Pharma 2020 - The Vision

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The vision for the future of the pharmaceutical industry.
Article by PricewaterhouseCoopers.

Published in: Health & Medicine, Business

Pharma 2020 - The Vision

  1. 1. PharmaceuticalsPharma 2020: The visionWhich path will you take?**connectedthinking pwcPharma 2020: The vision #
  2. 2. Table of contentsIntroduction 1A growth market 2Emerging opportunities 3Compound crisis 5External barriers to innovation 8Mixed signals 9The bill for every ill 10Washington blues 12Blurring healthcare boundaries 14Pay-for-performance 16Medicines for different markets 18Healthy habits and fab jabs 19Sticking to the rules 21What’s in a name? 24The need for a dynamic new approach 27Access to basic research 28Pharmaceutical research 29Pharmaceutical development 31Regulation 33The supply chain 36Sales and marketing 38Conclusion 40Acknowledgements 42References 43# `PricewaterhouseCoopers
  3. 3. Introduction Demand for effective medicines is At the start of the decade, many rising, as the population ages, new people thought that science would medical needs emerge and the come to the industry’s rescue and disease burden of the developing that molecular genetics would reveal world increasingly resembles that numerous new biological targets, of the developed world. The E7 but the human genome has proved countries – Brazil, China, India, even more complex than anyone Indonesia, Mexico, Russia and first envisaged. It is no longer the Turkey – are also becoming much speed at which scientific knowledge more prosperous, with real gross is advancing so much as it is the domestic product (GDP) projected healthcare agenda that is dictating to triple over the next 13 years. By how Pharma evolves. 2020, the E7 could account for as much as one-fifth of global sales. The first part of our report highlights a number of issues that will have a Yet the biopharmaceutical sector major bearing on the industry over (Pharma) will find it hard to capitalise the next 13 years. The second part on these opportunities unless it covers the changes we believe can change the way in which it will best help pharmaceutical functions. Its core problem is lack companies: of productivity in the lab. Several • operate in this new milieu external factors have arguably exacerbated the industry’s • realise the potential the future difficulties, but the inescapable holds; and truth is that it now spends far more • enhance the value they provide on research and development shareholders and society alike. (R&D) and produces far fewer new molecules than it did 20 years ago. The shortage of good medicines in the pipeline underlies many of the other challenges Pharma faces, including its increasing expenditure on sales and marketing, deteriorating financial performance and damaged reputation.Pharma 2020: The vision 1
  4. 4. A growth market strains of some existing illnesses. The US Centers for Disease Control and Prevention (CDC) estimatesThe bottom line: Demographic, epidemiological and economic shifts are transforming that more than 70% of US hospitalThe global market the pharmaceuticals market. infections are resistant to at least one of the antibiotics most commonly The population is growing andfor medicines is aging; new areas of medical need used to treat them.5 And medical research has exposed problemsgrowing, although are emerging; and the diseases from which people in developing that were previously unidentifieddemand is moving countries suffer are increasingly – including risk factors like metabolic like those that trouble people living syndrome and conditions liketo different in the developed world. These chronic fatigue syndrome, whichtherapeutic areas, changes will generate some huge opportunities for Pharma. recent evidence suggests is linked to changes in gene expression in thea shift that global The global population is projected white blood cells.6warming could to rise from 6.5 billion in 2005 to 7.6 billion in 2020. It is also aging Meanwhile, new diseases, including mutated forms of old diseases, areaccelerate rapidly; by 2020, about 719.4m surfacing. Urbanisation and greater people – 9.4% of the world’s mobility have contributed to the inhabitants – will be 65 or more, introduction of new pathogens, compared with 477.4m (7.3%) two some of which spread very fast years ago.1 Older people typically and are very difficult to treat. SARS consume more medicines than moved from Asia to North America younger people; four in five of and Europe in a matter of days. those aged over 75 take at least Similarly, the H5N1 avian flu virus one prescription product, while has spread from China and South 36% take four or more.2 So the East Asia to the Middle East. The grey factor will boost the need for human cost has been tiny so far, but medicines dramatically. the impact of an avian flu pandemic Clinical advances will reinforce this could be enormous. trend. The improvements of the Global warming could also have past few decades have already a major effect on the world’s converted some previously terminal health. In February 2007, the illnesses into chronic conditions, thus Intergovernmental Panel on Climate increasing long-term demand for Change (IPCC) reported that the therapies to manage such diseases. global average temperature had The number of deaths from heart increased by about 0.2°C per attacks has declined by over 50% in decade between 1990 and 2005. most industrialised countries since The IPCC projects that the average the 1960s,3 for example, while five- temperature will increase by another year survival rates for US patients 0.2°C per decade for the next two with cancer (expressed as an average decades, even if the concentration for all sites) have risen from 53% in of all greenhouse gases remains the mid-1980s to 66% today.4 constant at year 2000 levels, and Demand for new anti-infectives that it will “very likely” increase is also mounting, with the still more, if mankind’s output of development of drug-resistant greenhouse gases continues to rise.72 PricewaterhouseCoopers
