E-DRUG: The Economist: An overdose of bad news
--------------------------------------
[An interesting article from The Economist on the pharmaceutical
industry. A few very interesting little snippets hidden inside, including
this one on cost savings in procurement:
"The Wisconsin Department of Employee Trust Funds, which covers 240,000
[people] managed to reduce its drug bill by 23% last year, while
maintaining the same level of prescriptions. The secret, says Eric
Stanchfield, head of health-care purchasing, was a strict reimbursement
list based on drugs' clinical effectiveness, a pharmacy benefits manager
with transparent accounting and a willingness to be
tough in negotiations with drug firms."]
From The Economist
http://www.economist.com/printedition/displayStory.cfm?Story_ID=3764524
AN OVERDOSE OF BAD NEWS
Mar 17th 2005
Can big drug companies recover from a recent string of problems?
IT HAS all gone horribly wrong for the dozen or so manufacturers that
make up "big pharma". The withdrawal of high-profile drugs, growing
suspicion among consumers about drug companies' ethics, and arguments
with regulators and customers have all dented what until recently was
one of the least-tarnished of industries. A string of books has
attacked the marketing tactics used by the industry, while lamenting
the diminishing returns from its much-touted search for new drugs. Some
observers have questioned whether a business model that was once
capable of producing huge and reliable profits has been irreparably
damaged. The industry is struggling to come to terms with a changing
environment in its biggest and most lucrative market, America.
What happens in America is critical to the future of all the biggest
drug firms. Prices there are mainly set by the market, not
penny-pinching governments as in Europe and much of the rest of the
world. It is also where the drug firms have chosen to place much of
their research. America is by far the world's biggest spender on
health-care in general--a whopping $1.8 trillion, more than 15% of GDP
last year alone--and on pharmaceuticals in particular.
Last year, America accounted for more than 40% of the world's $550
billion pharmaceutical market, according to IMS Health, a consultancy
(see chart 1). Moreover, the prices of many branded drugs can be
significantly higher in America than elsewhere. A recent report from
the Department of Commerce, looking at international prices of 54
leading prescription medicines, concluded that the average price
charged by manufacturers in Canada, Britain and Australia was roughly
half that in America in 2003 (though US discounts narrow this gap).
And it is in America that drug firms are facing the loudest and
fiercest criticism. They stand accused of focusing on "me-too" drugs
which confer little clinical benefit over existing medicines; rushing
these to market through cunning clinical trials designed to make them
look better than they are; and suppressing data to the contrary. The
industry is also lambasted for expensive, aggressive and misleading
direct-to-consumer advertising, which sometimes creates conditions to
fit the drugs, rather than the other way round. Hobnobbing with doctors
means giving them "food, flattery, friendship" at best, and outright
bribery at worst. Such flames were fanned by two high-profile events
last year: Eliot Spitzer's lawsuit against GlaxoSmithKline (GSK) for
allegedly suppressing data linking antidepressants to suicide risk in
children (which later prompted initiatives to disclose clinical trial
results) and the recent scare over the safety of COX-2 inhibitors, a
class of pain-killers, following the withdrawal by Merck of one of
these called Vioxx.
Indeed, critics argue that society is largely on the losing end of its
dealings with the industry. Drug firms benefit tremendously from public
largesse, be it basic research from universities and government-funded
laboratories, or tax breaks on R&D, yet fail to reward this by putting
a brake on pricing. For their part, drug firms argue that in order to
keep innovation moving, they must maintain high prices, and therefore
high profits. Yet many Americans doubt these arguments. A poll
conducted last month by the Kaiser Family Foundation found that only
14% of the 1,200 Americans surveyed believe that current drug prices
are justified because of the high cost of R&D, and that 46% favoured
greater government regulation of drug prices, although this might lead
to lower profits and therefore less research.
Big drug firms are having a hard time defending the argument that
higher profits mean more innovation. New drug launches have slowed to a
trickle in recent years. Companies plough 15-20% of their revenues back
into R&D; global spending on pharmaceutical R&D has doubled over the
past decade, to $56 billion this year according to CMR International, a
research group. Yet the number of new drugs approved by the FDA--a
rough measure of productivity--fell to a low of 18 in 2002.
TRIALS AND TRIBULATIONS
Drug development times are lengthening, and 50% of all drugs still fail
in mid- to late-stage clinical trials. But things are slowly perking up
in the laboratory, says Stuart Walker, head of CMR. Last year the FDA
approved 34 new drugs and there are signs that early-stage pipelines
are filling up with new compounds for cancer, diabetes and central
nervous system disorders. Many of these new drugs actually come from
nimble biotech companies. They pass their products--for handsome
rewards--to bigger drug firms, which then do clinical trials, register
the drugs with regulators and market them.
However, this does little to impress many investors, who have had
enough of the industry's talk on breakthrough drugs. Stewart Adkins, an
analyst at Lehman Brothers, reckons investors are simply discounting
products that have not reached late-stage clinical development;
everything else is seen as too risky to put a value on. Yet many firms
are putting their faith in their pipelines and current business models
to get them out of the current mess, says Richard Balaban, a consultant
with Mercer. This will not be sufficient, he argues, to win back the
trust of their three key customers: patients, payers and physicians.
