Stakeholder Perspectives on The Pharmaceutical Industry in Transition

Ian Morrison

Outline

Key Issues for the Pharmaceutical Industry Perceptions and Attitudes Medicare Reform: Wholly Inadequate

Prescription Drug Benefit for Seniors (WIPDBS)

Consumer-Deflected Healthcare Implications for Pharmaceutical companies

The Ten Big Issues for the Pharmaceutical Industry

Costs for everyone globally, focus on Prices in the U.S(and therefore importation)

Losing the Value argument in the US and elsewhere Big Ugly Buyers and Tiering Coverage for the Elderly in the U.S. and Elsewhere AIDS in the Third World: Capitalism run Amok R&D productivity:

– Is bigger better or is it all a lottery– $ 4 Billion Blockbusters or 40x $100 million

Intellectual Property under assault Marketing practices as asset or liability: DTC, detailing, rebates and

sales force productivity Losing Friends and gaining enemies Leadership finally coming out from the bunker of self-righteous,

myopic, isolationism

Percentage of consumers who say each industry does a good job serving their customers

1997

% 1998

% 1999

% 2000

% 2001

% 2002

% 2003

% Change

since ‘97 Change

since ‘02

Hospitals 77 73 71 72 67 73 73 -4 -

Banks 75 72 68 73 71 74 72 -3 -2

Computer hardware companies 80* 78 80 76 78 59 71 -9 +12

Computer software companies 80* 77 80 78 80 60 70 -10 +10

Car manufacturers 70 69 70 67 67 64 64 -6 -

Airlines N/A 78 71 66 51 63 64 -14 +1

Telephone companies 80 76 67 64 61 58 57 -23 -1

Life insurance 64 63 61 62 60 55 56 -8 +1

Pharmaceutical and drug companies

79 73 66 59 57 59 49 -30 -10

Oil companies 59 64 55 39 27 38 42 -17 +4

Health insurance companies 55 48 41 39 38 51 40 -15 -11

Managed care companies 51 45 34 29 29 33 30 -21 -3

Tobacco companies 34 32 31 28 28 25 30 -4 +5

How Consumers Rate Industries

* In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately

** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002

Health Care Tops List of Industries Public Wants to See More Regulated

20%

8%

10%

11%

21%

24%

26%

30%

31%

35%

35%

44%

52%

57%

59%

60%

None of these

Computer hardware companies

Supermarkets

Computer Software Companies

Banks

Car manufacturers

Packaged Food Companies

Telephone Companies

Airlines

Life Insurance Companies

Tobacco Companies

Oil Companies

37%

27%

40%

22%

35%

14%

23%

12%

20%

34%

11%

3%

4%

13%

7%

4%

Should Be More Regulated Generally Honest & Trustworthy

Hospitals

Managed Care Companies

Health Insurance Companies

Pharmaceutical Companies

Medicare Drug Benefit

Catastrophic Coverage

No coverage

Partial Coverage up

to Limit

Deductible

5%

$2850 Gap

25%

$5100*

$2250

$250

Equivalent to $3,600 in out-of-pocket spending: $250 deductible + $500 (20% cost-sharing on $2000) + $2850 (100% cost sharing in the “gap”)

Source: Kaiser Family Foundation

Out-of-Pocket Spending

Medicare Part D Benefit+ ~$420 in annual premium

18% 15%

30% 39%

52% 46%

0%

20%

40%

60%

80%

100%

Total 65+

Favor

Oppose

No opinion

A Slight Majority Favor the New Medicare Plan…

Source: CNN/USA Today/Gallup, Dec 5 - 7, 2003.

Do you favor or oppose the new prescription drug benefit for Medicare recipients?

54%44%

33%

25%33% 51%

20% 23% 16%

0%

20%

40%

60%

80%

100%

Total 50-64 65+

Pleased

Dissapointed

Not sure/Don't enough tohave opinion

…But Most Elderly are Disappointed with the Specifics

Source: Wall Street Journal/Harris Interactive, Dec 3 - 5, 2003.

Congress has passed a new Medicare Bill that includes a new prescription drug benefit. Which of the following best describes how you feel about the new Medicare Bill?

