Big pharma has big problems

Big pharma has big problems. The root cause is a lack of research and development productivity, which means a dearth of new products to make up for
looming patent expirations. Something near half of big pharma’s
revenues will be threatened by generic competition within the next
three to four years, and that will radically change the face of the

The R&D productivity problem isn’t exactly new. When I was at
the Boston Consulting Group (BCG) in the mid-90s we were already
talking about the “NCE gap,” which referred to the number of new
chemical entities that needed to be developed to justify pharma
companies’ valuations at the time. Back then, there was still a
possibility that new discovery tools would boost productivity and
prevent a collapse of the industry.

Over the next decade or so, pharma largely managed to maintain its
revenue growth and valuations, but things weren’t as healthy as they
looked. The revenue growth was due to price increases, new indications
for existing products, changes to guidelines (e.g., blood pressure,
cholesterol) that increased the number of people who were recommended
for drug therapy, combination products, new formulations, growth
outside the U.S., and the arrival of the Medicare Part D prescription
drug coverage. Almost all of these growth levers are now tapped out.

According to the Washington Times (Drugmaker ads to target Obama idea)
the pharmaceutical industry is now planning a large advertising effort
to undermine President-Elect Barack Obama’s plan to have the government
negotiate drug prices on behalf of Medicare, rather than leaving it up
to the PBMs that do the job now.

My old BCG buddies are at it with a new report, which the Times cites.

Giving Medicare the authority to negotiate drug prices –
a provision that they currently don’t have – would cause the
pharmaceutical industry to lose $10 billion to $30 billion in annual
revenues, according to a report released last month by the Boston
Consulting Group.

“If you start to take a pretty big price decrease out of that large
market, it has an enormous impact on drug companies and really their
ability to generate their type of shareholder return that they have had
in the past,” said Peter Lawyer, a senior partner with Boston

According to the Times, the ads will “tout the importance
of free-market health care” and may try to have the same impact as the
famous Harry and Louise ads of 1993 that undermined the planned Hillary
Clinton-led reform bill. (By the way the brains behind the Hillary
effort was ex-BCGer Ira Magaziner.)

If that’s really the aim, someone is misjudging the mood of the public.
People aren’t looking for “free-market” anything at the moment,
especially when what the pharmaceutical industry really means by “free
market” is pricing freedom for themselves. And remember, drugs are
protected by patents, which are granted by the government, not the free

Here’s some friendly advice to the pharmaceutical industry: don’t
make the mistake of attacking the policies of our new President. Such a
move is likely to backfire.

David E. Williams
is co-founder of MedPharma
Partners LLC
, strategy consultant in technology enabled health care services, pharma,  biotech, and medical
devices. Formerly with BCG and LEK.

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3 replies »

  1. When the new, expanded Medicare for All is implemented upon the passage of H.R. 676, the pharmaceutical companies will then have to begin negotiating their prices with the government as they currently do with the VA. This will bring drug costs in the USA more in line with those much lower costs that are found in most every other country around the world.
    If you believe that affordable health care in America should be a right and not a privilege, then join HR676.org today and your voice will be heard.
    Larry Pius, Dir

  2. When I see patients in my (nonsurgical specialty) practice, elderly patients (and often younger ones with high medical usage) with long lists of medications, I feel that we are really diverting a lot of wealth for little in return. For most costly drugs, there are reasonable generic substitutes (of course not for all drugs and for every patient, I am aware of allergies, side effects, interactions). And when I see elderly people who get a lot paid by medicare part D and still have substantial copays, I do think that for these folks, there basically is a second tax, and a very high one.

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