China's Innovative Pharma Industry: What the Latest Set of 5-year Plans means for this sector

It is China month here at Bioassociate, and in our previous post on China we covered some of the new initiatives filed in the latest set of 5-year plans aimed at making China a competitor in the originator pharma space.

One such initiative has been the direction of foreign investment towards niches which the government has deemed "innovative". Needless to mention, pharma and biotech are high priority on the list of said niches. 

Another issue which the government has prioritized (for very obvious reasons) is the intellectual property protection situation in the country. Historically, China has been one of the most notorious violators in the IP space, but perhaps all of that is about to change over the next decade. 

Direction of Foreign Investment

The Chinese government has specified rules on the direction of foreign investment in order to nurture certain priority sectors and to restrict investment in others. China’s foreign investment policy is outlined in the Regulations for Guiding the Direction of Foreign Investment, which essentially classifies foreign investment into one of four classes: encouraged projects, permitted projects, restricted projects and prohibited projects.

As of 2009, investment in innovative pharma falls under the category of encouraged projects, specifically the production of raw pharmaceuticals which are under patent, those which are granted administrative protection in China, and products which use new technologies. Investment in generic APIs and traditional Chinese medicines is currently restricted, in order to direct investment towards the innovative sector.

In a step to improve investment opportunities for its innovative industries, the Chinese government launched ChiNext on the Shenzhen Stock Exchange—China’s “NASDAQ”—in 2009, paying particular attention to innovative enterprises and supporting venture entities.  ChiNext is expected to play a crucial role in innovation by providing an important exit alternative for many start-ups over the coming years. The independent exchange caters to the high-growth, high-tech sector, and the majority of its 354 listed companies are SMEs with a combined market value of roughly US$ 118 billion.  Currently, 24 companies are listed in the Pharmaceutical Industry on the ChiNext, 9 of which were listed in the last year (see table 1).

Table 1. 24 Pharmaceutical companies listed on the ChiNext (as of Oct. 2012)

1. Ticker	Company Name	Listing Date	Market Cap. (CNY bn.)
   300006	CHONGQING LUMMY	30/10/2009	3.37
   300009	ANHUI ANKE BIOTECHNOLOGY	30/10/2009	2.37
   300016	BEILU PHARMA	30/10/2009	2.05
   300026	CHASE SUN PHARM.	30/10/2009	7.55
   300039	SHANGHAI KAIBAO	08/01/2010	6.50
   300049	INNER MONGOLIA FREE MEDICAL TECH.	20/01/2010	1.59
   300086	HAINAN HONZ	26/05/2010	2.65
   300110	QINGDAO HUAREN PHARM.	25/08/2010	3.09
   300119	TIANJIN RINGPU BIOTECH.	17/09/2010	3.28
   300122	CHONGQING ZHIFEI-BIOLOGICAL PROD.	28/09/2010	12.6
   300138	CHENGUANG BIOTECH	05/11/2010	1.67
   300142	WALVAX BIOTECH	12/11/2010	6.73
   300147	XIANGXUE PHARM.	15/12/2010	3.55
   300158	SHANXI ZHENDONG PHARM	07/01/2011	2.74
   300181	ZHEJIANG JOLLY PHARM	22/02/2011	2.02
   300194	CHONGQING FUAN PHARM	22/03/2011	2.66
   300199	HYBIO PHARM	07/04/2011	3.10
   300204	STAIDSON BIOPHARM	15/04/2011	6.24
   300239	BAOTOU DONGBAO BIOTECH	06/07/2011	1.80
   300254	SHANGXI C&Y PHARMACEUTICAL	19/08/2011	1.16
   300255	HEBEI CHANGSHAN BIOCHEM.	19/08/2011	2.17
   300267	HUNAN ER-KANG PHARM	27/09/2011	4.33
   300289	BEIJING LEADMAN BIOCHEM	16/02/2012	3.52

Note: There is substantial discrepancy between Market Cap values contained in the ChiNext company index found on the official Shenzhen Stock Exchange website, and values found on leading financial data websites. The official ChiNext company index can be found here: http://www.szse.cn/main/en/marketdata/sinformation/index.shtml?CATALOGID=1693&TABKEY=tab4

