Robert Freeman April 2705

Global Price Sustainability in Key Pharmaceutical Markets: Impact on Innovation and Health Outcomes

Robert A. Freeman, Ph. D. The Freeman Group, LLC. Senior Fellow, The University of Maryland Center on Drugs & Public Policy Senior Scholar, Thomas Jefferson University Department of Health Policy

1

Europe & Japan More of the same Through 2012 – no radical change Japan • • • •

Bi-annual price reductions to continue Innovative drugs fare relatively better at bi-annual price reductions Radical change unlikely while economy depressed Some encouragement of generics

Europe • • • • •

Measured decline 1-2% a year

Price convergence to an EU average driven by – price referencing, parallel trade, EURO Increasing use of therapeutic class based internal reference pricing (F, I, Sp) – Limits price of brands in “commodity” classes Product differentiation essential to maintain price Average prices in Accession countries lower than current EU average Recent trend, flat, represents best case for future

Flat to declining 2

Price movements US, Japan, EU5 2000-2002 5.0

% Change in Ex-Mnf Price

4.0 3.0 2.0 1.0 0.0 2000

2001

2002

-1.0 -2.0 -3.0 -4.0

US

Japan

3

EU Top 5

European prices are converging European Drug Index: 1986-1999

Source: Apoteksbolaget 1999

4

US Pricing Sensitivities included Medicare, Medicaid, 3rd party rebates, and parallel trade.

Baseline Net Sales 2002

2004

2006

-3.6%

-7.3%

2008

-11.9%

Medicare Rx coverage Medicaid rebate increase Private third party rebate Parallel import

Catalog price increase included in Base Case

5

2010

-14.5%

Structure/Dynamics

Anatomy of Price in the US Market

Discounts

Channels

$125

 Average wholesaler price (AWP)

-- Price to cash patients -- Reimbursement reference price

$4.43

$115

 Actual reimbursement to retailers

$4.07

$102

Wholesale selling price to retailers

$3.61

$100

 Ex-manufacturer price -- Wholesaler acquisition cost (WAC) -- Catalog price

$3.54

$84

 Price to private third party payers

$2.97

$71

 Price to states / hospitals

$2.51

 Price to Federal government

$1.42-$2.12

$60-$40

6

Structure/Dynamics

Approximately 75% of the US business is contracted. All contracted business is expected to require deeper discounts over the next several years.

TOTAL Rx MARKET PRIVATE SECTOR EMPLOYER

NO RX COVERAGE (CASH)

RX COVERAGE

3rd Party PBM/HMO

% of Business

53% (

Average Discount off WAC

16%

Hosp/LTC

*)

7%

29%

PUBLIC SECTOR

Non Contract

FEDERAL

CASH

15%

7% (

0%

0%

VA/DOD

*)

7%

45% (26-65%)

STATE

MEDICAID (POOR)

10% (

28%

Average Discount 18%

STATE PROGRAMS (NEAR POOR)

**)

1%

29%

* 3rd party increases over time, cash decreases. Assumes Medicare Rx privately administered (most likely case). ** Decrease in Medicaid business over time assumes dual eligibles covered under Medicare.

7

Structure/Dynamics

Typical discounts in a primary care market skew towards third party channels TOTAL MARKET PRIVATE SECTOR EMPLOYER RX COVERAGE 3rd Party PBM/HMO

% of Business Opportunity

Average Discount Off WAC

68%

22%

Hosp/LTC

2%

31%

PUBLIC SECTOR NO RX COVERAGE

FEDERAL

STATE

(CASH)

Non Contract

CASH

VA/DOD

MEDICAID (POOR)

STATE PROGRAMS (NEAR POOR)

13%

7%

0%

9%

1%

0%

0%

30%

31%

21%

Average Discount 19% 8

Structure/Dynamics

Some specialty products are more evenly spread across private and public payers TOTAL MARKET PRIVATE SECTOR EMPLOYER RX COVERAGE

3rd Party PBM/HMO

% of Business Opportunity

Average Discount off WAC

10%

5%

Hosp/LTC

24%

10%

PUBLIC SECTOR NO RX COVERAGE

FEDERAL

STATE

(CASH)

Non Contract

16%

CASH

2%

0%

0%

(POOR)

STATE PROGRAMS

6%

41%

1%

53%

30%

21%

VA/DOD

Average Discount 9 19%

MEDICAID

(NEAR POOR)

Assumptions

US Rx Market Assumptions To 2012 1.

2.

3.

US remains premium-price market, although with reduced pricing flexibility Market-based healthcare delivery continues to dominate (i.e. no “single payer” system for US as a whole) Cost shifting to consumers continues and accelerates • •

1.

2.

Aging population (and innovation) continue to fuel volume growth, offset by consumer behavior described above Government role increases in healthcare delivery and funding • •

1.

Increasing price sensitivity Decreasing persistence and compliance

Some form of Rx coverage for at least some additional senior citizens will become available Rebates paid to states under Medicaid program increase

Generic penetration increases, based on • • •

Consumer price sensitivity Payer (public and private) promotion Patent expiries

10

Key Sensitivities

A number of factors will affect US pricing sustainability over the next five years.

