The Price is Right Replay

Here is another post from the vault, September 26, 2013 to be exact.

When a pharmaceutical company puts a price tag on a new drug it will sell in the US, it employs more art than science. Its launch team considers the prices of competing products, the acceptability of the price to reimbursers like Medicare, the perception of value by the prescribing physicians, and other factors with the goal of maximizing revenues during the period of patent exclusivity. This is a sound strategy since those revenues, with the revenues of a handful of other drugs the company sells, need to cover the substantial cost of R and D, manufacturing, regulatory compliance, lobbying, shareholder dividends, and fat salaries of its senior managers. In the EU countries, national health care agencies evaluate the cost and benefit of new drugs before approving use so a company needs to provide more objective measures of the value of its product. Apparently, the more objective approach results in lower prices; according to a 2011 European Parliament study cited by a recent Reuters article, prices of drugs in the EU are about half of those in the US. Outside the US and EU, companies typically employ “tiered pricing,” setting lower prices in low- and middle-income countries that generally reflect the ability of (some) patients or national health agencies to pay. Needless to say, not everyone who needs drugs can afford them. I recently found two studies of the pricing of drugs for these rest-of-world markets that offered interesting conclusions and alternatives to tiered pricing aimed at improving accessibility to medicines.

In the first (Moon et al. 2011), the authors studied drug prices and the effect of entry of generic competing drugs for five cases: HIV antiretrovirals, artemisinin combination therapies for malaria, drug-resistant tuberculosis drugs, liposomal amphotericin B for visceral leishmaniasis, and pneumococcal vaccines. While acknowledging the difficulty of comparing complex situations, the authors found that “when markets were sizeable and multiple sources of production were available, tiered pricing performed poorly compared to competitive production in generating reliable and sustained price reductions.” They also noted that tiered pricing contributed to short term, improved access “when markets were small, highly uncertain, where production capacity was limited, or there was a time delay to overcoming barriers to competition.” To achieve long term equitable or affordable pricing, the authors recommended that governments of low- and middle-income countries encourage the growth of a domestic pharmaceutical industry, make public sector purchases at negotiated prices, and set reimbursement policies based on public health benefit and overall cost savings. To increase competition, they also advocated governments issuing compulsory licensing of patented products and that companies license their products more widely, participate in patent pools, and scale back patent coverage and enforcement in ROW countries. However, they also noted “such a system will only work in the long term if markets are large enough and alternate solutions for financing R&D can be implemented.” Unfortunately, with the biotech/pharmaceutical industry under pressure to increase R and D productivity and justify prices to skeptical reimbursers, its interest and support for alternatives is limited.

In the second article (Dow and Mora 2012), the authors used publicly available data to estimate the economic burden of viral disease, dengue fever, and the maximum potential market for a new dengue drug and, building on their findings, propose an alternative to the tiered pricing approach. Dengue is a mosquito-borne viral disease that infects approximately 100 million persons annually in the endemic tropical and subtropical countries, one-quarter of whom suffer debilitating symptoms and need medical attention and 3-6% advance to the deadly hemorrhagic shock syndrome. There is no specific drug therapy but several vaccines are in development (CDC Dengue). Utilizing data on the costs of treating dengue fever patients in eight countries collected by others (Suaya et al. 2009) and adjusting for unreported cases, the authors calculated a global cost of $1.7 billion and a per case cost of about $300. Then, after accounting for the introduction of a dengue vaccine and subsequent reduction in cases beginning in 2020, the authors proposed an alternative in which, during a temporary period of market exclusivity for a new dengue drug, individual countries would agree to pay 50% of the per-case equivalent of economic costs saved through its use. Depending on drug effectiveness and cost of medical and indirect costs and lost productivity in specific countries, the prices for treating a case would be $13–$239, and the maximum potential market for a such a drug would be about US $338 million annually. To me, this analysis presented a sound economic rationale for countries to use a new drug, for a company and its investors to expect an attractive return on investment, and for an approach to fair pricing based on economic burden and drug effectiveness. Of course, two unknown potential torpedoes to this approach are the cost of developing a dengue drug and how countries will pay for the drug. For the former, I posit that if the exclusivity period is five years and the desired ROI is five times cost, then the cost may be around $300 million which is not unrealistic. The latter is part of the continuing struggle to provide basic worldwide health care.