Intellectual Property Protection

Historically, China has had a skeptical approach towards IP protection, as it was viewed as a hindrance to the country’s imitation- and manufacturing-driven economy. Before 1992, patent protection was virtually non-existent, and between 1992 and 2008 pharmaceutical patents could essentially be violated on a “me-too” basis, where minor structural differences from existing drugs would suffice for marketing approval. In 2008 China became the newest entrant to the intellectual property arena, having finally adopted comprehensive patent protection regulations. Since then, the protection system strengthened significantly, albeit not sufficiently, and, despite the new initiatives, the IP protection arena remains in need of improvement. Current regulations still exclude IP protection of medical treatments, which encompass drug delivery, medical devices and personalized medicine.

Along with remaining regulatory concerns and loopholes, IP implementation is a pressing issue, particularly due to lack of adequate enforcement procedures in place, and due to insufficient numbers of enforcement authorities throughout the country whose pharmaceutical industry is highly geographically fragmented. In 2009, US businesses lost a colossal US$ 48 billion in sales, royalties and licensing fees due to patent infringement by Chinese manufacturers. 

In a recent move to act on this issue, the Supreme People’s Court of China (SPC) has set up two judicial IP protection bodies to act on behalf of the innovative pharmaceutical industry. The government is additionally making an effort to engage with industry representatives and foreign authorities in order to progress necessary amendments in the IP system. A positive increase in numbers of IPR cases in recent years showcases the government’s efforts, and, because the government is able to draw on established legal environments, it is a matter of time before a sufficiently operational IP protection system is in place. 

China’s strengthening IP protection regulations will certainly be an addition to the plethora of factors which will serve to buttress the innovative pharma industry over the next decade.

2012 Pharma Industry Summary Review: Pharmaceutical Industry's Winners and Losers

2012 has been a relatively fruitful year for Pharma. The financial performance of the biotechnology and healthcare indexes showed robust yield compared to the leading indexes, with the Nasdaq Biotechnology index returning ~35% growth YTD (more than 4 times that of the Dow Jones). For some of the publicly traded companies in the sector 2012 was an eventful year, with major achievements that were strongly reflected in their stock performance. The average return on investment this year for the top five companies was more than 350%, fueling up investors’ dreams.

This year we witnessed a bigger appetite for institutional funding when twelve new pharmaceutical companies entered the stock exchanges compared to the ten IPOs in 2011. The IPOs of 2012 were larger than last year, with Puma Biotechnology leading the pack with its mega IPO of $138M.

In addition, this year the momentum for M&A activities continued, as 7 deals above the $1 Billion target were completed and total deal value for the 50 biggest deals topped $27 Billion. Continuing the trend from previous years, M&A activities focused mainly on cancer and CNS therapeutics. Looking at licensing activities, we witnessed a tendency to license compounds in very early development stages, namely discovery and preclinical stages.

But this year wasn’t all about the finance. We also viewed some big achievements in bringing new life saving medications to patients. 2012 will be remembered as one of the years with the largest number of approvals from the FDA, with more than 30 new drugs, most of them targeted at cancer. Some of the drugs approved this year have the potential to become the next blockbuster drugs, addressing therapeutic areas that haven't seen new therapies for more than a decade. We also noticed some monumental failures of companies trying to develop treatments for some of the most serious diseases. We saw the industry giants, Pfizer and J&J, failing in the most expensive Phase III study for Alzheimer's disease, and Bristol-Myers being forced to write-off its very recent investment after the newly acquired compound, BMS-094, showed major safety issues.

For a full summary of the developments in the pharmaceutical industry in 2012 check out Bioassociate's latest free white paper: "2012: The Winners and Losers of the Pharmaceutical Industry"

Time to forget in-house R&D: enter the fully outsourced drug discovery model - Bioassociate for PharmaPhorum

Bioassociate has today published an article on PharmaPhorum about the fact that bulky in-house R&D is quickly becoming a thing of the past. With better outsourcing capabilities, conglomerates are “hollowing out”, whilst new entrants are beginning to operate on fully-outsourced business models.

There are now many companies operating on a model based on outsourcing of 50%+ of their pipeline.  

