Pharma companies should focus on high-performing therapeutic area and geographic markets and they need to realign their business models to be able to cope up going forward in 2017-18, writes Amit Varma, Managing Partner, Quadria Capital
Annual global spending on drugs is expected to reach $1.2 trillion by the end 2016, as the contribution from pharmerging markets, generic penetration and biologics is continuously increasing. In the developed markets, including the US, Europe and Japan, spending is declining due to expiring patents for a number of significant brand-name drugs, slower increases in spending on branded products, and increased cost containment measures by payers. Alternatively, pharmerging markets share is increasing as ageing population and economic growth contribute to dramatically higher use of drugs in these markets. Majority of the spending is expected to be on speciality drugs, especially in the chronic care therapies such as oncology, autoimmune, respiratory, anti-virals and immunosuppressants therapy areas. Much of this growth is from drugs bringing new treatment options for patients, including breakthrough therapies or even cures, and often reduced complications or hospitalisation. The pharma market is also witnessing an increasing focus on biologics and biosimilar, as biologics are becoming central to the key therapies. This is demonstrated from the fact that five out of the top 10 drugs today belong to the biologics category.
Amidst the healthy growth, the market incumbents across the globe face a wide variety of challenges, ranging from a more diverse and globalised economy, stringent government regulations, increasing R&D cost, longer developmental timelines, downward price pressure, and increased demand for better healthcare. The dynamics resulting from changes in the role of drugs in healthcare systems and the associated level of spending are differing significantly across countries. Healthcare payers are also beginning to focus on measure outcomes much more carefully and emphasising the importance of prevention. Furthermore, the governments across the pharmerging markets are in the pursuit of universal health coverage that is effecting the pharma landscape in many significant ways. With spend on drugs expected to be over $1.3 trillion by 2018, the focus on the value provided by drugs as an integral part of prevention and treatment has never been more important—to patients, healthcare professionals and payers alike.
This creates challenges for pharma companies that need to realign their business models to be able to cope up going forward. Pharma companies would need to adapt to current market dynamics and position themselves for growth through portfolio transformation, targeted make-or-buy strategy, cost-cutting measures, digitisation and sharpened focus on high-performing therapeutic area and geographic markets.
Expected trends factors in 2017-18 are:
- Increasing pricing pressures: In the past few years, there have been increasing concerns over sky-high drug prices and sharp price rises for existing drugs. Drug prices are rising faster than the budgets to pay for them. Premium-priced treatments for cancer, viral infections and high cholesterol create friction between concerns of access and drug costs, it remains an ongoing headwind, dragging on profitability in both Europe and Japan, where the use of generic drugs is rising. As a result, governments and payors are increasing pressure on pharma companies to manage the drug prices. A couple of governments have implemented price controls on critical drugs and are expected to further increase the drugs list that come under the purview of price controls. Pharma companies will have to re-align their business model and cost structure, in order to be equipped with government and payor policies in the coming future
- Complex regulatory framework: Development and commercialisation of a new drug and generics requires pharma companies to interact with complex and continually evolving regulatory environment across different countries. Most of the regulatory challenges are associated with slow review and approval process, increasing requirement around data integrity and clinical effectiveness and stringent adoption to process and protocols. Equally important, the challenges are different for each country and the penalties for non-compliance with these regulations are becoming increasingly severe, including the revocation or suspension of business licence, imposition of fines and sanctions, hence requiring companies to equip themselves accordingly.
- Portfolio transformation: Global companies will continue to evaluate portfolio realignment strategy with the objective of focussing on their core proposition, in terms of capabilities and products. This would entail divesting their non-strategic assets, using the proceeds to invest in a pipeline of new drugs that are core to their business. Various factors are driving the need to create competitive advantage in the core area. The big pharma companies have been shifting away from developing primary care and small-molecule drugs, and progressively tailoring their pipelines to speciality drugs and biologics targeted for high unmet medical needs.
- Make or buy strategy: High R&D costs and increasing developmental timelines are forcing companies to look at inorganic opportunities for acquiring product portfolio as well as entering into portfolio transformation agreements with other pharmaceuticals. Given the pressure of patent cliff and increasing drug development cost, the deal making, will largely be dominated by ‘specialty pharma’ groups with strategy to grow through acquisitions rather than by in-house drug research.
Going forward the focus would remain on smaller biotech companies developing innovative drugs in segments such as oncology and neurodegenerative diseases and acquiring companies that would help optimise costs, especially in the wake of pharma pricing coming under scrutiny would remain in focus.
- Increasing penetration of biosimilars: The global biologic market, primarily dominated by the US and the EU, is over $200 billion and growing at over 10 per cent annually. The top 10 biologics have an annual turnover of over $80 billion today and are expected to lose their exclusivity by 2020. Patent expiry and high barriers to entry is leading to an increasing interest in biosimilars.
The market for biosimilars in the US has just opened up and with the approval of three biosimilars over the last one year. We are about to witness the big biosimilar wave in the world’s biggest market.
- Performance-based pricing models: With increasing focus on pricing pressures and result-oriented models, pharma companies are now transitioning to pay-for-performance deals with payors. Pharma companies are agreeing to be paid based on the drug’s result estimated through the spend on hospitalisations by patients on the drug or patient’s reaction to the drugs.
