Pharmaceutical Markets: The New Price of Admission

The global pharmaceutical industry faces some tough problems. An unprecedented number of blockbuster products are going off-patent, and despite record investments in R&D, the pipeline of new drugs to replace them is decidedly thin. Even as healthcare budgets are rising, drug sales in most developed markets are forecast to be flat. With such a thin pipeline, the requirement to make the best of the current portfolio has never been greater.

The existing sales model does not seem to be working for the global pharmaceutical industry. Spending on sales and marketing in the United States, for example, has increased 13 percent annually over the past eight years, while return on that investment has dropped by 15 percent.¹ Attempts to improve efficiencies have had limited success, and companies are resorting to cost-cutting. Not surprisingly, share- holder returns are plummeting.

The future does not look any better. Pricing pressures are rising globally, and even the normally safe U.S. market has become challenging. While the increased access to drugs promised by President Obama's plans for universal health coverage may give a medium-term boost to revenues, longer-term cost-control measures are inevitable. Forecasts for flat sales may be optimistic.

We believe these problems are symptoms of a shift in the nature of healthcare systems. Healthcare is out of balance, and so, therefore, is the pharmaceutical industry. Within healthcare systems, the pressures causing this change are described in a publication available from
A.T. Kearney—Healthcare Out of Balance: How Global Forces Will Reshape the Health of Nations. In this article, we examine one of the most significant impacts of these changes, the increasing difficulty that pharmaceutical companies will experience in gaining access to markets, and what they can do about it.

Why Healthcare Systems Limit Access to New Technologies

Healthcare spending is rising at about 5 percent a year in most developing countries. Contrary to popular belief, the aging population is not the main cause of this increase; rather, it's the existence of more complex diseases and the availability of expensive technologies to treat them.² At the same time, as costs increase, funding is under pressure as the ratio of retirees to taxpayers is rising.

Governments, which fund the vast majority of healthcare spending, are striving to control costs. They are adopting a range of reform measures that may at first sight appear disparate, but on closer inspection conform to a predictable pattern. Given that rising healthcare spending is largely supply driven, it is inevitable that governments will seek to limit access to expensive treatments that are bankrupting the system and focus instead on providing a more limited set of "core" services. No advanced system to date has managed to stabilize spending successfully without limiting access to healthcare services.

Increasingly, therefore, the focus of core spending will be on prevention and treatment of the early stages of disease, where the greatest gains in healthcare can be achieved for a given investment. Paradoxically, it is the other end of the care continuum—the final stages of life—that is facing the largest cost increases and attracting the pharmaceutical industry's primary attention. The challenge for the industry will be to ensure that therapies remain in this core funding, which means pharmaceutical companies will have to adopt very different ways of accessing the market.

The Growing Importance of the Payer

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 what the patient needs. This assumption has led to the current strategy of investing in sales and marketing to influence doctors.

However, while the clinician makes the ultimate prescribing decision, he or she is increasingly constrained by formularies, influenced by guidelines, prompted by IT systems and motivated by financial mechanisms. These mechanisms are driven by payers (public and private) and regulators, or by provider organizations responding to payer cost and political pressures.

In today's environment, the decision over which drug a doctor prescribes is often less important to pharmaceutical companies than whether or not a drug is prescribed at all. The degree to which a disease is diagnosed, the relative importance of a therapy area to funders, the use of drug-based versus non-drug-based therapies, and the point at which patients move from low-cost to higher-cost therapies all have an enormous impact on the size of the total pharmaceutical "pie," and far more impact on sales than minor shifts in market share.

While the doctor-patient relationship is similar across markets, the payer landscape is becoming exceedingly complex. Healthcare priorities vary by country, locality and even ethnic group. In each country there are multiple stakeholders—clinicians, advisory bodies, regulators, charities and special interest groups—that influence how diseases are treated. These stakeholders also vary by therapy.

