DRUGMAKERS FACE AN ANGRY PUBLIC
Pharmaceutical companies would be sufficiently challenged just dealing with the many internal pressures facing them today. Plagued by patent expirations on key drugs and late-stage disappointments for products in the development pipeline, major drugmakers are struggling to deliver the kind of earnings growth that was typical in the 1990s.
But at the same time, they are being buffeted by a number of external pressures on the public, political, and regulatory fronts. Taken together, these strains are increasing costs, holding down pricing, and creating additional barriers to profitability. Under growing pressure from patient groups and public officials, U.S. pharmaceutical producers must invent new ways to address these antagonistic outside forces.
Many of these problems stem from the public's deteriorating opinion of big drug companies. Skyrocketing prescription drug prices and medical premiums, along with a heightened awareness of the growing number of uninsured Americans, reflect poorly on the industry, which has historically been extolled for its world leadership in the development of life-changing medications. "As pharmaceuticals become a bigger part of the overall health care pie, there is a growing feeling that drugmakers are grabbing more than their fair share," says Ashish Singh, a vice president in the health care practice at consultants Bain & Co.
And while unfavorable public opinion may not impact profitability directly, it essentially "comes in almost through the back door to limit the ability of pharma companies to pull some of the levers--through lobbying and managing the political environment--that have been important to their success in the past," Singh says.
Indeed, what U.S. drug companies fear most is "some type of government-imposed price control on their products, similar to what exists in other countries," says Kenneth I. Kaitin, director of Tufts Center for the Study of Drug Development. The U.S. industry has successfully argued that price controls would limit its ability to recoup its investment in R&D, thereby stifling innovation and compromising patient access to effective new medicines.
And it's true that U.S. producers "need to generate a certain amount of sales in order to make a profit and continue to conduct innovative R&D activities," Kaitin says. "If you take that away from them, the structure or the complexion of R&D is going to change dramatically."
He points to countries like France and Germany that have imposed very rigid price controls, noting that "the strength of the research-based industry is proportionally weaker than in those countries where prices are not as strongly controlled."
"There is a growing feeling that drugmakers are grabbing more than their fair share."
RECOGNIZING THIS, U.S. companies will work strenuously to protect the market-based system in which they now operate, Kaitin says. "The industry will take all necessary steps to put out any kind of spark or glowing ember that, even years down the road, might potentially lead to price controls."
While drug producers may laud free-market pricing, many U.S. consumers denounce it. Frustrated by high drug prices, an increasing number of U.S. consumers are looking across the northern border to Canada, where government intervention keeps pharmaceutical pricing at more affordable levels.
Small groups of patients, particularly senior citizens, have long made the trek across the Canadian border from New England to pick up their drugs, Kaitin notes. "But now this may be happening on a much larger scale, and it is receiving a lot more public and political attention."
A growing number of entities--including cities, counties, and states--are negotiating directly with Canadian pharmacies to import drugs at lower prices than they would pay in the U.S., observes Jeff Trewhitt, a spokesman for Pharmaceutical Research & Manufacturers of America (PhRMA). And the legality of reimportation has now become the topic of a national debate and the subject of much discussion in Congress.
Indeed, a number of legislative proposals have emerged to amend current health and safety laws to allow distributors to import prescription drugs--manufactured in the U.S. and possibly elsewhere--from Canada into the U.S. or to allow individuals to purchase medications directly from Canadian pharmacies.
Both the Food & Drug Administration and PhRMA oppose legislation that would support reimportation. In addition, FDA has been cracking down on suspicious imports.
In November, the agency conducted a second import "blitz" inspection at mail facilities and courier hubs across the U.S. It found 1,728 unapproved drugs, including foreign versions of U.S. pharmaceuticals, recalled drugs, drugs requiring special storage conditions, and drugs containing addictive controlled substances. Canadian parcels appeared more frequently than parcels from any other country. The first blitz exam, performed at other U.S. mail facilities in July and August 2003, prompted the same safety concerns, FDA says.
In another move last month, FDA issued a warning letter to three companies in Temple, Texas, notifying them that it considers a Canadian drug import program they developed to be illegal and a risk to public health. According to an FDA statement, "The warning letter is a continuation of the agency's efforts to confront illegal drug imports from abroad."
In certain limited circumstances, FDA, under its Personal Importation Policy, allows individual imports of unapproved drugs that are unavailable in the U.S., if those drugs are not commercially available to Americans and are of potential benefit for ill patients who have no other effective treatment. "This policy, however, does not apply to the bulk of illegally imported drugs, which generally purport to be foreign versions of FDA-approved medications that are available on the U.S. market," the agency says.
"FDA is doing its utmost to make safe, effective, and affordable drugs available to those who need them," FDA Commissioner Mark B. McClellan says, "but we cannot tolerate shady operations that enrich a few while exposing many patients to the risks of dubious imports."