Click here to check out the original article on PharmaPhorum! 

5-year plans and Biotech: China is becoming an innovator, begins by revamping Pharma and Biotech

China's mammoth manufacturing power needs no introduction. China's innovative sector, however, is perhaps something you have never heard of - for legitimate reasons. Innovation has really not been China's forte, and why should it, after all? Sans world-renowned tech visionaries and science gurus China has already made its way into anything between 80 and 100% of your everyday life - be it through the TV you watch all the way down to the vitamins you take. 

In the Pharma world, China has naturally made a mark as the manufacturing hub for many global drug producers, and generally feeds its own domestic market with the help of massive local generic players (the likes of Harbin Pharma and SinoPharm) which can easily stomp out any or all of the global pharma conglomerates by comparison. 

But one needn't be a leading economist to foresee obvious limitations to a manufacturing and, to some extent, imitation-driven economy. Intrinsically dependent on developments beyond its own borders, such an economy is characteristic of a follower, rather than a leader. 

Whichever way you look at it - China's seemingly exponential growth is only as exponential as is the growth of the economies which produce the novel technologies on which it relies. And China knows it. 

Over the next weeks we will be blogging about China's shifting pharma landscape, everything from the novel government initiatives to what is currently slowly brewing in this domestic industry's primordial bio-broth. 

Follow us for weekly updates on one of Pharma industry's most monumental changes! 

"Made in China” to “Designed in China” part 1: the 12th Set of 5-year Plans

5-year plans are China's social and economic development initiatives and goals for the subsequent 5 years, drafted by the Central Committee and national congresses on behalf of the Communist Party of China (CPC). In 2011 the CPC released the 12^th set of 5-year plans (2011-2015). This latest set of guidelines has been referred to as the most innovation-focused government initiative China has ever faced, and one which explicitly emphasizes innovation in the bio-industry.

In 2006, the National Congress used the word “innovation” for the first time, realizing the country’s massive potential for innovative growth, and in 2011, China’s utmost objective through to 2020 has become to make a transition from a manufacturing-based economy to one guided by innovation-driven growth. The government’s spending on R&D has already been on a steady increase from just 0.6% of GDP in the 90’s to 1.6% in 2011, with plans to reach 2.5% by 2020.

One of the major goals of the latest plans is universal and more accessible healthcare coverage, which will give a necessary market boost to the pharma industry. Domestic developers of pharmaceuticals are encouraged to consolidate, as the industry remains highly fragmented and dominated by a multitude of small-scale players. Foreign investment is being directed towards cutting-edge developments in the country, and domestic players can now take advantage of a 159% increase in the R&D budget  (now amounting to US$ 6.7 billion for biotech alone, from a total of US$ 48 billion), allocated by the government in order to acquire novel IP or establish in-house R&D.

Some of the goals the latest 5-year plans advocate are:

• Emphasis on Intellectual Property rights 

• Government support of joint research programs with foreign companies

• The addition of innovative medicines to the National Essential Drugs List in order for innovators to be compensated for R&D investment
• Applied tax reduction for the pharmaceutical industry
• Development of 30 kinds of innovative drugs and 150 kinds of diagnostic reagents within the next 5YP timeframe
• Initiation of more than 10 clinical trials of new vaccines
• Development of at least 40 biological drugs
• Strengthening of on-site verification of drug registration
• Strict control of development site supervision and drug registration
• Strict control of drug review and approval standards
• Effective control of fraud
• Strong focus on national support of entrepreneurship and innovation
• Active participation in the globalization of drug development and research
• Focus on learning from the scientific supervision concepts of the FDA

Sales of patented drugs have already been steadily on the rise, in line with total biopharmaceutical sales (figure 1),  but as a result of the latest 5-year plan initiatives, domestic Rx pharma sales are expected to exhibit marked growth over the next decade, and to potentially hit sales of US$ 60 billion by 2020.

Perhaps more so than in other industries, the pharmaceutical industry has historically benefited from dedicated government support. The most scientifically innovative countries, the likes of which are Switzerland, Germany, Israel and the US, benefit from higher-than-usual R&D-per-capita budgets, and the Chinese government has not remained oblivious of this fact. The latest set of 5-year plans will inevitably induce visible changes in the innovative pharma industry, and the new decade is likely to see a substantial increase in the volume of foreign investment in China’s developing bio sectors.

