By Allan L. Shaw, a four-time public company CFO (e.g., Serono & Syndax) who has served on five public boards, which included the chairing of two audit and two compensation committees. He currently serves on the board of directors of Vivus Inc.
To say the recent public debate regarding biopharmaceutical drug prices has received a lot of attention would be a “British understatement.” Interestingly enough, there have been no macro revelations from the intense media/political scrutiny of drug prices, which purportedly justified the biotech market sell-off. The industry’s pricing headwinds are well-known, particularly in the face of global cost containment initiatives aimed at tethering unsustainable increases in healthcare spending. Thus, as Moody’s Investors Services surmised, unsurprisingly, nothing tangible or sudden will come from all this political grandstanding apart from negative headlines for the forthcoming year, irrespective of regime change. Having said that, the horse is already out of the barn, and the shifting landscape is well underway. Consumer choice and cost-savings incentives established by direct (insurers) and indirect payers (pharmacy benefit managers or PBMs) are driving change in the industry’s commercial model as the healthcare ecosystem continues evolving into a value-based system. Apart from being vastly different, how will biopharmaceutical sales and marketing look in 10 years?
The healthcare commercial environment is changing rapidly, shifting to more of a business-to-consumer model (as compared to B2B) in an effort to increase patient engagement. A good example of this emergent patient-consumerism is the proliferation of pharmacy “Minute Clinics” that offer patients (i.e., consumers) on-the-spot diagnosis and treatment along with instant prescription fulfillment — a system capitalizing on the fact that 80 percent of all consumer retail purchase decisions are made at the point of sale. Another trend is the switch to more OTC drugs (as compared to prescriptions) as part of product life-cycle management and the FDA’s desire to enable patient-consumers to take responsibility for their own care, reflecting the general acceptance that certain conditions can be self-monitored and self-treated, such as erectile dysfunction, high cholesterol, or overactive bladders. As the patient-consumer becomes more educated and savvy, they will inevitably start to push back concerning the discrepancies in U.S.- versus international-branded drug pricing; drug prices in the U.S. are often two to five times those in Europe. Further heightening the stakes, the price controls in the rest of the world have put greater pressure on companies to capture ever-increasing profits in the U.S., underscoring the need to evolve, as the current model is clearly unsustainable.
It is important to recognize that purchasers, prescribers, and consumer-patients are considering price as a key component of a drug’s expected health benefit. This trend reflects the increasing prevalence of patient-consumers bearing responsibility for an ever-larger portion of most healthcare costs driven by health insurance plans that have higher deductibles and higher copays. To better illustrate, if an oncology drug costs $120,000 annually, and one’s co-pay is 25 percent, then the patient will owe $30,000 for a year’s treatment, which is more than 50 percent of the median U.S. household income. This increased healthcare-cost burden is also the reason for the emergence of oncology drug TV commercials directed to patient-consumers; historically those commercials were viewed as a waste of money since physicians previously decided the choice of cancer drugs.
This dynamic empowers patients to make educated decisions about their healthcare purchases, much as they do when buying other consumer goods and services. In the new era of patient-consumerism, it will be all about product positioning, which highlights the strategic importance of optimal formulary inclusion for drug products (e.g., secured via drug manufacturer rebates), which is similar to retail shelf space for other consumer products (slotting fees paid retail product manufacturers), whereby commercial success can hinge on consumer or patient access. Without a formulary listing, over 95 percent of drug-class purchases will go elsewhere (e.g., choose another drug product alternative).
As pricing headwinds continue, the disparity in gross-to-net pricing has never been greater (i.e., invoice brand price versus off-invoice price net of rebates, discounts and other adjustments/costs), reflecting in part the PBMs’ emerging purchasing power (70 percent control of the commercial market given recent consolidation). While we are still quite far from a single payer system, the PBMs are currently defining the debate and are extorting ever-increasing rebates/ discounts in exchange for favorable formulary positions (e.g., secure hightier formulary status in exchange for a significant rebate and correspondingly lower patient-consumer co-pay). PBMs also have turned to formulary exclusions or restricted formularies as well as exclusive arrangements with drug manufacturers to fundamentally reduce market access for certain products to drive savings. For example, Solvaldi experienced a nearly 50 percent price erosion within one year of launch pursuant to AbbVie’s exclusive distribution agreement through Express Scripts for Viekira Pak. This dynamic is further compounded by the increasing prevalence of high-deductible plans with higher out-of-pocket costs that are being partially mitigated by various forms of copay assistance, including coupons and vouchers. This domino effect is furthering the disparity in gross-to-net pricing that can exceed more than 60 percent in some instances.
Given the sheer magnitude of the financial stakes, it should not be surprising that a cottage industry has been created that has feasted on the inefficiencies and byzantine relationships embedded in the opaque biopharma supply chain. With so much value being lost or redirected, particularly in a pricing environment that is being challenged by the gravitational forces, isn’t it time for the industry to start exploring ways to extend its commercial supply chain to better engage with patients and advance commercial goals while squeezing out the vast waste of legacy business practices? If not, these companies will be unable to claw back the margin that is being left on the table.
To start, biopharma must focus more on increasing brand loyalty by creating closer relationships with patients as well as other stakeholders who play a role in drug adherence and compliance. Patient noncompliance, particularly as rising out-of-pocket costs are hurting patient adherence, is directly related to the diminished value of pharmaceutical products. Establishing patient support programs is one solution. In my experience, drug adherence is the common denominator for all stakeholders and should serve as the foundation of any consumer strategy. Drug manufacturers, in tandem with stakeholders, need to implement discounting programs that correlate to disease management protocols that facilitate compliance, as opposed to simply trying to grow (or sustain) market share. For example, giving consumers price incentives on refills could become a loyalty strategy that uses discounts while generating other intangibles such as providing an opportunity for the industry to start rehabilitating its soiled image. Further potential benefits of reengineering the commercial model and extending the patient-consumer supply chain could include the following:
- Unimpeded access to the patient — understand the needs of our customers
- Undiluted brand positioning
- Offer a unique value proposition with superior products, tools, and services
- Capture incremental revenue within the patient-consumer value chain
- Increased contribution margin
- Secure loyalty to brands
- Drive market share
- Expand the market
- Influence trends and direction within target market
- Confirm leadership position via case management.
Healthcare consumerism is here to stay; the Internet and e-health have facilitated this, putting information and tools in the hands of the patientconsumer and not only for their benefit, but the entire healthcare industry’s (e.g., gadgets, self-monitoring, and useful websites that help people track their conditions). Simple economics shows us that by empowering patients to understand and monitor their condition, thereby taking charge of their own lives and becoming an engaged patientconsumer, we can improve healthcare outcomes and reduce spiraling costs. Diabetes is an excellent example. By informing the patient-consumer about the benefits of managing their diet, regular exercise, and avoiding smoking, we can minimize the risk factors and positively affect outcomes. The stepchange toward healthcare consumerism means that healthcare providers are increasingly targeting patients with their products. They are doing so in order to help/support patients on their journey to becoming more engaged and educated in their healthcare decision making. With this in mind, healthcare stakeholders must adjust to new ways of patient engagement to accommodate their needs in an evolving commercial model. If Fiat is already incorporating Viagra in its commercials, how long do you think it will before Viagra is marketed with Victoria Secret lingerie? We need to recognize that our business is changing from selling drugs (e.g., selling pills, injections) to delivering comprehensive solutions.