year of the product," says Peter Tollman. "The breakthroughs in oncology we've seen over the last year or two are just the beginning; looking ahead, the potential of combination treatments may be more exciting." Thanks to advances in the understanding of disease mechanisms, modeling, data analytics, genetics, and translational medicine, Tollman believes we can expect improved productivity and the science to begin bearing fruit in the form of new disease treatments.
One product area to make a splash could be wearables. For Tarek Sherif, chairman & CEO of Medidata, 2015 will be a breakout year for healthcare mobile devices that go beyond exercise and diet apps. "The instrumentation of patients with wearable monitors will be dramatic in 2015 and 2016, creating a revolution parallel to what we've seen with smartphones over the last few years," says Sherif. The sector will remain a challenging one, however. "We're only starting to grasp the potential and technical challenges that this amount of data will create. From something like a wearable EKG monitor, the data quantities are staggering."
Added to that, there is the issue that "nobody's really cracked a business code in how to make money from wearables," says Funtleyder. "That includes pharma, the payer community, and the technology companies." But "the millennial generation," comfortable with wearables and with the idea of having data made more or less publicly available, is more likely to adopt and "the wearables market will be pulled by them." Certainly, adds Funtleyder, there will be a lot of investment going into healthcare IT this year. "I believe you're going to see a number of IPOs in the sector."
2015 could be a banner year for vaccines, especially in the area of tropical endemic disease, with the likely launch of Sanofi's live, attenuated, tetravalent dengue vaccine (CYD-TDV) and GSK's RTS,S, the world's first vaccine against malaria. Their overall efficacy in a real-world setting will be interesting to follow; both have the potential to reduce the risk of suffering or death for millions of people in endemic markets such as Brazil and India, as well other developing countries. Recent clinical trial data for the dengue vaccine showed efficacy across multiple important strains which raises its value to the public, says Kevin Fitzpatrick, principal at IMS Consulting Group.
2015 Strategic Outlook: An Industry in Flux
Tackling the Ebola outbreak remains a top priority; we can be sure to see the testing of any Ebola product with reasonably strong potential fast-tracked in 2015, adds Fitzpatrick. J&J appears to be leading the way in this space, and, according to Funtleyder, the World Bank's agreement to indemnify J&J's $200 million commitment to an Ebola vaccine could be a significant precedent for future pharma business models. "If the World Bank or some other organization is willing to indemnify you, you're assured at least of not losing money, and it's possible you will start getting a toe-hold in the market," says Funtleyder.
How vaccine innovation will prove profitable is a good question, agrees Fitzpatrick. Companies will need creative solutions to balance stakeholders in ways not required before. We're likely to see a combination of mechanisms for these different vaccines, including tiered pricing across markets and public or NGO sponsorship to make the treatments affordable while rewarding innovation.
Ebola has brought attention to the fact that there is a lack of healthcare infrastructure in Africa, particularly sub-Saharan Africa, says Funtleyder. Market development there will be slow: "It will be a lot like China or Brazil, mulling along for five or 10 years, and then all of sudden becoming much more viable." There is always the danger of political instability, but this isn't anything we haven't seen before in South America or Asia, Funtleyder adds. And South Africa serves as the region's "anchor country." South Africa's competition committee is currently looking into healthcare competition, and may report as early as this year with its recommendations. But Africa "is not a place that's going to move the needle in one or two financial quarters; it's going to take time," says Funtleyder.
A commitment to the improvement of healthcare is also a priority in Indonesia, and the country's new healthcare insurance scheme, Jaminan Kesehatan Nasional (JKN), which aims to cover all citizens by 2019, positions Indonesia as "the most promising emerging market for pharma" in 2015, according to Reenita Das, partner and senior vice president of healthcare and life sciences at Frost & Sullivan. In the short term, JKN is expected to boost the prescription drug demand in the country, as it will cover medical consultation and drug costs for participants. It is estimated that the drug spend as a percentage of total health expenditure will be close to 19% after JKN implementation, says Das. In 2014, over-the-counter (OTC) medicine covered 40% of total pharmaceutical market in Indonesia. This will grow to approximately 50% by the end of 2015.
"More global multinational pharma companies will continue to make more deals with local home-grown companies in this region," says Das. This will continue to be expedited in response to local governments' protectionist policies and to help in private-public partnerships.
According to Reflector, "stirrings of hope" in the EU have been driven by the recent appointment of a new team to run its affairs-a new president of the European Commission (Jean-Claude Juncker) with a promise of a new plan, a new president of the European Council (Donald Tusk) from a (fairly) new member state (Poland), and a new foreign affairs supremo, Federica Mogherini. But, politically, the very substance of the EU itself is under threat-internally, from increased dissension within and among its institutions and between its member states, and externally, by instability and even open conflict on its eastern and southern borders. Socially, the divisions in Europe are starker than they've been for years, with austerity driving a wedge ever deeper between the affluent and the dispossessed, as health statistics underline, and with tensions further sharpened by migration, particularly from eastern to western Europe.
In scientific terms, the EU's capital is robust but vulnerable, says Reflector. Official analyses released in December showed EU R&D investment is lagging behind other key competing regions, and spoke of "the poor R&D performance" of EU drug firms dragging down overall EU R&D investment trends and renewed efforts to relocate R&D elsewhere. And the reputation of Europe's regulatory system has been shaken by a series of sudden departures of senior figures-most notably the highly regarded boss of the European Medicines Agency (EMA), Guido Rasi-and by the "new incoherence creeping into EU attempts to adjust its healthcare systems to the opportunities that more personalized medicine might offer."
The question, then, is what hope is there for the pharma sector in Europe?
At the technical level, explains Reflector, 2015 will bring in new levels of openness both about clinical trial results, through EMA publication, and about industry links with doctors, through voluntary codes. "Those could make life easier if they relieve some of the recent pressures for greater transparency -but they could equally well stimulate an appetite for still more information."
This year will also see the inception of some EU-led discussions on how to address the economics of drug supply. Says Reflector: "Just how much those discussions will take account of industrial imperatives depends very much on how hard industry can convince skeptical governments that they really need new drugs and a vibrant drug industry."
"Meanwhile, Putin, ISIS, and al-Qaeda will throw further shadows over geopolitical stability, with the inevitable knock-on impact on the world economy, while budgetary constraints in Europe will tend to focus social spending increasingly on equality of opportunity-in poverty relief, housing, education, preventive life-style changes-rather than on higher drug bills. The drug industry in Europe will have to maneuver adroitly as its operating flexibility diminishes, and will have to be light on its feet to avoid being dragged into the mire."
Casey McDonald is Pharm Exec's Senior Editor. He can be reached at firstname.lastname@example.org. Julian Upton is Pharm Exec's European and Online Editor. He can be reached at email@example.com.