Disappointment over Expanded Private Sector Involvement and a Lack of a Reimportation

Provision

Total 50-64 65+ % that “Approve” % % %

Prescription drug benefit for people on Medicare starting 2006

55 57 48

A drug discount card which will allow seniors to get a modest discount on their prescription drugs

65 68 44

A plan to help insurance and managed care plans to compete with traditional Medicare

47 47 30

A law which prohibits importing less expensive drugs from Canada

17 14 12

How do you feel about the four following pieces of the bill?

(Asked of those who “know enough to have an opinion” (58% of all adults)

Most Consumers Think the Medicare Bill will Benefit the Rx industry More than

the Elderly

36%

50%

14%

28%

59%

13%

Medicarerecipients

Drug companies No opinion

All65+

Source: CNN/USA Today/Gallup, Dec 5 - 7, 2003.

Based on what you have heard or read about the new Medicare plan, do you think it will do more to benefit people who receive Medicare or do more to benefit prescription

drug companies?

Medicare Bill as Three MoviesAs Good as it Gets

Prohibition on Price Controls on drugs Medicare cannot use its raw naked purchasing power Prohibition on reimportation of pharmaceuticals from Canada Private Sector Handouts for corporations, health plans, PBMs (and

doctors and hospitals) MSAs and HSAs enabled and encouraged for the elderly (The Warren

Buffet PPO) No new Taxes for the rich And some fresh new coverage for the poor uncovered elderly who

are not in states with rich PACE or Medicaid programs

Medicare Bill as Three MoviesThe World is Not Enough

Wholly Inadequate Coverage when it finally arrives because most people will be paying for at least half their medications

Price Transparency now and in the future (discount cards in the short run and donut holes in the long run)

Drug industry will experience the coverage kicking in when many of the big blockbusters are off patent and when huge classes of drugs like statins will be both generic and OTC

Huge incentive for corporate America to phase out retiree health benefits or make them Medicare Compatible (a euphemism for shitty)

HMOs and HSAs will have to find a way to make money on anybody but the rich well elderly (all four of them)

When it comes to healthcare for the elderly we are all poor Is this bill a platform for future Democrats to go after the drug industry when RX

industry is at a low ebb, lacking innovation and subject to five years of public outrage about prices

What would Hillary do with it in 2008?

Medicare Bill as Three Movies The Ten Commandments

There shall be competition (Even if it is unpopular, doesn’t work and there are no willing HMOs or congressional districts willing to participate in it)

There shall be liberty for seniors to be confused by a myriad of private health plan and drug coverage offerings

There shall be skin in the game (consumer responsibility for payment through co-payments, deductibles and premium sharing) because it is good for consumers to pay at the point of care (it will stop them overusing the Medicare system for recreational purposes and it teaches seniors that they should look after themselves in their forties and fifties)

There shall be no supplementary coverage because supplementary coverage nullifies skin in the game

There shall be no new taxes for rich people, only raised premiums for all There shall be privatization because private is better than public (don’t argue,

this is a commandment) There shall be unrestricted free choice of plans each of which has a restricted

choice of doctors because choice is good There shall be no Canadian drugs in the veins of Americans even if the drugs are

made in America and purchased by Americans There shall be big differences in coverage among seniors but thou shall not covet

thy neighbor’s coverage There shall be no senior left behind……….. in traditional Medicare

The Argument For Consumer Responsibility for Payment

Consumers have been progressively insulated from the cost of care for the last 40 years

If they only knew how much healthcare cost and had to pay they would use it less

If they were responsible for paying they would also take more responsibility to become healthy and cost the system less

Consumers should have the right to choose and to trade up to better quality with their own money

When they are make rational consumer choices the market will be working and whatever is spent will be appropriate like any other market or sector of the economy

The Argument Against Consumer Responsibility for Payment

The 5/50 Problem: Most consumers that are heavy users have significant co-morbidity or serious illness like cancer, they didn’t choose this health status

One day in an American hospital and they are over their maximum deductible, so……

Catastrophic coverage is a green light for excessive care by hospitals and procedure-oriented specialists

While skin in the game can clearly move people around does it save money overall?

