Drug rebates: a lethal spiral

Offering rebates and price reductions gains market share in the short term, but in order to sustain the industry and in turn help patients, pharma needs to take a more collaborative approach and share its knowledge.

"This isn't just about saving money, most importantly, it is about making sure that patients stay well and get the best outcomes from their medicines." – so said Lord Howe, when he was head of the National Health Service in the UK.

The head of procurement from a hospital chain said: "I say: 'We need to improve our bottom line' and they hear: 'I want a discount!'"

Isn't there anything better that the pharmaceutical industry could deliver besides rebates?

There are plenty of requests from the so-called market and the pharmaceutical industry has the ability to fulfil many of them. One issue, though, is that pharma does not seem to listen to those who want broader solutions to their problems and not just pills.

It seems as if pharma only knows one game to play: 'killing by rebates'. At first, this approach could 'kill' competitors, but the side effect is likely to be 'suicide' in the longer term. As long as pharma's only strategy seems to be to beat competitors' prices, the number of pharma companies will shrink over time. There are already a number of countries where the drug business is an oligopoly, with very few companies left.

Who will survive the rebate battle?

An increasing number of physicians, payers and other stakeholders in healthcare are complaining about pharma.

Many physicians complain about the time lost to medical rep visits that deliver little of use. The reps appear trained to talk, rather than ask questions and listen.

Payers suffer from poor outcomes from treatments, when only half of all patients are compliant and fail to adhere to the planned and prescribed therapy.

It varies by country, but governments and health ministers are struggling with the role of pharma, when the industry sells drugs to hospitals for almost nothing and demands high prices when they are prescribed for outpatients.

Patient associations are angry at the inequalities, because they see high-end drugs costing a fortune for them, while in other countries they pay only a fraction of the price.

Is pharma sensing the coming headwinds?

Pharma is one of the only industries hiring medical reps and paying them to make unsolicited calls in an attempt to sell drugs to people who do not even buy.

When reps can no longer increase the pharma company's revenue, the bosses change strategy and reduce prices. Every percentage point of rebate cuts into profits. One day, the margin is so slim that field forces have to be reduced. Then the CEOs and top management suddenly discover that the top line does not really suffer from the change. Instead, they see that, after the so-called restructuring costs are covered, the bottom line rises sharply.

This contradicts basic economics and goes against the power of differentiation. Where is pharma's 'Apple'? Simply granting rebates appears to be the magic bullet, ready to cure all problems.

"There always is someone granting more rebate and offering a pill even more cheaply"

But one problem remains: there is always someone granting more rebate and offering a pill even more cheaply. This lethal spiral is turning fast in pharma currently. In Europe's largest drug market, the oligopoly is there: seven companies cover almost 80 per cent of the generic market.

In a globalised world, Good Manufacturing Practice (GMP) rules and US Food and Drug Administration surveillance globally applied, with huge differences in production and other costs, many companies stand no chance of escaping a deadly price war. There are a number of countries and companies, with FDA-approved production, following GMP and any other regulatory detail, that can produce at much lower costs than other producers could ever achieve.

There are pharma companies still profitably producing pills, at costs and prices that the poor and deprived, many governments and all payers dream of.

There is a cure to this monomial procedure of reducing prices and granting rebates: If the pharmaceutical industry would develop strategies to get actively involved and contribute to healthcare by sharing all their knowledge and expertise around specific diseases, this could add huge value and considerably improve patient outcomes.

The business model would change from selling pills to improving healthcare and the sales model would change from 'pushing drugs' to Key Account Management 3.0.

About the author:

Hanno Wolfram is the founder and owner of www.Innov8.de, a Germany-based firm offering consultancy for pharmaceutical companies. He is the author of the book KAM in Pharma 3.0, which was published in January.

Have your say: Is pharma ready to change and start knowledge-sharing?