The Future of the Global Pharmaceutical Industry:The Quest for Value

Ian Morrison

www.ianmorrison.com

Page 2

Outline

Good News/Bad News The Quest for Value Long Term Scenarios for the Global Pharmaceutical

Industry

Page 3

Good News: The Top Ten

Healthcare is a superior good Innovation makes a difference in human health Powerful New Science Stem Cell Research Everywhere Global infatuation with technology The Obesity epidemic and the aging of the planet will

drive raw demand for drugs, devices, and healthcare services

The elderly now have coverage in the US Consumers and providers are swayed by sales and

marketing The marginal cost of the next pill is small Bush is in the White House

Page 4

The Bad News: Top Ten

Costs for everyone globally, focus on prices in the U.S (and therefore importation)

Losing the value argument in the US and elsewhere Big Ugly Buyers and Tiering Coverage for the Elderly in the U.S. and Elsewhere AIDS in the Third World: Capitalism run Amok R&D productivity:

Is bigger better or is it all a lottery $ 4 Billion Blockbusters or 40x $100 million Are these new drugs safe anyway? How many hoops do we have to jump through?

Intellectual Property under assault Marketing practices as asset or liability: DTC, detailing, rebates and sales force

productivity Losing Friends and gaining enemies Leadership finally coming out from the bunker of self-righteous, myopic,

isolationism

Page 5

Percentage of consumers who say each industry does a good job serving their customers

1997

% 1998

% 1999

% 2000

% 2001

% 2002

% 2003

% Change

since ‘97 Change

since ‘02

Hospitals 77 73 71 72 67 73 73 -4 -

Banks 75 72 68 73 71 74 72 -3 -2

Computer hardware companies 80* 78 80 76 78 59 71 -9 +12

Computer software companies 80* 77 80 78 80 60 70 -10 +10

Car manufacturers 70 69 70 67 67 64 64 -6 -

Airlines N/A 78 71 66 51 63 64 -14 +1

Telephone companies 80 76 67 64 61 58 57 -23 -1

Life insurance 64 63 61 62 60 55 56 -8 +1

Pharmaceutical and drug companies

79 73 66 59 57 59 49 -30 -10

Oil companies 59 64 55 39 27 38 42 -17 +4

Health insurance companies 55 48 41 39 38 51 40 -15 -11

Managed care companies 51 45 34 29 29 33 30 -21 -3

Tobacco companies 34 32 31 28 28 25 30 -4 +5

How U.S. Consumers Rate Industries

* In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately

** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002

Page 6

Health Care Tops List of Industries Public Wants to See More Regulated

20%

8%

10%

11%

21%

24%

26%

30%

31%

35%

35%

44%

52%

57%

59%

60%

None of these

Computer hardware companies

Supermarkets

Computer Software Companies

Banks

Car manufacturers

Packaged Food Companies

Telephone Companies

Airlines

Life Insurance Companies

Tobacco Companies

Oil Companies

37%

27%

40%

22%

35%

14%

23%

12%

20%

34%

11%

3%

4%

13%

7%

4%

Should Be More Regulated Generally Honest & Trustworthy

Hospitals

Managed Care Companies

Health Insurance Companies

Pharmaceutical Companies

Page 7

Medicare Drug Benefit

Catastrophic Coverage

No coverage

Partial Coverage up

to Limit

Deductible

5%

$2850 Gap

25%

$5100*

$2250

$250

Equivalent to $3,600 in out-of-pocket spending: $250 deductible + $500 (20% cost-sharing on $2000) + $2850 (100% cost sharing in the “gap”)

Source: Kaiser Family Foundation

Out-of-Pocket Spending

Medicare Part D Benefit+ ~$420 in annual premium

Page 8

Number of Medicare Beneficiaries Soars Beginning in 2010

40 42 4653

6170

7717%

15%15%14%

19%21%

22%

010

20304050

607080

90100

2001 2005 2010 2015 2020 2025 2030

Nu

mb

er

of

Be

ne

fic

iari

es

(M

illi

on

s)

0%

5%

10%

15%

20%

25%

Pe

rce

nt

of

US

Po

pu

lati

on

Source: HCFA, 2000; Census Bureau 2001

Page 9

Who Pays for Drugs?