  5. 5. It is currently impossible to predict Emerging opportunitiesthe full impact of a change in India’s insulin dependenceglobal weather patterns, or even The markets of the developing world The number of Indians with diabetes isto be absolutely certain that man- are altering even more radically than projected to reach 73.5m in 2025. Themade pollutants are causing the those of the developed world. At direct and indirect costs of treating suchchange. But many scientists believe one time, infectious diseases were patients are currently about $420 perthat global warming could bring the biggest killers. This is still true of person per year. If these costs remaineddiseases such as malaria, cholera, the same as they are now, India’s total bill sub-Saharan Africa and South Asia.diphtheria and dengue fever to for diabetes would be about $30 billion by But, elsewhere, chronic diseases are 2025. But as its economic wealth growsmore developed regions. Cases of now the leading cause of death,11 and standards of care improve, treatmentmalaria have now been reported in a pattern that will become even costs are likely to rise.Azerbaijan, Corsica, Georgia and stronger as the population of theTurkey, where the disease was developing world gets older, fatter The US spends an average $10,844 pereradicated after World War II.8 year on each patient with diabetes. If and less physically active. India’s per capita expenditure rose to justSpecialists argue that most vector- Two specific instances illustrate just one-tenth of this level, the total cost ofborne diseases are unlikely to how much the epidemiological profile treating all patients with diabetes wouldbecome a major threat in North is shifting. In 2004, an estimated be $79.7 billion by 2025. The value ofAmerica or Western Europe, where prophylaxis in India alone would thus 639m people living in developingthe climate is cooler and better be substantial; preventing 10% of the countries suffered from hypertension. population from developing diabetespreventative measures are in place. By 2025, the number is forecast to would save nearly $8 billion a year.The greater danger in such regions reach at least one billion – more thanis an increase in respiratory illnesses twice the projected rate of increaselike asthma and bronchitis, since in that same population over thehigher levels of greenhouse gases same timeframe.12 The picture is veryare expected to boost the pollen similar when it comes to diabetes.production of ragweed and other The number of people with diabetescommon allergens.9 in developing countries is expectedBut numerous other medical to rise from 84m in 1995 to 228mproblems could also emerge in 2025, with India, the Middle Easteverywhere, because even a small and South East Asia bearing therise in temperature accelerates worst of the burden (see sidebar,the proliferation of many common India’s insulin dependence).13bacteria. The replication rate of Demand for medicines that treatSalmonella increases by 1.2% illnesses formerly associated almostper degree above minus 10°C, for exclusively with the developed worldexample, while the replication rates is thus expanding in the developingof Campylobacter (one of the most world, at the same time that somecommon causes of gastroenteritis) countries are becoming increasinglyand E. coli increase by 2.2% and affluent.6%, respectively.10 The E7 countries look especiallyIn short, all these changes are attractive. Our economic modellingcreating new openings for Pharma. suggests that the real GDP of theSome of them may be in different E7 countries will triple from UStherapeutic areas. But demand for $5.1 trillion in 2004 to $15.7 trillioninnovative medicines for old and in 2020, whereas that of the G7new conditions alike is growing, not countries will grow by just 40%, fromshrinking.Pharma 2020: The vision 3
  6. 6. Figure 1: The E7 economies will treble their real GDP by 2020The bottom line: 18,000 G7 Countries E7 Countries GDP (US$ Billions) 16,000The diseases of 14,000the developing 12,000 10,000world increasingly 8,000resemble those 6,000 4,000of the developed 2,000 0world, and greater S n ce a na Ru ia ia o Tu ia il y ly ey K az an ad pa ic U U Ita d ss s rkaffluence is making an hi ne In ex Br m an Ja C Fr do M er C G In 2004 2020 forecastsome countries Source: PricewaterhouseCoopers Macro Economic Consulting Groupmuch more Notes: 2004 estimates based on World Bank World Development Indicators database (except China, which was adjusted for a later large data revision); 2020 projections based on our modelattractive markets $25.8 trillion to $36.1 trillion.14 Their However, this is probably too wealth relative to that of the G7 will conservative an estimate. The richer rise from 19.7% to 43.4% over the countries become, the more they same period (see Figure 1). tend to spend on healthcare. The E7 populations are also aging faster In 2004, the E7 countries spent than those of the G7; by 2020, 0.94% of their GDP on prescription 338m of the people living in the E7 medicines (although the precise countries will be at least 65 years of percentage varied from one state age, compared with 152.8m of the to another). They collectively people living in the G7 countries.16 accounted for 8% of the $518 But the G7 countries will still be billion global market.15 The G7 more than twice as wealthy as the countries, by contrast, spent 1.31% E7 countries, and better able to of their GDP on medicines and afford the higher healthcare costs accounted for 79% of all sales. associated with an aging population. So, if all 14 countries continue So it is likely that both the G7 to spend the same proportion of and the E7 countries will spend a their GDP on medicines as they larger proportion of their GDP on do now (and if their GDP grows medicines than they do now. But the as we have projected), the global rate of growth in the G7 economies pharmaceuticals market will be will almost certainly be much slower worth about $800 billion in 2020, than it is in the E7 economies – and and the E7 countries will account that disparity could eventually make for about 14% of sales. a significant difference.4 PricewaterhouseCoopers