Interestingly, the estimates of Dow and Mora may be under-estimates; researchers reported in a recent letter to the journal Nature that the incidence of dengue is closer to 390 million per year, further increasing the market potential of a drug (Bhatt et al. 2013). Also interestingly, Dow is the CEO of 60° Pharmaceuticals LLC, a company founded in 2010 with a “mission to discover, develop and distribute new medicines for neglected tropical diseases … while also providing an economic return.” The company has a preclinical dengue drug program (60 Degrees) and I hope to learn more.

What is needed to advance the Dow-Mora approach? More data on the economic burden of diseases are needed, and I suggest the Global Disease Burden program of the University of Washington’s Institute for Health Metrics and Evaluation add the cost of care to their data collection and evaluation (GBD). Then regulatory agencies need to encourage the marketing groups of the multi-national pharmaceutical companies to use the data to justify the prices of their new drugs, first in the high-income countries and then in the rest of the world.

A Good Week for Big Bad Pharma

In last week’s post (“Trickle Down Again”), I wrote briefly about an announcement by the big pharma company, GlaxoSmithKline (GSK), on its plan for building its market in Africa and recycled a post from last fall about GSK and other pharma companies in the emerging and developing market countries. I thought GSK’s plan warranted a closer look since it illustrates the complications of improving health care in Africa and shows how the company thinks it can do so in a sustainable (profitable) way.

As was described in the company press release, GSK is committing £130 million over five years (about $42 million per year) to a plan that is “designed to address pressing health needs and contribute to long-term business growth.” I parsed the plan into the following parts:

Improving academic research infrastructure: GSK will first fund up to 25 professorships in African universities in the fields of pharmaceutical sciences, public health, engineering, and logistics with the long-term goal of building in-country manufacturing capabilities (amount of funding was not given). Second, it will establish a new “R&D Open Lab for NCDs” (non-communicable diseases) as a complement to its four-year-old Open Lab at Tres Cantos which is the company base for collaborations on infectious and neglected disease research (see Tres Cantos). In the new Lab, GSK researchers at its Stevenage R&D center will collaborate with African researchers to “conduct high quality epidemiological, genetic and interventional research to increase understanding of NCDs in Africa.” The near-term goal is to fund directly the education and training of African scientists and long-term to generate freely-available data needed for drug development. GSK will apply £25 million to this effort.

Improving the supply of GSK products: the company will spend £100 million to expand its existing manufacturing facilities in Nigeria and Kenya and build up to five new factories. The new GMP-compliant plants will make products such as antibiotics and respiratory and anti-HIV medicines and may be built in Rwanda, Ghana, and/or Ethiopia. FiercePharmaManufacturing reported this build-out will create 500 new positions (FPM article). The company will also improve its supply chain by creating regional supply hubs specific to serving rural areas. No amount was given for this effort. Also, GSK will work with its current business partner, the Aspen Pharma Group of South Africa, and regulators to increase the registration of GSK medicines and vaccines (mentioned are an antibiotic, Amoxil, and a respiratory med, Ventolin). Again, no monetary commitment was given.

Improving the health care system: over the next thee years GSK will contribute an unspecified amount of funding to support the training of 10,000 health care workers through an NGO, the One Million Health Workers Campaign. This effort is part of the company’s commitment to reinvest 20% of any profits generated in developing countries into strengthening health care infrastructure in those countries and through which GSK stated it will have supported the training of 15,000 workers by various NGOs partners by the end of this year.

So GSK is intending to improve health care in Africa through a long-term effort aimed at a number of targets- collaborative research, manufacturing, distribution, product registration, and community health worker training- which is good. Unlike some of the advocacy groups or NGOs which focus on a single aspect of the health care system, GSK is applying its operational experience and corporate giving in multiple areas to effect improvement. But the amount of funding committed is small relative to the overall company profits (probably less than one percent of 2013 $10 billion net profit before taxes) and modest relative to sales in Africa (about three percent of $1.5 billion annual sales); it should be/could be larger.

What other MNCs deserve notice for efforts in the emerging/developing world? Not to be out done by its rival GSK, Sanofi’s CEO, Chris Viehbacher, pointed out last week at conference on neglected diseases that Sanofi was investing almost 100 million euros ($138 million) in manufacturing and distribution in Algeria and Morocco, and started three collaborations with the Moroccan government to train doctors, build treatment facilities, and train regulatory staff (FiercePharma article). He also noted the company had 1 billion euros in sales in Africa last year and expects double-digit growth, so more investment is warranted.

