Last week the pharmaceutical industry's largest supplier of retrospective marketing data, IMS Health, presented its annual scorecard for 2010. While sales growth during a recession year was respectable and pharma's margins remain the envy of all legitimate businesses, a perusal of some details raises its share of worries.
For starters, last year's 2.3% sales growth was pharma's second-lowest, top line expansion in 55 years. The lowest sales growth during those decades came in 2008, meaning that in two of the last three years, pharma's sales growth lagged well behind the historical pattern. The reasons behind this comparatively slow sales growth generate concerns among those CEOs in the industry who devote themselves to matters beyond their own personal fortunes and leisure pursuits.
Pharma sales grew more slowly last year than usual, partly as a result of industry fundamentals and partly because of the overall economy. Relative to internal factors, 2010 was similar to the past several years in that the industry launched fewer new products to drive revenue growth. Without new brands to command premium prices, older drugs eventually lose patent protection and become available as low-cost generics. Last year US patients filled 78% of all their retail prescriptions with generic medications, up from 63% in 2006. Moreover, many of the new drugs that did launch last year were either for rare disorders or, more commonly, they did not confer sufficiently better outcomes to prompt coverage by insurers and use by physicians in place of generics. As a result, average spending per new branded product fell from $114 million in 2006 to $62 million in 2010.
The continuing loss of patent exclusivity on current big-sellers also slowed pharma's revenue growth. Even when the top seller in a therapeutic category retains its patent protection, patent loss by the number two competitor can still hurt number one's sales. This is exactly what happened when the patent expired on the number two statin in 2006, Merck's Zocor. Sales of the top-selling statin, Pfizer's Lipitor, slowly started to decline. As the patent on Lipitor, the world's top-selling medication, will expire late this year, to be followed next year by expiry on the number two prescription drug, Plavix, patent loss will remain a deterrent to industry sales growth for a while longer.
Through the 1970s, '80s and '90s, many people used to speak of pharmaceuticals as a recession-proof industry. It that ever was the case, it is no longer so. During last year's sluggish economy, some people continued to lose their jobs while others remained unemployed. As health care coverage for people under age 65 remains tied to employment, this meant patient visits to doctors' offices declined by 4.2% last year and 3.4 million fewer patients started new therapies for chronic conditions. At the same time, employers and insurers continued to shift more of the prescription cost burden to patients in the form of higher copayments and deductibles. As a result, an analysis from last year showed "the rate of prescriptions submitted to a pharmacy but never picked up—known as abandonment—rose 24% in 2009 and is up 68% since 2006" for brand-name drugs.
The type of payors for prescription drugs also seems to be working against the industry. Private health insurance used to pay for 66% of dispensed prescriptions in 2006, but job losses dropped that percentage to 63% last year while the share of scrips paid by Medicare Part D and Medicaid rose from 22% to 30% over the same period. As state budgets are also tightly squeezed during this recession, many Medicaid programs have started to reduce the extent of their drug coverage. So for example, the net operating income of Gilead Pharmaceuticals, a leading developer and marketer of antiviral medications, fell 24% in the first quarter of this year, partly because state Medicaid programs pay for a substantial share of HIV medications and many states reduced their payment levels and/or coverage.
So what remains to drive pharma's revenue growth? At this point the major engine appears to be the favorite device of cartels everywhere: price increases. The pharmacy benefits management (PBM) company, Express Scripts, found that prices for branded medications grew by 9.7% last year, following a 9.1% level of price increases the previous year. At the same time, Express Scripts also concluded that prices for generics fell by 10.2% last year. Lower generics prices, together with their growing share of use, kept the growth of total US drug spending to 3.6%. According to the PBM company's calculations, the US can save over $400 billion a year in unnecessary drug spending, principally by reducing the use of brands that fail to produce a health benefit. For this reason it seems reasonable to believe that employers and insurers will impose even more stringent constraints on branded drugs.
In short, the current period is one in which pharma's own dynamics and the overall economy are both causing difficulties for the industry. Short-term fixes cannot adequately address the situation and few approaches have emerged that appear likely to offer substantial course corrections. Now is the time for truly innovative leadership in the pharmaceutical industry.
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