It is much spoken about within the pharmaceutical industry that the model is broken. After years of unparalleled growth and high profits, the industry faces a range of pressures which are forcing it to change.
Internal industry pressures
Drugs accounting for many billions of dollars in sales are due to reach the end of their patent life over the next few years. This opens up the market to generic competition and triggers price and margin erosion.
Meanwhile product development pipelines are weak, meaning that fewer new products are reaching the market to replace the lost revenue from patent expired products. The industry is increasingly relying on mergers and acquisitions and reformulating existing molecules in order to sustain sales and to boost pipelines.
All this is on top of the hundreds of millions of dollars, the years and the high risk of failure which go with developing a new drug product.
External industry pressures
The industry also faces external cost challenges driven by aging populations in developed countries and increasing patient expectations. This is placing an increasing cost burden on healthcare systems, whether they are universal social providers such as the UK’s NHS (National Health Service) or privately operated insurance systems as in the USA.
The problem is that healthcare costs rise with age, whilst the ability to pay generally diminishes; particularly once people have retired. An aging demographic therefore places an increasing cost burden on the healthcare system. Drugs account for a small proportion of the overall healthcare bill (approximately 10%) but they are an easy target for cost cutting. The news headline from the BBC in 2008 is typical “Call to curb rising NHS drug bill: More must be done to curb NHS spending on prescription drugs in England, which has more than doubled in a decade to £8.2bn a year, MPs say”. The UK in 2007 spent ~7% of GDP on Health whilst the equivalent figure in the US was ~16% of GDP. In the recent years, the increase in spending on health has outpaced the increase in GDP and will eventually reach the point where we can no longer afford to pay.
Increasing complexity, choice of treatments and equivocal efficacy
A challenge for the healthcare provider is in the choice of treatments available. It is often not immediately obvious which course of treatment is best for the patient, because the clinical evidence of efficacy can be ambiguous and the costs of competing therapies can vary substantially. For example, rheumatoid arthritis is a disabling and painful condition which afflicts about 1% of the population. There are numerous drugs available which will alleviate the symptoms and even stop disease progression. However, they range in cost from under 50p per week for an older, generic treatment like methotrexate, which whilst generally effective can have some severe side-effects, to over £200 per week for some of the more recently developed biopharmaceutical therapies. Without doubt the more expensive therapies work exceptionally well in many patients, but the doctor has to decide whether to spend less than £50 per year or commit to more than £10,000 per year for a single patient. This is not a one-off cost for a single course of drugs as it is a chronic condition, once started, it is likely that the patients will be taking the therapy for the rest of their life.
The increase in cost of therapies is giving rise to the need for Healthcare Technology Assessment agencies around the developed world. The UK’s NICE leads the field and primarily uses the QALY or Quality Adjusted Life Year afforded by a treatment to decide whether it should be reimbursed. This evaluation is usually (although not exclusively) made at the patient population level.
However, many treatments do not work in many patients. Five years ago Allen Roses, worldwide vice-president of genetics at GlaxoSmithKline (GSK), said “The vast majority of drugs – more than 90 per cent - only work in 30 to 50 per cent of the people”. “I wouldn’t say that most drugs don’t work. I would say that most drugs work in 30 to 50 per cent of people. Drugs out there on the market work, but they don’t work in everybody.”
Increasingly, it is technologically possible and economically desirable to single out patients where the treatment is working and to identify those where it is not; the payer can then reject reimbursement when the treatment is not working. The evaluation of drug cost effectiveness can then be made at the individual patient level. The first drug where this model was adopted was Velcade, a treatment for myloma (bone cancer). The UK’s National Institute for Health and Clinical Excellence (NICE) states “the manufacturer rebates the full cost of bortezomib for people who, after a maximum of four cycles of treatment, have less than a partial response”.
A few treatments have companion diagnostics because it is clear they will not work in groups of patients. The first such drug was Herceptin, a treatment for breast cancer, which is effective in 20% to 30% of patients who have Her-2 positive cancer. Consequently there is a test for this before the drug is given. This is the first step towards genetic classification of patients and personalized medicine, however it does not make the linkage to payment for results in that the manufacturers get paid for the companion diagnostic whether the results are positive or negative; and for the drug even if it fails to work in a Her-2 positive patient. The cost of the drug is £1,200 to £2,400 per month depending on dose.
We are about to witness a revolution in healthcare enabled by technology which provides individual patient information; it is prompted by the HTAs, facilitated by new, evolving commercial models and pursued by new entrants into the healthcare area.