Echoing FDA's safety concerns, U.S. drug producers have also openly opposed reimportation. "Although it may sound politically appealing to amend current health and safety laws to allow for such importation of pharmaceuticals," PhRMA's Trewhitt says, "doing so presents real risks to patients and provides no guarantee that the imported pharmaceuticals would be cheaper."
Taking a strong stand against reimportation, however, could add to the industry's public relations problem, Bain's Singh points out. "How do producers come across as not being greedy when they try to block this? For them, it's not just a question of protecting profitability," he says. "The safety of these imported drugs is a very legitimate concern."
GlaxoSmithKline drew public criticism a year ago when it began to restrict the supply of prescription drugs to Canadian wholesalers and pharmacies that export medicines outside Canada. "Critics allege that the company's motives are purely financial; this is not the case," the company said in a statement. "GSK estimates that cross-border Internet sales of its products currently represent less than one day of its total U.S. sales." The company adds: "The decision to limit the supply of our medicines to Canadian Internet operators who illegally sell prescription drugs to U.S. residents is an issue of drug safety."
However, for the most part, the public isn't buying the safety and quality arguments of FDA or the industry, Tufts' Kaitin points out. "Many people will take a chance [on reimported drugs], especially if buying a questionable product from Canada is the only way they can afford their medicine."
Blockbuster drugs coming off patent provide opportunities for competition
|NOTE: Blockbuster drugs are those that have at least $1 billion in annual sales. SOURCE: Tufts Center for the Study of Drug Development|
FOR THE UNCERTAINTY it brings, "reimportation is really not a viable solution to the drug access and pricing problems plaguing the industry," Kaitin notes. "But I think it is serving as a lightning rod for all the public and political concern over affordability of pharmaceutical products."
Indeed, PhRMA calls the reimportation proposals a "distraction" to what it sees as "the real solution: the Medicare prescription drug benefit." Not surprisingly, the association applauded President George W. Bush when he signed the bill into law on Dec. 8. Passage of the law is good news for the industry mainly because it precludes the government from negotiating pricing directly with drugmakers. Instead, the law will provide drugs to beneficiaries through private payers and through private coverage.
Alan F. Holmer, president and chief executive officer of PhRMA, calls the law "the most important, pro-patient Medicare reform in the program's 38-year history." He adds, "Providing Medicare beneficiaries with insurance coverage that offers affordable access to medicines is essential to high quality and efficient care."
Some disagree. Ron Pollack, executive director of Families USA, a nonprofit, nonpartisan organization for health care consumers, says: "The Medicare legislation will cause deep disappointment for America's seniors and people with disabilities. It provides very limited drug coverage, fails to moderate skyrocketing drug costs, and spends lavishly to push seniors into managed care plans."
"Even if you made the drugs available for free, it does not mean that they would get to the people who need them."
THE LEGISLATION, Pollack adds, "genuflects to the pharmaceutical lobby by thwarting any meaningful effort to contain drug costs." And it prohibits Medicare from using its bargaining power to negotiate lower prices, he laments.
Given public criticism of the law, Kaitin doubts it will be able to survive in its current state until full implementation in 2006. He predicts that pressure from consumer advocate groups will spark renewed debate over the law, but not until after the 2004 election. At this point in the presidential race, he adds, "nobody wants to be responsible for taking away a drug benefit."
Critics are likely to continue poking holes in the industry's argument against government involvement in pricing. Drug companies have successfully argued that the government should not be negotiating pricing, consistent with the "way we do it in the U.S.," Kaitin says. "But the government, in fact, already negotiates--through the Veteran's Administration and through Medicaid, which is state- and federal-government subsidized."
The government has also invited companies to the bargaining table in special cases. For example, in the midst of the anthrax scare two years ago, the Department of Health & Human Services reached an agreement with Bayer to purchase up to 300 million tablets of Cipro brand ciprofloxacin, a drug for treating inhalational anthrax, at a reduced price.
Even without government involvement, pricing pressures on drug companies are acute. Pressure is coming from a number of different sources, including managed care organizations, in the context of a more competitive pharmaceutical market.
Unlike in the past, "it's not uncommon for multiple drugs that service a particular disease or condition to come onto the market in only a very few years," notes Joel Tune, general manager for global drug delivery at Baxter Healthcare. "So it's very important that the drugs that do come out can differentiate themselves to be able to compete."
In the prescription market, the crowding of drug classes "gives new weapons to the payers, allowing them to play one competitor against another to obtain the best possible price," Singh adds. For example, in the statin class of cholesterol-lowering drugs, "Pfizer, Merck, Bristol-Myers Squibb, and AstraZeneca are all competing for largely the same set of patients, with products that have relatively small differences in efficacy," he observes.
