Pharma 2012: Hard Times Before the Harvest

2012 will be a transition year for pharma, one of the most important in the industry’s history of product cycles that spin from plenty to penury. On the positive side, the fires of drug discovery are finally being stoked by a growing understanding of how genomics shape the biology of disease. This is leading to promising new treatments that target critical areas of unmet medical need while also increasing the efficacy of interventions geared to the individual patient. Evidence that these next-generation innovations can advance the science while improving outcomes will hopefully lead to ready acceptance in the market, despite the growing leverage of a much more skeptical and discerning customer base.

The challenge is that many new treatments may not complete the move from ‘bench to bedside’ in time to plug the yawning revenue gap from a second record year of patent expiries. This year’s drop off the patent cliff is the longest and steepest, with a $50 billion loss coming on top of the $30 billion ceded to generics in 2011. Most companies will struggle to play catchup, with margins under intense pressure due to the immediate fallout from genericization of the product base; in the U.S. alone, off-patent penetration has reached 80 percent of all scrip, and IMS forecasts this figure will rise to 86 percent by 2015.

Meanwhile, the fiscal crisis in Europe has voided the entire concept of patenting as a reward for innovation in providing a temporary period of price exclusivity. Therapeutic reference pricing is clustering brands with the cheapest generics, and some countries in the region are now moving toward a straight bulk procurement model for drugs reimbursed through state-sponsored systems. Quality? Innovation? These are yesterday’s questions.

So what is the preferred Big Pharma strategy to manage through this year of transition? Pharm Exec highlights four strategic drivers that should compel the attention of our “C-suite” readers in 2012.

1) A reinvented business model won’t change what is fundamental: Higher pipeline productivity in the form of new patented products is still the best source of future profits.
This year will see new therapeutic breakthroughs that may revitalize the blockbuster, to include biologic drugs intended for targeted patient populations with few treatment alternatives. Many are novel not only for their indications and superior efficacy and safety profiles; they also mark an advance in the mode of delivery, replacing injectables with a once-a-day pill or acting in combination with other compounds to provide more precise dosing with fewer side effects.

Overall, the trend illustrates the impact of company efforts to integrate within their R&D organizations a more overt commercial benchmark in addition to science and regulatory indicators. If trial and regulatory milestones are an ingrained part of the development timeline, why not add criteria for achieving access or reimbursement as well? Few companies today are inclined to say no.

Growing optimism about a return to innovation doesn’t mean that the debate over the best blueprint  for R&D will be resolved-at least not in 2012. It takes on average a decade to commercialize a promising compound from proof of concept, so much of the current discussion around alternative approaches-from outsourcing key aspects of development to the “string of pearls” focus on science generated in-house-amounts to sheer background noise. Consultants can’t charge for this, and the evidence is purely anecdotal, but what does seem to matter is a long-term commitment to the science; retaining good people; acknowledging that internal competition can boost overall productivity and performance against agreed targets; a knack for finding and keeping a diverse circle of partners; and a healthy helping of luck. Analysts call it the “hybrid” model and companies will continue to tailor R&D strategies to fit their own circumstances.

2) 2012 will signal the industry is transitioning to an era of lowered expectations; pricing, reimbursement, value, and policy will combine in complex ways to drive down margins.
The bottom line is that it is becoming harder to make the contacts that drive sales with providers and the patient. Consolidation in the payer community gives them greater leverage in controlling the use of medicines, generic penetration limits the scope of argument about competitive differentiation, and increased government regulation has ended many of the promotions that helped build relationships with physicians. More therapeutic “crowding” in the specialty segment is another trend that will depress margins because payers now have a choice and can restrict access or demand rebates and discounts, as they have done with devastating effect in primary care.

Moreover, to cope with these developments, brand manufacturers are spending heavily on incentive programs like copay cards as well as patient support activities geared to raising adherence to therapy. Much of this activity is geared toward influencing the commercial business, and the added cost exposures will sharply depress margins there just as higher rebates mandated by health reform turn the public Medicaid and Medicare Part D programs into loss makers.

As a result, 2012 will see more effort to change the incentive package for sales reps, on the premise that “not all prescriptions are considered equal.” Pay incentives will motivate reps to win more non-controlled, third-tier reimbursed prescriptions rather than just focusing on the volume of scrip. This in turn will provide the rationale for more culling of the ranks-selective deployment of this human resource is key.

3) Advances in information technology will continue to shape the conversation with customers on access, value, and price.
That conversation is going to take place in public, as evidenced by the growth of cloud computing, which “hyper-democratizes” access to the vast resources of the Web-it’s the everyman’s Google. But Big Pharma is a business, with proprietary interests, so a key priority that will play out through 2012 is marking progress in defining basic standards on the application of IT. The goal is to ensure those business interests are protected while adding benefits through agreed channels for data sharing-the new Pistoia Alliance of companies engaged in precompetitive research is a good example-as well as improved IT management processes that raise efficiencies and lower costs.

Government regulators can help speed this trend-or delay it. The problem is that key agencies like the FDA are way behind industry in adapting to the IT revolution. Internal reforms are vital, because done right IT can help advance the portfolio through faster lead times and building that better case for competitive differentiation.

4) Preserve those reputational assets. 
Maintaining a “license to operate” is becoming more important as the reach of governments extend from regulatory oversight to direct involvement in the business-as a payer and customer. The gap between strict legal prohibition and the more murky terrain of ethical lapses is narrowing; overall, the “zone of vulnerability” is expanding and is now global in scope. 2012 will see major new efforts by U.S. and European regulators to apply anti-bribery statutes to companies’ overseas promotional activity, including inducements by CROs and other third parties to influence the conduct of foreign clinical trials. Active management of the drug shortage problem is another imperative; it is not enough to blame the problem on FDA or on quality issues linked to generics.