Also last week, Merck announced that it and the Swiss specialty pharmaceutical company, Ferring, will be supporting the clinical testing of a new room-temperature-stable formulation of the drug, carbetocin, to prevent excessive post-partum bleeding (hemorrhage) (press release in FierceBioech). Post-partum hemorrhage is a main factor in the 275,000 annual maternal deaths, and the current therapy, oxytocin, requires cold chain distribution. The trial will be conducted by WHO starting this year and will involve 29,000 women in 12 countries. Merck did not specify how it will support the trial or amount of funding but did note that the trial is part its $50 million per year, ten-year program called Merck for Mothers (MFM). This drug development effort looks to me to be unique among the MFM-supported projects, most of which involve education and training conducted by universities, governments, and NGOs in Brazil, India, Uganda, US, and Zambia, and looks to me to be a more effective application of the companies’ expertise.

Trickle Down Again

On Monday, Andrew Witty, CEO of GlaxoSmithKline (GSK), the UK-based pharmaceutical company, announced a substantial strategy (in funding and scope) for Africa. Speaking at the 5th EU-Africa Business Forum in Brussels, he outlined plans that commit $216 million over five years to several efforts: improving non-communicable disease, pharmaceutical science, engineering, and logistics research at African institutions; expanding GSK distribution and manufacturing capabilities; and supporting community healthcare worker training. Lots of details were provided in the company press release, and the announcement got some press in FiercePharmaManufacturing and Reuters (thanks to a alert reader for finding this). The announcement of GSK’s strategy for Africa reminded me of report on the efforts of major pharmaceutical companies to expand their presence and sales in emerging markets. Here is what I wrote about the report last October.

Another thing the editors of the Fierce newsletters do well, in addition to aggregating important news stories for the pharma/biotech/medtech industries, is the synthesis and analysis of those stories to yield a bigger picture. Last week Tracy Staton of FiercePharma reported on the “Top 10 Drugmakers in Emerging Markets” (FP report) that provided some interesting numbers and insight into the emerging market strategies of the multinational pharma companies (MNCs). I should note that in the context of the report, emerging markets (EM) are those in countries other than the US, the EU (mostly), and Japan (usually) and represent broadly the low and middle income countries as defined by the World Bank (nice graphic at ChartsBin). With apologies to Ms. Staton, here’s my overview of her report followed by my take on the role of MNCs in improving global health.

First, here’s a tabular presentation of some key data ranked by the company’s share of total revenues derived from sales in the EM:

MNC EM Share of Total Revenue (%) Recent Annual EM Revenue ($B) Annual EM Revenue Growth (%) EM Country Focus
Bayer 33 8 8-15 China, India, SE Asia, Latin America, Africa, Mideast
Sanofi 32 15 10 China, Mideast
Merck KGaA 29 2 13 China, Latin America, Mideast
GlaxoSmithKline 26 11 20-76 China, India, Africa, Mexico, Russia
Novartis 24 14 Russia, SE Asia, Mideast
Johnson and Johnson 23 17 China, India, Brazil
Novo Nordisk 22 3 ~20 China, Mideast, SE Asia, Africa
AstraZeneca 21 6 4 China, Russia, SE Asia
Pfizer 20 12 Russia, China
Roche 20 10 ~15 China, India, Mexico, Russia, Brazil

Second, here’s a summary of the strategies these MNCs have been using to build their share in the EM.

Bayer: marketing of country-specific drugs, training of physicians and hospital managers (more than 4,500 in rural China in 2012).

Sanofi: putting manufacturing sites in emerging countries (more than 40), training of physicians, acquiring EM vaccine and generics companies, selling EM-specific brands at lower prices, funding public health initiatives including with capital investment, training doctors, e.g., in India (100,000), China (10,000), and Morocco.

Merck KGaA: pricing products to fit the budgets of a growing middle class, partnering with local/regional pharmas to make and sell its own and generic drugs; building local sales forces (30% of all employees are in EM).

GSK: discounting of all products in the EM with focus on low margin and high volume, increasing local employees (37% of its employees work in EM).

Novartis: partnering with governments; undertaking local manufacturing, public health projects, and clinical trials; discounting of patented products; running a management development program.

JnJ: setting up local R&D and manufacturing centers, partnering with local companies for new products and regional local products, selling inexpensive devices (e.g., cheap glucose monitors), conducting physician training, investing in improving management and operations.