Today, "it's just that much harder to create a blockbuster like Lipitor," Pfizer's statin, which generated more than $7 billion in sales last year, Singh says. The newest entrant, AstraZeneca's Crestor, which received FDA approval in August, "will undoubtedly become a multi-billion-dollar superstatin drug, but it is unlikely to come anywhere near the stature of Lipitor," Singh predicts.
Payers are going to be hard-pressed to add Crestor to their formularies when there are at least three other branded drugs already available to patients, Singh notes. "That means that they are going to either put Crestor in a weaker copay position or [AstraZeneca] is going to have to give significantly greater discounts and rebates for Crestor to be attractive." In short, these market factors will reduce the full potential of Crestor. "And this is likely a harbinger of things to come in many drug classes," he says.
With multiple competitors vying for the same patients in the prescription drug market, companies are not welcoming the increased presence of generic drugs. "As some of the big-ticket drugs go off patent, generic versions are going to come quickly onto the market, selling for a dramatically reduced price and stealing market share," Baxter's Tune points out.
Indeed, 15 blockbuster drugs--each with more than $1 billion in annual sales--are due to lose patent protection through 2008, according to the Tufts Center's Outlook 2004 report, released last month. "I think that the whole patent expiration and generic competition issue is one of the significant drivers of the growth pressure pharmaceutical producers are experiencing," Tune says.
In response to these market trends, "we see a lot of pharmaceutical companies spending much more energy on trying to expand the patent life of their drugs than they have in the past," Tune adds. They are working hard to improve formulations, by developing a sustained-release version, for example. "The hope is that generic players won't be able to compete with them in terms of that efficiency." Drugmakers are also seeking new indications for their products, he adds. "They may go back and do additional clinical studies to carve out a unique niche that they can then protect."
However, when a company no longer sees any opportunity to extend patent life on a prescription-only product, it may opt to petition FDA for over-the-counter (OTC) status. This can be a strategic move that "often helps them to maintain their revenue flow on the product for at least a few additional years," Kaitin says. "And it's easier than competing head-to-head against generic products with a prescription-only version."
Sometimes, however, the push to move a prescription drug to the OTC market comes from third-party payers. OTC switching is attractive to insurers because it enables them to lower their spending on pharmaceuticals, the Tufts study notes. The consumer doesn't necessarily benefit, however, as Tufts found that insurers often exclude OTC drugs from their formulary while raising copays for prescription drugs in the same category.
IN INSTANCES WHERE outside groups push for an early OTC switch, producers are often able to protect their stake in the prescription market by launching next-generation products for the same or similar indications, Kaitin notes. "Part of the reason that Schering-Plough was willing to have its Claritin antihistamine go OTC [prematurely]," he says, is that the company was prepared to launch prescription-only Clarinex, which it is marketing as an even better antihistamine than Claritin.
"So they are hoping that, instead of going to the drugstore and buying a relatively inexpensive version of Claritin, consumers will opt to get a prescription for the more expensive, new drug, Clarinex." Still, fewer than 60% of insurers surveyed by Tufts place certain next-generation prescription products in their formularies.
While U.S. drug companies work to shore up pricing, they are also struggling to suppress production costs. In particular, they are being hit hard by FDA's strategic initiative to modernize the regulation of manufacturing and product quality. The two-year effort, launched in August 2002, aims to "increase efficiencies while maintaining and enhancing FDA's high standards for safety in our regulation of the manufacturing of human drugs and biologics and veterinary drugs," McClellan says.
Singh notes that FDA's compliance initiative "is becoming a huge concern for companies, with several major companies suffering setbacks based on their inability to meet the new, more rigid standards."
Baxter's Tune echoes this point, saying, "The strategic initiative is going to have a pretty dramatic impact on the manufacturing operations of a lot of drug companies."
Companies are being forced to decide whether they want to make substantial investments to upgrade their manufacturing facilities or close those facilities and find outside partners to do the manufacturing--particularly the fill and finish portions--for them, Tune says. "It's a tough economic decision that most of them are still working through."
The FDA initiative is also driving pharmaceutical companies to revamp the way they manage their outside suppliers, Tune observes. "A number of our clients have said that they can no longer afford to work with hundreds of outside suppliers. They are looking to work with only the most responsive suppliers and those who have operations that meet the FDA-mandated goals and objectives, so that their risk is minimized," he adds.
In addition to making significant investments to meet the more stringent manufacturing guidelines, companies will also need to absorb the costs associated with product approval delays caused by limited resources at FDA, Kaitin says. FDA will be challenged to maintain in-house expertise as significant numbers of experienced staff members retire and the agency's mission expands to include counterbioterrorism activities and efforts to harmonize U.S. and European regulations, according to the Tufts study.
And declines in the number of submissions by drug companies will translate to a drop in revenues from user fees, which FDA relies on for a big chunk of its budget, Kaitin says. "These stresses on the agency mean fewer resources in terms of time and talent to help pharmaceutical producers get their products through the [approval] process more quickly."
