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Global pricing constraints are inevitable as the political climate shifts in the US, UK and France

Barbed wireMany observers find the US presidential election process complicated, cumbersome and even humorous, but its global impact in undeniable. The lead-up to the 2008 elections has drawn intense focus on healthcare issues that is likely to continue beyond election day. Implementation of a victorious candidate's platform will still be far from certain - witness Bill Clinton's failed attempts at reform 15 years ago - and will not even begin in 2008, but the national debate it will prompt is critical in setting the stage for action.

These changes in the US along with the new French government and pre-election environment of the UK will impact not only in these individual markets but also the global pharma. From the UK's re-evaluation of its drug pricing policy to the impact of biosimilars, there are a number of pricing and reimbursement issues that will continue to evolve in 2008.

In February 2007, the UK's Office of Fair Trading (OFT) released a critical report on the Pharmaceutical Price Regulation Scheme (PPRS). This report recommended replacing the PPRS with a 'value-based' pricing process. Value-based pricing is a troublingly vague term considering the UK's reliance on cost-effectiveness analyses, that are based on the arbitrary and dated figure of £30,000 per quality adjusted life year (QALY). Industry and government will shortly enter discussions to renegotiate the terms of the PPRS, which are likely to lead to price cuts in 2009. At this point it is unclear whether the OFT proposals will be negotiated, or if this will merely be a normal PPRS round. This negotiation alone may not significantly change the UK's pharmaceutical environment but it will have an effect.

It is likely that these discussions will be used to help enhance the UK Government's position with the public, as part of its preparation for the elections that must be called at some point before 2010. Given this politically charged environment, two factors will play a vital role on the path to a new paradigm: the options that may be pursued by the Department of Health in response to the methodology used in the OFT report, and the pharma industry's ability to understand and align around its interests in relation to the negotiations. The UK is the world's fifth-largest drug market and many other global markets reference its prices. Pharma makes an important contribution to the economy via employment and intellectual capital - over 73,000 direct employees, and nearly one fourth of the country's R&D - and UK firms own 43 per cent of late-stage biotech products in Europe. A process that seeks a government-led definition of 'value' may endanger an industry that is important to the nation's clinical and economic health, and whose sustenance has always been an objective of the PPRS.

The threat of biosimilars - or the opportunity they offer, from a payer's perspective - has been of consistent and increasing concern to the biotech industry for years. Historically protected by the lack of a regulatory approval pathway and the technical manufacturing barriers, firms with biotech assets recognise that their products will now face generic-like competition. To date a major missing key to determining the impact of biosimilars has been a real understanding of their potential pricing in relation to innovative brands. A common expectation is that the number of entrants may limit both price and market share erosion. Concern about the safety and efficacy of specialised follow-on biologics and the cost and expertise required to bring a biosimilar to market, create significantly higher barriers than in the world of generic small molecules. What can be considered to be the first marketed biosimilars have been launched in the already highly competitive human growth hormone (hGH) market. Sandoz's Omnitrope in the EU and US and Teva's Tev-Tropin in the US - have entered the market at discounts not exceeding 25 per cent and have captured relatively little market share. Part of the explanation may be suboptimal delivery systems; Tev-Tropin launched without a pen device.

The EMEA has been far more proactive than the FDA in providing guidance to potential biosimilar manufacturers; the FDA stated that its hGH approvals did not represent guidance. Two follow-on erythropoietins (EPOs) marketed as Binocrit and Epoetin alfa Hexal - were launched in Germany with bigger discounts than the growth hormones. These are chasing the second best-selling drug in history, the anaemia treatment epoetin alfa - manufactured by Amgen and branded as Epogen and Procrit. The market opportunity for a biosimilar in this disease area may be limited because far more of Amgen's second-generation EPO (Aranesp) is used in the EU, all of these products fall into a single reference group in Germany and the first-generation EPO is likely to be protected in the US for several more years.

The investment and trials required to bring biosimilars to market, may make it more attractive to position these new entrants as competitive brands that offer some, as yet undefined, differentiation. In this case their impact on prevailing price levels and reimbursement dynamics may be muted. However, biosimilar manufacturers could test the waters of steep discounting impacting on innovator product pricing and access.

Generic competition and use will continue to rise as more major pharma products lose marketing exclusivity and see rapid price erosion and loss of market share. In 2008 drugs with global sales of more than $11 billion should start to lose exclusivity, and reimbursement systems will reap the benefit of net price reductions on these valued therapies.

These events are well understood and expected, and there are steps pharma can take to optimise performance around loss of exclusivity, relating to some of the most pressing challenges:

  • How to identify valuable R&D targets that will fill the gap left by past innovation
  • How to develop those assets in a manner that demonstrates their value
  • How to capture that value through appropriate pricing and reimbursement strategies.

In the context of revenue holes in the industry's portfolio, and severe healthcare budget strains felt throughout the world's major markets, the ability to plan for successful pricing achievement and appropriate reimbursement will continue to grow in importance in 2008.

The US healthcare system, torn between proponents of a free-market system and advocates of government-funded universal healthcare, takes central stage in 2008 as presidential candidates debate and fight their way through primaries and November's general election. The pricing and funding of drugs will be a key theme in many discussions about the way forward, both directly - such as through suggestions of direct price negotiations with the federal government - and indirectly via proposals to allow importation. The focus on US drug pricing and funding is driven by concern over:

  • The high number - more than 46 million - uninsured people who lack affordable access to drugs
  • Underinsurance of a large portion of those individuals who do have coverage
  • Continued general escalation in the cost of healthcare
  • Increased federal government exposure to drug costs via expanded entitlement programmes such as Medicare 'Part D'
  • The relative ease of focusing on pharmaceutical prices as a means of controlling costs, despite the fact that drugs make up only about 15 percent of total budgets.

