Industry Forecast 2013

2013 is the industry's year of respite, a brief intermission that gives the C-suite extra time to adjust the reel on that slow motion movie with the payer voiceover that says: "how's that hopey changey thing working for you?" For Big Pharma, time moves in small increments, set by the minute hand of the patent clock. It is unique among sectors in being able to predict precisely when market dominance fades to loss. Nevertheless, all that certainty about the endpoints of the product lifecycle has done little to force company cultures to move faster in reinventing their business models to keep pace with disruptive change.

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This year provides one more trial run to the future. Management can still hedge their answers about what it takes to succeed in markets that face relentless pressures of commoditization, where drug companies have to fight not just among themselves but with every other health provider, for every incremental dollar of revenue. The question, for every company, is more or less the same: I've scrutinized my assets, sold off and restructured operations, slashed my SG&A/income ratio to single digits, but now what? Where is my Act II, the forward plan that positions us to achieve real top-line growth?

Multiply and differentiate

C-suite executives know that the cloistered, country club approach to market evaluation is gone forever. The massive global restructuring in the way healthcare is financed and delivered also suggests there is no one path forward; every company is putting itself under a microscope to identify what offerings will make it distinguishable from others in a crowded, "show me the money" marketplace.

All that hopey stuff aside, there are some real positives, including fresh evidence of disease relevance and depth in the pipeline, particularly at the crucial late Phase II level; a slow realignment of the clinical trial process to anticipate payer expectations and obtain better terms for reimbursement; and technology advances that, properly leveraged, can bring marketers much closer to untapped sources of market growth, ranging from the non-adhering patient in the United States to the rural poor in India. IMS data suggests that US companies may be leaving as much as $30 billion in annual revenues off the table due to poor rates of prescription compliance, while just one of those backwater Indian states, Uttar Pradesh, has more potential patients than the entire population of Brazil. And poor countries, as a group, do have disposable income to spend on drugs.

Please be seated…for now

The industry can rely on a few cushions to ease the transition. One is the mountain of cash compiled through divestitures and restructuring: Pfizer alone is sitting on $23 billion, followed by Merck and Abbott, with $18 billion and $11 billion, respectively. But deciding what to do with the windfall is harder than it seems. Even small acquisitions can prove a poor fit with an inflexible Big Pharma culture. Few experts believe that buying your way to market growth is a viable strategy, given discouraging precedents like Astra Zeneca's $15 billion purchase of MedImmune in 2007. Called transformational at the time, it has had zero impact on the company's deflated stock price.

Another cushion is the break in the patent cliff, which peaked last year but eases off considerably in 2013, with Eli Lilly facing the most significant exposure from LOE of its Cymbalta anti-depressant and two leading insulin replacements, Humalog and Byetta. After a moderate tick-up in 2014, when the last big tranche of primary care blockbusters like Nexium and Celebrex go generic, the industry will be free to focus on uptake of a new generation of targeted therapies drawn not from traditional chemistry but from the networked science of molecular biology. Some of these could be blockbusters, but many will carry smaller label indications that must be expanded over time. This requires a re-think of how to allocate clinical, manufacturing, and promotional spend, not to mention the substantial post-marketing study commitments demanded by regulators—and, increasingly, by payers.

Finally, the industry has a little more time to assess the implications of a restructured US healthcare system, since the expanded entitlements engine of the Affordable Care Act (ACA) does not hit full throttle until 2014. The ACA symbolizes the thickening web of regulation now found in all the mature markets and are beginning to enmesh Big Pharma's prospects in the emerging countries. Maintaining that "license to operate," with the goal of passing successive hurdles to obtain eligibility for reimbursement, is today a permanent campaign, involving not just sophisticated legal and regulatory expertise but globally-scaled partnering and reputational investments—what might euphemistically be called checkbook diplomacy.

Running from the rules

A few companies are pursuing a niche model that avoids this world entirely, in favor of stakes in products and geographies that are predominantly or exclusively private pay, with no requirement to negotiate access. Valeant's recent move to downgrade its presence in Europe is an amplification of what many other companies are thinking. Like it or not, company product launches—and ultimately patient access—are being re-evaluated and sequenced to minimize the impact of cross-national reference pricing on global revenues. Last year, Eli Lilly, Boehringer-Ingelheim, Pfizer, and GSK all decided to forgo launching new products in Germany rather than risk finding that near-generic pricing mandated by the country's AMNOG reform law might become the baseline for P&R decisions on these drugs in many other markets.

