Answering to Pricing Pressures

October 2017

Drugmakers continue to face difficult questions about how they set their drug prices. New healthcare reimbursement models, which tie payments to patient outcomes and incentivize cost efficiencies, are forcing new conversations inside pharmaceutical and healthcare boardrooms alike. 

Their financial filings echoed these sentiments: 84 percent of companies cited pricing and margin pressures as a risk this year, reflecting a steady increase from 2015 (79 percent), 2014 (68 percent) and 2013 (66 percent). 


The Price of Innovation

Central to the pricing issue is the cost of research and development to bring new products to market, which continues to spiral higher. With only one of every 10 products making it to market, recouping this investment is challenging. Successful products often must drive profits until their patents expire. In 2015, 80 percent of the growth in profits among the 20 largest drug companies resulted from price increases, rather than from the addition of new products, according to research by Robin Feldman, director of the Institute for Innovation Law at UC Hastings College of Law. 

BDO’s risk factor analysis showed that life sciences companies have grown increasingly worried about their ability to properly execute corporate strategy and growth plans—stating concerns about developing and capitalizing on new products in a timely manner. In 2013, this concern showed up on 69 percent of 10-k filings; this year, 93 percent of companies referenced it. Also among the top 20 risks: delays and unfavorable results from pre-clinical and clinical trials (reported by 90 percent of companies, compared to 80 percent in 2013). 

Patent exclusivity concerns, meanwhile, remain, with 55 percent worried about demand fading away. 

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Funding Future Development

As external pressures mount, the volatility of revenue, stock price and profitability is a rising concern for life sciences companies. In 2015, 90 percent of companies expressed worries about volatility; this year, 97 percent of companies mentioned it, making it the 8th biggest risk.  

Meanwhile, funding needs for R&D and product commercialization haven’t abated. The Tufts Center for the Study of Drug Development estimates that it costs more than $2.5 billion to develop a new drug. References to capital and liquidity risks have steadily increased since 2013, when 79 percent of companies highlighted the concern in their 10-k filings. This year, 94 percent of companies expressed worries over having adequate capital and liquidity, up 9 percentage points from 2016. The challenging funding environment threatens research and product development efforts that are critical to keeping product pipelines active. BDO’s risk analysis found that worries about having to reduce or eliminate product development programs rose 11 percentage points from 2016 (56 percent) to 2017 (67 percent).

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“Notwithstanding the rigorous debate around drug pricing, demonstrable value is the goal. Value is determined through the equation of outcomes divided by cost. The better the outcomes, held at a steady cost, the greater the value created. Competition will increase and the ultimate differentiator of value will be achieved through the inclusion of new therapies, formularies and networks.”   

2017-Manufacturing-RFR-headshot_Schreiber.jpgPatrick Pilch
National Co-Leader of The BDO Center for Healthcare Excellence & Innovation  
 




Defining Value 

One of the most vexing issues facing life sciences companies right now is demonstrating the value of their products. 

A variety of new approaches for determining value are emerging. Health plans and the Centers for Medicare & Medicaid Services (CMS) are starting to consider quality-adjusted-life-years (QALY), which addresses the quality and quantity of lives saved, to better determine a drug’s efficacy. New payment approaches are being implemented that place a heavy value on a drug’s efficacy, such as the agreement Novartis signed with Cigna and Aetna, offering a money-back guarantee to patients using the heart failure drug Entresto. Physicians are also using new tools to help them determine the value of a drug. For example, the American Society of Clinical Oncology developed a framework that assesses the value of different cancer therapies based on cost, as well as the benefits and side effects. 

Tracking and managing negative outcomes will remain a top risk, regardless of how value is defined. This year, 97 percent of companies referenced risks related to product complications, recalls and safety issues in their 10-k filings. The more patient-centric healthcare environment will emphasize patient safety above all else. 

Value-based payments will soon become the norm in healthcare; as they take hold, life sciences companies will need to better define, and constantly refine, what value their products provide to the marketplace. Competitive and product development pressures will likely remain primary risks for the industry, but the emphasis on value will alter the game. In this new environment, innovation isn’t limited to drugs, but extends to finding new ways to track outcomes and partner with healthcare providers to better manage costs. 

Despite evolving compliance risks, the life sciences industry is poised for a period of unprecedented innovation, spurred on by welcome changes taking hold under the Cures Act and through FDA proposals to boost transformation. Life sciences companies should keep abreast of these developments and update their risk frameworks accordingly.