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Global Price Sustainability in Key Pharmaceutical Markets: Impact on Innovation and Health Outcomes

Robert A. Freeman, Ph. D.The Freeman Group, LLC.

Senior Fellow, The University of MarylandCenter on Drugs & Public Policy

Senior Scholar, Thomas Jefferson UniversityDepartment of Health Policy

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Europe & JapanMore of the same Through 2012 –

no radical changeJapan

• Bi-annual price reductions to continue• Innovative drugs fare relatively better at bi-annual price reductions• Radical change unlikely while economy depressed• Some encouragement of generics

Europe• Price convergence to an EU average driven by

– price referencing, parallel trade, EURO• Increasing use of therapeutic class based internal reference pricing (F, I, Sp)

– Limits price of brands in “commodity” classes• Product differentiation essential to maintain price• Average prices in Accession countries lower than current EU average• Recent trend, flat, represents best case for future

Measured decline 1-2% a year

Flat to declining

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Price movements US, Japan, EU52000-2002

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2000 2001 2002

% C

hang

e in

Ex-

Mnf

Pric

e

US Japan EU Top 5

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European prices are converging

Source: Apoteksbolaget 1999

European Drug Index: 1986-1999

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US Pricing Sensitivities included Medicare, Medicaid, 3rd party rebates, and parallel trade.

Baseline Net Sales

2002 2004 2008 20102006

-14.5%

Medicare Rx coverageMedicaid rebate increasePrivate third party rebateParallel import

-3.6% -7.3%-11.9%

Catalog price increase included in Base Case

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Anatomy of Price in the US Market

Average wholesaler price (AWP) -- Price to cash patients -- Reimbursement reference price

Actual reimbursement to retailers

Wholesale selling price to retailers

Ex-manufacturer price -- Wholesaler acquisition cost (WAC) -- Catalog price

Price to private third party payers

Price to states / hospitals

Price to Federal government

$125

$115

$102

$100

$84

$71

$60-$40

Structure/Dynamics

Dis

coun

tsC

hann

els

$4.43

$4.07

$3.61

$3.54

$2.97

$2.51

$1.42-$2.12

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3rd PartyPBM/HMO

Hosp/LTC Non Contract

EMPLOYERRX COVERAGE

CASH

NO RXCOVERAGE

(CASH)

PRIVATE SECTOR

VA/DOD

FEDERAL

MEDICAID(POOR)

STATEPROGRAMS(NEAR POOR)

STATE

PUBLIC SECTOR

TOTAL Rx MARKET

% of % of BusinessBusiness 1%1% 10% ( 10% ( ****)) 7%7% 7% ( 7% ( **))

Average Average Discount Discount off WACoff WAC

Average Discount 18%

15%15% 7%7% 53% ( 53% ( **))

28%28%

45%45%(26-65%)(26-65%)

0%0%0%0% 29%29%16%16% 29%29%

* 3rd party increases over time, cash decreases. Assumes Medicare Rx privately administered (most likely case).** Decrease in Medicaid business over time assumes dual eligibles covered under Medicare.

Approximately 75% of the US business is contracted. All contracted business is expected to require deeper discounts over the next several

years.

Structure/Dynamics

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Average Discount

19%

3rd PartyPBM/HMO

Hosp/LTC Non Contract

EMPLOYERRX COVERAGE

CASH

NO RXCOVERAGE

(CASH)

PRIVATE SECTOR

VA/DOD

FEDERAL

MEDICAID(POOR)

STATEPROGRAMS(NEAR POOR)

STATE

PUBLIC SECTOR

TOTAL MARKET

% of % of BusinessBusinessOpportunityOpportunity

1%1% 9%9% 0%0% 7%7%

Average Average DiscountDiscountOff WACOff WAC

13%13% 2%2% 68%68%

31%31%

30%30% 0%0%0%0% 21%21%22%22% 31%31%

Typical discounts in a primary care market skew towards third party channels

Structure/Dynamics

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3rd PartyPBM/HMO

Hosp/LTC Non Contract

EMPLOYERRX COVERAGE

CASH

NO RXCOVERAGE

(CASH)

PRIVATE SECTOR

VA/DOD

FEDERAL

MEDICAID(POOR)

STATEPROGRAMS(NEAR POOR)

STATE

PUBLIC SECTOR

TOTAL MARKET

% of % of BusinessBusinessOpportunityOpportunity

1%1% 41%41% 6%6% 2%2%

Average Average Discount Discount off WACoff WAC

Average Discount

19%

16%16% 24%24% 10%10%

30%30%

53%53% 0%0%0%0% 21%21%5%5% 10%10%

Some specialty products are more evenly spread across private and public payers

Structure/Dynamics

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1. US remains premium-price market, although with reduced pricing flexibility2. Market-based healthcare delivery continues to dominate (i.e. no “single payer” system for

US as a whole)3. Cost shifting to consumers continues and accelerates

• Increasing price sensitivity• Decreasing persistence and compliance

4. Aging population (and innovation) continue to fuel volume growth, offset by consumer behavior described above

5. Government role increases in healthcare delivery and funding• Some form of Rx coverage for at least some additional senior citizens will become

available• Rebates paid to states under Medicaid program increase

6. Generic penetration increases, based on• Consumer price sensitivity• Payer (public and private) promotion• Patent expiries

US Rx Market Assumptions To 2012Assumptions

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A number of factors will affect US pricing sustainability over the next five years.

