Earlier this month we discussed how a major device manufacturer, Medtronic, blazed a trail for pharma by purchasing Cardiocom, a company that provides disease management and monitoring data for heart patients. Medtronic is well aware of the challenges facing device makers and the company decided to balance its revenue sources by entering a service business. Up to this point the finance executives that run pharma's operations have been unwilling to seriously consider service offerings, despite challenges that are likely more daunting than those in devices.
Last week John Graham published an article in Forbes (see here) where he praised Medtronic for their innovation in pursuing a supplementary business model, after which he threw cold water on the prospect that it might succeed. Basically Graham claims that an insurer, a PBM or a telecom company would be more credible than a manufacturer at using implantable monitoring devices for generating data to guide patient management.
Perhaps Graham knows something that Medtronic doesn't, but I wouldn't bet on it. Certainly a device manufacturer may create a conflict of interest by generating data that could suggest the use of its device products. But an insurer providing the same service could also advance its own interests by producing data that inappropriately recommend withholding products and care. And telecoms? Their unknown levels of competence and reliability in areas of health care represent major obstacles.
Graham actually seems to be generalizing from the low regard with which physicians and other providers hold pharmas, and then applying that situation to device companies. In so doing he inadvertently points out an additional obstacle that pharmas face in trying to develop credible service businesses.
In contrast to pharmas, device makers already provide major service support to physicians and patients. The exceptionally fine service that Medtronic already provides to diabetics that use their insulin pumps earns them high standing among these patients and their doctors. Pharma offers nothing even remotely comparable to the end-users of its products.
For the past several decades pharmas viewed service support as merely an ancillary "value add" to its products. Then within the past decade it became abundantly clear that even those services were surreptitious promotions. A growing number of physicians now recognize this taint on pharma services, together with the ways pharma's services distort treatment patterns and therapeutic decision making. It's clear that any initiative from pharma companies to balance their product lines by starting service businesses will have to contend with this spoiled image.
This week the Big Cap pharma analysts at Sanford Bernstein did some number crunching and found that pharma sales growth in the emerging markets (EMs) has slowed over each of the past four quarters. While their overall assessment soberly noted that the EMs aren't the pot of gold with which many senior executives tried to distract investors, the Bernstein analysts nevertheless point to the positive growth trend for pharma sales in those countries. In their view this positive direction, contrasted to a negative growth in the US and Europe, warrants continued pharma investment in the EMs.
Although their assessment may be true as far as it goes, their observations fail to address a whole range of issues associated with pharma's focus on the emerging nations. In particular they fail to discuss some fundamental issues connected with the fact that EMs will constitute a growing piece of the pharma pie.
It is well worth asking what it means for the industry that a growing segment of its business will consist of low margin sales to countries such as India and China. For example, will the electorates in Europe and the US eventually demand the ability to purchase branded drugs at the same, reduced prices likely to prevail in the EMs?
Then there is a question concerning the impact of the larger EM countries explicitly trying to skew their national markets so as to favor the growth of their domestic pharma companies. Does this mean a growing share of pharma sales will run the risk of economic policies that can turn most of those sales over to local competitors?
Finally the bribery scandals in China that have ensnared GlaxoSmithKline, Sanofi and Eli Lilly (so far) indicate that the EMs are using these multinational pharmas as bugbears to further increase government control over all aspects of health care. This means consumers in the US and Europe will still have to obtain their medications on the supposed "free market," meaning one that is rigged to favor corporate profits, while their EM counterparts will benefit from price controls and other policies designed to increase the affordability of drugs.
At this time biological compounds represent a growing percentage of new drugs in development and pharmas intend to price them in excess of $50,000 per patient per year. That equates to consumers here and in Europe subsidizing the EMs by amounts vastly larger than the several hundred dollars per patient presently associated with small molecule, primary care drugs. American consumers now accept products manufactured overseas, including the job losses created as a result, in return for substantially lower prices. How will they react to buying medications that cost them thousands of dollars a year above the prices in Russia, Brazil and China?
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