  7. 7. Suppose, for instance, that the G7 industry’s total shareholder returns is still struggling to apply thepharmaceutical markets grew by (TSRs) would plummet, unless it insights it has gleaned from thebetween 5% and 7% a year, while could “industrialise” its R&D.17 Our molecular sciences – genomics,the E7 markets grew by between forecasts were borne out by 2002, proteomics, metabonomics and the10% and 15% a year, for the next with the publication of “Pharma like – to improve its performance.13 years. By 2020, the global 2010: The threshold of innovation”. In 2006, North American spendingpharmaceuticals market would be The Pharma 2010 report contended on biopharmaceutical R&D reachedworth about $1.3 trillion, with the E7 that the industry’s best hope of a record $55.2 billion (and the UScountries accounting for about 19% earning higher returns lay in the accounts for about three-quartersof sales. China would be the second development of packages of of global expenditure in this area).or third biggest market in the world, products and services targeted The member companies of theand Turkey and India might well be at patients with specific disease Pharmaceutical Research andin the top 10. subtypes and that, if it was to make Manufacturers of America (PhRMA) such “targeted treatments”, itOne thing is clear from these spent an estimated $43 billion, while would have to start by focusing onbroad-brush calculations; the non-member companies spent diseases rather than compounds.18financial clout of the E7 countries another $12.2 billion.19 But the USis improving significantly. The However, the human genome has Food and Drug Administration (FDA)economic, demographic and proved more complex and less approved only 22 new molecularsocial changes of the next decade amenable to mechanistic analysis entities (NMEs) and biologics, a farwill make them very much more than many scientists anticipated, cry from the 53 it approved in 1996appealing places in which to make when the draft map was completed when R&D expenditure was less thanand market pharmaceuticals. in 2001. Hence the fact that Pharma half the sum it is now (see Figure 2).20Compound crisisYet Pharma will not be in a strong Figure 2: R&D spending has soared but the number of NMEs and biologicsposition to capitalise on these approved by the FDA is downopportunities, unless it can change 50,000 60 No. of NMEs and Biologics Approvedthe way in which it operates. Its R&D Spending (US$ Millions)core problem is lack of innovation 45,000 50in making effective new therapies 40,000for the world’s unmet medical 35,000 40needs. Medicines have helped many 30,000individuals enjoy longer, healthier 25,000 30lives. But, as the global population 20,000becomes older and more prosperous, 15,000 20people’s expectations are rising – and 10,000the industry is finding it increasingly 10difficult to fulfil their hopes. 5,000 0 0We predicted that this would 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005* 2006*happen when we published “Pharma * includes Biologics2005: An Industrial Revolution” in R&D Spending NMEs and New Biologics Approved1998. We argued that the safety,efficacy and cost-effectiveness Sources: FDA/CDER Data, PhRMA data, PricewaterhouseCoopers analysisof new medicines would attract Note: Data on R&D spending for non-PhRMA companies are not included here, because they are notgrowing scrutiny, and that the available for all 11 yearsPharma 2020: The vision 5
  8. 8. Figure 3: Only five of the top Pharma companies generate more than 10% of Even allowing for inflation, thetheir revenues from products that were launched in the last five years industry is investing twice as much in R&D as it was a decade ago 35 to produce two-fifths of the new 30 medicines it then produced.21 25 Moreover, only nine of the new treatments launched in the US in % Sales 20 2006 came from the labs of the 13 companies that comprise the 15 Big Pharma universe,22 a pattern 10 that has changed very little over the past few years. Our analysis 5 shows that, in 2006, only two Big 0 Pharma companies earned more ABT AZN BMY GSK JNJ LLY MRK NVS PFE ROG SGP SNY WYE than 10% of their revenues from % Sales in last 3 Years % Sales in last 5 Years “major”products that are less than three years old.23 Worse still, thoseSources: IMS Health and PricewaterhouseCoopers analysis 38 products generated only $10 billion of the $316 billion Big Pharma earned from its entire medicines portfolio.Figure 4: Big Pharma delivered weighted average total shareholder returns of The situation is little better over a-2.4% per annum between January 2001 and March 2007 five-year timeframe. In 2006, only five Big Pharma companies earned more than 10% of their revenues 80 from major products launchedTotal Return (%) Jan 2001- Mar 2007 after 2001, and those 65 products 60 generated sales of only $30.4 40 billion (see Figure 3). Thus more than 90% of Big Pharma’s total 20 Avg. Weighted pharmaceutical revenues came Return 0 from medicines that have been on the market for more than five years. -20 Yet the patents on many of these -40 products are due to expire quite shortly, exposing an estimated $157 -60 PFE GSK SNY NVS AZN JNJ ROG MRK WYE BMY ABT LLY SGP billion worth of sales (measured in 2005 terms) to generic erosion.24Sources: Yahoo!Finance, PricewaterhouseCoopers analysisNote: Total returns have been calculated for the period January 2, 2001- March 30, 2007, with theexception of Sanofi (now sanofi-aventis) where the total return has been calculated from February 7, 2002.The weighted average return is based on the market capitalisation in 20016 PricewaterhouseCoopers
  9. 9. The revenues the industry leaders Industry (ABPI), have also launchedgenerate have also come at a very new codes of practice imposinghigh price. Between 1995 and 2005, much tighter rules on the promotionthe percentage of total corporate of medicines.28 And, in late 2003, The bottom line:spending accounted for by R&Drose from 15% to 17.1%, while Spain’s Autonomous Regions introduced restrictions on the Pharma mustthe percentage accounted for bysales and general administration number of promotional visits sales representatives can make.29 improve its R&Drose from 28.7% to 33.1%. Sales In short, Pharma’s lack of R&D productivity, if it isand marketing is by far the biggestcorporate expense.25 productivity lies at the root of many of the other difficulties it is now to meet the world’sThis increasing expenditure onsales and marketing could be experiencing – difficulties that are reflected in its poor financial record unmet medicalseen as yet another sign of the over the past few years. Between needs and capitalisepaucity of