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Healthy Investment

Expenditure on healthcare, including on innovative pharma, shows positive return on investment

Pig money box Pharma is going through difficult times. Problems due to patent expiry, lean pipelines and safety concerns have triggered falling profits across the industry, from traditional big pharma to biotechnology companies such as Amgen and ImClone. It has been estimated that the recent loss in market value of the world's pharma companies is equivalent to the total annual GDP of India.

Amidst the doom and gloom, it is comforting to realise that this has all happened before. On February 24, 1985, the New York Times carried a story entitled "Glory days end for pharmaceuticals" in which it reported Hoffmann-LaRoche would lay off 1,000 employees, more than 12 per cent of its American payroll. It was said to be "a highly unusual move" for a company that had towered well above its competitors for so long. "After years of profits so fat that they immunised the $30bn American pharmaceutical industry against economic downturns, the big drug companies have suddenly found themselves mired in the same sort of troubles that have plagued less-glamorous industries for years."  Spiralling imports, legislative changes and new competition had struck hard, and new blockbuster products were harder and harder to come by.

We now know that the difficult days of the mid-1980s gave way to a golden age for pharmaceuticals, marked by hugely successful products such as Zantac, Prozac, Losec/Prilosec, Zocor, Istin/Norvasc, Plavix, Seretide/Advair, Lipitor and Zyprexa.

Increased R&D
The key to success in the 1980s proved to be in increased R&D spending.  

A similar pattern may be unfolding at present. According to data compiled by the European Commission, the pharmaceuticals and biotechnology sector has overtaken technology hardware and equipment to become the leading R&D investor worldwide. Pfizer is currently the largest R&D investor in the world, with Johnson & Johnson and GlaxoSmithKline also in the global top 10. Year-on-year R&D spending has risen by 16 per cent at Roche and AstraZeneca, and at Merck it is up by 24 per cent.

Hopefully, these record levels of investment will usher in a new golden age of drug discovery. But even if this happens, pharma is still faced with a challenge that barely existed in 1985 – persuading payers to allow its products to be used.

Controlling costs 
Over the past two decades a sort of 'counter-industry' has grown, populated by stakeholders whose remit is to control healthcare costs in general and spending on pharmaceuticals in particular. These cost controllers inhabit health ministries, health technology assessment agencies (HTAAs), insurance companies, hospitals and other healthcare provision organisations. Their weapons include blacklists, patient registries, annual spending caps, drug substitution, patient co-payments, reference pricing, restricted formularies, risk sharing and rationing. Their decisions may be presented to prescribers and the public as evidence-based decision making or as the results of objective cost-effectiveness evaluation, but the effect (and often the primary motivation) is cost control. 

It is not difficult to see how this situation arose. In all but one of the 30 member countries of the OECD, healthcare spending grew faster than GDP during the 10 years leading up to 2005.

The real-world consequences of this trend have been higher insurance premiums and higher taxes, with both economic and political fallout. Nowhere has this been more keenly felt than in the US, where health insurance premiums have increased by 78 per cent since 2001, compared with wage increases of 19 per cent during the same period.   

The perception that healthcare costs are out of control is a recurring theme in the US media. Perhaps in response to this, there has been a significant downward trend in the rate of increase of insurance premiums over the last four years.

Unfortunately for pharma, spending on prescription medicines in the US is growing at a much slower rate than healthcare spending as a whole, with drug cost inflation of just 1 per cent in the 12 months to August 2007, the lowest figure in three decades. The increasing use of generic drugs (up 13 per cent between 2005 and 2006) is cited as the principal reason. In the UK, where the NHS' overall budget has risen by 38 per cent over the past five years, spending on drugs also appears to have reached a plateau. Swedish health economist, Bengt Jönsson, believes that public financing has always been more limited for drugs than for the services of doctors and hospitals. It is also easier to restrict spending on drugs than on other components of the healthcare system.

All this places the pharmaceutical industry in a perilous position. In the short term, companies need to maximise revenue from a diminishing pool of products as a result of a fall-off in the number of new products launched since the mid-1990s. In the longer term, they need to generate significant revenue growth to justify the current high levels of R&D investment. These objectives cannot be realised if it becomes generally perceived that continued growth in healthcare spending is unsustainable and/or that the drugs budget is a relatively easy target. This, in turn, presents a major communications challenge to the pharmaceutical industry.

Investment not expense
Paul Ginsburg observed from a US perspective that, while increased spending for most goods and services inspires a celebration of the economy's ability to shift resources to the products and services that consumers want, rapidly increasing healthcare spending is often viewed negatively. One reason for this may be that healthcare spending is viewed as precisely that – spending rather than investment, despite there being evidence that expenditure on healthcare (including innovative pharmaceuticals) represents an excellent investment by society. For example:

• A recent study by Luce et al estimated that in the US, Medicare spending on treating heart attacks, type 2 diabetes, stroke and breast cancer between 1980 and 2000 resulted in a positive RoI in each instance. (For breast cancer, it was almost 5-fold.)

• A 2002 study by William Nordhaus, Sterling Professor of Economics at Yale University, calculated the economic contribution of health and non-health consumption to the growth in living standards in the US during the 20th century. The study indicated that from 1975 to 1995, the value of increased life expectancy was almost as large as the increase in value of all other consumption goods and services put together. He concluded that improvements in health status in the US yielded prodigious increases in economic welfare.

• A National Bureau of Economic Research study by Frank Lichtenberg, using disease data from 52 countries, found that launches of new chemical entities (NCEs) have a strong positive impact on the probability of survival. Launches of NCEs accounted for 40 per cent (0.79 years) of the increase in longevity between 1986 and 2001. The cost per life year gained from the launch of an NCE was estimated to be $4,500.

Studies such as these present a robust and resonant case for increasing healthcare spending in general and spending on innovative pharmaceutical products in particular. In a 2006 paper in Value in Health, Joel Hay suggests, "A strong argument can be made that the major global healthcare financing problem is not that the US spends too much on healthcare, but rather that every other country in the world spends too little, particularly on biomedical R&D."

This conviction needs to underpin all value communication, and needs to be aimed at a much wider audience than the traditional pricing and reimbursement targets within health ministries, HTAAs and health plans. The cost-controllers only make the decisions they believe their masters want them to make. And who are their masters? Ultimately, all of us – as taxpayers, healthcare professionals, patients, employees, carers and citizens. 

Alzheimer's disease, stroke, osteoarthritis, diabetes, schizophrenia and depression remain devastating diseases despite the availability of licensed treatments. Deaths due to drug-resistant pathogens are rising rapidly in both the US and the UK. Metastatic cancers are largely fatal. According to the World Health Organisation, 700 million adults worldwide will be obese by the year 2015. Do we want solutions to these problems, or are we happy to stick with the level of health technology we currently have? 

In his NBER paper, William Nordhaus poses this question in a novel way, pointing out that during the 50 years from 1948 to 1998, US life expectancy increased by about eight years. During the same period, improvements in non-health technologies included the jet plane, television, VCRs, computers, superhighways and so on. He asks readers to consider the following choice: would you rather have 1948 health conditions with 1998 non-health living standards, or 1998 health conditions with 1948 non-health living standards? 

It is a question that pharma should be asking, loudly and publicly, as it seeks to optimise reimbursement and uptake of the technological innovations it makes. Not least in the context of unprecedented economic turmoil and a presidency apparently committed to major reform of the all-important US healthcare market.

The Author
John Fanshawe is co-principal of specialist value communication consultancy Medaxial
To comment on this article, email

2nd April 2009


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