Whether arguing with insurers over whether a medicine is worth covering, chasing cures for never-before-treated diseases or facing a very public backlash against high drug prices, pharmaceutical and biotechnology companies are hearing a consistent message from the marketplace: Do more with less. Analysts say they probably shouldn't expect a reprieve from those demands in 2016.
Politicians, patients and physicians will likely double down on their criticisms of expensive medicines, in particular. The industry generates 44.5 percent of its annual revenue in North America, and companies have come under intense fire for sky-high drug prices and sharp price increases for existing medicines.
This issue has generated nationwide outrage in the U.S. over the past six months and is poised to take center stage in America’s 2016 election. Congress' freshly minted budget assigns the Department of Health and Human Services to compile a report on prescription drug spending by government agencies and health insurance programs, due next summer.
“I think it's going to be a pretty constant issue for companies,” Jeff Greene, global life sciences leader at professional services firm EY, said.
As the industry gears up for another year, Greg Reh, life sciences leader for Deloitte, said many of its current struggles are mere growing pains. Global pharmaceutical sales were projected to drop 2.7 percent in 2015, but Deloitte expects sales to grow at a clip of 4.3 percent annually on average from 2015 to 2019.
"I think a lot of the pressures are also drivers to optimize performance," he said. "Whether it's cost-cutting or optimizing R&D and manufacturing, those are going to have longer-term benefits."
Patients and politicians criticize drug companies for high prices.
It’s hard to predict what the drug-pricing controversy will mean for companies next year, but the biotech industry experienced an unsettling drop in stock value after Democratic presidential candidate Hillary Clinton sparred with former pharmaceutical executive Martin Shkreli on Twitter for suddenly raising the price of a drug by more than 5,000 percent.
Shkreli's move set off a national tirade against drug companies. The U.S. Department of Health and Human Services hosted a daylong forum on drug prices in November. Politicians and public officials have issued subpoenas to force companies to reveal price-setting strategies. The U.S. Senate Special Committee on Aging held a hearing about price spikes in December.
Still, Reh said not to expect any dramatic changes for most major pharmaceutical companies because many had already started to re-examine pricing when the Affordable Care Act was enacted. "I don't think there will be any changes for the traditional innovative R&D-based pharma companies," he said.
Mature markets will push major pharmaceutical companies to seek more deals.
The world's pharmaceutical giants struggle to generate additional revenue at the rate investors expect, and are projected to lose $17 billion from expired patents in 2016, according to PricewaterhouseCoopers. As a result, executives are eager to acquire fast-growing businesses to show growth. In 2015, pharmaceutical and biotech companies set a new record for the value of the deals they struck in a single year at $462.2 billion. The sheer volume of deals also grew by 21.5 percent, up to 768 deals, from 632 in 2014, according to EY.
“I don't think a week goes by that you don't see an M&A, and I think that just underscores that companies are thirsty for new medicines or innovation that allow them to grow their business,” J. Alan Butcher, head of business development at Purdue Pharma in Stamford, Connecticut, said. “I think the fever and the temperament of that environment isn't going to cool off anytime soon.”
Greene says major pharmaceutical companies still have plenty of “firepower,” or cash to close deals, in the coming year. He also expects biotech companies, which have been relatively quiet on the M&A front, to initiate more deals.
Public and private insurers demand better outcomes for new medicines.
Both public and private insurers are flatly refusing to pay for expensive treatments that don’t represent a significant benefit to patients or that threaten to bankrupt national health insurance programs, Deloitte notes in its 2016 life sciences outlook. In September, the U.K.’s National Health Service dropped coverage for 17 cancer medicines that it said cost too much.
In the past, companies would simply seek approval for a medicine that was slightly better than one that already existed. Butcher says they must now pursue treatments that are vastly superior to competitors’ drugs to persuade insurers to pay for them. PricewaterhouseCoopers estimates four-fifths of U.S. health insurers require pharmaceutical companies to demonstrate cost savings or show clear benefits to patients to cover a new medicine. Meanwhile private payers have boosted their negotiating power by consolidating.
“Minor incremental innovation on existing therapeutics just doesn't really cut it anymore,” Butcher said. At Purdue, he is on the hunt for outside collaborations and partnerships that can help his own company achieve this sweet spot of innovation and price-worthiness.
Greene expects to continue to see companies focus on a few core areas rather than spread themselves thin over many specialties. “It's easier to be successful if you're doing fewer things at a time,” he noted.
Biotech and pharmaceutical companies pursue targeted and specialized therapies.
Companies have also invested millions in new treatments known as precision or personalized medicine that rely on advances in genomics and big data to target very specific types of cancer or other diseases affecting small groups of patients. For example, a drug called Herceptin, approved in 2006, treats women whose breast cancer has too many copies of a specific gene that manufactures a protein that can stimulate out-of-control cell growth.
PricewaterhouseCoopers notes that 94 percent of companies are invested in research related to personalized medicine, and the Personalized Medicine Coalition says 20 percent of new drug approvals in 2014 went to these treatments. "That's one of the pillars where we believe growth will come from," Reh said.
This trend is widely seen as positive for patients. “When you start to unlock those approaches, you're not really talking about chronically treating; you're talking about being on the cusp of curing,” Butcher said.
U.S. President Barack Obama kicked off 2015 by dedicating $215 million to the nationwide Precision Medicine Initiative, and the Food and Drug Administration has offered fast-track approval to specialized treatments for rare and untreatable diseases. Next year, Congress will also decide whether to pass the 21st Century Cures Act, which could further speed approvals.
However, others caution the high prices of these new treatments are reaching the limits of public tolerance. A recent study of 115 specialty drugs found that a one-year prescription costs an average of $53,384 in the U.S., which is more than the nation’s median income.