innovative medicines 1985 and 2000, the industry’sreaching the market, since it is market value increased 85-fold, on the marketarguable that products for which far outpacing the stock market asthere is real demand do not need a whole.30 But in the six years to opportunities nowto be heavily promoted. However, March 30, 2007, the FTSE Globalit has generated considerable Pharmaceuticals Index rose just emergingcriticism, too. In a survey of 1.3%, while the Dow Jones Worldindustry stakeholders conducted Index rose by 34.9%. Big Pharma’sby the PricewaterhouseCoopers TSRs followed the same downwardHealth Research Institute, 94% path; between January 2001 andof the respondents said that March 2007, it delivered weightedpharmaceutical companies spent average TSRs of -2.4% a year (seetoo much money on advertising.26 Figure 4).Six US states have now passed “giftlaws” requiring all pharmaceuticalcompanies to disclose how muchthey give doctors, hospitals andpharmacists each year, whileanother 15 states have similar billsin the offing.27 Several Europeantrade bodies, including thePrescription Medicines Code ofPractice Authority of the Associationof the British PharmaceuticalPharma 2020: The vision 7
  10. 10. External barriers to The international laws governing innovation intellectual property rights have compounded this conservatism. AtThe bottom line: Pharma’s R&D processes have present, all patents last 20 years,The legal framework become so complex – even regardless of the quality of the intellectual property they protect. cumbersome, indeed – that it isin which Pharma hardly surprising its productivity has But if prophylactics and novel products serving an unmet medical tumbled. Nevertheless, severaloperates must be political, legal and financial factors need were granted longer patent have arguably contributed to the lives, while me-too medicines andaltered to promote problem. Most pharmaceutical new formulations were granted shorter patent lives, pharmaceuticalinnovation and companies use internal valuation mechanisms to assess the clinical companies would have a direct incentive to become morediscourage imitation and commercial potential of the compounds in their pipelines, innovative.32 and select the ones they want to Determining which therapies were pursue. In other words, like other worthy of longer patent lives might organisations that are answerable sometimes be difficult. If, say, 20 to shareholders, they “follow the new cancer treatments reached the money”. market within a few months of each But when they start developing other, it might be hard to decide a new medicine, they do not which were the most deserving know whether it will be eligible – let alone who should make that for reimbursement if it reaches judgement. But, given the typical the market, unless it addresses product lifecycle, we estimate a disease for which there is no that an extra five years of patent existing treatment or looks likely life would increase the cash flows to prove much better than any from a truly innovative medicine by comparable therapies. And, in most between 50% and 100%, depending countries, they are not allowed to on how vulnerable it is to generic seek guidance from the relevant erosion.33 government agencies. That, in turn, would furnish Many firms therefore try to minimise governments with much stronger their risks by “playing it safe”. The grounds for arguing that the prices Centre for Medicines Research of such products should be reduced International reports that, in 2004, and thus brought within reach of more than 20% of the money many more patients, since the 10 of the largest pharmaceutical industry would have a longer period companies invested in R&D went in which to recover its investment. on line extensions and other work, Indeed, there may even be a case as distinct from new development for extending the patent lives of projects. In smaller companies, the groundbreaking vaccines like percentage was over 40%.31 Gardasil to 50 years or more, on the understanding that they are priced at levels which are universally affordable.8 PricewaterhouseCoopers
  11. 11. Mixed signals three NMEs a year. Most companies value when its pipeline is valued subsequently acknowledged that differently by different analysts. AndThe political and legal framework these aspirations were completely it is more tempting to maximise thein which Pharma operates has thus unattainable. But, in repeatedly number of candidate molecules indeterred it from taking some of the altering the targets they then set Phase III, even though it would berisks that are required to produce themselves, they have failed to better to weed some of them outgenuinely innovative new therapies. give the investment community at an earlier and cheaper stage ofIts communications with the capital a clear idea of what to expect. development.markets may have muddied the Attrition rates in Phase II have also These are by no means the onlywaters still further. The preliminary deteriorated significantly over the problems. Analysts also look forresults of some research we recently same period.34 The variations in the evidence of sustainable returns. Butconducted show that there are value different analysts place on most pharmaceutical companies’significant variations in the value pipelines are entirely understandable revenues are becoming muchthe top city analysts accord R&D in light of these conflicting signals, more cyclical, as the billion-dollarpipelines, and that most analysts as is their reluctance to attribute any blockbusters in their portfoliosfocus mainly on the quality of the value to molecules whose fate still come off patent and they strugglemolecules in Phase III. Two major remains extremely doubtful. to develop new medicines that canchanges during the past decade However, in sending the capital replace this income. Research byhelp to explain why. markets such mixed messages, investment management firm AXAIn the mid-1990s, the leading Pharma has also made life harder for Framlington shows the scale of thepharmaceutical companies itself. It is more difficult to determine challenge (see Table 1).announced plans to launch two or how best to increase a company’sTable 1: The leading pharmaceutical companies will lose between 14% and 41% of their existing revenues as a resultof patent expiries Share of Company 2010 2011 2012 Revenues (%) AstraZeneca Arimidex ($2.2bn)* Seroquel ($4.7bn) Symbicort ($3.7bn) 38** BMS US Plavix ($4.8bn) Abilify ($2.1bn) 30 Avapro ($1.3bn) GSK Advair ($3.8bn) Avandia ($2.5bn) 23 Eli Lilly Zyprexa ($4.8bn) 22 Merck Cozaar/ ($3.2bn) Singulair ($4.5bn) 22 Hyzaar Novartis Femara ($1.1bn) Diovan ($6.0bn) 14 Pfizer Aricept ($800m) Lipitor ($12.1bn) Viagra ($1.7bn) 41 Xalatan ($1.6bn) Detrol ($860m) Geodon ($1.1bn) sanofi-aventis Taxotere ($2bn) US Plavix ($3.8bn) Lovenox ($3.1bn) 34 Avapro ($2.1bn)Source: AXA FramlingtonNotes: * Estimate of global sales in 12 months prior to patent signing ** Value of products losing patent protection as a percentage of total company sales over next five yearsPharma 2020: The vision 9