48.2%

42.7%

39.5%

34.9%33.4%

32.0%

32.1%

37.1%40.0%

44.0%45.3% 46.2%

17.3% 18.0% 18.8%20.1% 20.6% 20.8% 21.2% 21.3% 21.8%

36.8%

54.7%56.2%

52.7%

59.1%

42.4%

27.3%26.5%28.5%

24.4%

16.6%

19.8%

10%

20%

30%

40%

50%

60%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data

Percent of Total National Prescription Drug Expenditures by Type of Payer

Private insurance

Out-of-pocket

Government programs

Page 10

The Five-Tier Formulary

Old Generic

New Generic

Rebated Brands

Non-Rebated Brands

Look Good / Feel Good

Lowest Copay

Highest Copay and/or

Coinsurance

Page 11

James Brown and Fernando Lamas Effect

Mortality

Morbidity

Mobility

Feel Good

Look Good

Quality of Life

Affluence of the Individual or Society

End-Point

Page 12

“Skin in the Game” Matters

Trading down twice as often as trading up Rapid increase in generic and therapeutic substitution Poor, chronically ill most effected Starting to lead to adverse health outcomes like the uninsured Simple cost shifting without sophisticated disease management is not the right

answer in the long-term

Page 13

1014

22

127 5

57

411

26

0

25

50

75

No out-of-pocket cost More than US $1,000

Out-of-Pocket Medical Costs in the Past YearOut-of-Pocket Medical Costs in the Past Year

Percent

AUS CAN NZ UK US AUS CAN NZ UK US

2004 Commonwealth Fund International Health Policy Survey

Page 14

Cost-Related Access ProblemsCost-Related Access Problems

Percent in the past year who due to cost:

AUS CAN NZ UK US

Did not fill prescription

or skipped doses12 9 11 4 22

Had a medical problem but did not visit doctor 17 6 28 4 29

Skipped test, treatment or follow-up 18 8 20 2 27

Percent who said yes to at least one of the above

29 17 34 9 40

2004 Commonwealth Fund International Health Policy Survey

Page 15

All Privately Insured*

%

All HDHP**

%

Had a specific medical problem but did not visit a doctor 17 33

Took a medication less often than I should have 14 29

Did not fill a prescription 15 28

Did not receive a medical treatment or follow up recommended by a doctor

17 28

Did not get a physical or annual check-up 19 25

Took a lower dose of a prescription than my doctor recommended 15 19

Treatment compliance problems

Across the board, HDHP consumers have more compliance problems

* Currently insured in employer-sponsored or self-purchased plan** Currently enrolled in high deductible health plan

Page 16

Formularies: Who Makes What Decision?

Sophisticated Formulary Decision-Making involves: 1. How severe is the underlying disease, or is it self-limiting? 2. What is the cost of treatment, comparing drug and non-drug alternatives? 3. What is compliance with therapy? This is important, because if patients do not comply with

certain therapies, the benefit of treatment falls off dramatically. 4. Is the treatment curative or is it palliative? First funding priority is for products which cure

disease. 5. What is the complications profile? 6. What percentage of patients do well on therapy?

Use these criteria for reimbursement coverage and sophisticated benefit architecture

A Hypothetical Example: Statins Crestor: 50% coinsurance Lipitor: $40 Allowance Generic Mevacor: $15 co-payment Porridge: $5 coupon from CMS and the Scottish Parliament

Page 17

The Key Challenges for Bio Pharma

Price Re-importation is a symptom Cost-effectiveness in formulary design Reference pricing World pricing

Innovation Show me the molecules! Show me the safe molecules!