Changes in sales and marketing might help. Pharma firms spent a
whopping $14.7 billion on marketing to health-care professionals last
year, and at least $3.6 billion on direct-to-consumer advertising,
according to Verispan, a market researcher. Drug firms now spend a
third of their sales revenue on marketing and administration, on a par
with Coca-Cola and Nestle.
This infuriates critics, who argue that the firms could easily lower
prices and find savings on promotions without touching their precious
R&D budgets. For its part, the industry points to the public-health
benefits of marketing--doctors are kept up to date with developments
and the public is informed of lurking medical conditions.
Both forms of marketing are under attack. As John Schaetzl, an analyst
with GE Asset Management, points out, the COX-2 mess is a case where
aggressive promotion using mass marketing to create a blockbuster drug
has resulted in the inappropriate use and consequent withdrawal of a
medicine that undoubtedly benefits some patients. An FDA advisory
committee recommended last month that the COX-2 inhibitors stay on the
market (and that even Vioxx might make a limited return), but with
stricter warnings on their labels about their cardiovascular
side-effects. The committee also recommended tighter restrictions on
consumer advertising of the COX-2 medicines and--given the steady
stream of warnings the agency now issues to firms about various
claims--might extend these to other drugs.
As for marketing to doctors, Jerome Kassirer, a former editor of the
NEW ENGLAND JOURNAL OF MEDICINE and author of ON THE TAKE, wants to see
it stopped altogether--no more gifts, no more industry-sponsored
training courses, no more visits from salesmen and free samples.
Various codes of conduct have been promulgated by medical schools,
professional bodies and industry associations. Several pharmaceutical
firms have been investigated by the Department of Justice for dodgy
dealings with doctors.
Economics, more than ethics, may force the pace of change. There are
roughly 102,000 pharmaceutical "detailers", or salesmen, all trying to
meet the top-prescribers among America's 870,000 physicians. They get
only a few minutes with the doctor, not much time to sell the fruits of
modern science. There is a growing realisation--if not yet dramatic
action--that the industry's marketing model needs to slim down and take
a new shape to boost returns. Some firms are turning their drug
development away from mass-market blockbusters to specialist products,
which need smaller salesforces to target fewer doctors, who tend to
make more time for such products.
A few bosses, notably Jean-Pierre Garnier of GSK, have questioned the
traditional approach. But all eyes are on Pfizer, which employs more
than 10% of America's sales reps and might announce some changes to its
sales and marketing operations next month. "Pfizer ushered in the rat
race," says Viren Mehta of Mehta Partners, a consultancy. "Only it can
reverse the industry's direction."
The industry is also struggling with another central element of its
business model: its reliance on patent protection for high-profile
blockbuster drugs. Lehman Brothers reckons that, at best, drugs worth
$8.8 billion will face generic competition; at worst, $15.5
billion-worth of branded drugs will meet their copycat makers in
America. As the past few years have shown, the expiry of a patent on a
blockbuster drug--such as Prozac--can be a painful experience for a
drug firm, wiping billions off its market capitalisation. Alas, many of
the tactics firms use to tighten their grip on their intellectual
property are also coming under fire.
PATENT MEDICINE
This year's patent litigation has special significance for the whole
industry, not just the individual companies involved. Generic
drugmakers are challenging the big companies in court over three
blockbuster drugs--Zyprexa for schizophrenia, Lipitor for high
cholesterol and Plavix for heart attacks and strokes. These lawsuits
question the original "composition of matter" patents on these
products, not just the industry's efforts to spin out protection for a
few more years of profit. If any one of these were to go against the
big companies, it would affect the whole industry.
Then there are the lingering side-effects of the Vioxx withdrawal.
There have been drug withdrawals before--nine of them between 1997 and
2000. But for all the trouble this episode has brought Merck--including
a federal investigation and hefty lawsuits--the latest controversy is
about more than one drug and one company. While the FDA is likely to
accept its advisory committee's recommendations on COX-2 inhibitors,
the affair has highlighted the question mark over the future of
so-called me-too drugs, and is forcing R&D managers to take a hard look
at their pipelines across all therapeutic areas.
The last thing a beleaguered industry needs is a troubled regulator.
But the FDA is under pressure too, accused of putting new drug
approvals--funded by the industry--before drug safety. There are
several bills before Congress to improve drug-safety monitoring and the
agency itself will fall under Capitol Hill's spotlight this year. In
recent months, however, the FDA received a little pain relief. Lester
Crawford, its acting head, may be appointed on a permanent basis. He is
seen as a safe pair of hands, rather than a revolutionary bent on
wholesale reform of the agency.
Last month the government also announced the creation of a new
independent safety board to oversee drugs once they come to market, as
well as the introduction of new ways of communicating safety issues to
the public. Although still short on details, the proposal is said to
bring together officials from the FDA's existing offices of new drug
approvals and drug safety--more rivals than colleagues, according to
some observers--along with other experts, to assess and report
regularly on safety issues to the head of the FDA's drugs division.