Check back next week for Part 2 of "Made in China" to "Designed in China": China's domestic Pharma market situation & stats, plus a briefing on its current industry players who are already innovating!

If you want to skip straight to the point, check out our latest white paper, 

Pharmerging Markets: China – the Next Innovative Pharma Market?

Introducing: Bioassociate Experts

Bioassociate has unveiled a new team of experts in the Life Sciences who will be helping us on all future projects.

Bioassociate experts are a network of contributors working at leading research facilities across the globe. They provide the latest and most specific expertise across a wide range of Life Science sectors, and are available to help with client queries on a continuous basis. 

The expertise Bioassociate has acquired as a result of partnering with experts now ranges across oncology, neuroscience, pharmacology, stem cells, tissue engineering, immunology, genomics, microbiology and virology - and the list keeps expanding. 

In addition to providing us with the latest developments in these breakthrough fields, the Experts will work with Bioassociate on every project which requires their expert opinion.

Click here for our Expert bios! 

Why the Pharma Industry No Longer Warrants Public Trust 2: Medicalization and the Placebo Effect

There is a prevailing notion that the Western world, in particular USA, is over-medicated and over-diagnosed. There is also a prevailing notion the the Pharma industry is almost completely void of public trust.

The patent cliff may have encouraged dubious antics on the part of pharma conglomerates, but it would be safe to presume that consumer trust in the industry has begun to decline significantly earlier. It has been suggested that pay-for-delay cases alone have cost the consumer nearly US$ 3.5 billion annually, and such agreements are alarmingly on the rise, despite being illegal.

Extrapolating from the same principle, a recurring conundrum becomes evident: how much of the high drug cost would be accepted and justified by patients, and how much of this cost is compensating for activities which consumers are blatantly against? Some examples of such practices are evergreening and pay-for-delay practices, coercion of doctors, ghost writing, in particular with the aim of “medicalizing” conditions, endless clinical trials of the same compound for a variety of indications, and the list goes on.

Medicalization

It is a fact that the number of officially recognized disorders is soaring in the world, despite there being no obvious novel symptoms, and patients are increasingly becoming uneasy about medical practice as a whole. For instance, GSK’s new smoking cessation drug, Zyban, is nothing more than a long-acting form of its anti-depressant Wellbutrin, whilst its anti-depressant, Zispin, is also being marketed for sleeping disorders, which happen to be one of the primary symptoms of depression.

Understandably, in an industry which is slowly transforming from a "pull" to a "push" market, expanding the target customer base by blurring prescription lines can be a powerful business strategy, in particular at times when companies are desperately dashing around for short-term revenue boosts. To present it straight from the horse’s mouth, Barry Brand, the product director of Paxil at GSK, declared in a recent interview, “Every marketer's dream is to find an unidentified or unknown market and develop it. That's what we were able to do with social anxiety disorder." 

As companies are currently fishing around for novel business strategies, medicalization or analogous practices may become a legitimate item on multinationals’ agendas, and can be particularly applicable in emerging markets where the sphere of social disorders still comprises massive potential. 

Emergence of medicalized ailments for the most part takes place through medical journals, whose primary target audience are doctors and nurses. In a widely publicized case, research conducted by pharma journalist Ray Moynihan led to the conclusion that expert-industry links are not hard to find. For instance, a study published in the Journal of the American Medical Association on female sexual dysfunction (FSD), a relatively novel medical phenomenon, found that 43% of women were FSD sufferers. Incidentally, the authors of the study were found by Moynihan to have close links to Pfizer, which was conducting clinical trials of “Viagra for women” at the time.

Tales of a similar nature are ubiquitous, but perhaps the system is to blame as much as Big Pharma for lack of transparency. Pharma-sceptics argue that a regulatory system as part of which corporations are allowed to come in direct contact with and to essentially coerce medical professionals entices corruption at the least. Appointment of accountable government-approved entities, such as those in operation in Europe, would invariably benefit patients in this medicalized day and age. In some developing economies, however, it may take decades before governments are able to adopt systems of this sort.

