Pharma at the tipping point I: Price versus value
A new report by consultants AT Kearney suggests current business models may soon become irrelevant. How should pharma firms respond?
By on Oct 21, 2009A new report by consultants AT Kearney suggests current business models may soon become irrelevant. How should pharma firms respond?
The pharmaceutical industry is at a tipping point, according to consulting firm AT Kearney. In fact, the group believes pharma faces three interconnected tipping points related to what it sells, to whom, and how it must be organized. There is a danger that the current pharmaceutical model may become irrelevant in the context of the 21st centurys global healthcare needs, the group says in its new whitepaper, Pharmaceuticals Out of Balance. Healthcare is out of balance and, therefore, so is the pharmaceutical industry.
Kearney describes its three tipping points as transitions from therapies to service models, from rich niches to global mass markets, and from integration to connection. In this three-part series on AT Kearneys analysis, eyeforpharma looks at how the group thinks these tipping points will change the industrys pricing strategies, how emerging markets will soon become too attractive to ignore, and how tomorrows pharmas must shift from being R&D-driven to being market-driven.
Pricing pressures
Why is the industry operating on the precipice? AT Kearney observes that even as healthcare budgets are rising, drug sales in most developed countries are forecast to be flat. Attempts to improve efficiencies have had limited success, and companies are resorting to cost-cutting, Kearney says. Waves of consolidation have concentrated the problem, but not solved it. Not surprisingly, the shareholder returns are plummeting.
Pricing pressures are increasing globally, and even the normally safe haven of the US has become a challenging market. The problems, Kearney says, are symptoms of a shift in the nature of healthcare systems.
Healthcare spending is rising about 5% annually in most developed countriesnot due to the aging population, as is commonly thought, but due to the existence of more complex diseases and a growing availability of expensive technologies to treat them. And while costs go up, funding is suffering as the ratio of retirees to taxpayers grows.
Each company in this innovation-based industry will soon face a choice of either playing in ever-smaller niches or re-asserting its position as a key partner in improving global healthcare outcomes, the group predicts. This new role will require companies to move away from selling molecules and toward addressing health needs; to look away from traditional markets; to be driven by the way their therapies are used, rather than by the discoveries theyve made; and to restructure away from the integrated models that have dominated the industry to more fluid forms that allow companies to respond to new challenges across the value chain.
Although doctors are still important customers in the pharma sales model, they are increasingly constrained in their prescribing decisions by the actions of payers, regulators and provider organizations responding to payer costs and political pressure. And the payer landscape is exceedingly complex, with healthcare priorities varying by country, locale and even ethnic group, Kearney says.
Pharmas traditional view is that volume is not elastic to price. In other words, selling a drug cheaper does not result in more volume, since most doctors do not consider price when prescribing. However, the growing influence of payers is changing this assumption, the group concludes. Drug sales are, in fact, becoming increasingly elastic due to the relationship between price and value delivered. But how payers perceive value usually varies from the way pharma companies try to demonstrate it, Kearney says.
From therapies to service models
Over the past few years, there have been dramatic changes in what payers are looking to achieve. The effectiveness of the treatment pathway has become more relevant than the cost-effectiveness of a particular drug, the group observes. Epidemiological shifts toward chronic diseases, technologies that can shift diseases from terminal to chronic, and a greater understanding of what drives healthcare costs have expanded the concept of value to include the impact on the healthcare system.
The key to success for pharma companies, Kearney proposes, is to demonstrate that drugs, combined with other interventions, can minimize exacerbation of the conditions being treated and reduce system costs. But however a pharma company chooses to determine a drugs value, it must be framed in a way that is compelling to payers.
As pharma companies move to focus on payer needs, the source of competitive advantage and the opportunity to capture value will shift increasingly to the service model in which their drugs are used, the group stresses. Whether directly or indirectly, pharma companies will have to be involved in service design and delivery to ensure that their products deliver real value, Kearney advises.
Pharma at the tipping point II: Emerging markets
Pharma at the tipping point III: How tomorrows pharmas must shift from being R&D driven to being market-driven (coming soon)
To access Pharmaceuticals Out of Balance, click here .
To learn more about AT Kearney, visit www.atkearney.com.