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Is Cost Containment Impacting Pharmaceutical Innovation?

September 4, 2008

With the cost of healthcare provision spiraling, governments and payers across the seven major markets are applying cost-cutting measures, putting even greater pressure on pharmaceutical companies. In the UK, the National Institute of Clinical Excellence recently rejected four new kidney cancer therapies on the basis of cost effectiveness, effectively denying patients access to these novel drugs.

It is not just the credit crunch that is putting pharmaceutical companies under pressure. Indeed, an increasingly small number of novel products are coming to market, contributing to the declining return on investment that pharmaceutical companies are seeing. With the cost-effectiveness of a product at the top of the agenda for payers, pharmaceutical companies will need to focus upon developing truly novel drugs if they wish to achieve a premium price and strong reimbursement position. However, payers are also increasingly safety-conscious, leaving the pharmaceutical industry in a difficult position.

Global healthcare costs are rising due to ageing populations and poor lifestyle choices – particularly in western markets – combined with insufficient cost-saving initiatives. Consequently, governments and payers across the seven major markets are implementing numerous healthcare cost-containment policies. With big pharmaceutical companies experiencing declining returns on investment, the ability to make a profit will become increasingly difficult if innovative drugs are not launched in the near future.

The innovation capacity of the pharmaceutical industry is determined, to a great extent, by the external environment. Consequently, pharmaceutical innovation is likely to suffer in Europe and Japan, partly due to increasing government barriers precluding access to reimbursement lists. Furthermore, as governments push for greater use of generic drugs, the pressure on big pharmaceutical companies and their ability to be innovative will increase.

However, it is entirely understandable why governments push for generic substitution and, to an extent, large pharmaceutical companies recognize this. Nevertheless, there is an onus on the industry to respond to the reality of global healthcare costs and adjust accordingly. Streamlining R&D efforts and making strategic pipeline decisions early on in the development process will become vital. New drugs must show value for money in terms of therapeutic outcomes, and the companies that develop them must be able to demonstrate their efficacy if they want to receive favorable reimbursement.

The US P&R system, which is generally seen as spending lavishly by international standards, has also become more cost conscious due to rising healthcare costs, which in turn are driving up insurance premiums. Insurance firms are beginning to seek better deals on prescription drugs from pharmaceutical companies in order to avoid raising insurance premiums further in a country that is in an economic recession. Large enrollment numbers in the Medicare Part D drug program have also increased costs, with the Federal government reacting by looking to negotiate drug prices with the pharmaceutical industry to reduce healthcare expenditure.

In Europe, healthcare systems are outdated, financially inefficient and in need of modernization. Remedying this situation is a long-term and hugely expensive process, so focusing on cutting costs on prescription drugs is prudent. However, in the long-term, this could damage pharmaceutical companies’ ability to develop new innovative drugs. The way forward for the industry will be the implementation of assessments of cost-effectiveness that demonstrate a product’s value for money. In addition, strong differentiation from competitor products will be essential in order to achieve reimbursement status and a return on investment. The industry must, therefore, adapt its R&D strategy and incorporate pharmacoeconomics early on in the drug development process.

Due to the evidence-based pricing strategy of the UK’s National Institute of Clinical Evidence (NICE), gaining reimbursement for new medicines has become increasingly challenging and frustrating for pharmaceutical companies. Even when NICE approves a drug there is no guarantee that it will reach patients. Indeed, the National Health Service could subsequently fail to implement a drug’s use – even if it is below the set limit of GBP30,000 ($60,000) – as the limited funding of Primary Care Trusts means the health service may be unable to afford it.

Evidenced-based pricing is becoming an attractive P&R tool in other healthcare markets. Germany has also introduced a cost-benefit assessment for new and approved drugs in its equivalent of NICE, the Institute for Quality and Economic Efficiency. If a drug fails to make it onto the reference pricing system due to a negative review, Germany’s public health insurance funds, the GKVs, will more than likely not receive reimbursement. In the US, where prescription drug sales have increased from $216.7 billion in 2006 to $274.9 billion in 2007, there has also been mention of setting up a comparative effectiveness board as the current director of the Congressional Budget Office believes that, at present, less than 50% of all medical care is supported by evidence of effectiveness. As such, leading health economists in 2007 called for the Comparative Effectiveness Board to review the cost-effectiveness of current medication, in the same way that NICE does in the UK.

As a result, pharmaceutical giants will have to work much harder to differentiate their respective products from competitors and demonstrate health benefits/outcomes if they are to succeed in securing reimbursement, and potentially their own financial future.




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