Forces for Change

Forces for Change

High drug prices, a failing public image, generics-friendly legislation, and a dearth of innovation are forcing M&As, outsourcing, and radical thinking for Pharma.  PBMs are being called to the table for their drug pricing margins. And, get out your glow sticks, because SXSW is the new frontier for Pharma and Tech match-making.

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,

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.

Pharma Evolving

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 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.

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J.P. Morgan 2017 and FDA Chair Possibilities

This week, the ‘super bowl’ of biotech J.P. Morgan 2017 kicked off in San Francisco and Senate confirmation hearings on Trump nominees began in DC. While there is no official nominee for FDA chair, Jim O’Neill and Scott Gottlieb are under discussion.  Either way, the new Chair is likely to oversee much needed changes to our drug approval process.

National Cancer Institute Drug Formulary

At J.P. Morgan, Vice President Joe Biden spoke in favor of transparency and cooperation among cancer researchers as the fastest way forward and highlighted the National Cancer Institute Drug Formulary. The formulary is a public-private partnership with 20 – 30 pharmaceutical and biotech companies intended to facilitate research on new purposes, new compounds, and new combinations. The NCI Formulary is set to open next week.

No FDA Nominee on the Senate Confirmation Hearings Schedule YET

Trump’s intent for the FDA is not yet clear but he has indicated a focus on reform with an eye toward innovation and patient need which is consistent with the recent 21st Century Cures Act. Tech Pay Pal mogul Peter Thiel has been identified as someone involved in vetting the candidates.

Current estimates show that it costs over $2.5B and 12 years to move an innovative new pharmaceutical through the testing and approval process. No only do patients not gain access to life-saving drugs during these lengthy cycle-times, but these costs are translated into the very controversial pricing of drugs. So, with Trump’s focus on encouraging innovation while reducing overall drug prices (and costs of overall healthcare), it is no wonder that more progressive candidates are being considered.

Jim O’Neill

In a 2014 speechJim O’Neill, a colleague of Peter Thiel’s and an unconventional FDA Commissioner candidate, outlined the following perspective: “We should reform FDA so there is approving drugs after their sponsors have demonstrated safety–and let people start using them, at their own risk, but not much risk of safety. Let’s prove efficacy after they’ve been legalized.”  

Current regulators may struggle to translate what this type of wild, wild west concept for drug approvals would really look like. Yet, rare disease patient groups have been advocating for this model for many years. Sarepta’s Duchenne drug approval in 2016 shows encouraging transformation of the agency towards a more progressive model; Janet Woodcock is truly the hero.

While O’Neill is currently managing director at Mithril Capital Management, this is not his first trip to Washington. He is the the former HHS Deputy Secretary under George W. Bush.

Many are voicing concerns over O’Neill’s revolutionary thoughts and lack of medical background for the FDA post. If he were to be confirmed, it is predicted that it would cause disturbances at the agency and limit his effectiveness to do the transformative work that is needed.

OR Scott Gottlieb

Fan favorite Dr. Scott Gottlieb is also being vetted. Gottlieb has already done a tour of duty at the FDA and has been actively influencing policies regarding the recent 21st Century Cures Act. During a speech to the Energy and Commerce Committee, Gottlieb stated that “regulators made the barriers higher, not lower” and encouraged “as we improve our scientific understanding of rare diseases, and our ability to target their molecular origin, we’ll have more opportunities to treat and even cure the rarest disorders.”  

A partner at venture capital firm New Enterprise Associates, fellow at the conservative think-tank the American Enterprise Institute, Gottlieb is an outspoken critic of the Affordable Care Act and has deep ties to the pharmaceutical industry.

Some feel he is the better choice. He will push for and encourage change at the Agency. But, will it be transformative or fast enough for Trump?

Navigator: IBM’s Watson Health, Kaspersky Security Analyst Summit & Cybersecurity

The nexus of healthcare, life sciences, and technology is expanding at an accelerated rate. This week’s Navigator highlights a real-life cybersecurity attack on a hospital (with a bitcoin ransom, no less), perspectives on standardizing medical device regulations, and bold moves by IT companies wanting to expand into the healthcare sector.