But even with increasing budget restraints, FDA will continue to speed development and approval of a small subset of critical new drugs, Kaitin says. In recent years, the agency has been more responsive to public and industry interest in accelerating approval of certain new drugs through its rapidly evolving fast-track program. Between 1998 and 2003, the program has cut nearly three years from the average time required to develop a new drug and win approval, and significantly expanded the number of disease indications getting fast-track designation, according to the Tufts report.
The European Agency for Evaluation of Medicinal Products (EMEA), FDA's counterpart in Europe, is in the process of adopting a similar fast-track program. In addition, it will push hard to implement regulatory reforms, including providing more scientific advice to companies and allowing provisional marketing authorizations for compassionate use, according to the Tufts study.
EMEA efforts at being more transparent and open stem from concern about the movement of R&D operations out of Europe, Kaitin notes. "Because of pricing and a host of other issues, some drug companies have been relocating their operations to other countries, including the U.S., where there's more of an entrepreneurial spirit."
REFLECTING THAT SHIFT, pharmaceutical R&D expenditures in Europe were roughly 20% below U.S. expenditures of $26 billion in 2002, according to a new study on the "innovation imbalance" between the U.S. and Europe. Presented by Bain consultants late last month at the World Economic Forum in Davos, Switzerland, the report predicted that by 2012, the European figure will fall to about half that of the U.S.
However, for a variety of reasons, European regulators want to begin to correct this imbalance. Kaitin says the message EMEA is giving to European drugmakers is clear: "If you've got a really critical product, don't go to the U.S. Seek marketing approval here first, because we'll help you get it through the approval process quickly."
Keeping R&D in Europe is particularly critical for EMEA, because it is funded almost entirely by user fees, according to Kaitin. FDA, by comparison, gets 50 to 60% of its funding from user fees.
Drug companies stand to gain as well, Kaitin notes. "The moves to increase transparency in EMEA's approval process and implement initiatives to speed development and approval of new drugs in Europe will be very good news to the multinational pharmaceutical industry as it strives to expand its reach in the growing European Union marketplace."
As drugmakers become increasingly global, it's not surprising that they are facing public pressure to supply impoverished nations. "As the HIV/AIDS crisis in Africa and other developing areas continues to grow, there is more of an outcry that drugs should be made available for free or at a substantially reduced price," Kaitin says.
What the public may not understand, however, is that the supply of drugs is only part of the problem. Many of these areas also lack the infrastructure to distribute medicines once they receive them. "In many cases, there are no health centers. There may be limited research facilities. There may be only a limited distribution network," Kaitin points out. "So even if you made the drugs available for free, it does not mean that they would get to the people who need them." As a result, companies are saying, "Before we start giving away the shop here, let's make sure that there's an infrastructure in place to get drugs to the patients."
At the same time, prescription drugmakers have been concerned about patent protection, as efforts to get drugs to poor countries failed until recently to address issues of intellectual property security. However, in late August, the World Trade Organization amended the Trade-Related Aspects of Intellectual Property Rights agreement to enable drug companies in India, Brazil, and other countries to make drugs patented in the U.S. and elsewhere--but only if the drugs are exported to needy nations (C&EN, Sept. 8, 2003, page 14). Previously, WTO allowed poor countries to circumvent patents only if they ordered from domestic producers.
Supplying drugs to impoverished nations is yet another expense drug companies must shoulder. However, the goodwill that comes from it greatly outweighs any economic cost, Kaitin maintains. And now more than ever, U.S. drugmakers need to seize any opportunity to remind consumers of their positive contributions to society.
Toward that end, PhRMA and six other health care groups released a report earlier this month that they say demonstrates the value of investment in health care. The study, authored by MEDTAP International, notes that both mortality and disability rates have fallen steadily since the 1970s--a period that has seen a significant increase in health care spending. "The study underscores the significant role that medicines introduced over the past 20 years have played in achieving these gains," according to PhRMA.
"Innovative new medicines make it possible to prevent or slow the progress of many diseases and avoid costly hospitalization and invasive surgery," PhRMA adds. The number of U.S. hospital days per 100 people fell from 129.7 in 1980 to 56.6 in 2000, a drop of 56%.
In addition to providing hard data, pharmaceutical companies may need to develop grassroots communication programs to promote their products. Patient advocacy groups, for example, help patients to "focus on what particular drugs are doing for them as opposed to where the overall industry is falling short," Singh says. He points to some makers of drugs for diabetes, HIV, hemophilia, and cancer that have successfully developed these groups as a way to build a sense of community among their patients.
Developing innovative responses to public concern over prescription costs will require a new way of thinking, Singh says. "And the industry has just been so successful over the last 20 years--it's going to take some time to change that mind-set."