The equity problems:– A de facto reallocation of resources from poor to rich (my access to the

collective social capital of health insurance is better because I can come up with the economic down payment for physician visits and tests)

– Poor people with chronic illnesses will be disproportionately affected by consumer responsibility for payment

Consumer Exposure to Health Care Costs is About to Increase

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1980 1988 1990 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030%

5%

10%

15%

20%

25%

30%

Percentage of total personal health care expenditures paid out-of-pocket

Source: Centers for Medicare and Medicaid Services Projected

Per capita amount of personal health care expenditures paid out-of-pocket

Who Pays for Drugs?

48.2%

42.7%

39.5%

34.9%33.4%

32.0%

32.1%

37.1%40.0%

44.0%45.3% 46.2%

17.3% 18.0% 18.8%20.1% 20.6% 20.8% 21.2% 21.3% 21.8%

36.8%

54.7%56.2%

52.7%

59.1%

42.4%

27.3%26.5%28.5%

24.4%

16.6%

19.8%

10%

20%

30%

40%

50%

60%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data

Percent of Total National Prescription Drug Expenditures by Type of Payer

Private insurance

Out-of-pocket

Government programs

The Five-Tier Formulary

Old Generic

New Generic

Rebated Brands

Non-Rebated Brands

Look Good / Feel Good

Lowest Copay

Highest Copay and/or

Coinsurance

James Brown and Fernando Lamas Effect

Mortality

Morbidity

Mobility

Feel Good

Look Good

Quality of Life

Affluence of the Individual or Society

End-Point

“Skin in the Game” Matters

Trading down twice as often as trading up Rapid increase in generic and therapeutic

substitution Poor, chronically ill most effected Starting to lead to adverse health outcomes like the

uninsured Simple cost shifting without sophisticated disease

management is not the right answer in the long-term

Big Increase in Trading Down on Drugs

17%

34%

51%

11%

20%

37%

Not fill aprescription

Asked doctorto prescribe

less expensivedrug

Asked doctoror pharmacistfor a generic

drug

2003 2002

Base: Total cost of prescription drugs increased last year (53%)

Rx co-pay increase: More bargain-hunting since 2002. Low- and middle-income

equally likely to “trade-down”

Percentage of consumers who did the following in response to an increase in prescription drugs cost sharing

2003 by Income

2002

% 2003

% <$35k $35-

75k $75k+

Ask doctor or pharmacist for generic 37 51 56 61 40

Ask doctor for less expensive alternative 20 34 44 39 23

Use mail order service to fill Rx 16 20 18 18 22

Not get a prescription filled 11 17 31 21 7

Take medication less often than you should N/A 13 32 12 5

Base: Copays for prescription drugs increased a lot or a little in past year

The Coming Challenges

Price– Reimportation– Cost-effectiveness in formulary design– Reference pricing– World pricing

Innovation– Show me the molecules!

Value– The Cutler Defense: “Your Money or Your Life”– The Danzon/Fujikawa Defense

The Value of Prescription Drugs

14%

21%

24%

32%

35%

36%

43%

63%

Health insurance companies

Brand name prescription drugs

Hospitals

Pharmacies

Doctors

OTC (non-prescription) drugs

Medical devices

Generic prescription drugs

Percentage of consumers rating each of the following a very good or fairly good value

Source: Harris Interactive/Wall Street Journal. Aug 19, 2003

The Danzon/Fujikawa Defense

The structure of the entire pharmaceutical market

Brand, Branded Generic, Generic and OTC Prices

Purchasing Power Parity Deflators Innovation: Novel large molecules Costs of distribution

Unit Volume for Branded vs. Generic drugs Varies by Country

28%19%

36%15%

33%16%

29%

14%22%

36%

24%

33%

35%31%

14%30%

21%

43%

32%

12%

32%44%29%

7%18%

2%

37%

8%

US

Cana

da

Fran

ce

Ger

man

y

Ital

yUK

Japa

n

Single source originatorMulti-source originatorBranded generic Unbranded generic

Source, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs, October 2003

Outside US Prices for Generics are Comparable or Higher than US prices

0

0.5

1

1.5

2

2.5

Canada France Germany Italy UK Japan

Originator single source drugs Generic drugsSource, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs,

