Forecast 2009: Up in the Air

If pharma execs start upping their consumption of antihypertensives and anxiolytics (all branded, of course) in the months to come, it won't be a huge surprise. As we head into 2009, two remarkable developments—the collapse of the global economy and the election of Barack Obama as president—may be leaving them a bit stressed out. "They should be stressed," says attorney Daniel Kracov from his office at Arnold & Porter, in the belly of the Beltway beast. "The industry faces a truly unprecedented number of political and policy challenges."

Healthcare reform has hit critical mass, and pharma is poised to play a positive role if it so chooses. At the same time, the unemployment is rate expected to soar to as high as 10 percent and with more than 2 million people losing private insurance Big Pharma's prices are poised to become the target of rage and rhetoric. Says Carolyn Buck-Luce, head of Ernst & Young's pharma practice: "Any time there is an opportunity to make healthcare more affordable and accessible, that is good for the industry. What is not good is when the industry is expected to solve all the problems."

In this new era of government intervention, Congress will move fast to strike deals favoring increased federal control. Everything is up for grabs, from pricing to preemption to patents. "Patients in the US know they're paying much more than the rest of the world for the same drug," says Arthur Daemmrich, a professor at Harvard Business School and author of Pharmacopolitics. "In the current economic climate, that's not sustainable."

Meanwhile, of course, drugmakers will continue dancing at the edge of the patent cliff. "2008 was a year to make important strategic decisions that will be transformative. 2009 is all about execution," says Buck-Luce. "The real innovation will be around operating models rather than business models."

No Conventional Recession

As the media count down to Inauguration Day, comparisons to the Great Depression, FDR, and the New Deal abound. The middle class, after a generation of wage stagnation, suddenly feels the bottom falling out of the $14 trillion economy. "2009 will be a rotten year—that much is in the bag," says Boston Consulting Group's Peter Lawyer. "I expect there to be voluntary price restraint as companies try to keep their heads down—and that means even slower growth."

The conventional wisdom is that pharma's products don't follow the same business cycles as consumer products, and that the industry's tendency not to leverage protects it in a recession—but this may not be a conventional recession. Bain & Company estimates that US consumers will reduce spending by $500 billion through 2010 in an effort to rebuild lost wealth. Health plans will increase premiums, leading employers to increase copays. Generics and OTC products will take a bite out of branded drug sales, as one in four consumers skip dosages, refills, or doctor visits.

Medicare Part D ranks will surely swell as employers abandon their retirees, according to The Amundsen Group's Mason Tenaglia. "GM and Chrysler reneged on paying money to the VEBA, a trust created to cover the healthcare of retirees, months before their CEOs went begging for a bailout," he says. "And with states and cities facing bankruptcy over retiree health benefits, they will have no choice but to dump them into Part D and even Medicaid."

Bargain Basement Biotechs

Next to the Big Three, no industry has been harder hit by the credit squeeze than biotechnology. Says Joe Panetta, president of BioCom, Southern California's industry group: "Private equity has gotten scarce for many small and midsize companies. To make sure that they're still standing at the end of 2009, they're going to need assistance."

Stories of biotech bankruptcies began cropping up in the media late last year, and are likely to proliferate in 2009 if no cash infusion comes. According to BIO, more than a third of the 370 publicly traded US biotechs (nearly double the number publicly traded in 2007) lack the liquidity to survive until July. Panetta noted that even as he was speaking, BIO, the national lobbying group, was on Capitol Hill, hat in hand, to ask for up to $30 million per company of their estimated total R&D tax credit. "When you consider that the US car industry is a fossil, while biotech produces cures for diseases," Panetta says, "which is more deserving of taxpayer investment?"

Biotech's loss may be Big Pharma's gain. "We'll continue to see pharma taking advantage of this golden opportunity to buy interesting technology on the cheap," says Sandy Hillsberg of the law firm TroyGould.

A year ago a biotech with even a single product commanded a sky-high valuation. No more. "The economic downturn has brought the price of acquisitions and other deals back down to earth," says Daiichi Sankyo's Joe Pieroni, allowing that he would not be surprised if 2009 saw the same flood of M&A action by big Japanese pharmas that made 2008 so notable.

The collapse of the credit and capital markets will keep biotech valuations down for at least the next 18 months, according to Ernst & Young's projections. For now, pharma's only problem is figuring when to bite. "If pharma makes the mistake of waiting until companies are on their last legs, the talented people may have already left," says Panetta.