If this pattern continues into 2013, and indications are that it will, the result will be a widening of drug access discrepancies among countries in Europe—a trend that EFPIA appears determined to raise as another source of the health inequalities that the EU Commission wants to target as a legislative priority. There may also be a spillover effect as the EU Parliament begins its assessment of a revision to the 1989 Price Transparency Directive, which includes new measures sought by industry to penalize national authorities when they delay decisions on reimbursement beyond the 180 days set forth in the directive. Member states are decidedly cool about the revision, even though it gives them more leverage to demand, disclose, and share essential price information.

Reimbursement rocks

So, after years of bemoaning a cumbersome and risk-averse licensing process for drugs, the industry is discovering that the real challenge is reimbursement. The language of engagement has changed. Innovation defined around the merits of the science is insufficient; it must offer value to the user as well, relying on metrics of performance against existing therapies, clinical standards of practice, and patient-payer preferences. The problem is that, outside of Italy and an elaborate set of algorithms devised by its national drug regulator, AIFA, no one has bothered to define what "value" is; payers by and large want this definition to rest vaguely, in the opaque eyes of the beholder.

A breakthrough on this front is likely this year in the United Kingdom, where the Department of Health is finalizing an effort to refigure the 50 year-old Pharmaceutical Price Regulation Scheme (PPRS) with a new system of value-based pricing that depends heavily on metrics linked to disease states and unmet medical need. While many in industry welcome the idea of greater clarity and transparency to bind the concept of value, precedent suggests that the prudent advice is to be careful what you wish for.

Bending the data glut

A particular concern is the scope and quality of the evidence base, which requires a consensus on how to make sense of mounting volumes of raw data. "We are still data rich and information poor," Neil De Crescenzo, SVP of Oracle Health Sciences, said in an interview with Pharm Exec. However, he contends this great disconnect is gradually being breached, as industry comes to recognize that information, constructively applied, has amazing untapped potential to change patient and provider behavior, while regulators strive to make up lost ground in exploiting IT to speed drug approvals and anticipate and resolve problems once a new drug is introduced to clinical practice. "The desire of regulators to collaborate with industry in applying information to enhance the integrity—and thus the credibility—of the drug approval process is a trend that has been little noticed, but it is decisively important in easing the way to integrating medicines with better public health outcomes," he said. "That's the sweet spot, where both sides should want to be."

Groupthink registration

Over the longer term, FDA and the EMA have to think carefully about how the registration decision will facilitate—or hinder—ultimate access to the patient through reimbursement. The gap between the two has already been partially bridged in Europe through the EMA mechanism of parallel review, which includes not only the regulator and the applicant but national authorities responsible for establishing reimbursement eligibility through clinical and cost effectiveness studies. The next step is a pilot project in 2013 on "adaptive licensing" to consider how a system of periodic checks of a product's performance against its label, throughout the lifecycle, might work.

In the United States, the new Patient Centered Outcomes Research Institute (PCORI) is funding research to create a national infrastructure for the conduct of outcomes studies as well as their application in real-world clinical settings. While PCORI—for now—has no mandate to look at cost, it is relevant to point out exactly who is financing the group and its work plan: insurance companies and the big self-insured employers, who under health reform must pay a special tax as a ratio to the number of people they cover.

Tying registration to the broader perspectives of a community that worries about value and cost can be lauded as a time-saving end to duplicative data dumps, or as a concession to reality in forcing rigor on companies to develop drugs that payers really want. But there are inherent dangers too, the most important of which is the premature rendering of "no go" judgments about promising early stage therapies, even turning science into a game show for budget-obsessed politicians. The expert advice to Big Pharma? Get in and help shape that process, or the process will shape you.

The new competitor: Prepping to do harm

Combined, these trends lay out the terms of battle for Big Pharma—even if the true day of reckoning has yet to arrive. "2013 is the Year of Competition," Pharm Exec editorial advisory board member Dr. Stan Bernard told Pharm Exec. "Companies will have to start adapting to three aggressive and sophisticated types of competitors: rival brands, numerous generics, and the 'budget holders,' consisting of cash-strapped PBMs vying with drug-makers to control increasingly limited funding for prescription reimbursements."