Warm Regards,

Kristin Eilenberg
Founder and CEO

News In The News
Distilling Noise into Specific Signals

IBM’s Watson Health is set to get a bit bigger in 2016 – Make that nearly twice as big. International Business Machines Corporation announced early on February 18 that they would be purchasing Truven Health Analytics for $2.6 billion. Debora DiSanzo announced in the press statement that with the acquisition of Truven “IBM will be one of the world’s leading health data, analytics and insights companies.” As a vendor that manages healthcare data, one of the biggest challenges IBM faces is control and security of these sensitive data sets.

The Kaspersky Security Analyst Summit (SAS) 2016 (Lodescores: E4, BD5, N5) held February 7-11, highlighted how hospitals are very susceptible to cyber attacks as demonstrated by Kaspersky Lab’s Sergey Lozhkin. Lozhkin presented at SAS on how he successfully hacked his own hospital by finding a weak point in the free hospital wifi and infiltrating a tomographic scanner that was connected to it. Both hospital managers and medical equipment developers should be alarmed at the amount of work that needs to be done in securing medical equipment.

Luckily Sergey Lozhkin was not a real hacker, but the problem does not dwell in the hypothetical. On the evening of February 17, 2016 Hollywood Presbyterian Medical Center Officials announced that they paid hackers a ransom of $17,000 in Bitcoin to reclaim control and access over captured data. The hospital decided that the quickest way to regain access would be to pay the hackers, after the computer system was hijacked by a low-tech ransomware, which locked them out of their own networks. The CEO announced there is no evidence that patient data was accessed in the attack.

These attacks showcase the vulnerabilities in the healthcare sector. Scott Erven, a security advocate for medical devices, spoke at SAS on how healthcare is 10 to 15 years behind retail in regards to security. Sooner or later, Ervan warned, things will come to a breaking point.

The Institute for Critical Infrastructure Technology released a report on February 17 calling for regulatory enforcement from the FDA for medical devices. The report cited the “suggestions” from the FDA are not enough protection and that enforceable regulations are needed for manufacturers. Regulatory involvement and oversight has challenged the speed of innovation of new medical devices. However, with the threats of inappropriate access to these devices, standards need to be established and enforced to protect patients and potential life-threatening consequences of the hacking of these devices. This is an ongoing issue as the vulnerabilities of medical devices to hackers was demonstrated at Black Hat back in 2013.

Security is not a backseat issue as the push towards digital transformation, or digitization as it is beginning to be known, is growing across all sectors of business, and the healthcare sector is no exception. Cisco Live Berlin (Lodescores: E4, BD4, N5), which took place February 15-19, focused on how digital growth will allow companies to grow faster and gain competitive edge.

Cisco Live emphasized that part of this digitization is the importance of focusing on the digital customer experience. Customers want access to virtual experts, often through using mobile apps. Although hospitals should proceed with caution. Accenture released a report earlier this year that badly designed apps have the potential to cost hospitals $100 million a year. In-house designed apps infrequently offer what consumers want (access to medical record, ability to schedule and cancel appointments, etc.), and hospitals should instead implement a patient centered approach in app development.

Lodestone Insights is tracking over 5,000 conferences in the life sciences, pharmaceutical, business, and technology sectors. We provide several web-based products to help business leaders make more informed and strategic decisions.

Our proprietary indices rank the conferences by Educational (E), Business Development (BD), and Networking (N) opportunities, and allow you to compare multiple conferences at once.

Noteworthy conferences in Healthcare and Technology coming up:

  • HIMSS 2016: February 29-March 4, 2016 (Lodescores E4, DB4, N4)
  • Medical Informatics World Conference: April 4-5, 2016 (Lodescores: E3, BD5, N5)
  • 13th Annual Health Information Technology Summit: April 10-13, 2016 (Lodescores: E3, BD3, N4)
  • Becker Hospital Review 7th Annual Meeting: April 27-30, 2016 (Lodescores: E4, BD4, N5)
  • 10X Medical Device Conference: May 2-4, 2016 (Lodescores: E3, BD3, N4)
  • Health Datapalooza: May 8-11, 2016 (Lodescores: E2, BD5, N5)