Yet in the long run, pharma's fate is inextricably linked to biotech's. With half of R&D at some big companies done in partnership with biotechs, a decline in these entrepreneurial firms could poke more holes in pipelines. "A lot of biotechs and important early-stage research are going to die in the current financial crisis," says Peter Young, head of Young & Partners.

That's why Bain & Company's Tim van Biesen expects to see pharma be creative in funding as wide a range of biotechs as possible. "The all-or-nothing, buy-or-pass option is no longer adequate," he says.

Peter Young advocates a collaborative model in which drugmakers pool risk-sharing funds. "Money needs to flow more regularly to biotechs, so they don't have to spend their time raising venture capital," he says. How would you determine which company owns a particular product? "Maybe by sharing patents," Young says.

As venture capital flees biotechs, it is turning, ironically, to Big Pharma, whose high-risk drug development looks increasingly attractive to investors. Goldman Sachs recently announced that it would spend hundreds of millions of dollars to fund diversified portfolios of Phase I and II trials.

In related news, the economic crisis has been playing havoc with what looked like 2009's biggest deal: Roche's $43.7 billion bid for the 41 percent of Genentech it doesn't already own. In December, the business press reported that no bank would lend the Swiss giant the money.

The deal will go through in 2009, says Dan Zabrowski, global head of Roche pharma partnering: "Roche will introduce an appropriate level of leverage for the company from long-term bonds. The remainder of the debt is likely to be made up of bonds of short maturity."

As for the rumors of a mass exodus of Genentech talent, Lee Babiss, Roche's head of global R&D, says, "We've been clear from the start that Genentech will retain ownership of its discovery and development center, and we will share knowledge and intellectual property. We will only have ourselves to blame if there is a talent flight."

Snapshot of the Market

Sales IMS Health's annual forecast puts 2009 global sales at $820 billion, growing at the same 4.5 to 5.5 percent rate as this year. Major markets are expected to be stagnant, with the US growing by 1 to 2 percent, to a little less than $300 billion. "The correlation between economic factors and pharmaceutical growth is stronger in the current slowdown than in previous downturns, given the continued shift of drug-related costs to patients," says IMS Health's Murray Aitken.

The European market is pegged to grow 4.5 to 5.5 percent to $162 to $172 billion, while Japan will hit $84 to $88 billion, a 4 to 5 percent bump. For good news, look to what IMS calls the pharmerging markets—China, Brazil, India, South Korea, Mexico, Turkey, and Russia—which should break the $100 billion barrier in combined sales, growing at a rate of 14 to 15 percent.

Dynamics The contraction of the primary-care market will accelerate, with growth dropping to 2 to 3 percent, according to IMS. Primary care's piece of the drug-spending pie dropped below half for the first time in 2008, and it will fall to one-third in 2009. With a fourfold higher growth rate, specialty drugs are where the action is.

Oncology will remain the number one growth area in 2009, with sales increasing 15 to 16 percent. Last month, the World Cancer Report announced that cancer would outstrip heart disease as the leading cause of death worldwide by 2010; rates will double by 2020, hitting hardest in top emerging markets Russia, China, and India. But though medical need is increasing in oncology, profits may lag. With cancer compounds comprising almost half of the industry pipeline, Bain & Company predicts that competition will trigger price declines of 35 percent or more starting in 2011.

The economic downturn, however, may hasten that moment. Struggling private payers will increasingly make like NICE and refuse to cover $30,000 drugs that extend life for only a few months. "Couple that with all the front-page investigations we'll see about people who lost their health insurance and then get presented with a huge bill for their cancer medication—these drugs will become exhibit A in the case against high prices," says Arthur Daemmrich.

Generics The global generics market is expected to expand 5 to 7 percent to $68 million in 2009. That is consistent with 2008's 5 to 7 percent growth, but markedly lower than the double-digit rates of previous years. Generics will be OK'd for sale in Japan for the first time next year, while Spain and Italy will also see first time rapid uptake. The copay gap will increase in the US, with four-tier pricing and other payer-to-consumer cost shifts. This will help accelerate the so-called class effect, says Albert Wertheimer, director of the Center for Pharmaceutical Health Services Research at Temple University's School of Pharmacy. "A first generic entry will reduce branded sales faster than expected because it takes out the whole class," Wertheimer says. "Ironically, many me-too drugs are very much at risk."

