Feeling the Heat: Pharm Exec's 2016 Industry Forecast

It’s not hard to envision the mercury rising. With propellant from daily headers on the high-cost--of-drugs inferno and constant agitation by candidates on either side of the US election, the industry is going to be tested by regulators, patients, and payers with the high expectations commensurate with drug innovation’s status as a “public good.” Meanwhile, however, the progress of science slows for no one. The industry will find the most comfort from a return to its roots, away from price manipulations and financial maneuvering and toward the research and development of quality drugs with a focus on patients.

The Gilead pricing of sovaldi started a tremor that turned into a 8.0 earthquake when Turing priced Darapim. The top issue for 2016 will be trends in pricing and market access in the EU and US. Companies are focused on establishing value for their products in their clinical trial programs to make sure they have definitive evidence to present to payers as validation of pricing - Joseph Truitt, Achillion Pharmaceuticals.

Pricing, votes-and value

There’s a consensus among industry commentators that pricing will dominate the policy agenda in 2016, driven by a remarkably bipartisan sense of urgency in the US, where healthcare costs are a key contributor to a spiraling rate of public debt. A single tweet from candidate Hillary Clinton last autumn was sufficient to send the industry’s market valuations tumbling-billions in value swept away in less than 140 characters. With 5,000% price hikes and $1,000 pills in the headlines, Republican candidates for the White House have questioned the industry’s pricing practices. Actions can no longer be anticipated along the traditional left-right divide. 

This year, the effect of high drug prices on patient care will continue to draw attention on Capitol Hill and on the campaign trail. Several House and Senate committees have opened investigations of pharma company price setting for new therapies, as well as for brand and generic drugs available for many years. Pharma will continue to be an easy and necessary target for vote seekers, even if the likelihood of real action in Washington is uncertain given a dysfunctional legislative process and inability to act decisively on the Hill.

“Gilead’s pricing of Sovaldi started a tremor that turned into a 8.0 earthquake when Turing priced Darapim,” Joseph Truitt, of Achillion Pharmaceuticals, reminds us. “Suddenly, the industry is being called on its pricing model and tactics,” says Mason Tenaglia, managing director for the Amundsen Group at IMS Healthcare. “Due to the increased presence of pharmacy deductibles, patients are being exposed to the ‘raw, naked’ price of mainstream drugs like insulins, LABA, DPP4, and others.”

This leads to the situation where “the pharmacy passes these on at ‘full price’ when the payer probably is getting a 40% rebate,” exposing the branded model to more scrutiny, as well as hitting generics, particularly when there is limited competition. Tenaglia believes that 2016 “might be the year when all pricing heuristics disappear and pharma companies lower their list prices for new launches while holding back on rebates to the payers.”

Meanwhile, as overall healthcare prices continue their upward trend, industry backers and critics squabble over the impact of biologic and pharmaceutical therapeutics on the overall bill. With the patent cliff in the rear view mirror, as generics approach 90% of prescriptions, and with the new biosimilar class looming, the refrain from industry has changed little: while healthcare spending has increased, outlays for drugs remain consistent at around 10% of the total. Critics say this misses the point. Dr. Peter Bach of Memorial Sloan Kettering Cancer Center, who developed the DrugAbacus to single out the most cost-effective interventions, points to the steep average rise in prices for cancer therapies that extend life for short periods of time: from $50,000 in 1996 to $250,000 today.

Public attention to drug prices means 2016 is ripe for price control actions at both the national and state level, notes Pharm Exec contributor Tom Norton. If Hillary Clinton’s campaign for the presidency is successful in November, “look for a serious initiative to control the price of prescription drugs provided to Americans under Medicare.” Potentially, such an action would have major impact on all American Rx pricing, with federal involvement serving as the precedent for equivalent protections on the private commercial side. At the state level, it’s real people who get to speak; watch the Golden State, which will be considering a citizen proposition, “The California Drug Price Relief Act.” This measure states that any prescription drug obtained by the State of California shall be purchased at the same “fixed price” that is negotiated with manufacturers at the US Veterans Administration. If this California proposal passes in the November election, look for the new California law to have an immediate, national impact on Rx pricing, Norton cautions.

With drug pricing attracting so much attention and concern, both payer and non-payer stakeholders have become vocal about the impact of drug cost and the value delivered on prescribing decision-making. As Ed Schoonveld, principal, ZS Associates, points out, the value of a drug treatment may be judged very differently between physicians, patients, payers, employers, and various influencing and advising stakeholders. “Identifying what constitutes value to each stakeholder, and communicating evidence of value delivered will be the optimal communication strategy for pharma companies in 2016.”

