Pharma’s Cutting Edge

As you might have read in papers like the International Herald Tribune, Exubera, the first marketed inhaled protein therapeutic–recombinant human insulin–isn’t exactly flying off pharmacy shelves. 

Now that sales are flagging, analysts of all stripes are writing that they long ago knew this was going to happen.  This Monday-morning quarterbacking is known in behavioral circles as hindsight bias, or, as I like to call it, bullshit.  What nearly every stock analyst and pundit wrote while Exubera was in Phase 3 testing was that Exubera was going to be a big success.  Nearly every clinical opinion leader I heard from (there were many) said the same thing. 

What happened once Exubera was launched, its lackluster sales, isn’t nearly as interesting as how Pfizer and industry observers reacted to what was happening in the two years prior to launch.  Within industry, there are lessons here for market research, scientific communications, investor relations and executive management of all functions.   Chief among these lessons is this:  If you care about predicting customer responses to new products, and I’m sure you do, you cannot rely on inferences drawn from surveys, interviews, direct observations, product analogs, etc from a single point in time.  You must follow trends in attitudes and actions as information becomes available, and you must do so continuously during development and after launch.  A corollary is that you must carefully plan how you seek and disclose attitude-influencing information. 

Which leads me to my second lesson:  Keeping emerging product information secretive can be important for competitive reasons, but secrets are antithetical to the tasks of predicting market responses to products and to setting financial market expectations; a balance is therefore required.  With a product like Exubera, there were opportunities for disclosing to interested parties, namely key opinion leaders, selected patients, and investors, certain competitive information earlier and more fully than was done.  Here, I’m thinking specifically about the emerging product profile (i.e. safety, tolerability, efficacy, convenience, and usage) and Pfizer’s data and arguments supporting the cost-effectiveness of the product, which I’ve reviewed here previously.  If you’re a Pfizer employee, it’s now time to review whether your internal and external information disclosures were sufficient and timely to meet your market research, commercialization preparation, and financial market goals.  Be brutally honest with yourselves and take corrective policy action if deficiencies are found.  You may need different policies for different classes of products (e.g. a pioneering product vs. a fast follower).

For observers, and investors particularly, my suggested take away is this:  Recognize in yourself your reluctance to change your opinion as evidence mounts to the contrary; the strength of your unwillingness to change your mind is proportional to the strength of your held opinion.  This is hardly a novel insight, as published evidence supporting it dates to at least the 1950’s.  In behavioral circles, it’s known as attitude strength, or as I like to call it, stubborness.  You might not be able to overcome your stubborness, but you might be more willing to hedge your bets if you can admit to it.

In a conference call that so stunned a Credit Suisse analyst he was left literally at a loss for words, Alexion Pharmaceuticals  yesterday announced that the annual average wholesale price in the U.S. for Soliris, its newly approved drug to treat the rare disease Paroxsymal Nocturnal Hemoglobinuria (PNH), would be $389,000. 

Wow.

Leonard Bell, Alexion’s CEO, was quick to defend the cost of the drug–interrupting another Alexion executive who started discussing acceptable cost-effectiveness ratios–by referencing the high cost of other therapies for so-called ultra-orphan diseases, such as Pompe (Myozyme, Genzyme) and Hunter (Elaprase, Shire HGT).  But the costs he cited for these drugs (”over $400,000″ and “over $800,000″ annually) appear to be inflated figures, even when considering weight adjustments for adult patients.  Generally speaking, the top end cost for drugs that target around 10,000 patients globally is under $300k a year.  So Alexion seems to be exploring new price territory here. 

This story is sure to be fodder for the WSJ (who more than once roasted Genzyme for their pricing) and, more importantly, for a newly Democratic Congress with drug costs on its mind.

But patients apparently need not worry about the high cost of Soliris.  Alexion, as they reiterated at least five times on the call by my count, has a goal ”that every patient who can benefit from Soliris will have access to Soliris.”  Not the snazziest marketing message, but at least it’s reassuring to patients.  Isn’t it?

Today, the UK’s Office of Fair Trading (OFT) issued its commissioned report of the UK’s pharmaceutical pricing scheme.  Before you say, “so what?” consider that UK drug prices are directly referenced by countries representing 25% of the world’s pharmaceutical sales.  Still uninterested?  Thought not.

You will not be shocked to learn that the OFT believes UK’s current pricing scheme results in government money wasted on drugs.  Can you imagine them concluding that the UK is getting exceptional value for the money it’s spending on drugs?  I’ve never seen a report from any government’s office concluding that its government was getting a bargain.  The UK’s damage according to OFT?  About 500 million pounds in 2005, or about 4.5% of what the UK spent on drugs that year.

If you don’t have to read the entire report, consider yourself lucky and just read the Executive Summary, which certainly provides the salient points.  For now, though, take look at this snippet from the Executive Summary, which provides the government’s “compelling argument” for price controls on pharmaceuticals:

A major reason for the existence of a UK-wide drug pricing scheme is the difficulty the NHS [UK’s National Health Service] has in ensuring drugs are prescribed in a way that delivers value for money.  Informational and incentive problems result in a situation in which prescribers are often not sensitive to or even aware of the prices of the drugs they prescribe. This is particularly the case in primary care, which accounts for some 75 per cent of pharmaceutical expenditure in the NHS. Evidence we have collected from a survey of 1000 GPs suggests they have weak knowledge of the prices of some of the most widely-prescribed drugs in the UK.

Moreover, under current arrangements, there are high levels of prescribing for some products that cost much more than available substitutes but deliver very similar benefits to patients. This raises a major question as to whether value for money is being secured. Neither are patients price sensitive: they contribute through prescription charges to less than five per cent of expenditure on prescription pharmaceuticals – a lower rate than in almost all other countries in the world.