While this does not go far enough for some critics, others are on the
lookout for signs that the agency is drifting too far to the side of
caution, for example by demanding bigger, longer trials and slowing
down the approval of innovative, but potentially riskier, medicines.
As if it did not have enough problems, the industry cannot ignore
complaints over pricing. Americans pay vastly different amounts for any
given medicine, depending on who is footing the bill. Not surprisingly
big purchasers, such as state-funded Medicaid programmes for America's
poor or managed-care plans for big employers, get among the best deals.
The clamour for lower prices grows ever louder. One strategy is
so-called "reimportation"--bringing in drugs from abroad. An estimated
$700m-worth of pharmaceuticals flowed into America from Canada in 2003.
The busloads of elderly Americans crossing the border to buy drugs have
been joined by mayors from several cities and legislators from several
states, looking to ease the passage of pharmaceuticals from
Canada--especially through internet pharmacies.
DRUGS WITHOUT BORDERS?
The Bush administration (and indeed the drugs industry) takes a dim
view of such free trade. Personal importation of most foreign
pharmaceuticals is technically illegal, though authorities tend not to
enforce the law. A report late last year from America's Department of
Health and Human Services said that individual Americans buying drugs
from abroad are running "a significant risk", arguing that the quality
of such products is hard to verify. It did, however, suggest that
safety might be more easily monitored if the drug traffic was run by
authorised commercial wholesalers, rather than individual patients.
Congress will take up the issue of reimportation this year. But few
expect it to make much of a dent in pharmaceutical sales in America,
nor in American frustration at rising prices. Canada is already working
on ways to restrict sales south of the border, in part from fear that
it will face drug shortages of its own, as drug firms move to restrict
supplies.
Then there is Medicare. Thanks to the Medicare Modernisation Act of
2003, the federal government will start covering many of the outpatient
drug costs of America's pill-popping elderly. This means that, by 2006,
the government will account for 45% of all drug spending in America.
The drugs industry, excited by the prospect of increased volumes, took
further comfort when the act stipulated that the government would not
negotiate directly with companies over prices.
But as Rami Armon, a policy analyst with Lehman Brothers, points out,
those implementing the programme--pharmacy benefit managers and
managed-care firms--will be expected to find discounts. Indeed, given
the drug benefit's ten-year $593 billion price tag and the looming
insolvency of Medicare, firms offering the best prices by driving the
hardest bargains with drugmakers are more likely to get the
government's custom. In fact, the Centre for Medicare and Medicaid
Services, which administers America's two big government-sponsored
health-insurance programmes, is quietly getting on with collecting data
and evaluating the effectiveness of various medical interventions it
pays for--including drugs. If this data were to be used to decide
whether or not a drug purchase should be reimbursed, it could have
enormous implications.
State legislatures are already familiar with the difficulties of
reining in drug spending. Roughly 15% of their budget goes towards
paying for Medicaid, and with many facing straitened circumstances
cutbacks are in order. State governments also cover their own employees
and are equally keen to get a grip on these health-care bills.
Pharmaceuticals are the easiest target, says Kevin Outterson, a law
professor at the University of West Virginia and adviser to the state's
officer on drug pricing. The drug companies are multinational, whereas
hospitals and doctors are staffed by local people who are unlikely to
vote for anyone who wants to reduce their funding. In addition to
paying their own drug bill, states are worried about losing jobs if
companies move away because of high health-care costs.
States are trying a variety of tactics to control central drug costs,
from fixed formularies, reimportation (if not from Canada, then from
Britain or Ireland) and pooling their resources to buy in bulk to
extending the discounts negotiated through Medicaid to larger
populations and to even more radical measures, such as compulsory
licensing. Drug companies have made some concessions--for example,
offering discount cards to older Americans or those without health
insurance. On the whole, the drugs industry is not pleased with state
stratagems, says Sharon Treat, head of the National Legislative
Association on Prescription Drugs Prices, and does its best to lobby
and sue against price controls.
HOW TO NEGOTIATE
But a few states have been successful. The Wisconsin Department of
Employee Trust Funds, which covers 240,000 public workers, retirees and
their dependants, managed to reduce its drug bill by 23% last year,
while maintaining the same level of prescriptions. The secret, says
Eric Stanchfield, head of health-care purchasing, was a strict
reimbursement list based on drugs' clinical effectiveness, a pharmacy
benefits manager with transparent accounting and a willingness to be
tough in negotiations with drug firms. The programme is so successful
that the governor plans to expand it to cover the uninsured, and
General Motors has also been taking a look.
Another part of the Fund invests $2.9 billion of pension money in drug
shares every year. Mr Stanchfield, who is also a trustee of the pension
fund, believes that price concessions make pharmaceutical firms more
appealing to investors because they put firms on a more sustainable
footing. "If I were big pharma with lots of unhappy people and the
prospect of price controls, I would embrace changes such as ours. What
is the alternative?"
Well, the big drug firms could fight their customers. But that would
risk harsher intervention by governments that are already intent on
influencing drug pricing and marketing mechanisms. Even if they avoid
that, it seems certain that the world's biggest drug firms are going to
have to change in fundamental ways.