Physicians are likely to play an increasingly crucial role in evaluating the value of a drug across patient populations to patients and payers, and they will also play a key role in advising patients, as direct-to-consumer (DTC) communications “are severely impaired by regulation,” says Schoonveld. He adds that recent mechanisms, such as the ASCO Value Framework, Sloan Kettering’s DrugAbacus, and Institute for Clinical and Economic Review (ICER) evaluations, “fail to distinguish between patient populations in establishing value.” This may simply illustrate “the complexity of defining a meaningful algorithm,” he explained, but “simply rejecting these tools is not the answer; they need to evolve so that value is defined in a way that is meaningful and fully understood by the main stakeholders, including individual physicians and their patients.”

Certainly, drug value calculators should gain prominence in 2016 as they improve and the industry gains practice with them. Perhaps they will push the industry to find “Goldilocks” price levels as tools to encourage “collaboration-with insurers, patients, and new value assessment groups, which may be the key ingredient,” according to PwC’s Health Research Institute’s latest annual report. So far, the calculus from outside the industry has done little but add kindling to the drug pricing and political firestorm. ICER’s reckoning that the new PCSK9 inhibitors ought to have been priced close to $2,400 rather than $14,100 for Amgen’s Repatha and $14,600 for Sanofi/Regeneron’s Praluent, respectively, is a clear indicator of how far apart groups currently are on defining value. 

Demonstrating the value of innovative drugs “will fit well in a system of ‘pay for performance’ that allows for differential pricing,” says Daniel Pascheles, VP, global business intelligence, Merck & Co. Teva’s Michele Holcomb agrees that industry needs to prepare for a further shift toward pay for performance, but adds, more ominously, “the time will come when we have no choice.”

Strategies that also embed realworld evidence (RWE) “in the infrastructure that supports R&D and market access, and the way that commercial teams communicate value to clinicians”-will become increasingly vital, as the use of RWE becomes more prevalent in decision-making and pharma shifts further toward collaborative work with payers.

Pharm Exec’s Brussels correspondent Reflector highlights “unprecedented collaboration between industry and authorities” in efforts at the European level to bring new order to the drug-development and decision-making processes.

He points out that a new joint exercise in health technology assessment (HTA) will be launched during 2016, and an announcement of the results of the European Medicines Agency’s pilot on new authorization pathways “will guide further steps in early dialogue between drug developers and regulators.” Among other things, says Reflector, the European agenda will be increasingly dominated by “further exploration of reimbursement by outcomes rather than payment for pills.”

He points out that a new joint exercise in health technology assessment (HTA) will be launched during 2016, and an announcement of the results of the European Medicines Agency’s pilot on new authorization pathways “will guide further steps in early dialogue between drug developers and regulators.” Among other things, says Reflector, the European agenda will be increasingly dominated by “further exploration of reimbursement by outcomes rather than payment for pills.”

In 2016, the customer relationship must be orchestrated through tight collaboration between sales, marketing, IT and other functions. These teams, which work in silos in many large organizations, can be brought together through technology solutions. Take the shared information about the customer, add human interaction, and you have a strong recipe for a commercial process that yields customer satisfaction and ROI - Drew Bustos, Global Marketing, Technology Solutions, IMS.

Obamacare’s faltering platform 

This year, individual Americans who choose not to purchase health insurance can expect an IRS penalty that’s the greater of $695 or 2.5% of their modified adjusted gross income (MAGI), notes Norton. For a family, the penalty could top out at $2,085. The question is-is this stiff penalty enough to force individuals into Obamacare in 2016? Most likely not. “This will be interesting to watch as even the cheapest silver-tier Obamacare premium will likely come in around $3,700 per unsubsidized individual. Needless to say, to get health insurance at these levels, Rx options in these basic plans will continue to be reduced, and pressure to lower Obamacare Rx drug prices will only increase,” Norton adds.

