The future of the pharmaceutical industry
Colin Walsh and the Capgemini UK Life Sciences team
These have been dark days for the global economy, and the short-term prospects for the pharmaceutical industry look uncertain. The industry is currently undergoing change and restructuring on an unprecedented scale, however, external pressures are likely to continue to increase, accelerating the need for, and the extent of, change.
The current drivers for change are well recognised and catalogued: the impending patent cliff, increasing pressures to reduce prices, the move to smaller niche products as opposed to blockbusters, and the resultant decline in the stock market valuations of pharmaceutical companies.
These forces have set in place a wholesale rethink of the economics of the pharmaceutical industry. What has not yet emerged, however, is a clear vision of the future: most are still reacting to these forces rather than redefining and shaping the industry itself.
Until recently, an incremental and reactive approach to change was sustainable, since the earlier drivers for change emerged relatively slowly and spread across the globe gradually. The credit crisis has, in our opinion, altered that picture, necessitating a more radical and proactive approach to change. The bail-out of the financial system across the globe has left a legacy of debt that economies have yet to come to terms with. Because many of the pharmaceutical industry’s major customers are governmental payers, it will be dramatically impacted by these events.
Funding pressures in the UK
From a UK perspective, NHS funding is under severe pressure. The Department of Health is looking to cut some £20bn annually, which means a 20% cut over the next four to five years. Spend reductions of this size are a major challenge. Infrastructure changes, such as closing hospitals, are difficult from a political perspective, while decommissioning and redundancy costs mean that the associated savings are slow to be realised.
A much easier and more likely target for politicians of any colour would be pharmaceutical spending. Cost-cutting in this area will put pressure on existing medication but also refocus scrutiny on new, emerging, niche therapies. As the NHS budget declines, these new treatments will be required to clear higher cost-effectiveness hurdles.
“From a UK perspective, NHS funding is under severe pressure. The Department of Health is looking to cut some £20bn annually, which means a 20% cut over the next four to five years.”
While the spending squeeze may make it hard for the NHS to afford innovative treatments, NICE is starting to look seriously at ways to get round the problem. For example, it is working with other NHS bodies to accelerate the adoption of medicines, devices and diagnostics that it considers worthwhile in an attempt to realise the efficiency gains they promise.
U.S. healthcare reforms and the spending squeeze
An even more significant chain of events for the industry is playing out on the other side of the Atlantic. The Obama administration is making progress on its much-heralded healthcare reforms and has moved significantly to expand insurance coverage. The resultant expansion of demand will clearly be a good thing for the industry.
However, once demand has grown, the Obama administration will need to ensure that healthcare provision remains affordable. This would be a challenge at the best of times, but the U.S. government needs to do it at a time when healthcare expenditure is required to fall by $80bn over the next 10 years.
The administration could attempt to alter the way physicians and hospitals practise medicine, perhaps b following the NICE example: assess cost-effectiveness, then establish and enforce treatment guidelines. However, such a step would be very difficult in the U.S. because of the lack of any central mechanism to drive the change.
The other obvious strategy would be to tackle the prices that pharmaceutical companies charge for their products. It is hard to see the U.S. moving away from a free market approach to pricing, but what could be envisaged is the introduction of a ceiling for reimbursement, above which the individual would need to make up any difference. In a more subtle way, this step would put downward pressure on prices.
“It is hard to see the U.S. moving away from a free market approach to pricing, but what could be envisaged is the introduction of a ceiling for reimbursement…”
The concept that pharmaceutical companies can charge what the market will bear is not sustainable: the market simply can’t bear it any longer. The U.S. has always been the most liberal market globally, and the pharmaceutical industry has made a significant proportion of its profits there. America has in many ways subsidised pharmaceutical innovation, therefore, the changes we have been discussing will directly impact the funds available for research &, development, with global ramifications.
Cost control and the regulatory burden
It is clear from the U.S and UK examples that the credit crunch is going to compound the challenges facing the pharmaceutical industry, both locally and globally. We are about to enter a decade where healthcare spending will be reined in. As a result, the funding of research &, development, and the allocation of those funds, will become a pain point for the industry. Given that a major cost-cutting programme is already under way across the industry, what more can we do to address these additional challenges?
So far the industry has primarily focused on driving cost and complexity out of manufacturing, back office and sales and marketing functions. More recently, research &, development has also started to feature on the cost reduction agenda.
Now, however, the industry must take a comprehensive look at all the drivers impacting the cost of product development. An important area for attention is the regulatory burden, an area where costs have increased significantly in recent years. The two main challenges in this area are Good Clinical Practice (GCP) guidelines and the European Clinical Trials (EU CT) directive. Reform of these regulatory arrangements could change the economics of drug development.
Developed by the industry in partnership with the regulators in 1996, the GCP guidelines have harmonised global clinical trials, but have also been partly responsible for the rise in the regulatory burden and associated costs. As signatory to these guidelines, the industry needs to take the initiative and renegotiate them in light of the changed environment. In addition, the EU CT directive needs root and branch reform, as it has made the EU an uncompetitive environment for clinical trials.
“It is clear from the U.S and UK examples that the credit crunch is going to compound the challenges facing the pharmaceutical industry, both locally and globally.”
If we are to maintain Europe as a centre for pharmaceutical development, then, the industry must work to change the regulatory environment. There are signs that governments may be receptive to such approaches: the UK government’s recent establishment of an Office for Life Sciences shows a commitment to support the industry in these difficult times. (Given the significant contribution that the pharmaceutical industry makes to the UK economy in terms of the balance of trade and direct and indirect employment, this commitment is not a purely selfless gesture.)
All stakeholders must collaborate on a new framework
Along with payers and industry, it is likely that the general population, too, will have to face up to stark new realities. Although there has been a rationing element to healthcare in most major markets, this aspect has only occasionally been the centre of public scrutiny, but now it must be confronted, and spending priorities defined.
Payers, industry and patients urgently need to engage in a serious dialogue in order to establish a new framework for the future: one where we all understand what our role is and what we can expect of the other parties. The danger is that this dialogue will never happen, and that the situation will simply evolve, with results that fall short of everyone’s expectations. Politicians are unlikely to want to face up to this challenge voluntarily as raising topics like healthcare rationing is not a route to popularity. Perhaps it is up to the industry, then, to make a serious and concerted effort to reform the regulatory systems. Once initiated, discussions in this area could act as a catalyst for a wider debate about the future of healthcare.
About the author:
Capgemini, one of the world’s foremost providers of consulting, technology and outsourcing services, enables its clients to transform and perform through technologies. Capgemini provides its clients with insights and capabilities that boost their freedom to achieve superior results through a unique way of working, the Collaborative Business ExperienceTM.
Capgemini’s Life Sciences team globally includes 200 strategy and transformation experts who concentrate their efforts solely on this industry, plus an affiliated network of 2.500 consultants with significant branch experience.
Recognised as a thought leader in this sector, Capgemini brings an insider’s perspective to the challenges facing life sciences companies and employs a deep industry understanding to provide integrated global solutions for top-tier clients in the sector.
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