Key Sensitivities

1. Medicare reform/Rx benefit2. States/Medicaid3. Third party reimbursement4. Consumer behavior5. Parallel tradeIssues to watch

• Intellectual property erosion• Compelled OTC switching

Key Sensitivities

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States will continue to exact price concessions; Medicare reform or good economy could mitigate

• Supplemental rebates will spread to 40 states by end of 2003 and to all states by 2005.

• Mental health Rx and oncology are no longer excluded from supplemental rebate requirements in some states.

• States form multi-state purchasing cooperatives to secure additional price concessions for Medicaid enrollees and other state populations (elderly, near-poor, state employees)

• By 2006 up to 8 states may have passed ballot initiatives extending deep discounts to Medicaid and other populations.

Sensitivities: States/Medicaid

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Third Party Payers shift cost to patients to encourage them to “buy wisely”

• Three tier co-pay schemes ($5 for generics, $12 for preferred brands, $25 for non-preferred brands) become more competitive resulting in deeper discounts (-$):

• Steeper co-pay differentials ($5, $15, $30) shift market share and increase competition for preferred second tier position.

• Second tiers in crowded classes can be restricted to one or two brands, creating greater price competition.

• Three tier co-pay benefit design evolves to other schemes:• Short term schemes are dominated by incentives favoring lowest net

cost Rx (-$ and Vol).• Long term schemes may emerge with incentives favoring

classes/brands that deliver better outcomes (+ $ and Vol for brands that deliver such value).

Sensitivities: Third party reimbursement

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Consumers respond to Third Party incentives in making Rx purchasing decisions

• Consumers become more price sensitive when faced with tiering and ask for Rx with lower co-pay, rather than “trade-up” to premium brands with higher copays. (-$)

• Consumers with co-pay defined as a percentage of the Rx retail price (co-insurance) are exposed to the “real price” of Rx. (-$)

• Consumer price-based purchasing behavior begins to impact total medical care and spend (-$ and Vol):

• Some patients are Rx non-compliant, foregoing refills or skipping treatment days to make their Rx dollars go farther.

• Patients do not access other preventive or maintenance medical services (doctor visits, lab tests) and seek care when sicker.

Sensitivities: Third party reimbursement

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Parallel trade may become a serious threat when some combination of the following happens:

• Retail pharmacies and wholesalers are legally authorized to import Rx drugs from any legitimate source.

• EU-experienced parallel traders enter the US market.

• The global internet becomes an efficient and reliable source for importers.

.

Sensitivities: Parallel Trade

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2003 US Pricing-related market drivers

Downward drivers

2003 2010

Baseline business shape

Medicare Rx coverage

Supplemental Medicaid/state rebate

Increased rebate to 3rd-party payers

Parallel trade risk

Upward driver Annual catalog price increase

‘

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Scenario Assumptions

• 3%/year catalog price increase• Increasing third party rebates • 3%/year catalog price increase• Increasing third party rebates to secure preferred tier status• Impact of Medicare

• Catastrophic coverage and discount cards to 2005• Insurance coverage beyond, private market (3rd party) administration

• Additional Medicaid rebates of 15% over 2002 levels (ie 37% discount by 2010)• Minimal negative impact from Parallel Trade

• Low probability of legalization/major impact• Pressures diminish with Medicare coverage

• 3%/year catalog price increase• Additional Medicaid rebates of 27% over 2002 levels (ie 50% discount by 2010)

• Six states pass price control ballot initiatives by 2006• Impact of Medicare coverage (-4% overall)

• Catastrophic coverage and discount cards to 2005 • Government administrated Insurance coverage beyond (feds take over from states), with

price controls (FSS or Canadian reference pricing)• Third party rebates increase with collapse of public pricing

• -50% discount for ½ of third party by 2010• -27% discount for ½ third party by 2010

• Minimal negative impact from Parallel Trade (see above and notes)

Current (LTF)

Most Likely

Worst Case

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Summary: Impact on Net Sales

Upward 1. Catalog price increase + 18% + 18% +18%

Impact by 2012(baseline is 2002 )

Downward (additional rebate%)2. Medicare Rx coverage - 0% - 2%

- 4%3. Increased Medicaid rebate - 1% - 1%

- 3% 4. Increased rebate to 3rd party - 6% - 6%

- 15% 5. Parallel trade - 0% - 1%

- 1%

Drivers

Worst-case Scenario

ML Scenario

Total Downward - 7% - 10% - 23%

CurrentAssumption

Net Price Change: 2012 + 8% + 3% -14%

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Net Effect on Innovation and Outcomes

• Industry cannot sustain current R & D levels and fund future research, especially high risk research.

• Let biotech and niche pharmas take risk• Outsource to India and India• Mergers ??

• Current business model based on discovering products with annual sales of >1.0 Billion is not sustainable.

• Move into “life-style drugs”, generics• Personalized medicine: smaller markets but better margins

• Evidence-based medicine and personalized medicine may become the new model.

• Effect on health care unknown at this point but probably negative

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Alternatives

• Increase price levels in EU, Asia and NA• Change national reimbursement mechanisms• Use national tax policies and trade agreements in

lieu of price controls• Patent buy-outs• Marginal cost pricing with tax credits equal to value of

innovation• No risk loans