Additionally, the much discussed “employer mandate” goes into enforcement in 2016. Businesses must provide their full-time employees (and their children up to age 26) health coverage options, and ensure that those options cover at least 60% of total allowed medical costs. Failure to comply may result in serious penalties that can end up between $2,000 and $3,000 per full-time employee (FTE). Again, one place that employers can look to cut back on health premium costs is to reduce the Rx benefit that they offer to their employees. Therefore, the employer mandate is likely to result in fewer Rx options under Obamacare insurance offerings, Norton states. And it looks like 2016 will be the year that insurers offering Obamacare healthcare policies will be forced to raise premiums, often by double digits. “A clear concern for the American Rx industry is that consumers may be so strained by the increased cost of their premiums that not only will they not be able to afford the out-of-pocket deductibles to see a doctor, they may also forgo buying the Rx pharmaceuticals prescribed for them.”

The impact of higher prices hitting home may force those currently working inside the Washington beltway to see legislation that backs the industry as too hot to handle. Consider the progress of the 21st Century Cures Act, a legislative undertaking that had built substantial backing early in 2015 but faltered as the year went on. The bill may spark intensified resistance in 2016 as the pricing debate taints good will toward the industry. It may impede the Senate’s efforts to craft a companion bill to the House measure as politicians question whether the Act, which seeks to extend incentives for drug innovation, might lead to developing drugs that are too pricey for their constituents.

Patient groups will have to line up with pharma to voice their approval for any action on 21st Century Cures, as well as a smooth re-authorization of the FDA Prescription Drug User Fee Act (PDUFA VI). The fee renewal process is sorely needed to keep industry payments flowing to support FDA oversight and foster more participation by patient groups.  

There are larger reputation challenges as well. One can envision the drug industry as a object of ridicule for its DTC drug ads, broadcast on the same television outlets used by presidential candidates in an election whose total cost is estimated at $5 billion. The American Medical Association broke ranks in the professional provider community and decided to publicize its stance against DTC last year. However, significant changes in DTC policy will require legislative action, and that is not likely until after the presidential election, noted John Kamp, executive director, Coalition for Healthcare Communication. Kamp expects a challenging go in the next year as “the politicians proposing limits on marketing are paying close attention to public opinion polls that reflect significant concerns about drug pricing and lesser but articulated concerns about the role of marketing in pricing and inappropriate use.” Public and political sentiment is against the industry, he warned.

Another point of contention in 2016 will be the FDA’s voucher programs. The escalation of values for the transferable assets awarded to approvals in areas of tropical diseases and rare pediatric diseases peaked when AbbVie bought a priority review voucher from United Therapeutics for $350 million in August. Being part of the PCSK9 race was an interesting wrinkle for the voucher program. The voucher’s astonishing price tags have set off alarms and a change is on its way. It will be interesting to see if vouchers will be eliminated outright, or if the incentive structure can be realigned toward novel drug innovation as originally intended.

The next deal

Industry consolidation also will remain a hot-button issue as Congress struggles to reform corporate tax policy to stem the tide of US multinational corporations shifting headquarters overseas. Pfizer’s $160 billion inversion deal as it acquires

(or is acquired by) Allergan in pursuit of an Irish tax address, is one more knock against the industry. Pfizer CEO Ian Read’s testament that the move will ultimately be good for the US, though framed optimistically, has been taken as a tongue-in-cheek barb at the IRS.

Whether legislation will ever be in place to freeze M&A focused on tax inversions, the indication is for even more M&A activity in 2016, with one report pointing out that acquisition and other deal types are vital for an industry needing to offset the cost of drug development at an average $2.6 billion per drug.

In addition to M&A activity, in-licensing, partnering, and joint ventures will bolster pipelines across pharma and biotech. 

For an indicator of the next big deal, look no further than Gilead’s balance sheet, which has analysts haranguing its leadership for sitting on some $25 billion in cash and equivalents, thanks largely to its hepatitis C proceeds. What the winner of Pharm Exec’s Annual Pharmaceutical Industry Audit and 2015’s Brand of the Year will do is one of the industry’s hottest topics. Management has hinted at the possibility of both piecemeal add-ons and transformational deals. 

Pfizer’s deal with Allergan and the threat of tax inversion means that the Washington lobby baton will be formally passed from the traditional pharmaceutical gorillas to the companies leading more innovative commercialization strategies, including the big guns, Amgen, Genentech and Gilead. This huge power shift means less influence towards the objectives of the mass-market players and more opportunities to reinforce the market momentum towards therapeutic innovation and pioneering new treatments - Elys Roberts, President, Ipsos Marketing.

