Will Economic Returns from Drugs Continue to Disintegrate?

Lifetime net economic returns in the pharmaceutical industry are diminishing, according to a new study published in Health Affairs (1). The study, which was funded by the Pharmaceutical Research and Manufacturers of America (PhRMA) and conducted by the IMS Institute for Healthcare Informatics, examined financial returns for four cohorts of new prescription drugs launched in the United States from 1991-94, 1995-99, 2000-04, and 2005-09. The study authors concluded that while revenues in the first three cohorts were positive, returns in the last period studied, from 2005-09, fell sharply and many development-related costs were not recouped. These lifetime global net sales for new novel drugs have declined, the study says, “even as the drugs’ relative sales volatility has remained persistently high and has increased for biologics.” While biologics typically produce higher returns than small-molecule therapies, the authors predict a reduction in the profitability of biologics as a result of “new policies that might affect the sales or the cost sides of the equation.”

BioPharm International spoke to one of the co-authors of the study, Michael Kleinrock, research director, IMS Institute for Healthcare Informatics, about the implications of the study findings and how factors such as more powerful payers, expedited generic erosion, loss of patent exclusivity, and crowded therapeutic categories have affected net economic returns in the pharmaceutical industry.

According to an IMS report released late last year (2), consistent high numbers of innovative and orphan medicines are expected to be released through 2018 compared with the last decade, and a high number of new molecular entities (NMEs) are expected to be launched annually, continuing a second wave of innovation similar to the levels launched in the mid-2000s. This prediction is in line FDA approvals; the agency approved 41 drugs in 2014, the largest number of drug approvals since 1996. Kleinrock notes that although there are some positive signs in both numbers and revenues in 2010-2014, it’s “simply too early to tell if this cohort will mark a rebound in innovation that early indications suggest.”

BioPharm International: The recent Health Affairs study looked at drug revenues from 1991-2009. What about 2009-2014? Were net economic returns still falling through these years?

Kleinrock: Studies like this take a long time to do, and in this case we required a set of data post-launch of 3-5 years to allow us to project products accurately until their “end-of-life,” which we defined as protection expiry plus two years for small molecules and five years for biologics. For biologics, we further amended protection expiry to mean expected competition entry, which for some molecules of lower commercial significance is likely to be much later. We could model the 2009 launches to end-of-life, but for more recent products, our confidence in the lifetime projections is much lower.

There are always a mix of very successful and not very successful products, and one of the exhibits in our paper points out this distribution has shifted pretty dramatically in the most recent cohort (2005-09). The more recent period, on the face of it, is also skewed in a similar way.  Many companies note a tougher launch environment; others demonstrate some of the fastest uptake ever. It’s important to note that 1-5 years of a product doesn’t mean its lifetime sales, except if you’re measuring Incivek (telaprevir) or Victrelis (boceprevir), which are now withdrawn, having been superceded by Sovaldi (sofosbuvir), Harvoni (ledipasvir and sofosbuvir) and the rest.  We examined this 2010-14 cohort and found it to be substantially similar to earlier cohorts—perhaps better, but inconclusive yet—and not substantially demonstrative of a massive recovery in innovation. There are certainly some positive signs, however, in both numbers and revenues.  It’s simply too early to tell if this cohort will mark a rebound in innovation that early indications suggest.

BioPharm International: IMS reported in November 2014 that between 2013-2018, total global spending for pharmaceuticals will expand at a compound annual growth rate of 4%-7% compared with 5.2% in 2013, and absolute growth will be $305-335 billion, which is upwards of $100 billion more than in 2013. Why won't these spending levels influence net sales by manufacturers? Or will they?

Kleinrock: IMS global spending projections include both generics, and non-NME molecules (i.e., branded generics) from all companies, some much older than the cohorts we’re analyzing.  Much of that growth is from emerging markets and is driven mainly by generic medicines. The products we’re including [in the Health Affairs study] are important innovative molecules and they are expected to have normal lifecycles, which includes robust growth, but the beginning of life sets the stars, as it were, and these are a group of lower-selling innovators.

The relatively modest growth in the five-year forecast is more indicative of a recovery from the depths of low growth from the “patent cliff” whose products are embedded in our earlier cohorts. The products in the 2005-09 cohort typically have 8-12 more years of “life” and these higher-growth dynamics are in the normal growth phase of those products. In that sense, the global outlook is for relatively modest growth and that is not helped as much by this weaker [2005-09] cohort, but these products reaching maturity will drive higher growth.