The industry will lose $24 billion in sales to patent expirations in 2009—not a spectacular amount by current standards. Big-ticket drugs going over the cliff include Takeda's $3.5 billion-a-year proton pump inhibitor, Prevacid; Sanofi-Aventis' blood-thinning behemoth, Lovenox ($3.1 billion); Johnson & Johnson's anti-epileptic, Topamax ($2.2 billion); GSK's genital herpes cream, Valtrex ($1.6 billion); and Shire's ADHD drug, Adderall XR ($900 million).

Bain predicts a sustained generics jump through 2011, as pharma loses as much as $105 billion to the patent cliff. But once the industry reaches the other side—that would make the cliff a canyon—the annual incursion of new copycats will sink by half. "Generics will have the wind in their sails for the next few years," says Tim van Biesen. "But they will run out of new products after that—and they have no clear path to new revenue." Competition in top therapy areas is already driving prices down, says IMS.

A surprise trend: Brands like Pfizer's Lipitor are outselling projections in certain foreign markets. "These consumers trust pharma's strong brands more than generics," says PA Consulting Group's Gary Liberson. "As the global market unifies, I would expect to see Big Pharma start branding their companies, like Johnson & Johnson does."

More Delays at FDA?

Several of 2008's most promising NMEs were delayed by FDA, where drug approvals, even for priority reviews, ground to a near halt as the presidential election approached.

No top pharma needs a blockbuster more than Lilly, which had pinned its hopes on Effient (prasugrel), a first-in-class platelet inhibitor that was set to race against Plavix until side effects hobbled it—twice—at the gate. The agency has also tossed two filings for once-a-week GLP-1 inhibitors of diabetes back to their makers, asking for more safety data probably pushing the launches of Novo Nordisk's liraglutide and Lilly/Amylin's new formulation of Byetta (exenatide) to 2010. Despite requests for better label and manufacturing info, Roche/Chugai's Actemra, a novel IL-6 blocker for rheumatoid arthritis, is still on track to hit the market this year.

The potential blockbusters-to-be in 2009 include two from Merck, telcagepant (MK0974), the first in a new class of migraine drugs in nearly 20 years, and rolofylline (MK-7418) for acute heart failure. Amgen is pinning hopes on its novel osteoporosis med, a fully human monoclonal antibody dubbed denosumab, while Schering-Plough/Centocor's new anti-TNF agent, golimumab, is set to storm the rheumatoid arthritis market. Novartis' new vaccine Menveo will save infants worldwide from meningitis. It remains to be seen whether a new Obama-appointed FDA chief will implement a kinder—or at least quicker—risk/benefit analysis in deciding the fate of the 25 to 30 new chemical and molecular entities poised for launch in 2009.

No candidate is likely to be named until the Senate confirms Tom Daschle as head of Health and Human Services. Joshua Sharfstein, MD, the Baltimore health department chief who heads Obama's FDA assessment team, has emerged as the likely front-runner. A former Waxman policy advisor who spearheaded legislation for federal regulation of tobacco, Sharfstein has earned high marks as an effective and innovative city health commissioner. Other top contenders are Steve Nissen, MD, the Cleveland Clinic's chief of cardiology, who has tangled publicly with pharma over drug safety; and Susan Wood, the former head of women's health at FDA who resigned in protest over the agency's refusal to approve Plan B due to Bush administration pressure. Pharma's unofficial choice, Janet Woodcock, MD, the current head of CDER and agency veteran, is way back in the pack for that reason.

Critics in pharma view the agency as so paralyzed that almost anyone will be an improvement. "Just give us an end to the turnovers and the void," says Wyeth's VP of clinical R&D, Evan Loh. In fact, Loh would like Obama to think big—and divide FDA into two independent agencies. "Separating food and drugs could begin to make consumers feel more confident in the institution and in drug safety," he says.

Despite their anti-industry rhetoric, Obama and the Democrats are likely to make progress on FDA's most serious problem: a chronic lack of funding and staff. (For more on what to expect at the agency that everybody loves to hate, see "Coming Attractions at FDA".)

