At eyeforpharma’s Pharma Forecasting Excellence USA conference, Graham Clarke, CEO of ImmunoBiology, likened pharma companies to ships at sea, navigating through uncertain waters. Several factors, says Clarke, make determining company direction a very complex process. In his presentation “The future of pharma: the business model is changing – why resist?” Clarke discussed the challenges of forecasting in the changing pharma marketplace.
According to Clarke, some of the greatest challenges to a pharma organization include managing new science and technology, getting new products to market and keeping them there, managing payers’ responses to the cost burden of therapies, understanding the significance of pharmacogenomics, and driving sales (with an eye to pricing and uptake curves). To remain in business, a pharma company must either build top-line growth, or it must adopt the fall-back position of cutting costs and assets. The challenge is to use forecasting as a “navigation aid” that will enable you to deliver growth.
It’s unwise, says Clarke, to depend on blockbusters to keep a company afloat. Only a small number of new chemical entities (NCEs) become blockbusters; historically, the trend has been for a relatively small group of NCEs to account for the lion’s share of market sales. And the cost of getting NCEs to market is high and getting higher. Not many companies are willing to spend the resources necessary to develop and market a drug whose sales peak at $50 million or less. The costs of getting a new drug to market don’t vary as much from drug to drug as the potential revenues do. An understanding of market drivers will allow for more accurate forecasting, which in turn will enable companies to allocate R & D dollars wisely.
Clearly, R&D is in need of some assistance. While expenditures on sales and R&D have grown, the productivity of R&D has flattened or even dropped. These days, it takes enormous effort just to stand still and not lose ground.
Drivers of the future
So what are the drivers of the future? Clarke breaks it down into four major, “macro-level” drivers: demographics, economic stress, technology and socio-political values.
Changes in demographics result from such factors as epidemiology, the “graying” of the population in many countries, healthier lifestyles and diets, etc. “Economic stress” deals with just that – stress. Under trying economic conditions, hard decisions must be made about how and when to spend limited resources. This can be on the macro-level of countries’ economies and healthcare systems, or on the micro-level of companies’ economies. Technology remains a great unknown. What will it produce or achieve in future years? And finally, socio-political values influence the ways that people and governments spend money. What policies and programs will governments encourage, and how will that affect pharma? Says Clarke, “the healthcare environment is shaped by the scale of these drivers.”
And of course, none of these drivers stands alone; they all intersect and overlap in complex ways, making the forecasting process even more complicated. However, if your company is looking at a three-to-five-year or longer forecast horizon, it’s important to operate from an informed best guess of what the future environment is going to look like.
The challenge of technology
In recent years, there has been an explosion in technology investment opportunities. In technical terms, there’s never been a more complicated environment than the one we’re in now. Informatics, bioarrays, structural proteomics, chemical libraries: Clarke asks, “How do you configure this vast array of technology to create value more predictably?”
Improved technology means a far greater number of potential targets to work on. This expanded range of targets, however, has led to a higher rate of attrition – one of the biggest issues facing pharma today. In previous years, says Clarke, there was a hope that as technology improved, the process of R&D would become more industrialized. The same technology that was used in the manufacturing side could somehow be applied to creativity and development of new therapies, reducing cost and making the whole process more predictable by removing reliance on serendipity from the system. And, of course, this would reduce attrition. So far, this hasn’t happened. The enormous complexity of interrelating and integrating pharmacogenomics, genomics and proteomics has proved to be too complex for any one entity to take on alone.
So what is happening? To account for new technologies and the greater sophistication that comes with them, companies are having to shift and rebalance their activities, from monogenic to polygenic disorders, from genomics to proteomics, from targets to tractable hits, and so on. The bottom line is that companies must work to improve predictability and bring down the time and costs per NCE. Until recently, an $800 million NCE was considered standard; now some sources are putting that figure at closer to $1.2 billion. Says Clarke, these numbers are simply not sustainable. It is assumed that, in time, technology will help reduce costs and attrition rates. But, Clarke warns, we’re still on the worsening slope of that equation, not the improving one.
Says Clarke, one lesson to learn here is that too much time is spent looking at the income stream potential of a new therapy when we assess its value. We need to shift our focus to the probability of success. Yes, if the product launched and worked as intended, it would be in that elite pool of blockbusters. But the chances of getting it there are slim.
Getting the therapy to market and allaying payer concerns
How are prescribing decisions made around my product? Here again, the market is changing. While previously decisions about prescriptions were almost entirely in the hands of physicians, that may not be true now and will almost certainly not be the case in the future. It’s true that most of the decision-making power is still in the hands of doctors (and in some countries, pharmacists or other substitute bodies), and the sales force still concentrates most of its activities on this population. However, now it’s important to also pay attention to those Clarke calls the “gatekeepers.” Regulators, formulary committees, reimbursement bodies, policy makers and payers all can have a say in prescribing decisions, possibly by reducing available options and knocking some products off the list.
