by John D. Rhodes
As we enter 2006, the pharmaceutical industry is facing an unprecedented number of challenges. However, these challenges also present unparalleled opportunities for pharmaceutical companies to redefine themselves and remain profitable and competitive moving forward. Here are some of the industry’s most pressing issues, as well as potential responses to increase future success.
Improving Trust Amidst Increasing Regulation and Price Pressure
Regaining public acceptance amidst increased regulatory scrutiny comes down to an overriding imperative about trust, transparency and perception. In 2006, pharmaceutical companies will need to devote additional time, people and money to address safety and transparency issues and educate the government and consumers about their compliance efforts and pricing.
From a pricing perspective, the biggest regulatory challenge facing U.S. drug companies is global and domestic price controls or pressures. According to the Commerce Department, foreign drug price controls cost U.S. pharmaceutical companies $18-$27 billion per year globally. On the domestic front, 2006 brings new pricing requirements mandated by the Medicare Modernization Act of 2003 (MMA). For example, dual eligibility requirements will change rebating and pricing models for certain drugs. Also, the Act establishes specific Medicare regions, and pharmaceutical companies will now have to negotiate drug prices with each PDP and MA region and model the impact.
Additionally, regulatory organizations are soon expected to require economic as well as scientific data around pricing. First-mover companies that embed the economic justification of price and its cost benefit in the development and filing process will have the ability to maintain or gain price premiums.
Managing Expiring Patents And The Competition From Generics
There are a large number of drugs coming off patent in the next two to four years. Analysts estimate that the pharmaceutical industry could lose $35 billion to $50 billion in product sales to generics during this timeframe – a huge loss of dollars that drive research & development and earnings results. The existing product pipeline is estimated to only account for annual sales growth of about 5.5 percent, even after adjustments for an aging population and expansion into new markets. This leaves an anticipated gap between market expectations and reality.
What can the industry do to maximize the value of its pipelines? First, companies need to embrace R&D in areas such as specialty products for smaller populations and biologics that are better positioned for price, particularly in the new world of the Medicare Modernization Act. The industry’s current R&D yield and mix is neither optimal nor sustainable, as the top 50 pharma companies have produced less than one New Chemical Entity (NCE) since 1998, despite increasing R&D investments.
Second, pharmaceutical companies need to look to additional partnering, licensing, mergers and acquisitions as a way to fill their product pipelines and to minimize capacity challenges created by the industry’s recent low productivity. Organizations must also be open to creating flexible and innovative deal structures, particularly when partnering with smaller biotech companies or organizations outside of the United States.
Evolving Drug Development From Blockbusters To Specialty Products
Large pharmaceutical companies that continue to rely on a 30-year-old investment and commercialization model that hinges on blockbuster brands will face considerable challenges in the coming years. Almost 75 percent of NCEs entering the market are specialty products or biologics generally produced by smaller biotech and large-molecule companies. While a few products are coming from the big pharma pipeline, the more nimble biotech model has proven particularly effective to date in yielding NCEs. Big pharma will be challenged with evolving from its blockbuster model to delivering returns through the development of a portfolio of smaller products either internally or through biotech relationships.
Companies that can diversify, yet focus, their opportunities by developing and marketing these specialty products will be better positioned for price, regulatory and marketplace dynamics. Also, the new 2006 Medicare pricing models may favor a specialty product that is a more unique patient option or that focuses on previously untreated conditions.
Leveraging Technology To Enhance New Product Development
The pharmaceutical industry needs to better leverage technology to enhance innovation in product development. Currently, the process is very lengthy, labor-intensive and highly regulated. Many drug companies are hampered by legacy IT systems and multiple, disparate data sources that are resident internally and externally, and the industry has been slow to adopt electronic technologies that can improve the way it implements clinical trials and other stages in the manufacturing process. Leveraging Electronic Data Capture, remote type monitoring and management, computer modeling of clinical side effects, and other technologies will bring significant savings and speed to drug discovery and development.
Focused strategies around the consolidation of information and processes will go hand-in-hand with the industry’s increased use of genomics, nanotechnology, and other platforms and technologies around personalized medicine.
Redefining the Role Of The Sales Representative
An ongoing issue is the ROI of the pharmaceutical industry’s costly “saturation” sales force and promotion model. As PhRMA and OIG Guidelines, as well the Anti-kickback Statute, shut down most channels for pharmaceutical sales reps to increase time with physicians, the industry’s challenge is to find a more efficient way to target and deploy resources against physicians, particularly in an education mode. One solution that ties closely to the evolution of specialty products is to establish more specialty care sales forces, which focus on one target market and are usually smaller and less expensive than a blockbuster drug’s sales force. Additional cost-effective sales and promotional alternatives are direct-to-consumer advertising, e-retailing, seminars, peer-to-peer education and patient-centered education.
Expect the industry to be slow to change current sales practices. It will be difficult for these organizations – especially those focused on blockbusters - to adopt a new model. However, the flexibility to re-deploy this spending to R&D could define future market leaders.
Maximizing the Potential of Emerging Global Markets
By the year 2020, it’s projected that the greatest mass of individuals needing health care will be in Eastern Europe, the Pacific Rim and Africa. U.S. pharmaceutical companies must address global markets for continued growth. Fortunately, conducting business in emerging economies, particularly India and China, offers tremendous opportunities and benefits including less expensive clinical trials, easier access to drug-naïve patients, potential for in-country drug discovery and development, a cost-effective population to staff drug manufacturing facilities, and a huge consumer/patient population.
However, the opportunities presented by an expanding global market are certainly tempered by challenges. U.S. drug companies will have to develop a business model that can be profitable and caring in these developing nations, as Western pricing models probably won’t hold. Also, the protection of intellectual property is a big concern and while emerging countries are starting to honor IP rights, enforcement is a different issue.
Companies Must Respond To Survive
U.S. pharmaceutical companies must address each of these industry challenges if they are to prosper into the next decade. Those that can leverage technology and adapt their discovery, development and sales processes to support a diverse product portfolio and emerging global markets will realize financial gains and continued growth. Also, by improving product and price transparency, companies can improve their public reputation.
Perhaps the biggest challenge for the pharmaceutical industry is its ability to transform the culture of its workforce. Companies will need to implement a change management project of unsurpassed magnitude or risk continued price erosion, increasing governmental regulations, consolidations, and public skepticism. An evolutionary solution won’t get the industry where it needs to be. Widespread change will require a significant disruption in business models, as well as the integration of knowledge, technologies and processes from many different sources.
About the Author: John Rhodes is U.S. & Global Managing Partner, Life Sciences, for the Life Sciences & Health Care Practice of Deloitte & Touche USA LLP. He can be reached at: jorhodes@deloitte.com.