Novo: undertaking public health work in education, screening, access to care (e.g., mobile clinics); discounted pricing; physician training (50,000 in China); mobile clinics; continuing production of inexpensive generic substitutes to its patented products; increasing local manufacturing, R&D, and sales and marketing.

AstraZeneca: conducting local hiring (47% of all employees are in the EM) and local acquisitions and partners.

Pfizer: selling a mix of branded generics and patented drugs, making deals for local acquisitions and partners.

Roche: with insurer Swiss Re offering health care coverage through five insurers in China, engaging local partners to make and sell its patented drugs at discounted prices, providing oncologist and pathologist training.

Third, here are my spins. The MNCs are serious about building their EM revenues which account for 20-30% of total revenues for some companies, an important contribution to their bottom lines considering that EM products have lower profit margins than non-EM products. The MNCs are using a variety of strategies to increase their EM sales, including the traditional one of ramping up the number of sales people to those that increase the capacity of the health care system like doctor training, public health projects, and sponsoring insurance. The MNCs are spending a substantial amount of money on their emerging market effort, most directly in the EM countries. My guesstimate on the total aggregate spend of these ten companies is $78 billion per year based on this hand-waving: according to the FB report, the total aggregate revenue is $98 billion and assuming that 20% of this disappears as corporate profit margin (20% is the industry average reported by Yahoo Biz) and assuming the remaining revenues are applied to the companies’ EM efforts, one ends up with $78.4 billion spent per year. Granted some of this doesn’t build capacity or the local economy (like company administrative spending) and some may be pernicious (like bribes, although I think the Chinese government is over-estimating the amounts of MNC bribery) and it is aimed at the mid and upper economic strata, the MNC spending compares favorably to the $28 billion spent in 2012 for “development assistance for health” by government aid agencies, multilateral donors, private foundations, and charities according to Institute for Health Metrics and Evaluation at the University of Washington (IHME press release). Clearly, the latter is vitally important in addressing desperate needs that companies (and unfortunately, local governments) are not now addressing on their own, but, in terms of improving health care in the rest of the world over the long term and in an economically sustainable way, the MNC effort is important.

What effect will the MNC EM effort have on health care for those at the bottom of the economic pyramid? I am guessing that by building their EM market share by improving access to and use of their products the MNCs will improve the overall health care system and general economic conditions to the point where, like in the EU, Japan, and the US (where 30% of the population gets its health care through the government), governments will be able to subsidize care for those at the bottom. Not a trickle or a downpour, more like a steady rain.

Herd Wisdom

At the risk of adding another echo to the blogosphere, I am commenting on a recent editorial by John Carroll, chief of FierceBiotech, in which he noted the major pharmaceutical companies are now concentrating their research and development efforts on a few diseases (indications), apparently to reduce R and D risk but with the possible unintended consequence of increasing their market and competitor risk (“Assessing the Crowd Effect”). Mr. Carroll’s comment was initiated by Helen Thomas’s Heard on the Street column in the Wall Street Journal (“Beware the Thundering Pharma Herd” at for those with a subscription or at Innovator94 for those without). Ms. Thomas cited a report by Barclays (I assume written the bank’s market intelligence group and not publicly available) that the indications of oncology (cancer) and inflammation absorb one-third of big pharma’s R and D budgets although drugs for these indications are likely to account for only 17% of projected sales. The point of both writers is that big pharma, by focusing on indications with less risky and less expensive development efforts, is heading for lower profits when their “not-much-different-than-all-the-other” drugs hit the market. Mr. Carroll: this concentration “could set the stage for a migration [by innovative companies] to lonelier diseases or drug theories, where true pioneers can be years ahead of the next competing therapy.” Ms. Thomas: “Today’s R&D efforts are bearing fruit, but there is something to be said for standing apart from the crowd.”

Of course big pharma’s herd wisdom also includes a number of other rubrics as analysts, industry watchers, and I have noted:

  • R and D is expensive so needs to be down-sized into areas where a greater knowledge base exists to build on;
  • R and D on some indications like cardiovascular disease that require huge trials and are subject to closer scrutiny by the FDA and Alzheimer’s disease that has seen a large number of late-stage trial failures is too risky;
  • biotech companies will take on the riskier, more innovative research (ignoring that investors invest primarily in companies that can be sold to big pharma);
  • more money can be made in rare disease treatments where insurance companies tolerate astronomical annual per-patient costs;
  • although payers (insurance companies and the government) make sounds about paying only for demonstrably better drugs, it is marketing that sells drugs not benefit; and
  • there is no market and will never be one for new drugs to treat the diseases of poverty that afflict a large percentage of humankind.