BioPharm International: The study looked at 466 novel meds, 378 of which were small molecule and 88 biologics. What about the breakdown of drug type from 2009-2014?

Kleinrock: We haven’t examined the breakdown of NMEs launched in the US in this way, but for the most part, my observations of the industry and launches suggest that [the ratios from 2009-2014] are largely similar.  In the earlier periods there were more biologics for cancers, but more recently, we’ve seen a swing back to more small-molecule targeted cancer agents, so the ratio should be largely similar but not identical.

BioPharm International: Are the waning financial returns for drugs mostly due to the fact that drugs are better quality? In other words, are the returns simply diminishing because drugs are now so much more complex and that much more effective?

Kleinrock: When we began our study, we were revisiting the work done in a 1998 Congressional Budget Office study and we felt that so much had changed in the environment. We have stronger payers; deeper, faster generic erosion; and highly satisfied therapy areas. We felt that these evolutions would need to be shown and while we all have a view of the late-90s blockbuster era, less has been discussed of the more recent periods. Certainly, the 2005-09 cohort in our study brackets the period of the lowest ebb in the numbers of early revenues from NMEs, and it also coincides with the economic crisis, emboldened payers, and a rise of patent expiries (which provide other options that can hamper the uptake of a late-to-market innovator).

Some medicines are clearly better quality, but some in the earlier cohorts and even in 2005-09 could be said to be only incrementally better than earlier drugs. The distribution of drugs with very positive revenues and those with lower revenues suggests that the environmental factors and stakeholder shifts to de-emphasize some lesser-clinically important innovations has impacted the lower revenue products more than the higher revenue ones. Those higher revenue products could be seen to be much better clinically, and the lower revenue products could be seen as of lower value.

There is a problem with this simplification though when it comes to specialty, niche, and orphan drugs. A drug for a very small population could end up with very low revenues in aggregate because it is perfectly suited to a small and stable population and the price charged doesn’t add up to much even if it is high. Those situations are certainly included in [our study].

All in all, the lower returns are for a lot of reasons, including the predecessors being “good enough” and available generically, the drugs being great but niche or orphan, stakeholder pressures, and poor marketing execution, to name a few.

BioPharm International: Just because drugs may not be as profitable, does it truly equal less innovation, or could it really just mean less money for things like marketing?

In our study we used industry standard averages for things like marketing and cost of goods sold (COGS). For the most part, by using these average percentages of revenue, we by default are assuming that as companies realize their revenue potential for a product is low, they reinvest elsewhere, or cut marketing spend. The range of staffing cuts, cost-cutting, and general restructuring in pharma over the 2005-09 cohort coincides with the lower returns we see in this period. We believe that the reaction by companies to lower launch trajectories in some way informed these strategic investment decisions and while it may not be a definitive link, it’s clear that the industry reaction to these lower returns has already taken place to a large extent. In our paper, we see that if returns were to continue at these levels or worsen, further action would need to be taken. Those actions could focus on marketing spend, or they could drive refocusing or lowering of investments in R&D.

BioPharm International: Is there anything else you would like to add?

Kleinrock: The decline in economic returns is the evidence many in the industry saw themselves years ago and it prompted many companies to retool their R&D, refocus their strategies, and prepare for the new century with new portfolios, marketing strategies, and companies. The number of mergers, partnerships, and incentive-laden deals that industry has made in the past 5-10 years are the most in the history of the industry and all the deals were executed as a means to find a resolution to this lower returns norm. If pharmaceutical companies had changed nothing, the downward trend would no doubt continue. While we have not completed a study that takes us more up to date, it is without question that the 2010-14 cohort and newer products will come to a market which continues to change, but one which industry has also changed. The imperatives that drove the consolidation, restructuring, and M&A activity of the past five years remain, and the key now will be to see if those changes are sufficient to change the returns on innovation investment to keep the quality of treatments and cures coming from research. A more challenging question, perhaps, is whether society as a whole can afford to wait for the level of innovation to rebound.

References
1. E.R. Berndt, D. Nass, and M. Kleinrock et al. Health Aff. 34 (2) 245-252 (February 2015).
2. IMS Institute of Healthcare Informatics, Global Outlook for Medicines Through 2018(Parsippany, NJ, November 2014).

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