A third party, which Clarke refers to as “influencers,” is gaining power, at least on the level of influence. Patients, patient groups, caregivers, pharmacists, opinion leaders and healthcare policy makers are all starting to weigh in on prescribing decisions, and it may be to a company’s detriment to ignore this population.
Two power groups are emerging, and Clarke says it’s important to pay attention to the potentially conflicting pressures these groups are under. On the one hand, patients’ primary interest is in maximizing the quality of their health care; cost may come in a distant second. Payers, on the other hand, also seek to maximize benefits to all patients, but are constrained by finite resources and the need to allocate judiciously. The rise in patient empowerment has sparked a growth in DTC advertising, and studies show that when patients request a particular therapy, they usually get it.
Looking into the future, one possible avenue of reconciliation is to create a spectrum of drug utility and use it to help determine who will fund treatment and to what extent. The spectrum would run from “life threatening” on one end, through “life shortening,” “chronic morbidity,” “impairment,” and “enhance life quality” to “recreational” at the other extreme.
Another issue for pharma forecasters is pricing: in future, how will we determine what a drug should cost? Says Clarke, there are three regimes for product pricing. The cost/profit model says that I will pay you for your costs plus some on top as a reward for the risks you took. The value/utility model is based on what the drug does and how well it does it. And the comparison with the gold standard model looks at the prices of competitors to evaluate a fair price for a new entry into the market. According to Clarke, most pharma companies use the value/utility and gold standard models to generate pricing, while payers tend to favor cost/profit and gold standard models.
Pharmacogenomics
While the idea of pharmacogenomics has been around for a long time, the science is far from fully realized and the future of this branch of pharma is still uncertain. There are certainly pros and cons to pharmacogenomics. These treatments stand to have the greatest impact on populations with life-threatening diseases or chronic conditions, but as a result, diagnosis and treatment processes must be highly accurate. And, says Clarke, the economics of pharmacogenomics will be very different: patient populations will be smaller, drug trials will likely be shorter and less costly, but there will be a smaller market for each therapy. However, the prices of the drugs could be higher. On this issue, Clarke says, it’s vitally important to “do the numbers.”
The role of the forecaster
With so much information available and with a highly unpredictable marketplace, what’s a forecaster to do? Says Clarke, one of the first things a forecaster must accomplish is to establish an agreed-upon forecast horizon. There’s little point in trying to forecast the success of a drug over its entire lifecycle when so little is known about the future of pharma. Make an agreement with the company on a forecast horizon that makes sense. Second, if the organization is good at extrapolating, if your company can spot trends and act on them, then you must decide if it makes sense to carry the forecast on to the next level of complexity, looking for potential discontinuities that will render your investment decision worthless. Third, suggests Clarke, establish baseline assumptions when assessing multiple investment opportunities. Make sure you’re comparing like with like, Clarke says. If one group assumes automatic annual price increases on products and another doesn’t, then expectations may prove radically different. Finally, if your forecast model is moving beyond straight extrapolation, then you must have logic underlying the factors you include and you must be able to articulate that logic. “These are the sorts of factors I believe will affect this product in the future, and this is the probability of it happening.” If a potential affecting factor has high probability and high impact, it may be worth taking a closer look at.
A view to the future
For many years, the pharma industry has enjoyed a comfortable position in what Clarke terms a “virtuous circle.” Pharma companies have been quite profitable for some time now and have been able to make significant investment in sales and marketing and R&D. This has led to good products, high demand and continuing profitability. Additionally, the major drivers mentioned before (demographics, technology, socio-political pressure) have all lent themselves nicely to pharma’s needs: access to demographic information, a wealth of technological advances, high expectations of society and the desire of political systems to provide quality, affordable health care have all contributed to healthy demand for pharma products.
What we need to be wary of now, according to Clarke, are those things that might break this virtuous circle. Already companies are engaging in cost efficiency practices, trying to trim expenses wherever possible. Unfortunately, the “low-hanging fruit” cost efficiencies have been or soon will be exhausted, and fewer opportunities for saving money will be available. The question then becomes, where do I really want to spend my money? In years ahead, those decisions may depend more on what the pipeline looks like and what investors think about the future of the company.
In conclusion, Clarke has these suggestions – be aware that the ability to “pick winners” is limited by technical do-ability. Don’t focus just on the sales forecasts, but take into account how risky and demanding the project you’re considering really is. Expect few blockbusters, and be aware of the changing economics that could occur during the lifecycle of a product. Be aware of pricing pressures, wherever they come from, especially when you are unsure who the payors will be and who will have influence on prescribing decisions. And expect that company performances across all of pharma will continue to be volatile and that different companies will experiment with different business models as we all attempt to master an uncertain future.
Author: Shannon Perry, journalist, theforecaster