 The Placebo Effect

The “placebo effect” is an emerging phenomenon promising to be a worthier challenger to the pharmaceutical industry than many other threats. The miraculous ability to self-heal, powered purely by the human body’s will to live (animals have not been found to respond to placebo), has been a well-documented occurrence for some time, but only recently has the potential of the placebo seriously attracted the attention of scientists and medical practitioners. The effect used to be nothing more than a nuisance attributed to gullibility and neurosis in patients, but the emergence of neurological proof of its action finally put this phenomenon on scientific agendas.

Acupuncture, Reiki, and similar practices bear testimony to Placebo’s power, but, ironically, so does the pharmaceutical industry itself. An overwhelming number of clinical trials, in particular trials which are conducted with the use of questionnaires, have failed because placebo pills were shown to be more than, or at least as effective as, the drugs being tested. That is to say, the compounds in trials were able to improve the patients’ conditions, only the placebo improved them more. Even in the case of previously approved CNS drugs, such as anti-psychotics and anti-depressants, the compounds’ effectiveness over placebo is sometimes so insignificant that companies would have a hard time bringing them to market in the current regulatory environment. This applies even to blockbusters, such as Prozac, which has performed rather poorly against sugar pills in recent follow-up trials. Pfizer’s "female Viagra" and Amgen’s Parkinson’s disease drug have also fallen victims to the Placebo Effect in recent years, sparking much-needed debate about deepening our understanding of the body’s innate ability to heal itself.

Probably a little to pharma’s dislike, progress is being made in the sphere: Harvard Medical School recently initiated a new program in placebo studies, headed by placebo guru Ted Kaptchuk. The program has conducted a number of breakthrough studies to date, including curing cases ranging from chronic bronchitis to stomach ulcers. As the cellular and molecular pathways of placebo action are en route to becoming elucidated, therapy of the mind is likely to gain more traction in modern medicine. Various forms of hypnotherapy are already being approved by the NHS in the UK, and governments are certainly eager to explore alternatives to drugs in light of pharma’s reputation. In addition, clinical trials previously conducted by pharmaceutical companies could hold a wealth of information useful for placebo studies, but this is unlikely to ever see the light of day.

Perhaps the biggest threat of the placebo effect to pharma is its role in the media and society: the issue is becoming widely publicized and bears the message “drugs don’t work”, or at least not as well as the brain. Up until now, even despite bad reputation, pharma stayed afloat because everybody conventionally needed drugs, but the placebo effect happened to be one of the proofs presented to patients that medication is in fact something they can occasionally do without. And so much effort was spent by companies on building relationships with doctors and insurers, that they have seemingly neglected or simply ignored their public perception. Thus, in a rapidly shifting pharma environment, especially where out-of-pocket payers will shortly constitute a huge portion of pharma’s customers, it is imperative that multinationals begin to take their public image seriously.

Pharma Must Act to Restore Public Trust

Documented cases of Big Pharma misconduct have been on a frightening rise in recent months. Both Roche and Novartis were accused of under-reporting and concealing side effect data of several of their drugs, whilst a number of other companies were accused by governments of the developing world of severe over-pricing (the Indian government recently revoked Roche's patent for the company's Hepatitis C drug Pegasys due to its extortionate cost). 

In the West, scepticism in the pharmaceutical industry has reached of point where patients have begun to develop a habit of reflexively looking for non-pharmaceutical alternatives as therapy for non-life-threatening ailments.  Studies into the Placebo effect may have negligible repercussions on the industry at this point, due to a general lack of knowledge and faith in "Placebo practices". But the sheer fact that alternative therapies for many blockbuster disorders have been proven feasible and effective renders this practice a potentially very powerful pharma competitor. 

At the moment, Big Pharma's interest in developed markets may have waned, and it has subsequently lost interest in maintaining an immaculate public image, amidst a frantic gold rush for pharmerging shores. Markets such as China, India and Brazil may still lack the public awareness of this industry, and are likely to look much more favourably upon the business of saving lives. For the time being,  to maintain its success, pharma is merely changing its location, rather than changing its conduct. But as Einstein's famous quote goes, "Insanity is doing the same thing over and over again and expecting a different result"; the industry is in dire need of a new modus operandi. If drugs can no longer effectively and safely reach the market without concealed data and unlawful acts, the industry can only anticipate an inevitably unanimous public reaction globally. And, unfortunately for pharma, effective alternatives to medicine are beginning to emerge and to slowly win over the public.

