Historic change reduces access to innovation

Erroin A. Martin

Von Gehr Consulting Group

The passage of comprehensive healthcare reform in the United States begins a new chapter for the pharmaceutical industry. The ability to set pricing and launch new products into the marketplace will take a new twist. The price controls that come with more government intervention, and have been experienced by Pharma in the rest of the world, are about to become the business norm for marketing drugs within the U.S. Access to U.S. markets will become restricted.

The old argument

It has been the argument for the pharmaceutical industry that the pricing for patented drugs was meant to help pay off the investment made in R&amp,D. Since it cost anywhere from $800 million to $1 billion to bring a drug to market, that the prices per pill, per prescription were so high. That is especially true in the case of pharmaceuticals in the U.S.

The other side of the coin was that the U.S. consumer was paying for (some would say subsidizing) the price controls placed on pharmaceuticals in other developed markets. A pill of Lipitor®i would cost a dollar in Europe and four dollars in the U.S. The companies charge more in the U.S. because the market and regulators allow it. In accordance with the previous argument, a profit is needed to pay back the R&amp,D.

Therefore to follow the argument to its conclusion, the greater the profits the pharmaceutical companies could make, the more money would be spent in R&amp,D (Figure 1).

 Figure 1

Figure 1: Profits = R&amp,D spend?

Yet, as money was spent on R&amp,D this did not increase the number of new drugs that were launched. It has been assessed that the return on investment for the billions of dollars used to fund the R&amp,D departments has not changed since the mid 1990’s (Figure 2). The result has been to stand the core premise of the profit argument in jeopardy.

 Figure 2

Figure 2: ROI on R&amp,D spend

The fact that Pharma negotiated this time with the Federal Government to reduce costs by $80 Billion shows that they too have recognized that the profit argument is no longer valid.

The current state

Even before comprehensive healthcare reform was passed, both costs and access to pharmaceutical agents were under intense pressure. When Federal, State, and third party payers (insurance companies) are combined they represent roughly 96% of payment for pharmaceuticals (Figure 3). Access was already limited by formulary decisions with differing levels of co-pays. The co-pays are provided to encourage push back on providers by price conscious patients, while also providing a subsidized benefit to patients.

 Figure 3

Figure 3: US split of drug payers

Treatment algorithms are currently in place by insurers and other payers to ensure that healthcare providers treat with generics first or approved branded agents. The result being that a new agent launched into the marketplace is not covered and must be paid for out-of-pocket by the patient. It is at this point that patients see the full price of the medicines they wish to purchase, at times creating another barrier to treatment. In fact it is one of the few times the patient actually has a full awareness about their cost of care.

Since passage and the future

Barring any changes to the currently passed legislation, the status quo will not change immediately. The government has been researching price controls extensively since the passage of the Medicare Part D – Prescription Drug Coverage Act.

The savings touted by proponents of the bill and Pharma for reduced medical costs come really from one main area: patent loss on popular drugs. Agents like Lipitor® and Plavix®ii, along with others, will begin to go off patent. This represents $137 billion dollars in lost revenue due to generic competitioniii. The impact from pharmaceutical spending declining will be seen very soon.

The only factor reversing that trend is the ever increasing demographic of retirees as the baby boom generation continues to age. Disease states, like hyperlipidemia, arthritis, and Alzheimer’s to name a few will begin to see drastically larger number of patients. Since these diseases are incurable and chronic, they are sustained costs that must be carried until the patient dies.

Already since the passage of universal healthcare in Massachusetts, healthcare treatment costs have not gone down but only continued to increase. One of the most draconian formularies for the treatment of many different illnesses has been instituted to contain costs. The same will hold true as the full range of benefits from comprehensive healthcare reform becomes instituted in 2013.

“During the next five years, markets will be impacted by numerous payer actions, including the imposition of price cuts on existing drugs, the raising of standards required to achieve reimbursement of innovative therapies, and the use of economic incentives for prescribers and pharmacists to drive a shift to generic alternatives.” – IMS Health, Inc. 2010 Forecastiii

Access to new and existing treatments will be restricted. Using the comparable effectiveness treatment standardsiv that have been set up by NICE in the United Kingdom as an example, newer agents will not be covered. Already the FDA has not approved or delayed approval on life saving cancer therapies because of archaic investigation standards. There are now calls within the agency to have companies test new therapies against existing therapies and that they must show superiority to achieve approval. That would definitely reduce the number of “me too” drugs from reaching the market. It would also mean that some disease states would have few options available for treatment.

The United States Government Accounting Office (GAO) has been researching how other countries negotiate pricesv. Since the government is the largest payer for healthcare treatment, now and presumed to be going forward, the pharmaceutical industry will be negotiating under one of three modalities, Ceiling Prices, Reference Prices and Profit Limits. The easiest therapy to control (and therefore demonstrate cost containment) is pharmaceuticals when it comes to healthcare.

All of these items will restrict access to current therapies and new discoveries. The costs will increase for pharmaceutical companies to bring new drugs to market in developed countriesvi.


The impact of comprehensive healthcare reform will not be seen immediately when it comes to access to pharmaceutical treatments. It will happen gradually over time. The vast majority of healthcare consumers will have less choice when it comes to treatment options. Access will be given to those that can afford to pay.

If there are any doubts about this, look where Pharma is turning its attention. Resources, facilities, and new infrastructure are being built in what IMS Health, Inc. (NYSE: RX) calls “Pharmerging markets”iii. According to the 2010 forecasting report these markets represent strong growth now and in the future, despite the current economic conditions. They will become the new sources of profits for Pharma.


i. Lipitor (atorvastatin calcium) is a registered product of Pfizer, Inc.

ii. Plavix (clopidogrel bisulfate) is a registered product of the Bristol-Myers Squibb/Sanofi Pharmaceuticals Partnership.

iii. IMS Health, Inc. 2010 Forecast for Pharmaceutical Market Growth.

iv. National Conference of State Legislatures Summit, 21 July 2009, Philadelphia, PA “Comparative Effectiveness: Better Care or Rationing?

v. An Overview of Approaches to Negotiating Drug Prices Used by Other Countries, U.S. Private Payers and Federal Programs, GAO-07-358T.

vi. “Health Law Surprise Is Page 1,617 Demanding Which Drugs Work”, Bloomberg.com

About the author:

Erroin A. Martin is a Business Advocate with the Von Gehr Consulting Group, LLC, a business coaching and consultancy provider for business owners, executives, and entrepreneurs. He has fifteen years experience working within the pharmaceutical, manufacturing, natural resources, medical devices, software, technology, business services, and agriculture industries in various levels of leadership across six continents. He has led diverse teams in sales, marketing, planning, and in the Army. He currently coaches business leaders and physicians in the tools needed to plan for their success. Learn more about the Von Gehr Consulting Group, LLC at www.vongehrconsulting.com or call +1 203 433 8079. You can follow him on Twitter at @Erroin.

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