The Obama effect

Last month, I discussed the good fortune of biopharmaceutical companies being something of a shelter in the current financial storm. They may be over-sized, over-paid, bleeding R&D resources and desperately seeking new directions, but at least people around the world continue to get ill without having to pay the full cost of their drugs.

Jacky Law

This month, I focus on another benefit bestowed by the financial storm, this time stemming from the Obama effect. The new president-elect has made no secret of the fact he wants to reform how healthcare is delivered in the industry's flagship market. His white paper on healthcare says, "[pharma] companies are exploiting Americans by dramatically overcharging US customers." Given the economic turmoil surrounding his first term in office, the industry may have more breathing space as healthcare, and specifically drug, costs fall down the priority chain.

As it happens, no one can know the Obama effect, as his extraordinary popularity, pulling in the highest voter turnout in US history, will also strengthen his mandate. Nevertheless, people have been doing their sums. The Boston Consulting Group, for example, estimates that Barack Obama's plans to provide healthcare coverage for 47 million uninsured Americans will boost the healthcare industry by $17 billion (€13.5 billion) a year.

But medicines only constitute a small proportion of this. Overall, the drugs industry stands to lose significantly more — up to £30 billion (€35.1 billion) a year — from Obama's intention to restore the government's right to negotiate Medicare drug prices. Medicaid is the government health insurance for the elderly that, until a couple of years ago, excluded drugs from its coverage. In January 2006, however, following an industry masterstroke, drugs were not only reimbursed by the government, but at non-negotiable prices. Since then, the federal agency has become a truly massive player, assuming no less than 45% of US industry sales and making it the world's single-biggest payer by an extremely wide margin.

It also charges high prices. Data from another bulk purchaser, the US Department of Veterans Affairs (VA), shows the VA price for the top 20 drugs prescribed to senior citizens is 25–91% lower than the lowest Medicaid prices. Based on these figures, the Boston Consulting Group estimates industry revenues could nosedive by $14.7 million–30 million (€11.7 million–23.9 million) a year if the government rescinds the law preventing it from negotiating prices.

The practical significance of the economic crisis then is that it gives industry more time to work out a robust defence. Already it argues that the private insurers operating within the Medicare programme strike pricing deals of their own that drive down the levels of reimbursement the government must pay. Indeed, Medicare figures show that in the year to 30 September, it spent $44 billion (€35 billion) on drug reimbursement, 12% down on 2007 and a third less than the original estimates for 2008.

However, there is more to do and more fronts to fight on. Obama has also said he wants to eliminate the ban on importing drugs from countries that have good safety records, such as Europe and Canada, and where prices are considerably less than in the US. His plan also mentions getting generic drugs to market faster and conducting more comparative studies to see if patients are getting value for money from their drugs.

Being protected from all this by a financial tsunami may seem like cold comfort. According to the EvaluatePharma database and despite years of price pressure on the US market, it still contributed 45.7% of global pharmaceutical sales in 2007, which is a pretty sizeable chunk. At some point, industry chiefs will have to address the US wrath at being charged so much more than everyone else in the world. They will have to do more to downsize, reinvent themselves and, most importantly, find a few decent drugs.

The uncomfortable truth is that just as the banks are suffering the effects of a massive depletion in capital, so Big Pharma is feeling the effects of an equally massive depletion in innovation. The only crumbs of real comfort come from Obama's expected boost to stem cell research. Being in favour of more federal funding in this area suggests the new administration is not anti-science or even anti-industry. It just wants lower prices. From pharma's point of view there can be very little comfort in that and the stronger the mandate of the administration the bolder the moves are likely to be. Long live the storm!