Big Pharmas Using Four Strategies

Published Date: 02 Nov 2017

The global pharmaceutical market has grown steadily, with sales reaching around $1.08 trillion in 2011 with a year-on-year increase of 7.8%. Based on this pattern the market for medicines is expected to reach $1.6 trillion by 2020.

Compared to 2010 where there were an estimated 6.9 billion people in 2020, the estimate would be more than 7.6 billion. This would give rise to several health related issues like lack of physical exercise, obesity & old age which would increase the risk of heart disease, diabetes, dementia and cancer. Also new pathogens like HIV have emerged and the old scourges like pertussis has remerged

There has been unprecedented growth due to the removal of the historical trade barriers. However there are enormous obstacles like the decline of innovations, onerous regulations, harsh market conditions and rising health costs.

Furthermore the poor industries scientific productivity has flattened the output of drugs in the last decade. In addition the drug development costs are enormous (around $ 1.24~1.32 billion) thus increasing the risk of failures of new drugs

The ‘patent cliff’ shows the generic erosion of about $148 billion between 2012 and 2018.

Other factors which are challenging are harsher price controls, dubious promotional practices, corruption in foreign markets

Six markets generate three-fifths of pharma’s revenues from prescription Products

There are big differences within the mature markets compared to the past. Collectively, US, Canada, Germany, France, UK and Japan still generate 59% of the industry’s total revenues. These markets are all demanding better outcomes for new medicines.

Financial pressures have played a part. Demographic shifts and epidemiological factors have further compounded these economic problems.

Consumer power increase has become a challenge. They need medicines that work for them and they usually turn to the Internet for the viable options or to broadcast their opinions

The value dilemma

The mature markets have evolved economically, demographically and structurally whereas pharmaceutical makers approach remains the same ‘get more, pay more’, by providing little extra value. Any company in the future need to offer more value instead of charging more or output the costs from another part of the system to provide for the higher prices it’s charging.

Pharmaceuticals has an additional lever in the form of outcomes data

In the past, pharmaceutical makers had four ‘profit’ levers: cost cutting, R&D productivity, marketing and extension of the exclusivity period of market. Most of the businesses relied mainly on marketing, but this has become less effective now. Nowadays sales reps don’t offer value compared to the competitors.

There is another lever called "outcomes data", wherein you demonstrate the worth of its products with real-world evidences thus saving total healthcare costs

But pulling the ‘outcomes lever’ would deeply affect the other 3 issues: health economics, R&D and marketing and sales. Now we need to focus on creating customer value while deciding which medicines to progress through the pipeline. The proof of that value arises, using real-world outcomes data.

Another way companies to maximize the molecules under development is to create companion diagnostics that allow the doctors to maximise the value of the molecules themselves. This means prescribing therapies targeting one disease subtype for patients based on the healthcare players and rewarding innovations that help to direct precious resources more effectively. For example

Targeted medicines that generate high revenues with companion diagnostics since they work so well for specific segments of patients

The growth markets are described as hot and cold. They’re expanding rapidly, by 2020, the BRIC economies will account for 33% of the world’s GDP, measured in terms of PPP (purchasing power parity). There are enormous challenges, like cultural diversity, geographic size, under developed infrastructure, distribution systems that are fragmented and weak ineffective regulations. Average incomes are also much lower compared to the developed world. They have great commercial potential however this could take more than 20 years to get up to the mature markets that is associated with a lot of associated risks

Demand for medicines are rising rapidly in the growth markets

These markets are very difficult to serve due to their intrinsic problems and because of so many variations. They differ politically, socially, religiously, geographically and structurally. Even the disease subtypes from which people suffer vary. Also they differ in the ability and willingness to pay for new medicines.

There is a growing number of ‘middle-class’ consumers (annual incomes of between $6,000 and $30,000 (PPP). This is estimate to rise from 1.7 billion to 3.6 billion by 2025

The middle class is expanding

Typically the patients have to fund a larger part of their own healthcare costs compared to the mature economies as seen in the table below. Also per capita expenditure for healthcare is far too less to support biologics priced at several thousands of dollars

Patients in the growth markets can’t afford costly biologics

There is a need to reconcile the healthcare needs of the rich & poor is one of the in terms of better accessibility to essential medicines from the lower socio economic strata

For example in China, where the one-child policy the aging curve has been accelerated, there are healthcare reforms in the central government’s 12th Five-Year Plan. Also efforts are made to improve the regulatory environment for hospitals that are privately run with provisions for the removal of certain barriers to foreign investment

Most of the projected increase over the next decade in pharmaceutical sales is expected to come from generics instead of patented products. This means you can’t rely on the usual methods of profit making as done in mature countries. There is a need to adopt a totally different strategy for each market, since the markets vary so greatly.

Patented medicines play a small role in driving pharmaceutical sales in the growth markets

The competitive dynamics show a four policies approach

Big pharma’s using four strategies in the growth markets

Those at the innovation-driven end focus on quality for example Roche strategy in China. The companies at the opposite end focus on market share and volume sales, mainly by selling primary-care products, by using differential pricing and building their generics divisions with acquisitions in key territories for example GSK.

The other leading players are somewhere between these two poles for example Eli Lilly who are quite selective in its growth-markets forays where it concentrated on selling branded medicines. In contrast Sanofi has invested mainly in building a generics arm and MSD or Merck & Co. lies in the middle. For example MSD linked up with the Indian generics manufacturer Sun Pharma, with the aim of not only selling existing treatments but also setting up a joint venture to develop convenient formulations of branded generics.