As one may have noticed over the past four years in this blog, I have applied my small voice to refuting the last rubric, and anyone who is interested may read my rants in “Playing the Long Game”, “Missing the Boat”, “A Rare Request”, and “Throwing Darts”.  So what is my point? If the major pharmaceutical companies are plowing one-third of their current R and D spend (or $17 billion based on a $50 billion annual spend) into drugs that are projected to capture 17% of all sales (or $54 billion if one assumes annual US drug sales of $320 billion) (an approximate 1:3.2 ratio), I think at least one of the major pharma companies would find it an acceptable risk to put $100 million each year into R and D on a neglected disease with the assumption that eventually it would yield a drug with a $320 million market. That seems reasonable to me, given the company would likely have no competition and number of potential patients is in the tens or even hundreds of millions. The only barrier is that the world needs to find a way to pay for the new drug in the next five to ten years, the time it takes to develop it.

The most recent issue of Technology Review is about remarkably innovative companies, and in it I read about Mark Levin, a founding partner of the local venture capital firm, Third Rock (Tech Review feature story). Third Rock is known as a non-traditional VC firm, emphasizing early-stage investments in novel ideas vetted by its science team and acting more like an incubator than an investor (FierceBiotech article). And it has been successful as indicated by its raising of $1.3 billion in capital since 2007, including closing a $500 million fund in 2013. According to the article, Mr. Levin will back companies addressing challenging indications (like amyotrophic lateral sclerosis or ALS), can spot what will be an important product in five to ten years, is personally wealthy, and is “extraordinarily empathetic.” I wonder what he thinks, or if he has thought, about the investment potential of a start-up aimed at a global health disease.



I have John Carroll, editor of the newsletter FierceBiotech, to thank for setting up this posting.  Last week, he ran an article on the announcement by Johnson & Johnson (JnJ) of the formation of a dedicated global health business group (FierceBiotech article).  But he also included in the story a quote that nicely illustrated the diametrical (and wrong, in my opinion) direction some big pharma companies are taking in global health.  The quote is from a Business Week article on the on-going duel between some big pharma companies and the Indian government on access to their patented drugs (for more, see my post, “Dueling Sitars”).  The CEO of Bayer AG commented on the compulsory license the government issued last year to a generic maker of a copy of Bayer’s patented drug, Nexavar:  “Is this [license] going to have a big effect on our business model?  No, because we did not develop this product for the Indian market, let’s be honest.  We developed this product for Western patients who can afford this product, quite honestly.  It is an expensive product, being an oncology product.”  If he was being honest, he should have explained why Bayer bothered to patent it in India if it had no plans to sell the drug there or in the markets where a generic copy may be sold.  Why not plan to sell a new, needed (presumably) drug globally rather than using patents solely to minimize competition?  Competition is part of business (increasingly so for big pharma companies in the “Western” markets) and to be successful Bayer should figure out how to compete globally.  Roche, one of Bayer’s competitors, apparently decided it was profitable to sell a low-cost version of its oncology drug, Herceptin, in India and licensed an Indian company to do so in 2012.  And soon that company will be competing with the Indian biotech, Biocon, and its bio-similar Herceptin, CANMab (Biocon press release).  Time for a new business model, Bayer?

At the other end of the diameter, last week JnJ publicized its Janssen Global Public Health group (JGPH) (Janssen is the pharmaceutical division of JnJ), “an important new group unifying Janssen’s commitment to research, develop, and deliver transformational medicines to address the world’s greatest unmet public health needs” (Janssen press release in FierceBiotech).  To me, JGPH is pioneering a superior business model with several laudable features.  The group will conduct research and development for new drugs for these unmet needs, not just repackaging or repurposing existing products.  It will also develop and launch both products (diagnostic and therapeutic) and services that cover a wide range of healthcare, and these will be  “… designed specifically to address the real world needs of people living with disease in underserved regions of the world,” according to Wim Parys, JGHP co-leader.  JGPH will not be a stand-alone, on-its-own division.  Since JnJ has existing global health products and efforts (e.g., in 2011 it acquired Crucell, one of the largest suppliers of childhood vaccines to UNICEF, see JnJ Caring), it will work with other divisions within JnJ as appropriate.  More important, JGPH will co-develop products with outside organizations, including the global health product development programs (PDPs) like PATH and the Drugs for Neglected Diseases initiative (DNDi) that have product pipelines but lack commercialization expertise.