Take for example the rheumatoid-arthritis market. The disease is typically treated using a progression of increasingly expensive therapies. Patients start on non-steroidal anti-inflammatory drugs (NSAIDs), move to disease-modifying anti-rheumatic drugs (DMARDs) and finally to bio-logics such as anti-TNFs.³ Although there is strong consensus that aggressive, early use of anti-TNFs is clinically effective, payers continue to consider their use to be third-line therapies. Thus, a pharmaceutical company providing bio-logics could gain more by persuading payers to allow earlier use of biologics than by trying to prove its drug is more effective than that of a competitor. This approach requires an understanding of—and an ability to influence—the entire therapeutic system. It also challenges the nature of what pharmaceutical companies sell and how they price their products.

Price Matters

In the pharmaceutical industry, the traditional view is that volume is price inelastic: Selling a drug more cheaply does not increase volume, as most doctors do not consider price when prescribing. The growing influence of payers, however, is changing this assumption.

Figure 1: Elasticity of statin use in the United Kingdom

Organizations such as the United Kingdom's National Institute for Clinical Excellence (NICE) define where in the care pathway a drug is used on the basis of clinical cost-effectiveness. Expensive drugs are authorized as second-, third- or even fourth-line treatments, after less-expensive drugs have been used or restricted to specific patient segments. There also is a trend toward changing the use of drugs from treatment to preventive use as drugs decline in price. The use of statins in the United Kingdom is a case in point. As Zocor went off-patent and generic Simvastatin became available, prescribing guidelines were introduced, resulting in a tripling of overall and specifically generic statin use. This, in turn, prompted the U.K. healthcare system to increase dramatically those eligible for statin treatment (see figure 1).

Drug sales are becoming increasingly elastic to the relationship between price and value delivered. However, the way payers perceive value is quite different from the way pharmaceutical companies try to demonstrate it.

From Drug Efficacy to Pathway Value

In the past few years, there has been a dramatic change in what payers hope to achieve. Epidemiological shifts toward chronic diseases, the emergence of technologies that have converted previously terminal diseases to "chronic" long-term conditions, and a growing sophistication in understanding what really drives healthcare costs have expanded the concept of value to encompass the impact on the healthcare system. Measures to reduce the number of unplanned admissions and complications can outweigh the cost of drugs significantly. Broader value measures might include the impact on families, social care, employment and needs of the disadvantaged.

Rarely are drugs the only intervention used to treat a disease. Payers are more interested in the effectiveness of the treatment pathway than in the clinical effectiveness of a particular drug in a randomized control trial.

A company wishing to demonstrate its product's value will have to adapt its strategy according to therapy area and impact on overall system costs (see figure 2). Schizophrenia, for example, is a devastating and costly disorder for families and for society. In 2002, the overall cost to treat schizophrenia in the United States was about $63 billion, of which only $5 billion was for pharmaceuticals.⁴ Care pathways typically include a combination of drug therapies, behavioral therapy, outreach, help lines and psychological services. The key to success for a pharmaceutical company will be to demonstrate that its drugs, combined with other interventions, can minimize exacerbation of the condition and reduce system costs.

Figure 2: Establishing therapy value

Metastatic cancer requires a different approach. While tragic to the sufferer, the disease does not carry the high system costs of schizophrenia, and pathways are comparatively straightforward. For pharmaceutical companies, the opportunity is to help payers reduce overall treatment costs (perhaps by administering drugs in community or home settings), target therapies where the drugs can be most effective and find innovative ways to price therapies that can help payers manage the risk of incurring excessive costs by moving to capped or success-based pricing models.

Diseases such as diabetes and chronic obstructive pulmonary disease (COPD) offer many opportunities to create system value. In the United Kingdom, COPD is the second leading cause of acute admissions, with each admission costing the equivalent of eight years of management in the community. On average, diabetics consume four to five times the care resources of non-diabetics. However, despite the huge human and monetary costs of these diseases, diagnosis rates are quite low, and poor compliance with taking medicines is a major drain on the system.

There will, of course, be therapies that have a high return and low complexity, where the focus will be on increasing usage and improving compliance. This is also an area where there may be considerable price-demand elasticity and where payers offer incentives only when the product goes generic.

Proving Real-World Value to Payers

Figure 3: Objectives of "Phase 3P" trials

However a pharmaceutical company chooses to define a drug's value, it will need to do so in a way that is compelling to payers. While Phase 3 randomized control trials can demonstrate the clinical value of a therapy in a "controlled" environment, payers want to know how it will perform in the real world before providing widespread funding. We call these demonstrations of real-world outcomes Phase 3P (payer) trials. Such trials should take place at different points in the development cycle and will require companies to collaborate with local payers, caregivers and service providers to implement effective care-delivery services in target communities (see figure 3).

