Massachusetts Health Insurance Bill Could Be Decisive Shot in Prescription Drug Revolution

Armen Hareyan's picture

Prescription Drugs and Health Insurance

$35 Billion in Branded Drug Profits are At Risk in Three to Four Years If 'Reference Pricing' Becomes National Battle Cry, according to Bain & Company

"Reference pricing" - a prescription drug cost-control measure gaining significantly more prominence this month as Massachusetts lawmakers passed a mandatory health insurance bill - could cost branded drug makers $30-35 billion in profits over the next three to four years. That hefty financial risk to Big Pharma, equivalent to about 25% of total branded drug industry profits, is detailed in new healthcare industry research released today by Bain & Company, the global business consulting firm.

A response to growing pressure from government and commercial healthcare payers advocating greater use of lower-cost generics, "reference pricing" requires officials to judge the effectiveness of comparable drugs and to calculate reimbursements based upon the least expensive choice. The cost-control measure, first implemented in Europe, already has driven down pharmaceutical prices substantially in Germany. Bain & Company expects the use of reference pricing to begin in the U.S. in mid-2006 as the cholesterol-lowering drug simvastatin becomes available as a generic, with more extensive use in 2007 as therapeutic substitution gains widespread acceptance.

"Reference pricing could empower government agencies, managed care organizations and their intermediaries to dramatically change the pharmaceutical landscape in the United States," said Charles Farkas, partner and head of Bain's North American healthcare practice. "The growing demand for less profitable generics undercuts analyst expectations of 8% annual growth for the pharmaceutical industry through 2015, which may be overstated by as much as 25%."

"Given the current political and economic pressure on branded drugs, the industry shouldn't count on optimistic growth projections. In fact, we may actually see overall pharmaceutical spending levels moving back to their historical relationship as a percent of annual GDP growth in the U.S.," Farkas added.

Generic drugs currently account for just over half of total prescriptions filled in the United States, according to the research. This could increase to well over 65% by 2009, driven in large part by the approximately $60 billion in branded drugs (2005 sales) that are losing patent protection over the next 3 years. Industry-wide, Bain & Company anticipates that generic drug sales will grow at an annual rate of 10-12% over the next few years, more than twice the rate of branded drugs.


Bain & Company recommends several strategies that pharmaceutical companies should consider to cope with reference pricing as it increasingly becomes a cost-cutting battle cry due to the movement towards mandatory health care insurance in Massachusetts and elsewhere, the increasing expiration of branded drug patents, and other factors.

"The days of turning a profit from a 'me-too' branded prescription drug are over. Differentiation and therapeutic superiority must be clearly demonstrated in the marketplace," said Preston Henske, a partner in Bain's global healthcare practice. "At the same time, Big Pharma must increase its focus on expanding and developing new market segments by focusing on unmet patient needs."

Among the strategies suggested by the Bain & Company research:

  • Eliminate "me too" drugs. Bain & Company encourages pharmaceutical companies to reevaluate the value of continuing with incrementally improved drugs that are third or fourth to market. Drugs that are not first or second to market will have to demonstrate clearly superior efficacy for a targeted set of patients or should be cut.

  • Pull the plug sooner on compounds that offer little likelihood of therapeutic differentiation. Bain & Company recognizes that this may drive up overall development costs. However, in the longer-term, pharmaceutical companies will be spared many money-losing marginal "successes."

  • Make the investment necessary to clearly differentiate prescription drugs already in the pipeline. Bain & Company warns pharmaceutical companies to be prepared for tremendous pressure ahead to rigorously demonstrate differences in efficacy.

  • Shift more attention to building business where medical needs remain underserved. Bain & Company cites market opportunities even in the more well-known medical areas such as Alzheimer's treatment, multiple sclerosis, diabetes and oncology.