Pharmaceuticals: Reaching the Tipping Point

14 September 2009

A.T. Kearney, the global management consultancy firm, today announces the publication of its White Paper on the pharmaceutical industry. There is a danger that the current pharmaceutical model may become irrelevant in the context of 21st century’s global healthcare needs. Healthcare is out of balance and, therefore, so is the pharmaceutical industry. The fortunes of the pharmaceutical industry are driven by the healthcare systems it serves – and virtually every healthcare system is restructuring.

The same forces driving global healthcare reform are having a major impact on the pharmaceutical industry. A.T. Kearney believes that the pharmaceutical industry is at a tipping point – indeed, three interconnected tipping points – and that it will emerge in a much different form. These tipping points relate to what the industry sells, to whom, and how it must be organised.

Tipping Point 1: From therapies to service models

The pharmaceutical sales model has always assumed that the prescribing doctor is the primary decision maker and that prescribing decisions are based solely on the doctor’s perception of patient need. This assumption has led to the current dual-track market-access model, in which sales and marketing focuses on influencing doctors and pricing.

However, the doctor is increasingly constrained or influenced by formularies, guidelines, IT systems and financial mechanisms. These mechanisms are driven by payers and regulators or by provider organisations responding to payer costs and political pressures.

While the doctor-patient relationship is similar everywhere, the payer landscape is exceedingly complex, with priorities varying by country, locality and even ethnic group.

In the pharmaceutical industry, the traditional view is that volume is not elastic to price. However, the growing influence of payers is changing this assumption.

Organisations such as NICE define where a drug is used in the care pathway on the basis of clinical cost-effectiveness. Expensive drugs are often relegated to second-, third- or even fourth-line treatments even if they have high efficacy as a first-line treatment. There is also a trend towards changing the use of drugs from treatment to preventative use as they decline in cost.

Over the past few years, there has been a dramatic change in what payers are looking to achieve with the effectiveness of the treatment pathway becoming more relevant than the cost-effectiveness of a particular drug. Therefore, payers are far more interested in pathways than in drugs.

Moreover, epidemiological shifts towards chronic diseases, the emergence of technologies that can turn diseases from terminal to chronic, and a growing sophistication in understanding what really drives health costs have expanded the concept of value to encompass its impact on the healthcare system.

For payers seeking to address complex diseases, the availability of a marginally more effective, but much more expensive therapy, is far from compelling. The problem with many drugs is not their efficacy, but getting patients to take them as instructed. Compliance is poor even for life-threatening diseases such as cancer.

What would be compelling for payers is a service model that enables therapies to be administered with high compliance and can be proven to result in fewer admissions. It would be even more compelling if this could be demonstrated in the payer’s specific care system and target population. Positioning a therapy in this context dramatically increases its value.

Tipping Point 2: From rich niches to global mass markets

The US dominates the pharmaceutical industry. Prices are based on what the US market will bear and pricing policy seeks to defend this “list price” regardless of revenue impact in other countries.

However, the US market is failing. Whether President Obama’s current plans for universal healthcare insurance are successful or not, mechanisms to limit access to medicines based on their cost effectiveness will inevitably spread. The likely outcome will be that the US pharmaceutical industry may well see revenues decline.

Meanwhile, healthcare demand is shifting rapidly towards the developing world, with emerging markets experiencing a dramatic increase in diseases long common in developed countries.

The developing world is today characterised by high levels of self-pay and rudimentary public health systems. However, most countries will develop some form of comprehensively funded healthcare system as soon as they can afford to do so. This scenario offers enticing but challenging opportunities for the global pharmaceutical industry. Emerging state-funded systems will need to develop cost-effective solutions to Western-style health problems, but they will not be prepared to pay Western-style prices.

As the size of developing markets become too attractive to ignore, the pharmaceutical companies will need to drop their obsession with high-priced solutions and instead price in a way that maximises revenue over the drug’s life cycle and throughout the global portfolio.

There are signs that the pressures to create low-cost mass-market solutions are appearing in the pharmaceutical industry. Indian and Chinese biotech companies once focused on treatments for local patients are becoming significant innovators on a global scale.

A.T. Kearney’s belief is that pharmaceutical companies need to view emerging markets in a new light – not just as an opportunity for lowering R&D costs or demonstrating market commitment, but as a source of low-price, breakthrough innovation. If the global pharmaceutical industry does not respond to these challenges, then local companies surely will.

Tipping Point 3: From integration to connection

The traditional model of a globally integrated pharmaceutical industry will struggle to survive. It will be too large, unwieldy and unfocused to connect with the payers, providers and potential partners in markets it seeks to serve. Successful pharmaceutical companies of the future will shift from being R&D-driven to market-driven, and this will require a complete re-wiring of their organisations.

Given the complexity of healthcare systems and treatment pathways, the challenge for pharmaceutical companies is to decide on which therapy areas to focus. A.T. Kearney believes that the current R&D-driven trend to specialise in specific therapy areas will accelerate further.

This will require a very different kind of sales-and-marketing organisation. Virtually all pharmaceutical companies have dramatically reduced their traditional sales forces in favour of localised “market access” organisations and that trend will continue.

The shift towards mass-market solutions introduces a dramatically different dynamic to the supply chain. When margins are 80% or more, working capital, manufacturing costs and distribution costs have little impact on profitability. However, for mass market products, supply-chain costs become a key profit driver.

We expect to see the further emergence and consolidation of highly efficient outsource manufacturers. Management of the contractual relationships with these providers will become a core competence of the truly connected pharmaceutical company – and a major driver of profitability.

Shifts in distribution strategies will also accelerate. There is an increasing trend for healthcare systems to focus away from hospitals and towards home- and community-based care. Thus, the current shift from wholesale distribution towards direct-to-pharmacy will shift again to direct-to-patient.

A.T. Kearney believes there are several different types of pharmaceutical companies, all with different competencies, that will operate in the space currently occupied by integrated pharmaceutical firms. Value-delivery companies will focus on specific therapies in certain countries, and will gear value propositions in response to local market needs. Health innovation companies will develop and leverage technologies in as many applications as possible to gain a return on investment at a reasonable cost. Supply-chain companies will focus on optimising operating efficiencies. The truly connected pharmaceutical company will have to decide which of these functions it wishes to deliver, and which companies it needs to partner with to deliver other services.

Contact

A.T. Kearney London
Jonathan Anscombe/Michael Thomas — 020 7468 8000

Bell Pottinger Corporate & Financial
Dan de Belder/Emma Kent — 020 7861 3232

About A.T. Kearney

A.T. Kearney (www.atkearney.com) is one of the world's largest management consulting firms, known for high quality tangible results and its working-partner style. The firm was established in 1926 to provide management advice concerning issues on the CEO's agenda. Today, it serves the largest global clients in all major industries and government agencies. A.T. Kearney's offices are located in major business centres in 34 countries.