  12. 12. Many pharmaceutical companies The bill for every ill face a serious dilemma, then. For the past 20 years, they have “sold”The bottom line: The themselves on their ability to develop The same features that will ensure Pharma’s market continues toinvestment model blockbusters, but they now have to alter their story without forfeiting the expand have also exposed the limitations of the current approachused by the capital confidence of the capital markets. They also have to meet short-term to healthcare funding: namely, that most of the world’s pharmaceuticalmarkets does not earnings targets (from quarterly spending goes on the treatment of reporting or other, more subtle disease rather than its prevention.work very well for pressures) that may be at odds with This is partly because some their long-term aspirations – and they diseases are so complex thatan industry that have to do these things at a time when scientific understanding of their competition for funding is gettingworks to timelines more intense, thanks to the revival of pathology is still very limited, and developing cures or prophylacticsof 10 years or more, interest in the biotech sector. for such illnesses is therefore In the US, where the sector is extremely difficult. In addition, theand is unlikely to do relatively mature, the cycles of risks associated with preventing investment in Pharma and biotech disease in healthy people are quiteso unless Pharma have converged. But, elsewhere, different from those associated with treating people who are already sick.“re-sets” market there is still a major disjunction between the two. So, if the biotech However, most countries investexpectations sector’s charms grow over the next couple of years, as some investors much less in public health than they do in other forms of healthcare; predict, Pharma could find itself out the OECD average is just 2.9% of in the cold. total health expenditure.35 In effect, society’s spending priorities are back-to-front. A specific example shows the full extent of the bias. Gardasil, Merck’s breakthrough vaccine for cervical cancer, sells for just $360 in the US, compared with an average annual wholesale price of $19,289 for Betaseron, $22,875 for Rebif and $28,400 for Tysabri, all products that modify the symptoms of multiple sclerosis but cannot cure or prevent it.36 As the global population grows and ages, and demand for better healthcare management increases, this emphasis on treatment rather than prevention will become increasingly unsustainable. Older10 PricewaterhouseCoopers
  13. 13. people consume more healthcare Figure 5: Older people consume more healthcare than younger people dothan young people everywhere,although there are some hugenational discrepancies. In Spain and Patients Relative to Those in 50-64 Age GroupSweden, for example, the average Increase in Healthcare Costs of Olderlevel of healthcare spending on 35patients aged 80 or older is twice 30as much as it is on patients aged50-64; in the US, by contrast, it is 2511.5 times more (see Figure 5). 20We estimate that, by 2020, theOECD countries, excluding the US, 15will spend 16% of their GDP on 10healthcare, while the US will spend a 5huge 21%. In all, they will spend $10trillion on healthcare (see Figure 6).37 0So, governments everywhere will US Canada UK Australia Japan Germany Spain Swedenhave to reverse their approach. Age Group 50-64 65-69 70-74 75-79 80+They will have to devote a much Source: Laurence Kotlikoff & Christian Hagist, “Who’s Going Broke?” National Bureau of Economiclarger proportion of their healthcare Research, Working Paper No. 11833, December 2005expenditure to preventative Note: Ratio of average spending on individuals in each age group in each country relative to an individual aged 50-64 in the same country. Numbers roundedmeasures, and reward thedevelopment of vaccines and curesmore highly than they do palliativemedicines. Without such a changeof strategy, no country will be able Figure 6: Health expenditure as a percentage of GDP is increasing rapidly in theto fund the healthcare needs of its OECD countriesinhabitants by 2020. 21The aging of the population,together with dietary changes 19and more sedentary lifestyles,will also increase the burden of 17chronic disease. The World Health % GDPOrganisation (WHO) estimates that 1560% of all the deaths that took 13place in 2005 could be attributedto chronic conditions, and predicts 11that the number of deaths fromchronic diseases will increase by 917% over the next 10 years.38 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20The toll is highest in developing 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20countries, which account for 80% ofall mortalities from chronic diseases US OECD ex-USand where the onset of disease is Source: PricewaterhouseCoopers Health Research InstitutePharma 2020: The vision 11
