A prosperous new year for pharma? Let's check the tea leaves
As usual, the biopharma year is ending with a bang, as companies scramble to wrap up pending business before the books close. Plenty going on in the present to occupy the mind. And as a long-range type of business--governed by patent periods and extended R&D timelines--this industry is as likely to be thinking about 2017 as next week.
We'd like to turn your attention past the flurry of today, but before the years of lifecycle management ahead. To 2014, a.k.a. next year. A mere two weeks from now, it stretches out into the dimly lit future, with four quarterly reports, 12 monthly goals, and, if you're fortunate, one year-end bonus, amount as yet determined.
We can't predict your incentive pay, of course. We can, however, hazard a few predictions about the forces--positive and not so much--shaping the industry in 2014.
Most troublesome for drugmakers is the growing pricing pressure--including private insurers in the U.S. Once counted upon for the pricing freedom drugmakers lack in most other world markets, the U.S. system is changing. In the wake of the mergers between Express Scripts ($ESRX) and Medco Health Solutions, and CVS ($CVS) and Caremark, pharmacy benefits managers (PBMs) find themselves with more power. And they're using it. CVS Caremark last year rolled out some strict formulary restrictions on a handful of drugs, as something of a test case for bigger moves down the line.
But the big blow came this year, from Express Scripts, when the PBM introduced its 2014 National Formulary. For the first time, that formulary specifically excludes a list of drugs, including some commonly used products--and some brand-new drugs Big Pharma hopes will vault it past the patent cliff. Pfizer's ($PFE) rheumatoid arthritis drug Xeljanz, GlaxoSmithKline's ($GSK) respiratory med Breo Ellipta, Johnson & Johnson's ($JNJ) anti-inflammatories Simponi and Stelara all fall in that latter category. Since then, an Express Scripts executive told Bloomberg that the PBM will be tough on the new crop of pricey hepatitis C drugs. Gilead Sciences' ($GILD) Sovaldi just launched at an $80,000-per-course price, and Gilead is about to follow up with a combo pill that could be even more expensive. Express Scripts will be looking to cut a deal and plans to compare the different treatments head-to-head to make sure it's getting the best value for its buck.
And it's not just the U.S., of course; Australia is tracking patients using Bristol-Myers Squibb's ($BMY) melanoma treatment Yervoy to gauge its value for the $110,000-a-year list price. And then there's the newly strict Germany, where unfavorable pricing prompted Bristol and AstraZeneca ($AZN) to yank their new diabetes treatment Forxiga. And arguably, the most dramatic form of pricing pressure can be seen in China, where the government is probing most Big Pharma companies for potential bribery, most notably GSK. Various on-the-ground sources have said that price cuts could ease the scrutiny.
While these pricing battles rage, Pfizer, Novartis ($NVS), and to a lesser extent, Glaxo and Bristol-Myers are taking a hard look at their businesses to see where they might unlock value, free up cash for stock buybacks, and refocus their attention. Pfizer, of course, has already jettisoned a few units peripheral to its core business; its successful spinoff of the animal health business Zoetis ($ZTS) wrapped up earlier this year. But the pharma behemoth took another step in July that people will be watching closely: It split its commercial operations into three separate businesses with separate financial reporting to give investors an eye on their value. Pfizer will unveil the first of those numbers with first-quarter results.
Inspired, Glaxo is creating a new unit encompassing its older brands, and it, too, will get its own line item in the company's financial results. Meanwhile, Novartis launched a strategic review after its 2013 annual meeting, and it is now mulling over some unit sales--with animal health first on its list. The Swiss drugmaker already hived off a small segment of its diagnostics business, and it intends to shed other businesses it considers poor bets for growth. Units that aren't market leaders now will either build up through M&A and joint ventures, or ship out. That review will continue into the new year, with action sure to follow.
It's no coincidence that these companies also are buying back their shares to support the stock and keep investors happy. The cash is also helping to fund dividends. Glaxo sold off a couple of its drinks brands and several thrombosis drugs, raising more than $4 billion, funding some recent deals, as well as share buybacks. Pfizer already granted a boon to investors with the Zoetis shares that effected its spinoff. And Bristol-Myers, looking to focus more tightly on a core of several therapeutic areas, bowed out of diabetes research and sold its share of its diabetes joint venture to partner AstraZeneca.
On the ground, sales reps are feeling ongoing tremors across the pharma landscape. While medical schools and teaching hospitals crack down on their site visits--and soon may bar reps altogether--physician practices continue to raise barriers. Speaking fees for physicians, a staple in the pharma-promotion diet, will get more scrutiny in 2014 as the Sunshine Act forces disclosure of all payments and gifts to U.S. doctors. And while marketing experts don't expect the rest of Big Pharma to follow suit anytime soon, GlaxoSmithKline is moving to remake its marketing strategies, rolling out a new compensation system for reps worldwide and nixing most speaking fees and other physician payments.
Meanwhile, the iPads that reps now tote on sales calls could soon replace many of them altogether, as the share of doctors who prefer electronic detailing grows. And these days, those doctors are more likely to own their own iPads, where they can review drug presentations whenever they like. The sales-rep jobs that remain--and remain unchanged--are fewer, too, as the move to specialty drugs leaves droves of primary-care sales people out of jobs. Eli Lilly ($LLY) was 2013's prime example, with layoffs meant to ease blockbuster sales losses as the antidepressant faces generic competition. While the sweeping layoffs of several years ago appear to be past, Big Pharma remains in cost-cutting mode, and more job cuts are likely to come in 2014.
Hiring will continue in some places--in emerging markets, namely, where drugmakers have been staffing up for several years. But these days, companies are handling developing countries with more care. India's intellectual property crackdown continues, with compulsory licenses threatened on several cancer drugs. Bayer went so far as to give up pursuing patent protection for its breast cancer blockbuster Herceptin, and Indian drugmaker Biocon immediately pledged to get a biosimilar version to market posthaste. China's corruption scandal has roped in Sanofi ($SNY), Novartis, Eli Lilly and others--in addition to GSK--showing how politics can throw up obstacles quickly and unexpectedly. After all, payments to doctors have till now been common in China, among domestic and foreign companies alike.
And now, the FDA is following up on its promise to beef up local inspections in developing countries, with agency staffers setting up new bases in India, and soon, China. Some manufacturers that teamed up with multinational pharma companies years ago have found themselves in hot water for manufacturing violations as a result.
Most drugmakers aren't deterred, however. Glaxo, at the center of the Chinese scandal, is spending billions amping up its stake in emerging-markets subsidiaries, while Sanofi continues its march not only in the biggies like India and China, but smaller countries like Turkey and Saudi Arabia. Smaller drugmakers are getting in on the act, too; CFR Pharmaceuticals' ill-fated buyout of South Africa's Adcock Ingram is as much about manufacturing capacity for feeding emerging markets as it is about access to Adcock's drug portfolio and distribution. Just over the past 10 days, the small Hungarian drugmaker Richter announced a joint venture in Malaysia and a deal for Mexico's DNA Pharmaceuticals. Emerging markets will remain the world's fastest-growing, so navigating new obstacles is just a reality of today's drug business.
On the bright side, the FDA has ushered another big crop of drugs into the market, and several of them are already on their way to blockbuster status. Biogen Idec's ($BIIB) multiple sclerosis pill Tecfidera, Roche's ($RHHBY) breakthrough breast cancer drug Kadcyla, and now Gilead's Sovaldi show that real treatment advances can still deliver big sales. Whatever the vagaries of the pharma market, that's a perennial promise.