JGPH is also starting with a nice portfolio of ongoing products and projects in various stages of development.  From early to late, the portfolio includes:

- a chewable form of mebendazole (Vermox®), a Janssen-developed drug for treating intestinal worms now distributed in public health programs in many countries, for younger children (in preclinical development);

- a reformulated flubendazole, a potential new treatment against parasites that cause lymphatic filariasis (elephantiasis) and onchocerciasis (river blindness), under a preclinical data sharing agreement with DNDi;

- a long-acting, injectable version of the JnJ HIV medicine, rilpivirine, to enable less frequent dosing and prophylactic treatment, under a licensing agreement with PATH to conduct planned late-stage trials;

- an anti-microbicidal vaginal ring using the investigational HIV medicine, dapivirine, for preventing sexual transmission of HIV with the International Partnership for Microbicides (in trials); and

- a global access program for Sirturo®, a newly approved drug in the US and Russia to be used in combination therapy in adults with pulmonary multi-drug resistant tuberculosis.

JGPH is also tackling the (really big) challenge of access and affordability.  It “will cultivate and help implement innovative pricing and results-based financing models that improve access to these medicines for patients in resource-limited and emerging markets, while also creating sustainable, long-term solutions based on country ownership and accountability for health services and outcomes.”  This will not be a de novo effort but will build on the experience of the company’s existing Global Access and Partnership Program (GAPP).  The GAPP was started in 2006 to provide access to its HIV drugs to people living with AIDS in low-resource countries (GAPP report).  GAPP’s works primarily through licensing of manufacturers in regions of need.  To date, Janssen has licensed several South African pharma companies, non-exclusively and without royalty, to make three of its branded anti-retrovirals for sale in low- and middle-income countries, and it has licensed these companies plus an additional three (one in the US and two in India), non-exclusively and with royalty, to make and sell generic versions of two of the anti-virals.  The latter agreements also include the right to make combination drugs, transfer technology from Janssen to the licensees, and the right to sell the active ingredient to others.  Janssen also is not enforcing its patents on unlicensed companies for one of the drugs if the drug is approved and will be used in low-income countries.  For the branded drugs it sells, Janssen has prioritized seeking registration in countries of most need and is selling these products at reduced prices that will be reduced as cost-savings from production volume or manufacturing efficiency allow.  In addition to increasing access, this approach helps build the distribution and regulatory infrastructure needed for a functioning pharmaceutical market in the regions of need.  GAPP also has medical education program to improve drug use and a sequence database for diagnostic development accessible to academic collaborators.

JGPH is a large and ambitious effort, many years in the making, and, my hope, will be a model for other companies that are building global health businesses.  My advice (which I always have) is that JGPH needs a website to advertise its approach and progress (I couldn’t find one) and a dedicated business development group to find opportunities and cut deals.  The management should also encourage JnJ’s corporate venture group (JnJ Development Corp.) and the new chain of innovation centers (e.g., the Boston Innovation Center) to find and incubate ventures that are applying new technologies to global health problems.

One Trillion Plus

That’s a big number and it is also the total amount to be spent globally on medicines in 2014 as estimated by the Institute for Healthcare Informatics, a subsidiary of the for-profit pharmaceutical and health care information company, IMS Health.  In its just-released report, “Global Use of Medicines:  Outlook Through 2017” (IMS report), the Institute provided a readable summary of trends and drivers for those interested in global pharmaceutical business.  Using the multiple data streams of the parent company, the authors forecasted a modest growth rate of about 3% with higher rates of growth outside the major market countries.  In the mature market countries, defined as having have health care spending of more than $100 per capita, they gave growth forecasts of 0% (Spain) to 5% (South Korea), and in the “pharmerging” market countries (less than $100 per capita) rates of 5% (Turkey) to 15% (China).  The report also noted the geographic distribution of spending between the major markets of the US/EU/Japan and the rest of the world (ROW) will be approaching 50/50 in 2014-17.  The authors reported their forecasts are more uncertain than those of the past and prepared three alternative scenarios to attempt to bracket the uncertainty.  Here is my abstract of their key observations:

  • cost containment and slow economic recovery in Europe will limit spending on meds there;
  • remodeling of the health care system in the US will affect spending but the direction and magnitude are uncertain in part due to the unpredictable political situation;
  • in the major market countries, medicines for cancer, rare diseases, and diabetes will have an increase in their share of the spending;
  • in the ROW countries, increases in government investment in health care and the number of out-of-pocket payers will drive the increase in spending with an emphasis on generic meds; and
  • while new medicines in the pipeline will significantly improve treatment of a number of diseases that have the large impacts on health in both major market and ROW countries (heart disease, stroke, lower respiratory infections), the pipeline is lacking for meds for diseases like malaria, tuberculosis, neonatal sepsis, and diarrhea that have major impacts in the ROW (HIV treatment is an exception).