Coming Attractions at FDA

Fear of ObamaCare

Of the 30-plus consultants, academics, and other experts Pharm Exec talked to, most are optimistic about Obama. "The Obama administration creates a very complex and exciting environment for pharma," says Carolyn Buck-Luce, choosing her adjectives carefully. "There will be more net benefits than risks. Pressure over prices will be outweighed by the commitment to healthcare expansion."

The Bruckner Group's Michael Russo agrees. "Obama's going to do a lot of the right things. Some of it may hurt in the short run, but the industry will be much better off for it," he says. "The question is: Do pharma leaders want the right things for the long-term health of the industry?"

Even Billy Tauzin, head of industry trade group PhRMA, is upbeat. "I have a growing optimism about what the new year holds for the industry, based on my conversations with Obama's advisors and transition team. They believe a lot of things in common with us," he says, ticking off expanded and higher quality healthcare coverage, prevention and wellness, and a revitalized FDA. "They have definite views on policy, but they're open-minded and want to hear from us."

Obama is a science booster, who has pledged to increase funding to the federal research establishment and restore its independence from the faith-based lobby. One of his first acts as president is expected to be the signing of an executive order lifting Bush's ban on federal funding for embryonic stem cell research.

Healthcare Reform And what's not to love about many more millions of newly insured people filling new scrips? According to the Boston Consulting Group, healthcare reform's enhanced safety net is likely to deliver an annual $17 billion in additional prescription drug sales. "Certain classes of drug are going to be taken up at enormous rates," says Mason Tenaglia. When Part D was introduced, many seniors who previously had no prescription coverage upped their scripts from one to four a month once covered. We can expect a comparable uptake with expanded access."

However, for an industry that sees itself as fettered by regulation, Obama poses some real threats. Lower drug prices are widely viewed as inevitable, while price controls are not as unimaginable as they once were. On the campaign trail, candidate Obama was frequently heard to say that he would "take on the drug and insurance companies and hold them accountable for the prices they charge and the harm they cause." Yet the apparent centrism and pragmatism on display in his transition raise hopes that President Obama will not walk that walk. "Industry should be a bit encouraged. In the past Obama has given signals that he favors a balanced approach that also incentivizes innovation," says Daniel Kracov. "The hope is that his cooler head will filter down to every level of the new administration. But there are a lot of forces out there that could turn this into a frenzy against pharma."

Comparative Effectiveness Obama proposes a national insurance marketplace that includes a government-run coverage option along with private ones. Tom Daschle, tapped to head not only HHS but also a new White House Office of Health Reform, advocates further regulation in the form of a federal health board, which would make coverage decisions for all government-run health plans. "Value for money" animates Daschle's agenda, as do the efficiencies promised by cost-effectiveness and pay-for-performance. The studies would be done by an "independent" comparative-effectiveness institute run by Daschle and other federal healthcare honchos along with "experts" in and around the field. Most alarmingly for pharma, Daschle wants to link tax breaks for private payers to compliance to these coverage decisions.

But it will take time to hammer out the details of such an institute, including pharma's role in it—if any. "Comparative [effectiveness] and cost effectiveness are at about where safety was five years ago," says Richard Gliklich, MD, the CEO of Outcome Sciences. "There's a lot of momentum, the industry as a whole is moving the ball forward, and policymakers and the public are getting up to speed."

Price Controls Most of Pharm Exec's sources agree that price controls are off the table. Says Billy Tauzin: "The Obama administration and the Senate are more concerned with getting something done on the big healthcare issues, rather than starting that political war again." Tufts University's Ken Kaitin also nixes the notion. "Obama and his advisors understand that price controls effect innovation and new product development," he says. As for Daschle's federal health board, "A NICE would never fly in the US," says Gary Liberson. "Congress got involved in [a case of] a woman on life support who was brain dead. Would our elected officials tell a dying patient he or she can't have a lifesaving drug?"

In the end, economic woes are more likely than ideological wars to stall healthcare reform. "We won't be taking over the hospitals the way we took over the banks," says Shire's Charlotte Silbey. "We'll only have the money to do some basic things like coverage for poor children and maybe veterans' rehabilitation." She notes that Obama's $600-billion-and-counting economic stimulus package includes funding for electronic health records and a general IT upgrade.

Damn Democrats

Still, an empowered Democratic majority, led by healthcare and finance committee mavens Ted Kennedy and Max Baucus in the Senate and Henry Waxman and John Dingell in the House— dubbed "the four horsemen of the apocalypse" by St. Joseph's University's Bill Trombetta—is likely to mobilize behind important legislation that pharma lobbyists had helped block under the Bush administration.

