by Daniel R. Hoffman, Ph.D.
Last week one of pharma's newsletters briefly reviewed (see here) what they consider the five most important factors affecting the industry's relations with payers. Pharma clearly faces daunting challenges aside from those related to payers. The most formidable problems concern the fact that customers can defer purchasing new drugs because most of them don't significantly advance curative medicine. Nonetheless, the problems with payers reveal some of the drug industry's obvious business challenges.
All of the factors related to payers are really just variations on the theme that the organizations footing the drug bill, both public and private, are increasingly demanding value for their constantly growing costs. For example, one of the issues relates to the matter of "value-based pricing." That approach to establishing drug prices has advanced much farther in countries outside the U.S., where national health systems predominate, but the basic idea is that payers are looking to pay for drugs on the basis of how well they work. That means if a pricey new drug produces outcomes among patients that are not noticeably better than those of older, cheaper medications, then the new brands should not expect to receive premium prices.
A second factor, comparative drug assessment, is yet another aspect of this demand for drug value. In most places around the world, new products can obtain regulatory approval merely by showing better results than a sugar pill and not causing undue harm. The idea is that if a medication does not cause undue harm and is better than nothing, the manufacturer can then tout it as a therapeutic breakthrough. Once the drug is approved for sale, the pharma company can use personal sales, mass communications and expensive freebies to persuade physicians that the new product represents an improvement to the standard of care. By relying on an asymmetry of knowledge, pharmas can implant that message in physicians' minds and then charge premium prices for the new drug. But now a growing chorus of third party payers has resisted the pattern, arguing instead that if new products want to obtain anything more than minimal payment, their studies for obtaining registration must demonstrate substantially greater benefits than alternative medications. Payers understandably see the costs of health care as just too high to let drug companies earn huge profits simply by besting sugar pills.
The demand for real-world data is still one more aspect of this call for drug value. The clinical trials needed for registering and selling new drugs are designed and executed by the same companies that intend to market them and collect the revenues. Physicians have at last caught on to the fact that the situation merits a high level of skepticism (see here). Even beyond that, the therapeutic process and its outcomes in the community and the hospital settings differ from those generated by controlled clinical studies, no matter who designs and manages the trials. For those reasons, payers and providers are requiring more real-world evidence to decide which medications they will use on which patients.
Starting in January 2014, Medicare and Medicaid will require all providers to adopt electronic medical records or risk lower reimbursements from those government programs. In theory, electronic records will allow IT professionals to provide real-world data by collating and assessing millions of individual patient records to determine the circumstances under which various medications are most cost-effective. In other words, discerning physicians will be less likely to prescribe particular drugs as a result of the marketing and sales spin that a drug company puts on its own studies. The electronic databases will provide real-world evidence of what has worked and what hasn't.
Other issues beyond payers are also proving more perplexing for pharma. For several years senior executives have misdirected investors by claiming that the rising prosperity in emerging national markets will more than offset cost containment efforts in the U.S. and Europe. Recently the luster of emerging markets has started to fade. Some of the rising countries want to grow their local pharma companies at the expense of established ones in the developed world. Also, while rising middle classes in the budding economies do represent customers for advanced medications, those countries also contain poor populations numbering in the hundreds of millions. It is simply beyond the economic means of those countries to treat their impoverished masses with the latest drugs.
Recently some of the emerging countries have decided to serve the two purposes of treating their poor and growing their domestic pharmas by creating strict price controls and/or breaking patents on brands from established, foreign companies.
India and China, the jewels in this crown of emerging markets, illustrate the trend. Last week India broke Pfizer's patent on its cancer medication, Sutent. The government there had earlier voided patents on Glivec, Novartis' billion dollar cancer drug, and Viread, an HIV medication from Gilead with worldwide sales approaching $1 billion. The Indians upheld the patent on Roche's cancer drug, Tarceva, but they effectively gutted the company's exclusivity by ruling that a version from a local manufacturer does not infringe on the patent.
China for its part announced this week that they are placing all imported drugs on an electronic monitoring network to permit better tracking and control of pharmaceutical commerce (see here). That's all well and good, but buried in the announcement was a statement that prices on imported drugs will remain capped at levels to insure public affordability. The trend there aroused the Council on Foreign Relations to wonder whether China will follow India down the path of voiding patents (see here).
So the worldwide environment where pharma does its business is more aggressively pouncing on the industry's weaknesses. Many astute observers continue to ask if the pharmaceutical industry has developed an effective, long-term solution for its predicament.