Conducting such trials, however, introduces the need for a new set of competencies and capabilities. Pharmaceutical companies must demonstrate not only the effectiveness of the therapy, but also the circumstances in which it works best. They must demonstrate which other interventions are required for it to deliver a real-world outcome. Borrowing from social science, techniques such as realist evaluation recognize the importance of the real-world context in which an intervention is delivered as critical in assessing value.⁵

The Importance of Delivery Models

For payers seeking to address complex diseases such as diabetes, the availability of a marginally more clinically effective—but more expensive—therapy is far from compelling. The problem with many drugs is not their efficacy, but rather patient compliance. Within six months of agreeing to take a prescribed drug, about half of all patients with chronic diseases have stopped taking it. Compliance is poor even for life-threatening diseases such as cancer.

A compelling service model for payers is one that administers therapies, facilitates compliance, and reduces exacerbations and hospital admissions. It would be even more compelling if demonstrated in the payer's specific care system and target population. Positioning a therapy in this context increases its value dramatically. Drugs account for only 10 to 15 percent of most health budgets, yet their proper use could reduce total healthcare costs considerably. As pharmaceutical companies begin to focus on payer needs, the source of competitive advantage and the opportunity to capture the upside value will shift increasingly to the service model in which their drugs are used. Whether directly or indirectly, pharmaceutical companies must design services and delivery to ensure their products convey real value.

Mastering the Market

Given the complexity of healthcare systems and treatment pathways, the challenge for pharmaceutical companies is to decide on which therapy areas to focus. We believe that the current R&D-driven trend to specialize in specific therapy areas will accelerate further, with even the largest pharmaceutical companies building expertise in only a few clinical areas.

The requirement to integrate drugs into delivery models and demonstrate real-world value will require building broader relationships with healthcare systems and forming partnerships with local providers. Demonstrating "3P" value will fall to local organizations, introducing major complications and challenging current organizational boundaries among government relations, marketing, sales, health economics and clinical management. This will require a very different kind of sales-and-marketing organization. Virtually all pharmaceutical companies have reduced their traditional sales forces dramatically in favor of localized "market-access" organizations.

Perhaps the biggest internal challenge will be between local market-access organizations and R&D. It is far easier to demonstrate real-world value if the value propositions have been planned during the early stages of therapy development. The link between the market and innovation is an area of weakness that pharmaceuticals companies must address urgently.

Mastering the market will be a long-term challenge. However, there are two steps that companies can take today:

Know your therapy areas and strengthen market-access and development skills to gain an intimate understanding of care pathways, stakeholders and drivers for each therapy in each locale. Choose the areas to master, embed delivery models in your go-to-market strategies, invest in Phase 3P trials to demonstrate value and improve your market-access skills.

Put the market back into innovation by creating mechanisms to align the development portfolio and process with market needs, build relationships between marketers and scientists, align incentives and operate trial processes seamlessly. Identify key non-drug technologies and build a supply base.

This new model of marketing will have a dramatic impact on the products a company sells, and the capabilities it requires.

Making the Transition

As the pharmaceutical industry continues its transition, gauging the price of admission into markets will be crucial. Moving too soon can destroy value in the current model, and moving too late can be fatal. As former Chief of Staff and retired U.S. Army General Eric Shinseki said, "If you don't like change, you're going to like irrelevance even less." Or as Microsoft Chairman Bill Gates said, "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don't let yourself be lulled into inaction."

Consulting Authors

Jonathan Anscombe is a partner and co-head of the firm's pharmaceutical and healthcare practice in Europe. Based in the London office, he can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Michael Thomas is a principal in the London office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Omar Sawaya, Ph.D., is a principal in the Dubai office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

The authors wish to thank their colleague Tamara Gilberto, who performed the research for this article.

This article is an excerpt from a comprehensive review of the challenges facing the pharmaceutical industry by the same authors. Pharmaceuticals Out of Balance: Reaching the Tipping Point is available at www.atkearney.com.