Value “Saving Lives and Stamping out Disease” Demonstrating Benefits that payers can detect and are willing to

pay for Value In use (in real life) not just in the idealized circumstances of

clinical trials

Page 18

Health Care Products & Services Rated on “Value For Money”

12%

14%

21%

24%

32%

35%

36%

36%

43%

63%

44%

31%

35%

38%

44%

39%

47%

45%

44%

28%

45%

55%

45%

38%

24%

26%

17%

18%

13%

9%

Nursing homes

Health insurance companies

Brand name prescription drugs

Hospitals

Pharmacies

Doctors

Vitamins and mineral supplements

Over-the-counter (non-prescription) drugs

Medical devices and equipment such as pacemakersand stents

Generic prescription drugs

Very Good or Fairly Good Value Not Sure/Average Value Somewhat or Very Poor Value

Page 19

Global Pharmaceutical Prices, 2001

0 50 100 150 200 250 300 350

Shanghai

New Zealand

Australia

Spain

Singapore

France

Germany

Sweden

Italy

Denmark

UK

Canada

US Fed Hosp

Japan

Switzerland

US HMO

US Pharmacy

International Price Comparisons, Australia =100, Fisher index

Source: Center for Strategic Economic Studies, Victoria University, Working Paper 19, Kim Sweeny, April 2004

Page 20

The Transformation of Pharmaceuticals

Discover a unique white powder Search for a therapeutic action Establish safety and efficacy Make sure it’s better than available

alternatives Promote to the profession Get a passive payer to pay for it

Design a white powder with a predictable therapeutic action

Establish safety, efficacy and cost-effectiveness

Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings

Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press)

Get an active payer to pay for it

Past Future

Page 21

% o

f P

atie

nts

Do nothing

Chronic pill popping

(Celebrex)

Me-too Fast Followers

& Generics

Higher PriceHigher Efficacy

InnovativeTechnology

$

Big Pharma Success

Heavy-duty traditional therapy

Evidence-based medicine

Consumer payment

Marketing

Demonstration of clinical efficacy

Traditional Pharmaceuticals vs. Advanced Therapeutics

Page 22

Happy Biotechnologist Scenario

We have the best stuff Sure it’s expensive, but it works Because it works there are savings elsewhere This is complex – do not try this stuff at home As generic competition makes costs go down for some

technologies, there will be more gross margin left for us Catastrophic drug coverage insulates consumers from caring

about price

Page 23

Biotechnologist’s Nightmare Scenario

Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom

It’s complex brewing not chemistry, but how hard could it be?

Big ugly buyers and providers incensed about price of technology

High efficacy focused on small sliver of needy, desperate patients

Can you pass the NICE/Kaiser Test? True Innovation will always be rewarded but payers

see innovation differently from pharmaceutical companies

Page 24

Scenarios for the Global Pharmaceutical Industry

High Technology for Human

Health

Harmonization

Division

High Innovation Low Innovation

Long Division

Consumer Empowerment

Global Harmonization

Page 25

High Technology for Human Health:Scenario Summary

Global acceptance of medical technology as the key to longevity and quality of life for the global baby-boom

Accepted definition of human health and well being extends to quality of life issues such as appearance, sexual function, and sense of well-being

The New Millennium belongs to molecular biology not silicon

The fruits of R & D creates new, innovative and cost-effective technologies

Page 26

High Technology for Human Health:How the Scenario Happens

Medical breakthroughs receive broad public acclaim Public opinion favors science and technology in creating

clinically superior outcomes that matter to individuals Proportion of population using and valuing health care

technology increases sharply Public health weaknesses exposed by bio-terrorism threats Growing understanding that pharmaceuticals, technology

and public health are the key Therefore, Aging baby-boom values both individual patient

interventions and broader population based societal responses such as public health (the selfish and the selfless) not just in the U.S. but around the world

Page 27

High Technology for Human Health:Industry Responses

R&D Intensive Pharmaceutical industry commits to using science, technology, and educational capacities to enhance human health and well being on a global basis Global Research Consortia (Sematech Model) established on basic

science, orphan drugs, AIDS and vaccines for the Third World Partnerships developed with public health stakeholders to measure,

monitor and manage chronic diseases (such as asthma and diabetes) and eliminate preventable diseases (such as tuberculosis)

R&D engine embraces new tools to create drugs faster, better, cheaper and works with global regulators to bring drugs to market faster

Promotion is based on science and clinical acceptance (pull model) not push model

The Public wants ScienceCare The Public wants science that is safe, effective and Green

Page 28

High Technology for Human Health:Industry Responses (continued)

Industry focuses DTC ads on compliance and public health issues as well as product marketing

Disease State Management reframed as a public health and compliance issue: optimal chronic care

Industry works with media, public opinion surveys and spokespersons to reinforce extended definition of health and well being to include end-points of well-being and quality of life. Focus on issues such as pain and cancer; appearance, anxiety and depression; mobility and active lifestyle enhancers, and sexual dysfunction.