  14. 14. often much earlier than it is in the Washington blues developed world. In the US, for example, only 12% of deaths fromThe bottom line: cardiovascular disease (CVD) occur The extent of the problem with healthcare funding is particularlyPharma will have in working-age people, compared with 28% in Brazil, 35% in India and apparent in the US, Pharma’s biggest and most profitable market.to participate in 41% in South Africa.39 As an article recently published in But the developed world is also The New York Times put it: “What isthe debate on paying dearly. One recent study the most pressing problem facing the [US] economy? A good case can behealthcare funding puts the cost of CVD in the European Union (EU) alone at made for the developing healthcare crisis.”41 The impact on theand demonstrate about €169 billion ($226.1 billion) a year.40 And though the developed automotive manufacturing industrythe value of its countries have been very successful has already been well documented. In 2006, General Motors and Ford in pushing some chronic diseasesproducts or risk up the age ladder, increasing spent about $5.9 billion and $2.9 billion, respectively, on healthcare longevity will force more people tocoming under work longer. Most of these changes – a bill that adds more than $1,380 to – like the raising of the retirement the cost of producing each car.42huge pressure to age in Belgium and the UK – will In fact, administrative costs arecut the prices of take place after 2020. However, the overall direction is clear; a bigger responsible for between 20% and 31% of US healthcare spending.43many mass-market percentage of the population of the developed world will still be working Hospital spending accounts for nearly 33% of all expenditure,medicines at the point at which chronic and prescription products for just diseases kick in. 10.1%.44 But governments often These trends have several focus on the prices of medicines implications for Pharma. As because they are a relatively easy healthcare rises up the political target, and many people believe the agenda, the industry will have to medicines bill is much higher than engage in the debate on how it is it really is. In a survey conducted funded and play its part in helping by the PricewaterhouseCoopers to control costs. The social and Health Research Institute, 97% economic value of good medicines of consumers estimated that for chronic diseases will rise with the prescription medicines accounted extension of working life around the for at least 15% of overall US globe – and many such medicines healthcare costs, while 63% put the already exist, as falling mortality and figure between 40% and 79%.45 morbidity rates in the developed Moreover, with the Democrats world demonstrate. But there will now in the ascendant on Capitol simply not be enough money in Hill, Pharma could find itself much the pot to cover the world’s future more exposed. Two measures, in healthcare needs, unless Pharma particular, are worth discussing can cut its operating costs and in further detail: the proposal margins on these products. to introduce a national health insurance scheme; and the bill to give the federal government the12 PricewaterhouseCoopers
  15. 15. power to negotiate medicine prices even bigger financial impact on the Human Services estimates thatfor Medicare Part D, the medicine industry, if they are ever translated the average level of discounts andbenefit programme for the elderly. into practice. In January 2007, the rebates in 2006 was about 27%.51 House of Representatives approved But research by the CongressionalSome 16% of the 300m people a bill requiring the government to Budget Office shows that averageliving in the US currently have no negotiate Medicare prescription discounts for the six federalmedical cover, and the Democrats drug prices, rather than having each programmes which negotiate pricesare keen to redress the situation plan provider deal directly with directly with manufacturers rangeby introducing a universal health manufacturers, as is now the case.48 from 51% to 59%.52 If the governmentsystem. However, such a move President Bush has said that he will were to secure similar discounts forwould be very expensive. In 2005, veto the Medicare Prescription Drug Medicare Part D, its net expenditurethe US spent almost $2 trillion on Price Negotiation Act if it passes the on medicines under the programmehealthcare, about $50-60 billion ofwhich went on providing medical Senate.49 And, even if the Act does would therefore fall from $794 billiontreatment for the indigent. It is become law, it makes no provision to $532.9 billion – a total saving ofextremely difficult to calculate the for altering a government programme $261.1 billion – by 2017 (see Figure 7).additional cost of covering the that is administered by third parties. But the Democrats argue that In practice, it is doubtful that theuninsured population as a whole, US government would introducebut one study suggests that it could negotiating medicine prices centrally could produce substantial savings. So quite such draconian price controls.be between $125 billion and $150 Critics claim that the programmebillion a year, depending on the what sort of sums might be involved? administered by the Departmentparticular model that is used.46 The net federal cost of Medicare of Veteran Affairs offers a relativelySome public-policy researchers part D is currently projected at $794 narrow range of treatment options inargue that the cost of restricting billion for the period 2007-2017.50 many classes of therapies, and thataccess to healthcare for the The US Department of Health and patients and physicians accustomeduninsured, measured in terms ofshorter lives and poorer productivity,could be as much as $130 billion a Figure 7: If the US government negotiated drug prices for Medicare Part D directly, Pharma’s revenues could dropyear, and that the introduction of afederal healthcare programme forthe uninsured would ultimately be 140revenue-neutral.47 But even if this 120proved true, the initial investmentwould be many billions of dollars, 100 US$ Billionsand the government would find it 80difficult to raise such a sum. Theintroduction of a national health 60system in the US would thus 40increase the number of people whohad access to modern medicines, 20but it might also result in morewidespread use of treatment 0protocols, generics and over-the- 17 07 08 09 10 11 12 13 14 15 16counter (OTC) medications, making 20 20 20 20 20 20 20 20 20 20 20life more difficult for research-based Projected Net Federal Cost of Medicare Part Dpharmaceutical companies. Projected Net Federal Cost With Average Discount of 51%The Democrats’ proposed changesto Medicare Part D could have an Source: PricewaterhouseCoopersPharma 2020: The vision 13