On the brand side, 2013 will see more crowding in major therapeutic categories, especially in the high-margin specialty drugs segment, resulting in negative pricing pressures and bigger investments to defend against the now ubiquitous counter-launch campaigns. Meanwhile, the race to "genericize" continues: 80 percent of all scrip in the United States is now written for generic medicines, while most European governments are deliberately skewing reimbursement away from brands.

At the same time, generic companies are more formidable competitors to Big Pharma, not only as a consequence of consolidation (Teva alone supplies nearly one of every five drugs prescribed in the United States) but also as they build a pipeline franchise in innovative medicines, combinations, complex therapies, and biosimilars—strangely enough, all hard to copy. JPMorgan analysts predict that, by the end of this year, diversification will set root and the top three generic companies in the United States will each generate less than half their sales from INN generics.

Expect no truce in the industry's battle with PBMs over their effort to limit prescription choices for patients participating in contract formulary networks. This month, United Health Care (UHC) begins barring member pharmacist acceptance of drug company coupon cards offered directly to patients to help them meet the high tiered co-pay fees on six widely prescribed branded drugs for which there are cheaper available alternatives. The ban eliminates an incentive that UHC—and other leading PBMS—says is being used by half of its enrolled patients to frustrate formulary management objectives through choice of medicines that are not as cost effective as recommended off-patent alternatives.

Health reform weighs heavily on this dispute, since the PBMs claim that what they are doing conforms to a longstanding rule prohibiting couponing for patients in Medicare, Medicaid, and other federal programs. It also carves out a new front for Big Pharma in the political debate about rationing—how PBMs are limiting choice of therapy by short-circuiting the physician-patient relationship.

A world of hurt

Churn on the product and customer fronts is accentuated by the unraveling of the geographic map that once drove strategy on everything from launch sequencing to manufacturing. The familiar neighborhoods for Big Pharma are changing—and the industry is not trading up.

In the United States, market forces are shifting toward an overt government role in the financing and delivery of care; some observers contend that the current flexible, employer-based system will start to morph into a European-style social insurance model after 2018, when the ACA is fully phased in and the first big employers calculate that it costs less to pay fines for not providing employee coverage than incentivizing their workers to move out to the government-run insurance exchanges. It is also hard to see how market pricing for a new generation of costly branded biologics is compatible with a scenario calling for expansion of the government Medicaid program that subsidizes medicine at below market rates as well as extensive new regulations on all providers seeking to access and serve the working uninsured population, a significant portion of which will be at incomes just above the federal poverty level.

"Most observers agree that under reform there will be more revenue coming into the system, on a net basis," Les Funtleyder, investment analyst for Polliwog Inc., told Pharm Exec. "The key issue is who captures that revenue; whether pharma can do it is an open question, even though the evidence shows when people are insured, utilization of medicines goes up." This returns us to the basic strategic dilemma of whether more volume can substitute for the certainty of lower margins—it was not irrational that those specialty medical practices dependent on big-ticket oncology drugs were among the most ardent foes of the 2010 reform bill.

The United States: A bureaucratic muddle

It is already evident that 2013 will not create much structural clarity around reform. Some 32 of the 50 states have either refused or delayed action on setting up the health exchanges that are designed to help the uninsured obtain subsidized coverage, which means Washington will have to step in and manage the process—meaning big delays, especially because there are no funds in the reform law to help the federal government expedite this task. The June 2012 ruling by the Supreme Court to uphold the constitutionality of key elements of the ACA also bars Washington from withholding the federal contribution to Medicaid in those states that refuse to accept subsidizing the large numbers of new Medicaid-eligible patients under the law. This subverts a key plank in the drive toward universal coverage.

2013 by the Numbers

What is clear is that execution of the ACA will significantly raise federal and state expenditures on health while doing virtually nothing to reduce costs for the system overall. It is probable too that Big Pharma will have to pony up more of the bill. The annual fee the brand name industry must pay, in the form of individual company assessments based on revenues, rises from $2.8 billion this year to $3 billion in 2014 and then to $4.1 billion in 2018. There is also the 50 percent discount manufacturers will pay, beginning this year, to help close the "doughnut hole" for Medicare patients facing loss of drug coverage, as their out-of-pocket costs rise.