These demand side problems provide a compelling argument for some form of pricing scheme.

Let’s review this rationale, in case it wasn’t entirely clear:  Doctors don’t know what drugs cost and they are not incentivized to consider costs when prescribing.  Patients also don’t know what drugs cost since they pay only about 5% of their actual cost out of pocket.  This information asymmetry (an economist’s catchphrase that means exactly what you might think) leads to demand-side imbalances that maintain artifically high drug prices.  And the solution to this demand-side imbalance??  Well, it’s price controls, of course.  If you’re scratching your head, do not be concerned, it means only that you are a creature of logic.  Sadly, it would seem you have few kin among those recommending health policy in this UK office.

Last week Byron Dorgan, Senator for North Dakota and colleagues, including Olympia Snowe, Republican from Maine submitted legislation to the U.S. Senate that would amend the Food, Drug and Cosmetic Act to provide for drug importation by non-manufacturing companies and individuals into the United States from registered exporters in other countries.  For individuals, importation would be limited to drugs originating from Canada, whereas registered institutional importers would be able to import drugs from Canada, Europe, Japan, Australia and New Zealand.  A companion bill was introduced into the House by Representatives Rahm Emanuel (D-IL) and Jo Ann Emerson (R-MO). 

The AARP promptly supported the bills, which are variants of very similar legislation that was first introduced into Congress in 2003 and re-introduced in 2004 and again in 2005.  Is the fourth time a charm?  Well, with a newly Democratic Congress it might be, although poltical pundits, which I do not claim to be, seem to believe that there will not be enough votes to avoid an assured veto by President Bush should the legislation make it to a vote and be passed by both houses. 

I know that pharmaceutical companies and FDA have both argued against such legislation, ostensibly because they believe such export/import will leave U.S. consumers with a drug supply tainted with counterfeit medicines.  The bill’s sponsors believe that they have adequately addressed such concerns in their legislation. 

I think manufacturers and FDA have a legitimate point.  I don’t believe that current technology and oversite resources, even if boosted by money flowing into FDA from fees collected from importers, will suffice to keep the supply of drugs on store shelves at the status quo level of quality.  My opinion is subject to change in the near-term, particularly if some clever technologies are deployed to tackle the tough problem of tracking medicines.  RFID was once portrayed as a panacea, but it is showing itself to be something less. 

In prinicple, however, I support legislation providing for regulated trade of medications across international borders.  Generally speaking, I favor relatively unimpeded international trade of nearly all manufactured goods and see no compelling reason to prevent cross-border trade of pharmaceuticals once a drug-supply equivalent to the U.S. status quo can be reasonably assured.

The $64,000 question pharma would like to have answered is:  What will happen to U.S. drug prices if this or similar legislation becomes the law of the land?  The Congressional Budget Office was asked in 2003 to make an estimate of cost savings to taxpayers, and they chose European parallel imports as the basis for making the estimate.  Of course, they had to lay all sorts of assumptions on top of the European analog to make it work as a basis, but it’s as good a basis as any, which is to say it’s not very good. 

The real problem with interpreting CBO’s estimated drug expenditure reductions of 0.5% for Years 1 and 2 post-implementation and 1% for the Years 3 through 9 is that their report doesn’t actually show how they arrived at their figures for expenditure savings.  Doh! 

Nevertheless, it’s clear that any savings to consumers will be modest.  Personally, I think consumers in the U.S. won’t save a dime, because other governments have no interest in creating a supply shortage in their homelands that could drive domestic drug prices upwards.  They’ll do what they must, including banning drug exports to the U.S. to avoid it.  The most popular drugs (i.e the most expensive drugs) will be banned from export first.  Limited export supply will drive up the prices exporters charge for all non-banned drugs.  Importers wil have no choice but to pass along these higher prices, owing to their already razor-thin margins, leaving wholesalers with a not-so-cheap supply, etc. 

Eventually, the bulk of the export-import business goes away, as everyone realizes that it’s not such a hot business to be in, leaving a handful of very efficient exporters and importers who survive but make almost no impact on consumer drug spending.  That is…I guess that’s what would happen.

So if I were advising PhRMA, I’d say fear not this legislation.  The marketplace efficiencies will reveal that higher drug prices in the U.S. are not primarily due to restricted importation.  But I’d also say, you’re not crazy for worrying about the quality of the U.S. drug supply.  Sure, coming out against the bill for whatever reason makes the industry look like a gang of lying, hypocritical profit-mongers, but hey, you should be used to that by now.  Fact is, importation as proposed could harm the U.S. drug supply.  Work behind the scenes to get that part of the bill fixed, then, as a wise doctor once said, stop worrying and learn to love the bomb. 

Pfizer is slashing its salesforce by 20%, a move that will come as no surprise to anyone familiar with the industry. 

This inevitable decision reflects the changing pricing and customer-access dynamics of the industry.  For the past year or so, company after company has admitted that its ROI on multiplexed sales calls (multiple calls to the same practice) has eroded, and company after company has quietly reacted to this erosion with measured, targeted reductions in the number of calls per physician.

Everyone was waiting for one company, Pfizer in particular, to come out publicly and admit that it wasn’t changing its sales practices fast enough to protect profit growth.   No company wanted to be first to blink, as a unilateral move was viewed as risky.  Now that Pfizer has blinked, does this mean others will follow?

While I suspect that some execs will seriously consider using Pfizer’s move to try to gain a competitive sales edge, most majors are likely instead to use the move as an opportunity to do the same.  GSK, which has made numerous overtures in this regard (search this blog to read some), is likely to be up next, followed by many others.

Pharma…new world.  New world…pharma.  I hope you two enjoy a productive relationship.