Technology and the availability of information
As is commonly the case, development within one sector is often driven by developments in another, apparently unrelated sector. In the future drugs, devices, diagnostics and data communication will coalesce and be integrated to enable reimbursement to be based on outcomes in individual patients. Information will be used to manage medication, monitor patient compliance, modify treatments in response to real-time diagnostics and trigger reimbursement; all driven by the integration of electronics and the generation, communication and analysis of data in near real-time. Increasingly the same technologies will provide patient coaching, education and stimulus. The industry standards for interoperability are already emerging to enable communication of devices from a variety of suppliers, removing barriers to entry and reducing costs.
The management of diabetes in some European countries is starting to show how this will happen, although signs can be seen in other diseases. For example, in diabetes, insulin, blood-glucose measurement and other diagnostics are being integrated, with multiple options for automated or direct intervention by the healthcare provider. The data can be collated and analysed and reimbursement given to the blood-sugarconcentration management service provider dependant upon patients managing their bloodsugar within pre-defined limits. The products needed to enable this are all currently available, and it is regulation and reimbursement that are the remaining barriers to this transformation.
The role of the HTA
The regulatory environment will be the main catalyst for change. Health Technology Agencies (such as the UK’s NICE) are evolving to determine reimbursement based on cost effectiveness and how the patient’s quality of life will be improved by the treatment, on a population level. However, this is showing signs of evolving to payment on a patient-by-patient basis, especially for expensive treatments for life-threatening diseases such as cancer. Such outcomes-based payment requires the management of compliance, outcomes monitoring and data analysis, which will be facilitated by technologies from other sectors. A lack of relevant expertise within existing pharmaceutical, diagnostic and medical device suppliers represents a significant threat to their continued dominance, and an opportunity for new market entrants that can source and integrate the components.
Physicians are extolled to ‘first do no harm’, which is contrary to the existing industry model. The era of delivering treatments to patients in whom the therapy is at best non-effective, and at worst harmful, is coming to an end. In 30 years time, swallowing, injecting or inhaling an active product without the means of determining its effect and hence how much to pay for it, will be the exception rather than the rule. The rule will be driven by the status of your condition and personalised assessments of safety and efficacy of the treatment in the individual, combined with monitoring and feedback to show whether the supplier should be paid or not.
Evolving commercial models and the value of data
Commercial models are evolving which are contingent on payment for results. Diabetes management, for example, will not be reimbursed based on supply of syringes, needles, blood glucose meters, insulin and so on. In future a service provider could be reimbursed for maintaining their cohort of patients within predefined blood glucose targets. In this situation, it is the data that is of prime value, and other components are reduced to commodities, where the pharmaceutical companies may bid for supply contracts, region-by-region, on the basis of lowest cost, where the integrator, potentially a provider of telephony or web services, delivers an integrated approach to health. Supplier margins will be squeezed by the need to provide healthcare services at the best price, while delivering returns to the shareholders of the integrator.
For example, many patients with blocked arteries get a stent rather than a quadruple heart by-pass. Which is the most cost effective treatment and how is it possible to balance the risk, recovery time, quality or duration of life to determine which approach is best for each patient? In the USA, is it worth a health insurance company investing in a hip implant which lasts for 25 years rather than the usual 15-18, when the average patient, via their employers health insurance scheme, switches to a different insurance provider every few years? These remain moot points, and first movers have the opportunity to define the future of the revolution.
Patient classification will enable identification of the individuals that will best respond to a novel treatment. However, equally importantly, the removal of the non-responder will enable clinical evaluation to be faster with appropriately powered, and proportionately cheaper, trials.
New entrants in the industry
Broadly, clinicians have three main ways to intervene in, or diagnose symptoms in the body:
Chemically (i.e. drugs and blood tests) fulfilled by the pharmaceutical and diagnostics industries
Physically (for example orthopaedic implants and blood pressure measurements) supplied by the medical devices industry
Electrically or other energy (for example pacemakers, ECGs, radiation and medical imaging)
These technologies are beginning to be combined in products, a process known as technology convergence, and in future will include communications devices to collect, analyse and disseminate information about the patient’s status.
A number of companies are entering the healthcare industry at different points in the supply chain in order to take advantage of convergence and to extract value from the supply and use of information. Many of these are not small-time start-ups but global giants such as Google, Intel, Microsoft and Cisco who have dominated their own industry sectors and are now looking to healthcare as the next growth opportunity. It is not yet clear which companies will win and how the industry will look in 20 years time. But it is clear that a company simply selling chemicals or little bits of metal, which might make you better, will be unlikely to dominate healthcare in the future.
Ian Rhodes - PA Consulting is a Member of PA’s Management Group and leads the technology and healthcare group. Ian’s background is in the development of new products and services within the Healthcare and Medical industries.
Ian has led and provided input to a number of due diligence assignments including Experts Reports for companies such as PowderJect where Ian was later invited to become the interim COO. Ian has an MBA from London Business School and recently was the founding CEO of Aegate Ltd, a company now owned by IPex Capital.
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