- Digitisation: It is estimated that digitisation will account for almost one-third of the growth and approximately 40 per cent of the profitability in the pharma market by 2020. For those that partially digitise, their business models can drive improved profitability by as much as 27 per cent. But, the true prize will go to those who become ‘digital all-rounders’ and build new business models that address new markets. Changing consumer behaviour and proactive approach of consumers with new technology tools is changing how patients interact with pharma companies and payors.
- Personalised drugs: The global pharma industry is witnessing a rise in development of personalised drugs, with leading players such as AstraZeneca, Pfizer, and Roche investing in R&D. Through advances in genomics and Big Data, companies are striving to provide targeted therapies to patients by analysing their characteristics, needs, preferences and genetic makeup.
- Creating a digital-health ecosystem: Apps and wearables are set to transform the industry into a digital pharma space. The popularity of “beyond the pill” pharma services — namely apps and wearable’s — is expected to rise dramatically in 2017 and beyond. These apps and wearable will help companies to track compliance of drugs by patients and consequently re-align their marketing strategy. Companies are increasingly focusing on offering consumers digital devices for monitoring health, as well as administering drugs.
- Big Data: Pharma companies are increasingly embracing the need for analysing big data to attain deeper insights and improve decision-making. The emergence of predictive and prescriptive analytics is moving data analysis toward anticipating trends that will drive efficiency, targeting cost-effectiveness and real-time validation in the R&D, sales, marketing and distribution of drugs. Companies are expected to focus on leveraging these insights to stay ahead in the increasingly competitive and demanding pharma marketplace. Big brands like Apple, Google and IBM are showing interest in the pharma sector because of the need for data-driven patient engagement, self-responsibility, and real-world results. For example: In 2015-16 Apple unveiled ‘ResearchKit’— a medical platform designed to turn the iPhone into a diagnostic tool for clinical trials and studies. Now, Apple has partnered with GlaxoSmithKline. GlaxoSmithKline has announced it will be using ResearchKit to conduct medical study on rheumatoid arthritis.
Given the stature and size of Indian pharma industry, it will be profoundly impacted by the global trends. Indian companies account for 10 per cent in terms of volume and approximately three per cent in value besides contributing 20 per cent of global generics exports. Given that India has the highest number of FDA approved sites beyond US and that Indian companies contribute to 30 per cent of the ANDA approvals every year, the emerging trends in the US will contribute to the important trends in India.
The key dominating trends
- Regulatory overhang: Over the past few years, the Indian pharma industry has seen a proliferation change in the regulatory landscape and is expected to be increasingly challenging and uncertain going forward as well. Unlike the past, where the regulatory compliance management was a back office capability, it is now becoming the cornerstone of key business practices due to high repercussions in case of non-compliance. For instance, over the past seven years, Indian pharma have received over 50 warning letters from the US FDA with nearly 40 per cent being converted into import alerts. During 2015 alone, US FDA issued 17 warning letters against companies such as Dr Reddy’s Laboratories, Cadila Healthcare, Sun Pharmaceutical, Unimark Remedies, Micro Laboratories. Pharma companies will need to align their business model to focus on their R&D and manufacturing procedures, implement comprehensive action plans and even conduct risk assessment of products that are already in the market. Furthermore, with the growing healthcare costs and longer development timelines, we will see increased collaborations between regulators and pharma companies in an effort to ensure that they are able to bring quality lifesaving products to market faster and minimal regulatory bottlenecks.
- Price control: In its effort to increase transparency and affordability of critical drugs, the National Pharma Pricing Authority has put in place price control on essential drugs. Currently, the authority has placed over 450 formulations under price controls and plans to increase the list to 800 formulation molecules over the coming years. The impact on pharma companies is however differing based on the percentage coverage of products under the price control. However, as companies are increasing their resources toward compliance with various regulations, price controls impact the profit margin to quite an extent. Companies would need to re-align the business models that would help reduce their cost of commercialisation and maintain profitability. Additionally, companies would need to transform the portfolio to focus on few of the key specialities where the pharma company specialises, both in terms of manufacturing as well as sales and marketing.
- Injecting innovation in India Pharma: India’s generic drug manufacturing industry constitutes over 10 per cent of the volume of the global pharma industry, but only 1.5 per cent of the value. With increasing regulatory overhangs, limited differentiation in generics and price controls, the next stage of growth would be propelled through innovation. Companies would need to focus on moving up the value chain by leveraging the well-developed scientific database and large number of highly skilled researchers and scientists. Companies would need to invest a higher proportion of their revenue into R&D as compared to what they have in the past and increase their partnerships with universities and research organisations to increase the chances of a healthy development pipeline. Furthermore, the companies will need to innovate their business to increase accessibility of drugs to smaller towns and cities across the countries.
- ‘Make in India’ initiative: Government is constantly working towards enabling Indian pharma industry to play a leading role in the global market and ensure abundant availability, at reasonable prices within the country, of good quality pharma for mass consumption. Through multiple initiatives such as ‘Pharma Vision 2020’ and ‘Make In India,’ the government is trying to attract investment to allow innovation, skill development, protect IP and build world class infrastructure and help Indian pharma become one of the leading destinations for end-to-end drug discovery and innovation. There are incentive plans for the bulk drug manufacturers, including both state-run and private companies, to encourage ‘Make in India’ programme and reduce dependence on imports of Active Pharmaceutical Ingredients (API), nearly 85 per cent of which comes from China. A boost for public sector enterprises, tax-free status for manufacturers and cluster development are the highlights of the policy. The government will also offer zero duty for technology upgrades in the pharma sector through the Export Promotion Capital Goods (EPCG) Scheme.