That innovative industry that played a huge role in lengthening our life spans has become the one everyone loves to hate. According to a recent Gallup poll, pharma and healthcare are at the bottom of the barrel when it comes to public opinion. Rounding out the bottom three is the Federal Government, which has joined in on the Pharma finger pointing. Our health care systems are losing money and insurance is becoming unaffordable. Both are in part due to the high cost of pharmaceuticals.
In some ways, we are the victims of our own life spans. More of us are living longer. The percentage of people over age 65 is 8.5% and projected to grow to 17% by 2050. With age come chronic and expensive health problems. That dynamic, in concert with the pharmaceutical industry’s struggles and a broken drug pricing system have created the perfect storm. Effective strategies for decreasing health care and pharmaceutical costs while the population ages will require more than cost shifting. It will require careful examination of the causes of escalating prices, targeted solutions, and innovation that requires pharma to think differently.
Too Many Expenses, Too Little Innovation
A recent analysis of 13 historically big pharma companies found that R & D expenses that are not off-set by sales of new products; an over reliance on off-patent drugs, price increases and marketing strategy; and a lack of focus on innovation from leadership on down. In short, there is too much focus on the status quo, too little risk-taking without the promise of a quick pay-off, and too few bold thinkers (trouble-makers).
‘Thus, the conundrum of big pharma is as follows: most companies are not innovative enough to live solely from their innovation. Eight (out of 13) depend upon off-patent drugs for one-third to two-third of their revenues. That in turn has slanted their leadership toward processed-focused leaders, who are deft at offsetting their innovation deficit with legacy sales, but not so good at boosting innovation to sustainable levels. It’s a vicious circle that has been tough to break.’ Bernard Munos, Forbes.com
American Consumers and Politicians are Angry
Some in the U.S. Congress are counting on the free-market as the best solution to spur innovation and bring drug prices down. They paint pharma as an industry in fear of being out-innovated and desperate to maintain control over drug markets. Recent testimony to the House Oversight Committee on Health Care, Benefits, and Administrative Rules pointed to pharma abuses of the regulatory process and other acts to maintain monopolistic prices. Ted Cruz (R-Texas) recently introduced a bill to permit drug importation as a means of forcing pharma to price competitively. Mike Lee (R – Utah) will soon introduce the CREATES Act, which will make it easier for generic drug manufacturers to get the formulae for off-patent drugs.
Historically Huge Price Increases in the U.S are NOT from All Pharmaceutical Companies
Several companies have voluntarily signed a pledge to limit price hikes including: AbbVie, Merck, Novo Nordisk, Takeda, Johnson and Johnson, and Allergan. Chicago-based pharmaceutical company AbbVie joined the price hike pledge at the J.P. Morgan Healthcare conference. Apparently, there was quite a bit of pricing talk at the conference with some mocking the 10% limit as still above the rate of inflation. Others are just not fans at all. Notably, Mylan CEO Heather Bresch said that a 10% increase is not the answer.
Also at JP Morgan, then head of Novo Nordisk’s North American operations, Jakob Riis called out the drug supply chain that routes drug purchases through pharmacy benefit managers, other payers, wholesalers, and pharmacies for their roles in higher drug prices.
Pharmacy Benefit Managers Role in Price Hikes
While drug makers are the most often blamed for escalating drug costs in America, the middle men, the Pharmacy Benefit Managers (PBM) are increasingly in the cross hairs of investigators for their role in excessively high drug prices. An analysis of drug expenditures in 2015 commissioned by PhRMA found that non-manufacturing stakeholders, which includes PBMs took in 31% of the total, approximately $142.8 billion dollars. PBMs negotiate discounts with manufacturers, contract with pharmacies, and process prescription drug claims. Over time, many believe that PBMs have morphed from a focus on cost containment to operations that harm American pharmacies, payers and consumers. Competition has decreased over the years and there are currently just 3 PBMs that control approximately 80 – 85% of the American market.
Express Scripts, recently purchased by CVS Health, has had several law suits filed by pharmacies alleging they were deprived of access to markets. Recently there have been multiple allegations that Express Scripts, CVS Health, Optum RX and Prime Therapeutics have colluded to drive certain pharmacies out of business. More telling than the flurry of lawsuits are indications that drug prices are better for companies that don’t use the big PBMs. Ten years ago, Caterpiller moved away from Pharmacy Benefit Managers and has seen a decrease in drug costs while the rest of us have seen spiraling costs. Last year, Anthem sued Express Scripts when the payer realized that they were not getting competitive pricing. Leary of the big 3 PBMs, some companies are switching to smaller, more transparent companies that charge a flat fee.
While the big PBMs deny the allegations against them, when DIY and boutique PBMs outperform big companies, something is off. One thing seems clear; the American drug pricing system is broken and high prices cannot just be blamed on big pharma greed. A bi-partisan bill introduced by Congressman Doug Collins (R-GA) this month requires greater transparency from PBMs.
Returns on R & D for the biggest companies have fallen to the lowest level in 6 years and are expected to fall further. To offset the cost of R & D and increase successful innovation many companies have opted for mergers, acquisitions and partnerships. Pharmaceutical M & A have focused on intellectual property, sales force efficiency, streamlining R & D, and reorganizing. Companies are expected to continue to downsize R & D and purchase rights to potential blockbuster drugs. Outsourcing partnerships, particularly for clinical trials which account for the largest chunk of R & D costs, are expected to grow to somewhere between 55% – 70% over the next ten years. Additional trends include increased and better use of analytics, data-centered tools to improve protocol design.
Some companies have begun to address what they have identified as internal obstacles to innovation including incentives to prolong dubious drug development programs. They are further shaking things up by recruiting scientists who rebel against bureaucracy, and placing nonscientists into drug development roles to come up with fresh ideas.
The Most Innovative Companies
According to a recent analysis of 2015 sales from newly approved drugs by Forbes Magazine Johnson & Johnson and Bristol-Myers Squibb are leading innovators. The overall picture though, is of an industry that is still struggling. Another analysis by IDEA Pharma noted that 7 of the 13 historically big pharma companies who received 14 FDA approvals in 2015, received none in 2016. Innovation, they note may be increasingly driven by smaller, more agile companies such as those that received 14 of the 22 FDA approvals in 2016.
Going Boldly Where No Pharma Has Gone Before.
Pharma’s next mission is to seek out new cost efficiencies and innovation so it’s not surprising that pharma companies are partnering with tech companies as another area for growth. Many companies partner with startups as well as large tech companies.
The Pharma ranks were a noticeable presence at this month. Whether digiceuticals or beyond the pill tech to enhance the effectiveness of their products, partnership and investment opportunities at SXSW make the conference a good fit for pharma.
Collaboration was also evident in the speakers. For example, representatives from the Dell Medical School at UT Austin, IBM Corp, and Johnson and Johnson were on a panel with the topic: Collaborative Innovation in the Digital Age.
Pharma stepping outside the box at conferences like SXSW will fuel innovation not just for their industry but for those they collaborate with. People need to learn about each other and their businesses. The silos need to come down but it will take work because this is real life.
A post by Janelle Starr at PharmExec.com illustrates this issue nicely. She was listening to an investor describe how he’d met with 100 start-ups and funded none of them because they had assumptions about the market forces that were false. So, it was a surprise to her when she realized that the investor himself demonstrated a knowledge of healthcare that was no better than those he was criticizing.
Going boldly can be embarrassing when you already think you know it all.