Not surprising is that I found the Institute’s big picture confirmed my bias that the future of the pharma industry depends on its ability to meet ROW needs.  The report also provides an economic and social framework against which to evaluate the actions and plans of the major global health actors- governments, multi-lateral funding groups, unilateral funders, and companies (multinationals and regionals).  As regular readers know, my themes are that to improve global health governments and funding groups should be building countries’ health care systems (including payers like insurance, regulatory and approval agencies, and delivery infrastructure; see my posts, “From Bad to Worse” and “Victory!”) and companies should be building their abilities to sell existing meds affordably and inventing new ones for unmet needs (e.g., my posts, “Playing the Long Game”  and “Trickle Down”).

Speaking of ROW strategies for companies, in a recent interview, Andrew Witty, CEO of the big pharma, GlaxoSmithKline (GSK), spoke of GSK’s strategy for India, an important pharmerging market, and gave advice to the industry.  As reported by the Economic Times of India (Economic Times article) and noted in FiercePharma (FiercePharma article), he said that he understands the need for the Indian government’s controls on drug prices and its attempt to increase competition by deceasing patent protection, but he also noted that the government should take a less adversarial position with big pharma companies.  He was quoted as saying that “there are alternative ways to achieve” cost savings, “and having a good dialogue may create positive ways to do it.”  To succeed in the ROW markets, he said that companies need operate in the “real world,” look at the long term, and come up with competitive and efficient business models.  Along the lines of the last point, during the same visit to India, he announced GSK’s intent to add to its multi-million dollar investment in expanding manufacturing capability in India by building a $135 million facility, likely in Bangalore (FiercePharmaManufacturing article).  In addition to having the capacity to produce upwards of nine billion doses of meds per year, the factory will utilize “continuous processing” technology to reduce waste and cost and will be the second of its kind for GSK, the first being a $50 million plant being built in Singapore.  It is interesting that GSK chose southeast Asia for the new plants, not Europe or China, and that Witty stated in an earnings call earlier this year that its commitment to this technology will result in very significant improvement in efficiency and reduction in costs, both capital and operating (also a FiercePharmaManufacturing article).  Close behind GSK is Novartis.  Starting in 2007, Novartis has been the sponsor of a 10-year, $65 million collaborative program on continuous processing at MIT and last year demonstrated a process that integrated several new chemical processes and equipment and could make a higher-quality drug faster and with less waste (Technology Review article).  Novartis’s CEO has said that the company will build a continuous processing facility by 2015 but not where.

Throwing Darts

A recent study by analysts from the management consulting company, McKinsey & Co., and published in Nature Reviews Drug Discovery (Cha et al. 2013) attached numbers to a skeleton that many in the biopharma industry keep in the closet:  the accuracy of forecasting future sales of new drugs is poor, so poor they may be useless.  The authors studied forecasts on 260 drugs launched 2002-2011 (1700 in all) made by sell-side analysts (analysts for brokerage firms whose livelihood is advising clients on what stocks to buy).  They compared the consensus forecast for a drug (an average of the forecasts of up to six analysts) with its actual reported sales for a period from two years before launch to seven years after and found a wide distribution of variance, both over- and under-estimates (+160 to -80%), with more than 60% of the forecasts being either over or under by more than 40% of the actual revenues.  The authors also found that, while the accuracy of the forecasts increased as a drug progressed through trials and onto the market, the sales forecasts were still unreliable, decreasing from being off by 75% prelaunch to 40% or so three to six years after launch.  Not so surprising, they noted that the estimates made for drugs developed by big pharma were more accurate than those for smaller companies (the former being underestimated prelaunch and the latter always enthusiastically over-estimated).

