Late last month Citigroup published its 2013 overview for pharma, "Global Healthcare Road Ahead: 2013 Outlook." It constitutes a sobering counterview to the touts and boosters from those in the investment community who tried to prop up the recent earnings reports.
The critical challenge for pharma, in their view, consists of reorganizing R&D to again make it the core of an innovative, rather than a finance-driven industry. "With reimbursement reform impacting pricing," they maintain that "R&D productivity will be critical...A combination of improving R&D success rates, shorter development times and smarter development paradigms will be needed to offset pricing pressures."
Pricing pressures on pharma up to this point have been love taps compared to what lies ahead. US health care spending is already at 18% of GDP as is trending toward a wholly unacceptable 50% of GDP by 2050. That means the country must and will take serious measures to bring health costs under control. Citigroup claims the elements of spending reduction that are most relevant to pharma will be led by what they refer to as the "Three Furies" of "shared savings, drug pathways and ACOs."
Shared savings is their diplomatic term for the fact that private payers and the federal government are starting to make providers share the risk. It means is that instead of paying doctors and hospitals on a fee-for-service basis that incentivizes them to order more tests and procedures, their compensation will depend upon the outcomes they achieve for patients. If they practice the most cost-effective medicine to improve outcomes, thereby lowering costs over the long term, then they will earn a portion of those savings.
Of course, beyond general guidelines, medicine has been loathe to establish optimally cost-effective practices for each patient in specific situations because the profession has historically been such a bastion of cowboy individualism. As far as drug selection and use, that's where Citigroup's second Fury, "drug pathways," comes in. Drug pathways represent another term for what others have called "database-driven therapeutics" or, more simply, "evidence-based medicine."
CMS' requirement that providers make "Meaningful Use" of electronic medical records by next January to preserve full Medicare reimbursement will make it possible for various payers and providers to establish patient databases. They can then analyze these databases to determine which drugs work best for which patients under various conditions. The upshot for pharmas will be what Citigroup refers to as a winner-take-all situation in which the most cost-effective drug will receive the vast, vast majority of use. No more will several products within the same therapeutic class become blockbuster sellers.
ACOs -- accountable care organizations -- are another approach that Citigroup believes will reduce the volume and the costs of drug use, while improving patient outcomes. They also represent a significant change to the way physicians will practice medicine. Instead of a lone physician, whether a primary practitioner or a specialist, exerting sovereignty over a patient's care, physicians from several specialties will regularly meet face-to-face and review the progress of their patients. Outstanding medical centers such as the Mayo Clinic and Intermountain Medical Center adopted this approach some time ago.
Currently several, disconnected specialists treat the same patient for a number of conditions. Each specialist either doesn't know what medications the others are prescribing or only pays enough attention to determine that two or more drugs in the regimen won't interact to cause serious problems. In contrast an ACO will monitor and pare down each patient's drug list, thereby avoiding the "regimen creep" in which the hypertension therapy for one patient routinely comes to include a calcium channel blocker, an ACE inhibitor, a beta-blocker and a thiazide diuretic.
Citigroup believes pharma maintains a 6-7 year window to demonstrate the value of its products to payers. After that, serious reimbursement changes will occur and sales to countries outside the US won't be able to rescue the industry's worsening financial results. Only pharma's political lobbying can avoid a meltdown in the absence of a genuine R&D upturn, and even then, only on issues that remain hidden from public scrutiny.
In the last few years pharma's approach to increasing the productivity of its all-important R&D has been driven by the penny-wise-and-pound-foolish blunderbuss of financial management. A perfect example is the recent decision by some companies to strangle small suppliers by making them wait 95 days to receive payment on their invoices.
The concept of materiality is apparently lost on these finance mavens and their henchmen in purchasing because each of the Big Pharmas pays billions of dollars every year to its CROs (contract research organizations). The drug companies apparently ignore the fact that CROs earn more than 25% of their revenue from "change order" fees incurred whenever the sponsor of a clinical trial wants to correct dysfunctional procedures the same CRO originally put in place.
As finance drives pharma's car farther into the ditch, perhaps R&D managers can learn a useful point or two from another business function at their companies. Marketing and sales would never try to launch a product by relying strictly on the experience, connections and reassurance of a single supplier, even one that purchasing designates as a "strategic partner" in what amounts to an obvious distortion of the English language.
Any marketing manager worthy of his/her position would first carefully assess the situation to determine the needs and behavior patterns of the people with whom they must deal. Only then would she develop a plan and tactical programs for implementing it. Given that a more efficient clinical R&D represents branded pharma's only way forward, the process merits at least as much diligence.