Pharmaceutical Industry Has Big Problems

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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.

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“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.

Reprinted by the Health Care Blog.

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