I found these findings rather astounding given that the analysts presumably are working from the same data (and post-launch, actual sales information) and have access to their fellow analysts’ forecasts and given the authors excluded from study 53 “outlier” forecasts that had over-estimates of more than 160%.  And what was not considered by the McKinsey team, but would have increased the under-estimate side, were the approximately half of drugs that fail in Phase III clinical trials.  These likely had prelaunch forecasts and, of course, revenues of zero; for a list of five such failures for this year, see the FierceBiotech special report.  But then I’m not really astonished since I had seen a report last April by EP Vantage, a division of the bioindustry data and analysis firm, Evaluate Pharma (Evaluate Pharma), and had read a fair number of market forecasts while working at Wyeth.  The EP report (accessed by an EP guest login) found that the revenue forecasts for ten drugs predicted to be blockbusters (annual sales more than $800 million) were off by 60-96% lower and for another ten, 3-183% higher.

So forecasting sales is difficult and the results suspect; why does this matter?  As noted in the McKinsey paper and by industry commenters (e.g., David Shaywitz in his columns in Forbes, e.g., Forecasts are Fragile), forecasts are critical to decision-making in the pharma industry especially because it has long product development cycles and high costs.  These data are used by companies to guide decisions on what basic research programs to pursue and which to jettison, the design of clinical trials, the deployment and size of sales forces, and what assets to license-in or companies to buy and at what price.  Early-stage forecasts are made and used by equity/venture investors since their returns upon exit depend on the potential value of their investments.  As noted by Mr. Shaywitz, forecasts of future revenue is central to companies:  “Forecasting enables an entire methodology, a structure, an approach to thinking about your business.”

So, what’s to be done about unreliable forecasting?  Mr. Shaywitz advised that companies focus on opportunities where the potential upside vastly outweighs the downside (like a cure for cancer) and on many opportunities that can be pursued cheaply and discarded early (the Silicon Valley approach).  The McKinsey authors noted the question is unanswered and suggested improving forecasting methodology through internal assessments and consideration of unforeseen circumstances like adverse clinical data or new competition (noting that some big pharmas make better forecasts than others).  They also said “beware the wisdom of the crowd” since well-compensated and experienced professionals are often wrong.

So, what’s this got to do with global health?  The wisdom of the biopharma crowd, the conventional wisdom, is that the potential revenues for drugs and other products aimed at the non-major markets are too low, and will remain too low, to justify investing in their development.  Moreover, the analysts say that there are too many unquantified risk factors, like whether a government is going to come up with the funds to pay for a needed drug, to make meaningful estimates.  But then to me the factors, data, and methods they use for quantifying risk for major market drugs looks wanting.  There is no denying that the major markets are where the money is now so it’s easier to assume a new drug will be profitable.  A report last year by the IMS Institute for Healthcare Informatics, a not-for-profit division of the pharma industry data company, IMS Health, noted that 63% of the about $1 trillion spend on medicines is in the major markets (US, most of the EU, Canada, and Japan), 20% in the “pharmerging” countries (China, Brazil, India, Russia, Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and Vietnam), and 7% in the rest of the world (ROW) (Medicines Outlook Through 2016).  With cost containment in the major markets and increasing wealth in the others, by 2016 the IMS put the pharmerging share increasing to 30% and the ROW share to 8%, or about $460 million or $10 to $100 per person.

Of course, the IMS’s data is on sales of existing drugs and not the value of existing drugs deployed in new markets or those developed expressly for diseases and conditions existing in those markets.  I posit that the industry analysts, venture capitalists, and company market researchers should be throwing their darts at these markets, too, and making the results public to rewrite the conventional wisdom and encourage investment.  I’ve found few attempts to forecast revenues for these types of products.  Several years ago, BIO Ventures for Global Health published a report on the tuberculosis vaccine market (BVGH reports) before the organization got off its track of industry proselytizing and wandered off into not-for-profit land.  More recently, as I wrote about in my post, “The Price is Right”, Dow and Mora 2012 estimated the market for a new drug to treat dengue fever by estimating its economic burden in individual countries and making the not-illogical leap that a country’s government (possibly with donor aid) would be willing to pay 50% of that cost for an efficacious new drug.  In their model, they also accounted for potential competition from a successful vaccine of which several are in the works.  I suspect there are other market studies for specific existing or hypothetical drugs needed in the non-major markets, or, at least, there should be given the billions that are spent on drug development (including $4 billion per year on drugs for the neglected diseases).  My suggestion to analysts looking for new clients and VC firms and bio-pharmaceutical companies looking for new revenues:  make the dart board bigger and don’t expect to hit the bullseye.