October 2003

Based on Health PPPs, All countries Except France appear to have Higher Drug Prices

than US

0

0.5

1

1.5

2

Canada France Germany Italy UK Japan

Current exchange rates GDP PPP Health PPPSource, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs,

October 2003

Per Capita Use of Newer Drugs is Lower in Other Countries Compared to

US

94

100

58

25

125

57

26

44

82

62

32

1

Canada

France

Germany

Italy

UK

Japan

121 months or more 24 months or lessSource, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs,

October 2003

US=100

The Missing One-Liners

Hey you elderly, stop bitching that Lipitor is cheaper in Canada and learn how to use the proper purchasing power parity deflators

Sure you pay more for brand name drugs but you’re getting young, long molecules

OK, Brand name drugs are more expensive here but at least we aren’t screwing you on generics and aspirin like the Germans

Who would you rather have the money, American drug companies or French pharmacists?

The Transformation of Pharmaceuticals

Discover a unique white powder

Search for a therapeutic action Establish safety and efficacy Make sure it’s better than

available alternatives Promote to the profession Get a passive payer to pay for

it

Design a white powder with a predictable therapeutic action

Establish safety, efficacy and cost-effectiveness

Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings

Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press)

Get an active payer to pay for it

Past Future

% o

f P

atie

nts

Do nothing

Chronic pill popping

(Rolaids for Yuppies)

Me-too Fast Followers

& Generics

Higher PriceHigher Efficacy

InnovativeTechnology

Big Pharma Success

Heavy-duty traditional therapy

Evidence-based medicine

Consumer payment

Marketing

Demonstration of clinical efficacy

Traditional Pharmaceuticals vs. Advanced Therapeutics

Cost

Happy Biotechnologist Scenario

We have the best stuff Sure it’s expensive, but it works Because it works there are savings elsewhere This is complex – do not try this stuff at home As generic competition makes costs go down for

some technologies, there will be more gross margin left for us

Catastrophic drug coverage insulates consumers from caring about price

Biotechnologist’s Nightmare Scenario

Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom

It’s complex brewing not chemistry, but how hard could it be? Big ugly buyers and providers incensed about price of technology High efficacy focused on small sliver of needy, desperate patients Payers/purchasers

– Medicare inpatients – the stent effect– Medicare hospital outpatient – the value case– Administering Physicians e.g. oncologists

zero-sum game on incomes “Plop, plop” vs clinical efficacy

– Consumers Co-insurance on top tier All drugs in CDHP

Can you pass the NICE/Kaiser Test?

Meeting the Business Challenge

Marketing– Increased consumerism: reaching the patient– Sales force Productivity– Doctors as economic gatekeepers for patients– Tiering will continue: positioning products in tiers– Coverage and contracting: PBM negotiations become more complex

Development– Global role of payers in the development process e.g. NICE– Embedding market understandings in go/no go decisions– Regulatory and reimbursement hurdles become more complex

Research– New science versus traditional R&D– R & D Productivity and the only 2 problem

Innovation Imperatives

Consumers love new technology Innovation is you ace in price control debates But if you don’t truly innovate in a way consumers appreciate and

pay for……. The new environment shifts responsibility for payment increasingly

and transparency of pricing to consumers Delivering innovation to an end user consumer that has value they

are willing to pay their own money for Do not overestimate (even) Americans willingness to trade up Are we comfortable with overt tiering?

Little R, Big D, Enormous M

PBMs

Pharmacists

Payers

Patients

Physicians

Marketing

R

R

R

R

R

R

R

R

R

Development

Big Pharma

Selected Partnerships

Five Industry Giants 2014

The Initial Company GSKBMSJ&J

The Latin Root Company AstraAventiNovarticus

The Mother of All PBMs Advanced MedcoExpress Care-Scripts

AmgenaMerck Biotech Baby eats an Adult

Pfizer