  16. 16. to a much wider range of choices to electronic pedigrees, DNA under private health plans would be labelling and the like. A growing unlikely to accept such restrictions.53 number of governments are alsoThe bottom line: Nevertheless, it is clear which way using prices in other countries toPharma cannot rely the wind is blowing – and, if the Democrats have their way, Pharma benchmark the prices they pay. There may thus come a time whenon the US market to will come under huge pressure to cut its prices. many medicines command a regional or even global price.bail it out. Nor can Moreover, if price controls areit assume that it will introduced, their impact will not be confined to Medicare Part D. By Blurring healthcare boundariesalways be able to January 2010, the US government will pay for 37% of all prescriptioncharge a lot more drug expenditure under Medicare Changes in the way healthcare is delivered will arguably play an even and Medicaid. Employers will payfor its products in for another 39% under private bigger role in shaping the industry’s future. The primary-care sector is insurance programmes.54 Given thesome markets than extent to which rising healthcare expanding and becoming more costs have already impaired the regimented, as general practitionersin others competitiveness of US industry, it perform more minor surgical seems reasonable to assume that procedures and healthcare payers any price controls the government increasingly mandate the treatment adopted would soon spill over into protocols they must follow, including the private sector. the drugs they can prescribe. Conversely, the secondary-care So Pharma cannot continue to sector is contracting, as clinical rely on the US to bail it out of its advances render previously terminal current difficulties. Indeed, it may diseases chronic; healthcare ultimately be unable to count on providers like Clinovia in the UK, and differential pricing in any market Gentiva in the US, deliver secondary whatever. The Internet has already care at home; and hospitals focus eroded geographical variations in on the specialist care that cannot be the prices of consumer electronics, supplied anywhere else. for example, and the European The self-medication sector is Commission recently threatened also growing, as more and more to fine Apple for charging higher products that would once have prices to download music in some been available only on prescription European countries than in others.55 are sold in OTC formats. Most Buying medicines on the Internet medicines that acquire OTC status is currently much more dangerous, are used for non-chronic conditions of course, unless the supplier which are relatively easy to self- is a reputable company with an diagnose and have little potential established track record. But, by to cause harm, if abused. But, in 2020, the problem of counterfeiting May 2004, the UK Medicines and should be largely resolved, thanks Healthcare products Regulatory14 PricewaterhouseCoopers
  17. 17. Agency (MHRA) broke with this set up retail medicine outlets staffed conceivable that patients will beconvention by reclassifying by nurse practitioners who provide able to use web-based receivingsimvastatin 10mg as an OTC basic medical care, including writing algorithms to establish whether theymedicine.56 prescriptions.60 An increasing have a condition that will sort itself number of surgical procedures are out without recourse to prescriptionMeanwhile, Australia’s Therapeutic performed in ambulatory surgery drugs. This would eliminate aGoods Administration approved the centres rather than hospitals. And substantial number of consultations,weight-management therapy Orlistat the FDA has said that it hopes to since self-limiting diseases arefor OTC use in October 2003.57 The boost the number of medicines it thought to account for about 85% ofFDA followed suit in February 2007,58 switches to OTC status by 50% a all visits to primary-care physicians.63and Boots, the British pharmacy chain, year.61 The American Pharmacists Any patient who needed additionalintroduced a trial scheme to sell Viagra Association is also advocating diagnostic tests or treatments wouldover the counter only a few days the introduction of a “behind-the- then see a nurse practitioner, andafterwards.59 The definitions of primary counter” option such as already would only be referred to a doctor ifand secondary care are thus blurring, exists in some European countries his or her case were more complexas some forms of care that were and the FDA has endorsed the idea, or required surgical intervention.traditionally delivered by secondary-care providers are transferred to a although any such move would These changes in the healthcareprimary-care setting, and some forms require congressional approval.62 system have obvious benefits forof primary care are transferred to the A better understanding of the healthcare payers; healthcare ispatient (see Figure 8). cheaper, the more it is planned taxonomy of disease, together and the closer it is delivered to theThis trend is particularly pronounced with better diagnostic tools and patient’s home. But they have hugein the UK, but it is taking place in monitoring devices, will provide ramifications for Pharma as well.other countries, too. In the US, the means with which to bringfor example, some large discount healthcare delivery even closer First, as treatment protocols replacestores and pharmacy chains have to the patient. By 2020, it is quite individual prescribing decisions andFigure 8: The provision of healthcare is moving closer to the patientHealthcare Delivery in 2007 Healthcare Delivery in 2020Secondary Care Secondary Care Emergency room, Diagnostics Intensive care, Minor surgery, Emergency room Major surgery, Other out-patient services Intensive care Major surgery Primary Care Initial diagnosis Complex diagnostics Prescriptions Patient & treatments Primary Care Routine checks Minor surgical procedures Complex diagnostics & treatments Minor surgical procedures Patient Basic diagnostics & prescribing by nurse practitioners Self-Care “Life checks” OTC drugs - Basic medical advice Self-Care Web based self-diagnostics OTC drugs self chronic & non-chronic Web-based for diagnostics conditions for chronic & non- OTC drugs - ““Wellness” services Wellness” servicesSource: PricewaterhouseCoopersPharma 2020: The vision 15
