Consultants: Pharma industry facing huge changes

To date, most analysts say health reform turned out pretty well for the pharmaceutical industry. But a detailed analysis by Deloitte Consulting says the indirect effects of reform will deliver a gut punch to the industry that will lead to full-scale transformation akin to what the telecommunications world has seen over the past three decades.

Deloitte, the international consulting firm, expects the cost pressures that the new law will place on health providers, health plans and patients will indirectly force the U.S. drug industry to reduce prices, stripping 11 percent of revenue from its coffers over the next five years.

Those costs far outweigh the 2 percent-3 percent reduction in revenue Deloitte expects the industry to sustain because of the direct impacts of health reform: an industry fee of $2.8 billion a year, larger rebates for Medicare drug beneficiaries and the expansion of health insurance coverage, among others.

That means the $300 billion industry, instead of growing to $320 billion over five years, as projected before health reform, Deloitte expects drug industry revenues to shrink to about $290 billion a year.

“What appeared to be at first blush reasonably good news—we think the indirect impact and the pressure on [health plan] formulary and pricing is going to create a lot more stress in this market than people are expecting right now,” Linda Heitzman, a director at Deloitte’s Indianapolis office, said during the Sept. 10 IBJ Health Care Power Breakfast.

(For a transcript of the event's panel discussion, including Heitzman's comments on the pharmaceutical industry, click here. In the video below, Heitzman and the other panelists discuss whether new regulations will slow or accelerate growth in health-care costs.)

Heitzman’s comments were based on a study by her colleague, Sanjay Behl, who examined the 250 best-selling prescription drugs in the United States. They account for about 80 percent of all brand-name prescription drug sales.

Behl, a principal in Deloitte’s corporate strategy and life sciences practice, placed those drugs into 25 different categories based on the severity of the diseases they treat the settings in which they are administered. Those factors affect how health insurance plans to treat them on their formulary lists, which set the prices that consumers pay when they go to buy a prescription.

Behl expects health plans to start adopting stricter formulary policies to try to shift more and more patients to generic drugs instead of brand-name varieties.

One U.S. health plan already using tougher restrictions is California-based Kaiser Permanente. It offers coverage for less than half the 250 drugs Deloitte analyzed. And even when some drugs are available, it’s in limited circumstances.

For example, Kaiser makes the cholesterol-fighter Lipitor available only at the highest doses, where there is some evidence that generic cholesterol drugs are less effective. On other drugs, Kaiser makes the brand-name version available only after patients have tried all the generics first and failed to achieve the results their doctors want.

Behl expects more U.S. health plans and pharmacy benefit managers to adopt such policies. They might even adopt some of the restrictions of the government health plans in other countries. In Germany, for example, the health plan pays for all drugs in a therapeutic class at the same rate, giving patients a strong disincentive to buy any but the cheapest one.

The looming loss of revenue will have a big impact on pharmaceutical research and development, Behl noted.

“What this will do is this will make the risk associated with development higher than what it was historically,” Behl said. “Even if my product was not a super hit home run, I could always come up with a product that could get me some money. The singles are gone now, or they become highly restrictive. My only option will be to go after those grand slams.”

In the short term, Behl expects more research to migrate in-house at large pharmaceutical companies and research universities, which can sustain the risks better than small biotech companies. Large companies will look to do mergers across the life sciences, so there will be more drug-device marriages and drug-diagnostic hookups.

Behl expects venture capital to move away from discovering new drugs and toward companies developing new ways to deliver drugs or software products that help patients and doctors use drugs better.

Eventually, however, the pharmaceutical industry will succeed around radical new business models, Behl asserts.

“The drug industry today is about as inefficient as the telecommunications industry was in the early ’80s,” Behl said. The forthcoming, “painful process,” he added, “It will change some companies completely.”