Biosimilars Follow-on biologics are widely viewed as a done deal, even with four different bills afloat in Congress. "We've crossed swords a few times with Waxman, who proposes no data exclusivity at all," says Joe Panetta. "But we're encouraged that other members of Congress support 12 years." Trombetta predicts an even more disruptive process. "A company will produce a biological generic of an expensive cancer drug, and it will win the lawsuit brought by the brand maker because it is offering a lifesaving drug at a much more affordable price."

Reimportation The issue is losing its potency as fear of the safety of foreign imports rises. "The public is coming to appreciate the dangers and downsides of importing drugs," Trombetta says. "Another Chinese heparin scandal will knock importation off the map." Importation may also lose its cost rationale. Says Peter Lawyer: "I doubt that reimportation will be introduced on a large scale, because by the time you get around to setting up quality control, the prices in Canada will already have been raised by pharma to balance out the loss of revenue in US."

Part D Pricing Estimates of how much margin pharma stands to lose if the noninterference clause is killed range anywhere from $10 billion to $30 billion, according to the Boston Consulting Group.

With most Americans opposed to the $700 billion Wall Street bailout, pols may think better of messing with Part D. "The question of the amount of government intervention you really need is going to be front-of-mind," says Terry Hisey, head of life sciences at Deloitte. "If a program works, they will let it be. And Medicare Part D is hugely popular."

Yet Waxman has already pledged to introduce a bill requiring drugmakers to pay rebates to Part D dual eligibles. "The Democrats may start there, and see how much resistance there is before taking on the noninterference clause," says Daniel Kracov.

Says Michael Russo: "If the government says it wants to negotiate prices with pharma just like it does with its other suppliers, how can pharma justify being the exception? With the economy in the tank, that's probably a nonstarter."

But pharma and its lobbyists will try. PhRMA is already rolling out a multimillion-dollar PR blitz trumpeting what the group's Ken Johnson calls "our free-market healthcare system," including national TV ads with talk show host Montel Williams boosting early diagnosis and patient assistance programs. "The government does not negotiate prices, it dictates prices, and that impairs our companies' ability to be innovative with the ability to develop lifesaving medicines," Johnson says.

The old arguments, however, may have little traction. The free markets are in free-fall. When it comes to prescription drugs, many consumers worry less about having a choice than about meeting their copays. As for the threat to industry innovation posed by lower reimbursement, "It's a really hard sell," says Lawyer. "People take for granted the availability of lifesaving drugs. And the drug industry doesn't get much sympathy for its own economic troubles."

Most Pharm Exec sources say that the industry must be far more proactive than in the past—willing to level with consumers and make concessions to Congress. "Industry needs to figure out the right way to present what the fair price for a drug is," says Daemmrich. "It has to be in terms that are meaningful to consumers—showing the value of a drug in terms of a health outcome and what that's worth."

Sommatech Consulting's Russ Somma adds: "Big Pharma needs to speak in a unified voice, and present an alternative. They should consider something bold, like developing a blended price rather than competing one against the other in every single little drug niche."

Pharma may not be ready to embrace blended prices, but some insiders indicate that the industry is evolving—cautiously—a new, more cooperative strategy to meet demanding economic and political conditions. Says Charlotte Silbey: "Our biggest problems with our customers are pricing and perception: The reality of very high prices, the cozy relationship between doctors and the industry, and the post-Vioxx safety monitoring that scared people. The new administration's commitment to healthcare reform is really an enormous opportunity for us to fix all that. But we need the courage to step up to it."

Dealing with the healthcare reform juggernaut isn't, of course, the only item on pharma's 2009 to-do list. Every drugmaker also needs to step up its efforts to produce more (safer, better, cheaper) drugs more quickly and efficiently while getting smaller, going global, and keeping shareholders, customers, and Wall Street happy.

"We have to be careful that we don't end up like the auto industry in front of Congress asking for a bailout in exchange for restructuring," says Evan Loh. "The companies that will survive these times are the ones that ask, 'Are we the best in the world at doing this?' and if not, then stop doing it."

Says Peter Lawyer: "I wouldn't surprise if companies look back in a few years and say 2009 was pretty good, in light of what's probably ahead."