Key Sensitivities

1. Medicare reform/Rx benefit 2. States/Medicaid 3. Third party reimbursement 4. Consumer behavior 5. Parallel trade Issues to watch

•

Intellectual property erosion

•

Compelled OTC switching 11

Sensitivities: States/Medicaid

States will continue to exact price concessions; Medicare reform or good economy could mitigate •

Supplemental rebates will spread to 40 states by end of 2003 and to all states by 2005.

•

Mental health Rx and oncology are no longer excluded from supplemental rebate requirements in some states.

•

States form multi-state purchasing cooperatives to secure additional price concessions for Medicaid enrollees and other state populations (elderly, near-poor, state employees)

•

By 2006 up to 8 states may have passed ballot initiatives extending deep discounts to Medicaid and other populations.

12

Sensitivities: Third party reimbursement

Third Party Payers shift cost to patients to encourage them to “buy wisely” • Three tier co-pay schemes ($5 for generics, $12 for

preferred brands, $25 for non-preferred brands) become more competitive resulting in deeper discounts (-$): •

Steeper co-pay differentials ($5, $15, $30) shift market share and increase competition for preferred second tier position.

•

Second tiers in crowded classes can be restricted to one or two brands, creating greater price competition.

• Three tier co-pay benefit design evolves to other schemes: •

Short term schemes are dominated by incentives favoring lowest net cost Rx (-$ and Vol).

•

Long term schemes may emerge with incentives favoring classes/brands that deliver better outcomes (+ $ and Vol for brands that deliver such value).

13

Sensitivities: Third party reimbursement

Consumers respond to Third Party incentives in making Rx purchasing decisions • Consumers become more price sensitive when faced with tiering and ask for Rx with

lower co-pay, rather than “trade-up” to premium brands with higher copays. (-$) • Consumers with co-pay defined as a percentage of the Rx retail price (co-insurance)

are exposed to the “real price” of Rx. (-$) • Consumer price-based purchasing behavior begins to impact total medical care and

spend (-$ and Vol): •

Some patients are Rx non-compliant, foregoing refills or skipping treatment days to make their Rx dollars go farther.

•

Patients do not access other preventive or maintenance medical services (doctor visits, lab tests) and seek care when sicker.

14

Sensitivities: Parallel Trade

Parallel trade may become a serious threat when some combination of the following happens: • Retail pharmacies and wholesalers are legally authorized to

import Rx drugs from any legitimate source. • EU-experienced parallel traders enter the US market. • The global internet becomes an efficient and reliable source

for importers. .

15

‘ 2003 US Pricing-related market drivers Medicare Rx coverage Supplemental Medicaid/state rebate

Downward drivers

Increased rebate to 3rd-party payers Parallel trade risk

Baseline business shape

Upward driver

Annual catalog price increase

2010

2003

16

Scenario Assumptions Current (LTF) Most Likely

• • • • •

• •

• •

Worst Case •

•

•

3%/year catalog price increase Increasing third party rebates 3%/year catalog price increase Increasing third party rebates to secure preferred tier status Impact of Medicare • Catastrophic coverage and discount cards to 2005 • Insurance coverage beyond, private market (3rd party) administration Additional Medicaid rebates of 15% over 2002 levels (ie 37% discount by 2010) Minimal negative impact from Parallel Trade • Low probability of legalization/major impact • Pressures diminish with Medicare coverage 3%/year catalog price increase Additional Medicaid rebates of 27% over 2002 levels (ie 50% discount by 2010) • Six states pass price control ballot initiatives by 2006 Impact of Medicare coverage (-4% overall) • Catastrophic coverage and discount cards to 2005 • Government administrated Insurance coverage beyond (feds take over from states), with price controls (FSS or Canadian reference pricing) Third party rebates increase with collapse of public pricing • -50% discount for ½ of third party by 2010 • -27% discount for ½ third party by 2010 Minimal negative impact from Parallel Trade (see above and notes)

17

Summary: Impact on Net Sales Impact by 2012

Drivers

(baseline is 2002 )

Current Assumption

ML Scenario

Worst-case Scenario

Upward 1. Catalog price increase

+ 18%

+ 18%

+18%

Downward (additional rebate%) 2. Medicare Rx coverage

- 0%

- 2%

- 4%

3. Increased Medicaid rebate

- 1%

- 1%

- 3%

4. Increased rebate to 3rd party

- 6%

- 6%

- 15%

Total Downward

- 0% - 7%

- 1% - 10%

Net Price Change: 2012

+ 8%

5. Parallel trade

18

+ 3%

- 1% - 23%

-14%

Net Effect on Innovation and Outcomes •

Industry cannot sustain current R & D levels and fund future research, especially high risk research.

• • •

•

Let biotech and niche pharmas take risk Outsource to India and India Mergers ??

Current business model based on discovering products with annual sales of >1.0 Billion is not sustainable.

• •

Move into “life-style drugs”, generics Personalized medicine: smaller markets but better margins

Evidence-based medicine and personalized medicine may become the new model.

• Effect on health care unknown at this point but probably negative •

19

Alternatives • Increase price levels in EU, Asia and NA • Change national reimbursement mechanisms • Use national tax policies and trade agreements in

lieu of price controls •

Patent buy-outs

•

Marginal cost pricing with tax credits equal to value of innovation

•

No risk loans

20