By David Balekdjian and Michael J. Russo
An increasing number of new drugs since 2003 have fallen drastically short of sales expectations, garnering as little as 4% of the billions they were expected to take in. These dire results have blindsided drugmakers and spooked investors. Why have so many new medicines, widely projected to be blockbusters, fizzled at launch? The short answer: managed care.
It's no secret that the clout of managed-care providers (insurance companies and pharmacy benefit managers who use the power of the purse to hold down health costs) has been growing for almost a decade. But many pharmaceutical and biotech companies failed to recognize just how much that transformation challenged their own business model. Now they're scrambling as managed care is increasingly determining the winners -- and the big losers -- in pharma land.
The strategy used by managed-care players, called outcomes-based access (OBA), is central to understanding the frequent disconnect between industry predictions and which drugs actually end up making money. Make no mistake, pharma remains a growth sector. But drugmakers and analysts must adapt to current industry realities if they hope ever to return to the days of predictable profit growth.
OBA IS A POWERFUL APPROACH that managed-care companies use to decide which drugs to cover. The impact of this new paradigm cannot be overstated. The drugs that managed care favors enjoy fewer access restrictions and lower co-pays, while nonpreferred drugs are difficult, expensive, or sometimes even impossible for a patient to get. When Bruckner Group's annual Payer Trends Study first characterized OBA in 2001, most drugmakers considered OBA a passing fad. Today it's the industry standard.
The basis of OBA is a simple question: Which medicines give the health-care system the most bang for the buck? The insurance industry seeks to find drugs that produce the best results at the lowest cost. The process for determining this is more complicated than just comparing prices. For example, drugs that let patients avoid expensive surgeries or emergency room visits get a value bonus, while those with costly side effects are penalized. So drugmakers need to find every last penny their drug saves the insurance system, since only those found to be most valuable to payers are likely to become hits.
That's a significantly higher hurdle than drug manufacturers historically have faced. Indeed, many pharma managers were reared in an era when cost wasn't their primary worry, and there's continuing public concern that insurers have exceeded their bounds by overriding physicians' patient-care decisions. Yet today health insurers put the burden of proof on pharmaceutical companies to show in dollars and cents how their new drugs are cost-effective to payers. Nifty science and catchy advertising mean little to payers if they don't produce cost savings or take treatment to a higher level. Improvements that provide little more than patient convenience at a higher price, like reducing the dose from twice a day to once a day, are valuable only if a drugmaker can prove that once-a-day treatment means fewer skipped doses and improved patient health.
"If a health plan is spending $100 to $1,000 or more per month for a drug, we need to know that we are getting value from the expenditure," explains Dr. Robert Seidman, chief pharmacy officer at managed-care leader WellPoint Inc.
Drugmakers caught unaware of or unprepared for OBA are suffering. Expected blockbusters like Biogen Idec's Amevive (a psoriasis treatment offering new science at a hefty price without better results) and Pfizer's Caduet (a combo-pill of two existing drugs) have become major disappointments because of OBA.
Sadly, few drugmakers or investors routinely incorporate OBA considerations into their decisions. In Bruckner Group's 2006 OBA Manufacturer Index, which measures the ability to bring to market drugs with high health-care value, only 3 of the top 20 pharma and biotech companies get a grade of C+ or better. That's why drugmakers must keep bolstering their products' ability to either significantly improve care or save the system money, or both. Doing so will lead to managed-care acceptance and larger revenues. Ignoring these increasingly powerful customers, on the other hand, is the quickest route to financial illness.
Views expressed in Outside Shot are solely those of contributors.
David Balekdjian and Michael J. Russo are partners at Bruckner Group, which provides strategic advice to pharmaceutical and biotech company executives.