And, of course, there are potential new financial burdens on Big Pharma as part of the ongoing negotiations to reduce the federal deficit, the biggest of which is extension of the 23.1 percent rebate for drugs paid for through Medicaid to all low-income eligible patients on Medicare. Reduction of the 12 years of data exclusivity for biologics to seven years, and even removal of the tax deductibility of promotional spend are on the table. There is also the indirect impact of major cuts to the budgets of key agencies like the FDA and the National Institutes of Health.

The IPAB show

The irony is that, while the industry may succeed in its insistent messaging to prevent Medicare from assuming the power to negotiate down drug prices, advocates of controls could eventually achieve the same outcome, not only with these initiatives but also if the ACA's new health spending review panel, the Independent Payment Advisory Board (IPAB), moves forward on schedule this year, with nomination of its 15 members by the President. IPAB, assuming it becomes functional—still a big if—is charged with responsibility to keep Medicare spending within a pre-determined per capita growth rate; if growth exceeds this rate, it must introduce specific cuts to bring it back in line, subject only to a congressional veto. Ludicrously, under the ACA, IPAB cannot consider any reductions to Medicare beneficiaries directly or in Part A hospital charges—meaning that what is left are doctor bills…and drugs.

Wipeout in Europe

Meanwhile, in Western Europe, government payers are shutting the fiscal spigot that used to finance generous drug benefits under national health insurance, more than three quarters of which is subsidized from the public purse. Beginning in 2010, the annual GDP per capita rise in outlays for medicines in the EU ground to a halt and has slipped into negative terrain since then. Not only are company balance sheets trending red, so too are patient out-of-pocket costs. According to the OECD's latest Health at a Glance report, the volume of such payments have increased by half in the 27 EU states since the recession began in 2009.

Public debt loads at more than 100 percent of GDP, budget austerity, and the unsustainable social charges that feed it have spawned predictions of a "lost decade" of revenue and profitability declines for Big pharma in Europe that will in turn choke off any new biotech innovation, permanently sealing the region's fate as a marginal player in the global medicines market. IMS forecasts that by 2016 only three European countries—Germany, France and Italy—will have a ranking on the top 10 world markets list, down from five today.

"It's hard to be optimistic for any turnaround when the majority of the payers in Europe are technically bankrupt," says Peter Tollman, senior partner and managing director of the Boston Consulting Group. Half of the world's spending on social transfer payments takes place in Europe, while the region's economic output is only 25 percent of the world total. These numbers cannot move farther apart without crowding out high-return public investments in research and innovation—investments that underpin Europe's ability to compete against "cheap science" in the emerging markets. It is already happening, with possible withdrawal of EU Commission funding for the Innovative Medicines Initiative (IMI), a novel, €2 billion discovery and development partnership program—the largest in Europe—between governments and the industry.

Bloom off the BRICs

Prospects are brighter in the BRICs, yet their appeal has dimmed as the high-rent alternative to downsizing mature markets. Under pressure to manage the expectations of a growing middle class, governments are responding by managing healthcare, with foreign originator drugs a prominent target. China is dismantling preferential pricing for branded foreign drugs and moving more products into a WHO-style essential drugs formulary; India and Indonesia have joined Thailand in actually enforcing that "nuclear option"—compulsory licensing; and Turkey actively discriminates in holding up foreign drug maker certification for local manufacture and distribution. Restrictive IP, price controls, and preferential "national champion" industrial strategies are all geared to making domestic generics firms more competitive against the foreign multinationals. This is one compelling reason for Big Pharma to stay active in the "pharmerging" countries, for the opportunity it provides to get intimate with the future face of global competition.

However, learning to compete effectively in emerging markets is proving more costly than expected. To expand sales beyond the traditional private-pay elite customer segment requires big ticket investments: in local manufacturing and distribution; better on-site science; marketing that can tailor products for a diverse consumer base, often outside established urban centers; new stakeholder outreach and partnerships; and in finding—and keeping—top performing talent. Because the fundamentals of big populations and relative gains in disposable income are still there, 2013 should see continued uptick in Big Pharma sales to the emerging bloc. The best performers will be the so-called "below the BRIC" countries like Indonesia and Saudi Arabia. But the larger question remains: will bigger volume sales yield the profits companies need to counter Europe's price implosion and continued regulatory uncertainty in the United States?