  18. 18. technology improves the ability to Pay-for-performance diagnose conditions, the decision- making authority is gradually movingThe bottom line: from doctors to healthcare policy- The provision of healthcare is not all that is changing; so is the wayPharma’s target makers and payers. However, the criteria policy-makers and payers in which it is measured. Several countries have set up agenciesaudience is use for adopting new medicines are different from those physicians specifically to compare the safety and efficacy of different forms ofchanging, as use; payers typically focus on risk intervention and promote the use of and cost-effectiveness,64 whereas evidence-based medicine. The UShealthcare policy- doctors put safety and efficacy Agency for Healthcare Research and before cost.65 Quality is one such body, as is themakers and payers Second, the sales and marketing UK Centre for Health Technologyincreasingly control model on which the industry has Evaluation – a division of the National Institute for Clinical Health historically relied is becomingthe prescribing increasingly obsolete.There is little and Effectiveness (NICE) – although the latter also considers economic point in sending out a large salesdecision force to influence primary-care performance. practitioners who do not choose The Australian Pharmaceutical which medicines they prescribe. Benefits Advisory Committee, Lastly, with the erosion of New Zealand Pharmaceutical the conventional boundaries Management Agency and Finnish between self-care, primary care Office for Health Care Technology and secondary care, the needs Assessment (to name just a few) of patients are shifting. Where also conduct pharmacoeconomic treatment is migrating from the evaluations of new medicines, doctor to ancillary staff or self-care, devices and procedures. But there for example, patients will require is as yet no systematic process more comprehensive information for measuring cost-benefit ratios, about the medicines they take, more and the volume of outcomes data advice and more surveillance. Where these agencies can analyse is still treatment is migrating from the relatively small – a restriction that hospital to the primary-care sector, will end during the next decade they will require new services such with the widespread adoption of as home delivery. electronic medical records (EMRs). Thus Pharma should be focusing The US aims to develop a national on the provision of a full range of health information network by products and services spanning 2014.66 The EU has also called for the healthcare spectrum, and using every member state to create an different channels to distribute EMR,67 and several countries have different kinds of products and already made considerable headway. services. In fact, some companies Denmark now has a comprehensive are already beginning to use health data network,68 while the different distribution channels in British system is expected to be the US – a trend we shall discuss in operational by 2012, despite the more detail further on. many problems that have dogged16 PricewaterhouseCoopers
  19. 19. it.69 Thus, by 2020, some countries data would expose those instanceswill have between six and eight in which a medicine works well foryears’ worth of longitudinal data. one patient population and not forThis may not be enough to assess others. And if the industry succeeds The bottom line:the impact of treatments fordiseases that progress quite slowly, in changing its approach to R&D, and launching many more drugs Pharma will have tobut it will certainly be sufficient toevaluate the clinical and economic with individually smaller revenues, it would also be spreading its risk to a prove to healthcareperformance of many therapies. much greater extent. payers increasinglyThe effect on Pharma is likelyto be two-fold. First, healthcare Second, the price any therapy can command will be based on interested inpolicy-makers and payers will useoutcomes data to determine best its performance, not what the manufacturer thinks it should fetch. establishing bestpractice. They will include medicines This is essentially what the UK medical practicethat are particularly safe, efficacious Office of Fair Trading proposedand cost-effective in their treatment in its recent review of the British that its productsprotocols, and exclude those that medicines pricing scheme. Itare not – as recently happened recommended that the current really work andin the UK, when NICE ruled that “profit cap and price cut” schemeAricept, Exelon and Reminyl should be replaced with a value-based provide value foronly be prescribed for people withmoderate to severe symptoms pricing system in which the prices of products are set by comparing moneyof Alzheimer’s disease because their clinical value with that of otherthey “did not make enough of a treatments for the same condition.72difference” to justify the cost of When a new therapy is launched,giving them to patients in earlier the manufacturer will also bestages of the disease.70 expected to assume a much greaterIt is impossible to predict just how share of the financial risk. At leastmany medicines will fail to pass one such deal already exists; inmuster. But in one recent analysis of September 2006, GlaxoSmithKline45 frequently cited studies claiming struck an agreement with twothat certain treatments worked, European governments under whichnearly a third of the original findings the prices of two new medicinesproved wrong.71 If this were true will be increased or reduced,of all the medicines on the market, once enough data are available toand the industry were still reliant on judge their true efficacy and cost-blockbusters in 2020, the impact effectiveness.73 In future, suchwould be punitive; Big Pharma had risk-sharing arrangements will be273 major products with average commonplace.sales of $963m apiece in 2006, The remit of healthcare payers issuggesting that the fate of about 85 growing, then. They are not justmedicines with aggregate revenues negotiating prices, they are startingof about $82 billion (in today’s to stipulate best medical practice –terms) would be in question. and access to extensive amounts ofThat said, the failure rate itself might outcomes data will give them muchnot be so high. Extensive outcomes more ammunition. By 2020, PharmaPharma 2020: The vision 17

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