Thursday, August 21, 2014
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How is Pharma adapting? By cutting R&D and raising prices

One of the major issues that CEOs of large companies and their strategic planners should constantly monitor concerns how their business environment is changing and whether their own company is responding adequately. Here is a quick rundown on pharma's changing landscape and what some of the bigger companies are doing about it.

How is Pharma adapting? By cutting R&D and raising prices

One of the major issues that CEOs of large companies and their strategic planners should constantly monitor concerns how their business environment is changing and whether their own company is responding adequately. Here is a quick rundown on pharma's changing landscape and what some of the bigger companies are doing about it.

The following trends are among the more important ones affecting the pharmaceutical industry.

1. Decision making regarding the selection and use of drugs for patients is passing away from individual physicians and inexorably toward the protocols and formularies of large organizations such as integrated delivery networks (IDNs) and payors. This means pharma's customers will no longer be the half-million or so individual prescribers but, instead, will be large institutions with sufficient capability, knowledge and acumen to resist pharma's previously irresistable promotions.

2. This selection and use of drugs will be determined by real-world outcomes that the above-mentioned organizations can readily collect and analyze by 2015, once all patient data become digitally recorded in electronic medical records (EMR). The dynamic that will determine the economic fate of pharma products will be one of dueling databases. The claims of pharma companies for their products will be tested against the databases of large providers and insurers who will assess how those products performed against alternatives on patients they treated or covered.

3. More than the dearth of scientific breakthroughs, the price sensitivity of payors or strict concerns at the FDA, dueling databases will create a market where nearly all branded drugs, aside from those representing really substantial clinical advances, will compete for single-digit market shares. That constitutes the final nail in the coffin of the industry's blockbuster model, together with the companion need for pharma companies to prosper from small, niche products.

4. Fiduciary officers will no longer be able to generate quarterly earnings and net income growth from small products for their multi-billion dollar, behemoth pharma companies. Despite the personal loathing of these officers, they will have to make their companies smaller, knowing full well that executives do not receive higher compensation for running smaller companies. This shrinkage will substantially alter the fundamental nature of pharmas. No longer will they principally function as discoverers/developers of new compounds to advance the standards of medical care. Instead they will increasingly operate as investors, financiers, and suppliers of marketing and other services for small companies that can develop consequential new drugs.

So how are the big pharmas currently adapting to this new world? So far, here are their major courses of action.

1. Denial and resistance. The number of mid-management people at the pharmas who are pretending it's still 1995 is astonishing. Some feel powerless to address the new environment of IDNs, accountable care organizations and patient databases, so they resolutely pretend these things don't exist. Privately, they and their superiors acknowledge the macro trends but, as a colleague of mine characterizes their attitude, "It's all IBG, YBG: pretty soon, I'll be gone, you'll be gone, so why pay attention to it."

2. Cut R&D. Research constitutes the lifeblood of branded pharma because without advanced new drugs under patent protection, the world will choose cheaper generics. Despite this reality, many big pharmas are cutting their R&D spending. Pfizer's R&D spend next year will be 9.2% less than the figure for 2009. Over the same interval, AstraZeneca's R&D spend will decline 11%, GlaxoSmithKline's 11.6% and Sanofi-Aventis' by 8.7%.

3. Cut SG&A, principally through layoffs. In 2010, pharma led all US commercial sectors in the absolute number of layoffs. Only government and non-profits terminated more people. While this year's pace remains slower, the trend is by no means at an end. So for example, the CEO at Novartis gave an interview to the Wall Street Journal this week where he berated pharma's historic aversion to cost cutting and claimed he seeks to make even further inroads towards that goal.

4. Buy back stock. If companies reduced their earnings per share as a result of badly conceived mergers and acquisitions that were motivated principally to save management's jobs, and if the dearth of new products cannot drive EPS, then companies are pouring available cash into stock buybacks to increase the figure.

 5. Let finance run operations. This has provided the topic for several earlier postings here, but the intrusiveness of finance domination continues with renewed ubiquity, together with its self-righteous rigidity, cronyism, hypocrisy and baldfaced ineffectiveness.

6. Use exorbitant pricing, previously restricted to orphan drugs, for all new products. Within the past week, a new product for advanced melanoma was pegged at $120,000 per patient while new protease inhibitors for hepatitis C unofficially acquired a more modest pricing that approaches $40,000 per patient. News about those prices came shortly after a St. Louis pharma with a troubled past received an ill-conceived exclusivity from the FDA and raised the price of a fifty-year old progesterone preparation for preventing premature delivery from $10-$20 per dose to $1,500 a dose.

7. The developing countries will cure all of pharma's problems. This approach was also discussed and skewered in earlier postings. Perhaps those who still believe that Brazil, Russia, India and China will make the industry well would also be interested in a hot tip that involves buying equity in the Brooklyn Bridge.

All things considered, some minor, subterranean and contrary currents in pharma may show the way for a remodeled pharma that can prosper by fulfilling the industry's historic mission. At present the major initiatives offer little reason for optimism.

To check out more Check Up items go to www.philly.com/checkup.

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Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

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