Promote “Clinical Patient Bill of Rights”: pain free, optimal medication,compliance with prescribed treatment,and responsibility for healthy lifestyle

Page 29

Global Harmonization:Scenario Summary

20 year Global convergence of health systems: around universal tiered coverage with consumer payment

Healthcare R&D processes are globalized as regulators are harmonized and plug compatible in Europe, Japan, and U.S.

Pricing and costs more harmonized as global budgets in Europe and Canada are supplemented by consumer willingness to pay

In U.S. universal tiered coverage, and reference pricing by private payers leads to lessening of cost and price differentials with the rest of the world

Page 30

Global Harmonization:How the Scenario Happens

European Community harmonization of currency and regulation including pharmaceuticals leads to further globalization of R&D, pricing and finance

U.S. begins to adopt technology assessment and budget controls as inevitable components in the base programs of Medicare, Medicaid and basic private coverage

Europe, Canada and Japan accepts limits to social/mandatory insurance and embraces (reluctantly)a greater role for consumer payment and supplementary insurance

Page 31

Global Harmonization:Industry Responses

Pharmaceutical industry becomes a globally integrated business with global scale and cost structure Consolidation of the industry into four or five major companies R&D economies of scale particularly on development and

commercial market launches Global outsourcing to achieve economies of scale and scope U.S based experience with DTC, tiering, and pluralism pays huge

dividends in the emerging tiered markets of Europe and Japan The industry responds to a global healthcare business

Page 32

Five Industry Giants 2014

The Initial Company GSKBMSJ&J

The Latin Root Company AstraAventiNovarticus

The Mother of All PBMs Advanced MedcoExpress Care-Scripts

AmgenaMerck Biotech Baby eats an Adult

Pfizer

Page 33

Global Harmonization:Industry Responses (Continued)

Industry pushes for DTC ability in other countries

Industry leads and supports efforts to standardize and harmonize global regulatory processes

Industry supports tiering and public policy initiatives globally that make markets similar

Industry focuses on global efficiency and scale in all key areas finance, marketing, DTC, regulatory affairs, and R&D

Page 34

Long Division:Scenario Summary

Healthcare systems globally are caught between an unwillingness to raise taxes and consumer resistance to paying out of pocket for care or for supplementary healthcare insurance

Growing division between countries and within countries based on individuals ability to pay

Technology is very unevenly distributed based on the specifics of coverage and income

Desperate stakeholders such as poor countries, payers or patients use desperate measures such as electronic smuggling, ignoring IP rights, and rigid price controls or reference pricing to limit exposure to rising costs of drugs

Page 35

Long Division:How the Scenario Happens

Ability to pay for pharmaceuticals becomes a key issue for government, business and households around the globe in tough economic times

Consumers unwilling to pay much out of pocket for supplementary insurance or co-payments

When pushed to pay more, consumers trade down more often than they trade up

A cascade of “best pricing” responses take place: Large payers in U.S. want VA prices, governments like Canada want Indian prices

Many countries simply ignore patent and intellectual property claims

Page 36

Long Division:Industry Response The Pollyanna Alternative

The Pharmaceutical industry commits to making necessary drugs available to the neediest and to promoting the value of pharmaceuticals Industry supported drug coverage for the neediest groups particularly the

low-income elderly in the U.S. Free medicines for certain low income patients with chronic diseases DTC and marketing efforts concentrated on segmenting the population

based on need and ability to pay Industry unites to make the value of pharmaceuticals case and forestall

states, private payers, and nations who want to usurp intellectual property rights and pricing freedom

