Big pharma has big problems

Big pharma has big problems. The root cause is a lack of research and development productivity, which means a dearth of new products to make up for looming patent expirations. Something near half of big pharma’s revenues will be threatened by generic competition within the next three to four years, and that will radically change the face of the industry.

The R&D productivity problem isn’t exactly new. When I was at the Boston Consulting Group (BCG) in the mid-90s we were already talking about the “NCE gap,” which referred to the number of new chemical entities that needed to be developed to justify pharma companies’ valuations at the time. Back then, there was still a possibility that new discovery tools would boost productivity and prevent a collapse of the industry.

Over the next decade or so, pharma largely managed to maintain its revenue growth and valuations, but things weren’t as healthy as they looked. The revenue growth was due to price increases, new indications for existing products, changes to guidelines (e.g., blood pressure, cholesterol) that increased the number of people who were recommended for drug therapy, combination products, new formulations, growth outside the U.S., and the arrival of the Medicare Part D prescription drug coverage. Almost all of these growth levers are now tapped out.

According to the Washington Times (Drugmaker ads to target Obama idea) the pharmaceutical industry is now planning a large advertising effort to undermine President-Elect Barack Obama’s plan to have the government negotiate drug prices on behalf of Medicare, rather than leaving it up to the PBMs that do the job now.

My old BCG buddies are at it with a new report, which the Times cites.

Giving Medicare the authority to negotiate drug prices - a provision that they currently don’t have - would cause the pharmaceutical industry to lose $10 billion to $30 billion in annual revenues, according to a report released last month by the Boston Consulting Group.

“If you start to take a pretty big price decrease out of that large market, it has an enormous impact on drug companies and really their ability to generate their type of shareholder return that they have had in the past,” said Peter Lawyer, a senior partner with Boston Consulting.

According to the Times, the ads will “tout the importance of free-market health care” and may try to have the same impact as the famous Harry and Louise ads of 1993 that undermined the planned Hillary Clinton-led reform bill. (By the way the brains behind the Hillary effort was ex-BCGer Ira Magaziner.)

If that’s really the aim, someone is misjudging the mood of the public. People aren’t looking for “free-market” anything at the moment, especially when what the pharmaceutical industry really means by “free market” is pricing freedom for themselves. And remember, drugs are protected by patents, which are granted by the government, not the free market.

Here’s some friendly advice to the pharmaceutical industry: don’t make the mistake of attacking the policies of our new President. Such a move is likely to backfire.

David E. Williams is co-founder of MedPharma Partners LLC, strategy consultant in technology enabled health care services, pharma,  biotech, and medical devices. Formerly with BCG and LEK.

When I see patients in my (nonsurgical specialty) practice, elderly patients (and often younger ones with high medical usage) with long lists of medications, I feel that we are really diverting a lot of wealth for little in return. For most costly drugs, there are reasonable generic substitutes (of course not for all drugs and for every patient, I am aware of allergies, side effects, interactions). And when I see elderly people who get a lot paid by medicare part D and still have substantial copays, I do think that for these folks, there basically is a second tax, and a very high one.

Posted by: rbar | Nov 19, 2008 9:04:19 AM

Pharma is just tyring to fend off challenges to their revenues and their profits but the hand-writing is on the wall. Economist had a brief piece on it but the future of pharma companies profits is going to be in the BRIC countries and non-G20 countries outside of North America and the EU zone.

http://www.economist.com/business/displaystory.cfm?story_id=12601852

Posted by: MG | Nov 19, 2008 9:53:04 AM

When the new, expanded Medicare for All is implemented upon the passage of H.R. 676, the pharmaceutical companies will then have to begin negotiating their prices with the government as they currently do with the VA. This will bring drug costs in the USA more in line with those much lower costs that are found in most every other country around the world.

If you believe that affordable health care in America should be a right and not a privilege, then join HR676.org today and your voice will be heard.

Larry Pius, Dir
www.HR676.org

Posted by: Larry Pius | Nov 19, 2008 10:37:08 PM

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