Pharma is Reaching the 'Tipping Point,' warns analyst

The pharmaceutical industry is experiencing troubling times, says Jonathan Anscombe, a partner based in AT Kearney's London office and an author of 'Pharmaceuticals Out of Balance,' a recently published paper on the future of the pharmaceutical industry.

An unprecedented number of 'blockbuster' drugs are going off patent, and the lack of replacements in the pipeline is leading to near flat growth projections in major markets. Productivity in R&D is declining, as are yields on sales and marketing investment. Despite the industry's phenomenal contribution to health and wellbeing, its public reputation is tarnished, hampered by frequent multi-billion dollar lawsuits and a failure to demonstrate the value it brings, says Mr Anscombe.

As if this was not difficult enough, pressure from payers to cut drug prices or limit access to new innovation is growing. While the industry might have considered itself immune from the effects of the financial crisis, this is unlikely to be the case for much longer. Governments, who pay for the vast majority of drugs, are struggling with an astonishing $12,000 billion worth of debt, equivalent to 25% of global Gross Domestic Product. Pleas of 'damage to innovation' are unlikely to hold much water against the need for ready cash. While the current deal with the White House may have stopped pressure on prices in the USA for now, the costs of any of the possible universal health plan alternatives will surely lead to deeper cuts in due course. The same story is happening everywhere, from competitive tenders in Germany to positioning by the Conservative new-government-in-waiting in the UK, with a domino effect beyond.

These current troubles are not a short-term crisis, but rather symptoms of more fundamental challenges to the industry model. Global forces of health care reform are driving the pharmaceutical industry to a point where the model will need to change from a focus on expensive niche therapies to one built on mass market delivery models. This shift will have dramatic impact on how the industry is organized. While not new, these trends have reached 'critical mass' and are now tipping the scales, Mr Anscombe notes.

Prescribing doctors increasingly constrained, influenced by payers

The first driver of this change is the growing role of the payer. The pharmaceutical sales model has always assumed that the prescribing doctor is the primary decision maker. However, the doctor is increasingly constrained or influenced by payers through formularies, guidelines, IT systems and financial mechanisms. For payers seeking to address complex diseases, the availability of a marginally more effective, but much more expensive therapy, is far from compelling. The problem is not the theoretical efficacy of drugs, but getting patients to take them as instructed, he points out.

To persuade payers to allow access to their drugs, the industry will increasingly need to prove that its therapies are effective at addressing health problems in the real world. This will inevitably lead to pharmaceutical companies becoming more involved in the way drugs are delivered. As the payer (and patient) landscape is exceedingly complex and varies widely by country, this will require closer integration and co-operation with local health systems, and a far more local approach to market access.

USA losing its influence to emerging markets

The second big change is the waning influence of the USA and the growing importance of emerging markets. The USA currently dominates the pharmaceutical industry and its needs drive both pricing and development priorities. However, the underperformance of the system and its huge cost will inevitably lead to reform, if not now then by a future administration. It is very unlikely the current freedom of pricing with near guaranteed access will survive such reforms.

At the same time, emerging countries are experiencing significant growth in health spending. While China will not soon replace the USA as the biggest world market, developing countries represent the majority of incremental growth potential in the industry. The dilemma for the pharmaceutical industry is that, while these new markets will increasingly have western-style health problems, they will not be prepared to pay western-style prices, Mr Anscombe says. Accessing these markets will require far lower, commodity-type pricing combined with the willingness to build delivery infrastructure. If the big western companies do not seize the opportunity, Indian and Chinese companies will ' and they will become the source of the breakthrough innovations that will power 'affordable' health care. As the size of developing markets becomes too attractive to ignore, the pharmaceutical companies will need to abandon US-centric policies, and instead price in a way that maximizes revenue over the lifecycle of a drug and across the global portfolio.

All of these pressures will have quite profound effects on the industry. The shift toward an intimate involvement in health delivery will require far more focus on specific countries and diseases than the current one-size-fits-all approach. It will also require companies to deliver far more than just the molecule ' they will need to find new ways to demonstrate value in the real world. Going mass market will require the implementation of truly low-cost manufacturing and distribution systems, and an operating model closer to that of a consumer industry than the current high-cost pharma model. In summary, it will require different business models than are now in place. Those organizations that are quicker and more effective in making changes will be the winners.

Companies that seize the opportunity will reposition themselves in the center of health reform. Those that do not risk becoming increasingly marginalized and irrelevant, Mr Anscombe concludes.