Global effort by industry and humanitarian groups to focus on providing AIDS drugs to the global community

Page 37

Long Division:Industry Response The Tough it Out Alternative

The Pharmaceutical industry fiercely defends their intellectual property rights using legal and macro-economic defenses Industry strongly supports intellectual property rights globally and

finds common cause with other high technology industries such as software and semi-conductors

Appeals to governments (particularly in Europe) that pharmaceuticals is a key element of the economic base for the 21st century

Industry defends right to set prices for new products Industry makes the value case, that R&D yields off-setting health

benefits

Page 38

Consumer Empowerment:Scenario Summary

Consumer Empowerment means the consumer has to pay more out of pocket

Globally consumers embrace the principle you get what you pay for in healthcare

But, drugs have become insurable events and consumers prefer implicit and explicit subsidies for their drug insurance coverage by employers and government

While some healthcare systems remain more socialized than others, healthcare consumerism grows globally

Consumers recognize the value of and demand access to specific healthcare technologies and brands

Consumers are willing to pay for care that they see as valuable (both as taxpayers, premium payers, and patients) provided the costs are shared among stakeholders

Page 39

Consumer Empowerment:Industry Responses

The Pharmaceutical industry commits to supporting the empowerment of consumers including consumers being asked to pay more (albeit with significant subsidies) for better health care technology, information and service

Industry works with consumer advocacy groups to encourage a larger patient voice and better insurance coverage for the care of chronic diseases

Industry supports supplementary coverage initiatives Industry comes to terms with open-access tiered formularies Industry supports efforts to increase the information available to

consumers e.g. multi-company disease-specific websites

Page 40

Consumer Empowerment:Industry Responses

Individual companies compete fiercely for hearts and minds of segments and individual patients

Disease State Management retooled for either genomic-based mass customization or public health improvement

Industry encourages market-based, consumer pay models globally

Industry accepts continued movement of potent medications to OTC? If not why not?

Page 41

Meeting the Business Challenge

Marketing Increased consumerism: reaching the patient Sales force Productivity Doctors as economic gatekeepers for patients Tiering will continue: positioning products in tiers Coverage and contracting: PBM negotiations become more complex

Development Global role of payers in the development process e.g. NICE and reference pricing Embedding market understandings in go/no go decisions Regulatory and reimbursement hurdles become more complex

Research New science versus traditional R&D R & D Productivity and the only 2 problem

Page 42

Little R, Big D, Enormous M

PBMs

Pharmacists

Payers

Patients

Physicians

Marketing

R

R

R

R

R

R

R

R

Development

Big Pharma

Selected Partnerships

Page 43

Innovation Imperatives

Consumers love new technology Innovation is your ace in price control debates But if you don’t truly innovate in a way consumers appreciate

and pay for……. The new environment shifts responsibility for payment

increasingly and transparency of pricing to consumers Delivering innovation to an end user consumer that has value

they are willing to pay their own money for Do not overestimate (even) Americans willingness to trade up Are we comfortable with overt tiering?

Page 44

Implications

Value needs to be demonstrated everywhere but increasingly in the US

Cost-effectiveness in end use will be a hurdle that payers will use to decide on reimbursement

Patients will be engaged through benefit design and incentives The Coming Development Paradox

Even though we are all moving in the same direction the development process will become more complex and pluralistic because payers are demanding more and more sophisticated information

None of this will make drug development any cheaper The Industry will need to radically redesign its own strategy and

business processes

Page 45

The New Business Model: Some Final Thoughts

Demonstrated Scientific Innovation will always win Payer sensitive innovation

Novel Clinical pay-off compared to all available therapies Payer’s dream: reduction in PMPM cost for therapy

Radical restructuring of the sales and marketing function Focus on evidence and guidelines Consultative selling Reduction in traditional channels Making the value case to end user consumers Focus sales effort on compliance, adherence and persistence

among chronically ill not just new Rx Conditional Approval to Market Entry

Monitoring in real clinical use Reference Pricing

Global Scale, Global Pricing, Global Product Launches It is still a great business