So goes Japan

And then there is the forgotten market: Japan, the aging, Asian Canada, but still the world's third largest in sales. The biannual price plunge next appears in 2014, but there is an interesting story in the government's lavishly funded effort to jump start a strong domestic vaccines business, capable of competing globally in research and production. Will it begin to pay off in 2013, or is the picking winner model an anachronism?

Now, the good news

The last, best refuge of this industry is science—and after a spotty drought it looks like companies are once again delivering the goods. The FDA approved a near record 39 new medicines in 2012, while the EMA is set to receive 54 new drug applications this year, up sharply from 34 in 2010. More important, many of these products represent a significant therapeutic advance in hard to treat areas like MS, rheumatoid arthritis, cancer, and hepatitis C. Likewise, the generic business is itself emerging as a source of innovation in drug formulation and delivery, with complex generics that combine drugs in novel ways; Teva is also a good bet to deliver the first biosimilar product approved by the FDA, sometime later this year.

Applying the science gets better

A key factor behind the success is the growing ability of the industry to translate academic insights about the origins of diseases into development pathways that lead to commercialization. "The entire cycle of development for anti-tumor agents has been reversed, because today we start with only those patients who we know have the abnormal mutation we are seeking to target," Novartis Oncology president Herve Hoppenot tells Pharm Exec. "The practical result is that time beyond proof of concept is reduced and the probability of success is significantly increased." Quintiles SVP for early clinical development Oren Cohen notes that today's "holy grail" for success is a better proof of concept, which is facilitated by reliance on "enabler" technologies: biomarkers, gene expression analysis, and major application breakthroughs in modeling and simulation. "The renewed focus on proof of concept is no surprise, because it gives us firmer evidentiary ground for making that essential go/no go decision in product development. There is real reason for optimism about the pace of the development process, as we see continued improvements in all the enablers that allow you to define and target your decision-making," he said. "And bad decisions cost money."

Money too is driving the change in how companies manage clinical trials—complex science, tough disease targets, and risk-averse regulation has sent their cost soaring. The Tufts Center for the Study of Drug Development has been monitoring protocol design practices among drug companies for more than a decade. "What we are now seeing, for the first time, is widespread adoption of new internal review committees to critically evaluate these designs and remove procedures that unnecessarily complicate the execution and cost of trials," said Ken Getz, Center director for sponsor research. This is good news, as failure to wrest more efficiencies from trial management puts industry squarely at odds with the pressure that regulators are facing to raise the scope, quality, and objectivity of the evidence on which they base drug approvals.

Manufacturing's Back

Manufacturing is the proverbial pumpkin turned princess; a function that was non-strategic, humdrum, and marginal has now become essential to seamless global integration. It's a proven cost-saver for companies looking for new ways to do old things. Technology and custom engineering are unleashing a revolution in process called continuous manufacturing, which is reducing the number of steps and locales required to transform basic raw materials into a safe and effective drug. Such turn-on-a-dime flexibility is a real asset in an era where regulatory and payer restrictions can lead to steep variations in market demand for medicines across countries. A big competitive differentiator will be among those companies that succeed first and consistently do best in crossing the "execution gap," between what's in the standard operating plan (SOP) and actual performance on site, in the field. This is a matter of necessity for the top generic suppliers, who are seeking leadership in manufacturing excellence, not only as an add-on business opportunity but also to remove the sector's historic taint of inferior quality against branded medicines.

A final word: Give me growth!

In many ways, 2013 marks another year of transition away from the stubborn complacency of an industry used to margins that other sectors might call nose-bleed high. The industry now embraces the concept of partnership with gusto; the clannishness of the past has been silenced. "Thinking in systems," is how John Doyle, SVP for Market Access at Quintiles calls it. " Every company today must begin by framing their market as a network of interconnected products and add on services."

Yes, there is change and there is hope –even if the balance sheet on the business of illness has shifted a bit to the night side. The best news the Big Pharma giants of the United States and Europe could get this year? Five percent real growth in GDP. When the tide is running in, you no longer have to see who's been swimming naked.

William Looney is Pharm Exec's Editor-in-Chief. He can be reached at wlooney@advanstar.com.