Specifically, the desire to 'fix' healthcare in the US most commonly consists of variations on the theme of government intervention versus reliance on market forces. These may be guided by attempts in other major markets at providing broad coverage and cost containment. Any significant change in the US system will have ramifications for global markets as their relative attractiveness or contribution to revenue potential changes. Former Democratic candidate John Edwards suggested that patent protection for new drugs be eliminated and replaced by cash prizes for innovation to spur faster, less costly drug development. An extreme example, but consideration of the risk involved in valuing a product in this system, it is clear that innovation could be severely constrained.

Other candidates' policy positions - Democrats and Republicans alike - include more commonly discussed elements that could also alter the attractiveness of the US market. As a result, manufacturers' reliance on other major and emerging markets could increase. With the additional strain caused by changes in the US, the pricing and reimbursement performance in the EU may become more critical. The industry could also shift its focus more quickly towards the needs of rapidly growing markets such as China, India and Turkey. Innovation in general could become more risky as the US government takes a greater role in product pricing - or has a clearer pathway to do so.

Such events could not happen immediately - certainly not in 2008, and probably not even in 2009. However, their foundation could be laid should the results of the presidential and congressional elections be seen as providing a mandate. Understanding the relative positions of the three candidates remaining in the race (at time of going to press) can provide a high-level view of potential reforms, allowing the industry to plan scenarios of future opportunities and challenges.

John McCain - Republican
Source of coverage
Seeks access to healthcare for all, while opposing mandates; eliminate tax bias toward employer-sponsored insurance; provide individual ($2500) and family ($5000) tax credits; expand HSAs; require states to introduce income-weighted Medicaid premiums; promote insurance competition and innovation.
Cost constraint mechanisms
Administrative and technology-based steps;  promote use of alternative (non-physician) providers and settings of care; reform malpractice, link to clinical guidelines; increase enforcement against collusion and other unfair practices; focus on chronic and preventative care; single billing for high-quality care as opposed to fee for service for each component; allow nationwide insurance (non-state regulated; greater consumer information on options and outcomes; pricing transparency; encourage faster generic and biosimilar introduction; allow re-importation.
Risk of free pricing - moderate
Repeal of ban on direct Medicare price negotiation; price transparency already underway through publication of prices; outcomes-based prospective payments may constrain value of innovative therapies; potential promotion of private payer consolidation; increased risk of generics/biosimilars indirectly adjusts price (and may result in perverse incentive for higher pricing of new products); intellectual property threat and risk of price referencing via parallel trade; unlikely to result in systemic change and address issue of lack of coverage.
Cost estimate - unknown

Hilary Clinton - Democrat
Source of coverage
Mandatory, fines for no coverage; mix of federal and private; access administered by existing Federal Employee Health Benefits Program; employers provide plan or contribute to cost; tax credits and additional low-income assistance plus patient out of pocket (OOP); tax on generous health plans if >$250K income.
Cost constraint mechanisms
Administrative and technology-based steps; focus on chronic care; Best Practices Institute; federal drug price negotiation; changed patent laws to increase generic availability; reform malpractice.
Risk to free pricing - significant
Repeal of ban on direct Medicare price negotiation; reduce payments to Medicare Advantage; Best Practices Institute with unclear remit (outcomes comparisons may result in non-coverage determinations); intellectual property threat and risk of price referencing via parallel trade.
Cost estimate - $110bn per year


Barack Obama - Democrat
Source of coverage
Mandatory for children, offered to all; mix of federal and private; new public plan, as well as exchange to facilitate small business and individual access to coverage; employers make 'meaningful' contributions; federal subsidies plus OOP.
Cost constraint mechanisms

Administrative and technology-based steps; focus on chronic care and public health; federal drug price negotiation; reimportation; policies to promote generics; cut Medicare payments; public reporting of provider and institution cost and quality; reform malpractice.

Rish to free pricing - significant
Repeal of ban on direct Medicare price negotiation; reduce payments to Medicare Advantage; intellectual property threat and risk of price referencing via parallel trade.
Cost - $50-65bn per year


Intuitively and historically, the most significant risk to US pricing is associated with the Democratic Party. The cost containment mechanisms currently included in their platforms are well known and have popular appeal: reimportation, direct pricing negotiations with the Government and limits on intellectual property rights. However, the Republican John McCain has a platform that mirrors some of those same positions, a fact reflected in the low volume of contributions to the McCain campaign by big pharma. None of these steps will solve the healthcare crisis in the US - drug spending accounts for about 16 per cent of the country's healthcare budget - and indeed they could harm long-term innovation and have knock-on effects on world markets. However, the remaining candidates policy elaborations on healthcare are indicative of its importance and offers hope to those who see the US healthcare system as unsustainably expensive and selective.

As with the PPRS negotiations, it is vital that governments consider the long-term implications of policy actions that may have a strong short-term popular component to them. It is also vital that the biopharmaceutical industry play a role, not only in understanding future environmental scenarios, but in helping to guide healthcare to a sustainable and successful path as opposed to taking an entrenched position that allows the sledgehammer of reform to drive short-term popular change.

The Author
Ted Sweeney is partner at PriceSpective LLC, a global value strategy consultancy, or see

26th March 2008


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