There have been instances where these strategies have a hitch. For example in March 2012, the Indian government had authorised the local producer to make and sell a generic version of Bayer’s cancer treatment Nexavar, even though it’s still under patent. Novartis issue and the Indian patent offices’ refusal and court verdict to grant a patent for Gleevec These two cases prompted Roche to reverse its long standing policy of requesting the same prices for the same products, irrespective of the region where they’re sold. They recently announced that they would offer ‘significantly’ cheaper versions by 2013 for two of its cancer therapies in India, Herceptin and MabThera.

Now China also revised its IP (intellectual property) laws to permit compulsory licences (CL) for the production of generic versions of drugs patented during state emergencies, unusual circumstances or ‘in the interests of the public’ for example Gilead Sciences’ tenofovir, for the first-line treatment for AIDS.

There’s much pharmaceutical companies can learn from the innovative organisations. For example:

Designing products for the lower part of the income pyramid

Ratan Tata decided to develop the Nano car for India’s urban masses that was affordable and better mode of transport. GE Healthcare applied the similar approach to the medical equipment sector by launching two stripped-down MRI machines that is sold for $700,000 to $900,000 as compared to their normal price of about $1.6 million.

Using mass-market techniques to deliver complex services

Dr Devi Shetty perfected heart surgery of high-volume at Narayana Hrudayalaya Hospital, in Bangalore performing some 600 operations a week and charging about $1,500 per operation. However his profit margins are higher than the typical US hospital and the quality is as good.

Eye-hospital chain Aravind also uses the assembly-line techniques to deliver healthcare by performing about 350,000 operations a year.

Pooling resources for different purposes

Simon Berry, founder of British charity Colalife, distributed anti-diarrhoea products in the developing world using the distribution setup of Coke by packing the crates with medicines. They designed a wedge-shaped container which fits between rows of Coke bottles thereby piggybacking on Coca-Cola’s distribution network.

Since patients in several emerging countries need to travel long distances in order to see a doctor the use of mobile technologies paved the way for ‘care anywhere’. US software firm Dimagi developed a mobile phone-based program "CommCare" that allows community workers gather information and refer patients for treatment using an electronic questionnaire. Apollo Hospitals Group has gone much further by using a remote triage advice & health monitoring service that uses an IT platform with a structured query (SQ) database that handles more than 700,000 calls since set up.

Patients with diabetes can measure the blood sugar count and input the data via SMS to a clinician. They get SMS text explaining and advising the readings to them whether they need to do something.

In the long term, remote operations can also be performed. For example the Italian surgeon Carlo Pappone had supervised in 2006 the first unmanned operation, using a robot based to perform heart surgery in Boston on a patient in Milan. There will be full automation in the next 40 to 50 years that make complicated operations much more economically and widely available to patients in areas with few proper medical facilities.

Another area is target selection and validation.

Most pharmaceutical companies spend a small percentage of their budgets on target selection and validation

There are progress which scientists are making new forms of medical intervention as the industry’s options are increasing, new avenues open up. New drug delivery technologies can reduce noncompliance, whereas new vaccines and regenerative medicine provide a way of preventing or curing some chronic conditions.

For example a new generation of vaccines is available in the pipeline to treat infectious diseases like HIV and malaria or for antibiotic-resistant pathogens like MRSA.

Vaccines for a wide spectrum of chronic illnesses, including obesity diabetes, and cardiovascular disease, are in the clinical development stage. Several cancer vaccines are showing considerable promise, for example a ‘universal’ vaccine that operates on the principle of recognizing and destroying tumour cells by itself. Work on vaccines to curb cocaine addiction and nicotine is likewise well underway.

Replacing damaged neurological tissue and organs is the end goal. In January 2012, scientists at Chinese Armed Police Forces Hospital started a Phase II trial on using umbilical cord stem cells for the treatment of motor neuron disease. In June 2012, the biotech company Advanced Cell Technology (USA) tested retinal pigments epithelium from embryonic stem cells for treating Stargardt’s disease, a condition that destroys vision (central) of the eyes.

Many companies don’t really understand the relationship between risks and value as a result failure rates in clinical trials have steeply climbed over the past two decades. The high percentage of products were for strategic reasons in Phase II which suggested that one problem could be due to overlapping activity between companies having similar compounds in the pipeline this calls for greater collaboration among companies

But there’s a second, more serious issue between 2007 and 2010 was that 83 compounds failed in the Phase III or during the submission process and analysis by CMR International showed that 66% of them was due to insufficient efficacy: 32% were due to not being better than a placebo; 5% was not better than an active control; and 29% did not show any real benefit as the add-on therapies.

In short, several companies are pushing candidates that show only marginal efficacy in Phase II studies into Phase III trials. Also many think success in one disease will lead to success in a different disease, without any firm evidence of relevant mechanism of action.

Therefore they need to prune their portfolios by focusing on the compounds with the greatest success probability. Here it is recommended to use therapeutic expertise and the plotting risk/value ratio of each molecule in the pipeline. Looking at the plot of the correlation between risk/value ratio helps to separate frontrunners from long shots, and low-hanging fruit from laggards

The companies need to draw on all the information that they have at their disposal. When measuring risk, they generally concentrate on technical risks that is how novel a target is the degree of confidence in rationale etc. Much less time is spent on considering the commercial risks like market access or whether the product is offering enough improvement to the existing alternatives

The risk/value equation has many dimensions