Regulatory redial

While R&D, marketing, and sales “used to be the most important functions for pharmaceutical companies,” notes Kristina Pelzel in her Industry & Supply Chain Optimization blog, the critical skills now needed to succeed are “operational capabilities and efficient cost management.” Pelzel points to five strategic steps necessary to developing new supply chains: 1) improvement of planning capabilities; 2) reconfiguration of the supply chain footprint; 3) more flexible product design and packaging; 4) adoption of tailored business streams; and 5) creation of a network of third-party suppliers. The key to realizing these steps, says Pelzel, is analytics: “Almost all of these can be implemented significantly faster and much more cost effectively by utilizing advanced analytics software.” 

But before the potential of analytics can be fully realized, pharma needs to get its house in order on a practical supply-chain level. Of the top 10 challenges facing the global supply chain, identified in December 2014 by academics Natalie Privett and David Gonsalvez, the most pressing were those found at the system level, such as lack of coordination, inventory management, HR limitations, and absence of demand information. Vitaly Glozman, partner at PwC, agrees, saying “there is definitely a lack of integration across companies-these are the basics at which the pharma industry still hasn’t excelled.” 

Regulatory compliance will inevitably bring more pressure on the supply chain. UPS’s 2015 Pain in the Supply Chain survey identifies the European Union’s Good Distribution Practices (GDP), Brazil’s serialization law, and China’s Medical Device Good Supply Practice as the international regulations currently causing the most “pain” for companies. For Glozman, “the industry is still dealing with the regulator as an enemy rather than as a collaborator.” But with so many changes facing the supply chain over the next few years- not least, the evolution of personalized medicine, new manufacturing technologies (e.g., 3D printing), the push for lower costs, and the drive for better anti-counterfeiting

security-“the only way for the industry to change is to have a much more collaborative relationship with regulators.” 

More transparency in Europe

The inevitability of further collaboration between industry and regulators will reach a milestone in Europe in 2016 with the June deadline for all European Federation of Pharmaceutical Industries and Associations (EFPIA) member companies to comply with EFPIA’s Disclosure Code, documenting and disclosing all transfers of value they make to or for the benefit of an HCP/HCO recipient. At CBI’s November 2015 Compliance Congress in Munich, Marie-Claire Pickaert, EFPIA’s deputy director, said it would be a “disaster” if disclosure levels are not consistent across countries by this time, although EFPIA communications director Andy Powrie-Smith has indicated that we can expect “significant variance in reporting rates between countries.” 

Most compliance-focused firms-where pharma is particularly exposed-have been priming their compliance teams over the last 7–8 years into proactive outfits that anticipate challenges at the policy development level rather than run to catch up with legislation after the fact. But there remains much to be done to improve the industry’s reputation. Results from a 2013 survey of 17 countries by the global anti-corruption NGO Transparency International (TI) stated that “more than 70%” of the public believed that medical and health services were corrupt or extremely corrupt. Further, TI’s 2013 Global Corruption Barometer showed that 17% of people said they had paid a bribe when dealing with the medical sector at least once in the past year; in some countries the figure was as high as 60%.

TI will be pushing forward with its investigation into pharma practices in 2016, said UK executive director Robert Barrington at the November Compliance Congress: “We will challenge you, and we expect this to be disruptive to your industry.” Barrington added that TI’s planned 10-year investigation will begin by focusing on five priority areas: procurement and distribution, marketing practices, manufacturing (including counterfeits), registration processes, and R&D. 

For Pharm Exec’s Reflector, 2016 “could be the year of a seismic change in healthcare systems in Europe,” with the European Union (EU) exploiting its new powers to vet national public spending plans more fully each year and “scrutinizing health budgets with unprecedented rigor.” Conditions are falling into place for a radical switch from the traditional responsive approach of health systems in Europe-the “You’ve got a problem, we’ll try to fix it” attitude-to a more calibrated and metered approach based on planning-that is, “We’ll allocate X million euro for dealing with that problem, and not a cent more.” The old model, dominated by patient demand and by drug industry offers, “is going to be increasingly displaced by armies of statisticians and social planners, whose priorities will be making the best use of limited resources.”

How fast all this will happen will depend in part on Europe sorting out more effectively how to confront the obvious challenges, says Reflector. “The speed of travel is not so easy to predict. But the direction of travel is inevitable. Discomfort will drive fundamental change, and ultimately the bid for greater comfort will dictate the new order.”

Casey McDonald is Pharm Exec's Senior Editor. He can be contacted at cmcdonald@advanstar.com. Julian Upton is Pharm Exec's European & Online Editor. He can be reached at jupton@advanstar.com