Above was an excerpt from Bioassociate's white paper, "The significance and apparent repercussions of the 2009-2015 pharmaceutical patent cliff", the full version of which can be downloaded here.

Why the Pharma Industry No Longer Warrants Public Trust: Reasons for Extortionate Big Pharma Drug Prices, and What Governments Are Doing to Contain Them

For governments and patients, the pharmaceutical industry has been both a curse and a blessing. The majority of “pharma sceptics” would nowadays argue that the industry used to be a trustworthy environment where innovative products automatically secured the confidence and demand of the public. However, whilst the productivity and quality of pharmaceutical innovation has steadily waned in recent years, the regulatory framework founded on the idea that all novel approved pharmaceutical products are efficacious and in-demand has hardly changed. Until very recently companies still enjoyed the unanimous trust of doctors and the passivity of patients, but has perhaps finally pushed its luck to the limits as it attempted to compensate for low productivity and spiralling research costs at the expense of the public. As the Rx market became less and less affordable for patients and governments, and as its ethical conduct became dubious, mistrust, suspicion and antipathy superseded simple conformity.  Seemingly, somewhere along the way the combination of capitalism and healthcare resulted in a raging war of corporate wealth versus public health, which left some patients wondering whether medicine, once so respectable, has become nothing more than a consumerist tool.

According to the Harris Poll of public opinion, already by 2006 the pharmaceutical industry in the US found itself at the bottom of the public trust ladder along with oil and tobacco companies; public trust last year stood at 11%, in contrast with 25% in 2006 and 60% in 1997. The majority of respondents, inclusive of stakeholders and patients, blamed the poor reputation of the industry on the shift in perceived motives from improving healthcare to maximizing financial success. Perhaps a number of highly publicized scandals, ranging from misrepresented indications and illegal marketing, to practices dangerously bordering on bribery, bear testimony to the fact that pharma has performed rather badly on the ethical front in recent years. Nonetheless, public mistrust has perhaps reached exaggerated levels: according to a report by PriceWaterCoopers titled, “Recapturing the Vision: Restoring Trust in the Pharmaceutical Industry by Translating Expectations into Actions,” two thirds of respondents grossly overestimated the percentage of the US healthcare budget allocated to medications (50-80% vs just 10% in reality), and underestimated by nearly 50% the costs of bringing a drug to market. 

Controversy aside, the figures alone paint an unsustainable picture: prescription medication cost the US government US$ 307 billion in 2010, accounting for 2.1% of GDP, in contrast with US$ 40 billion in 1990 when its portion of GDP was only 0.6%. Furthermore, amidst the patent cliff and health reform turmoil, 181 branded drugs in the US saw a whopping 8.7% price increase - the highest in the last decade, by far outstripping the inflation of 1.3% measured by the consumer price index, and in stark contrast with a 9% price drop of widely used generics (Fig. 1). Most importantly, over the past 12 years, generic substitution has saved the US government a colossal US$ 1.031 trillion, with over US$ 200 billion saved owing to the patent cliff alone (Fig. 2).  Benefits of such magnitude are not surprising: for instance, Erbitux, the antibody for colon cancer treatment distributed by ImClone, Bristol-Myers and Merck, costs US$ 17,000 a month per patient - and there are more expensive treatments on the market. Vertex Pharmaceutical’s new cystic fibrosis drug Kalydeco, for instance, costs US$ 294,000 a year per patient - treatment which even the best insurance could hardly cover. This begs the question whether such prices are really justified, and whether the patent cliff is a legitimate cause for celebration by pharma sceptics.

Reasons for High Drug Prices

According to drug companies, drug development costs today are more extortionate than ever, standing at over US$ 1 billion per compound, which is undoubtedly reflected in the high cost of prescription drugs. Table 1 shows a number of monthly consumer prices of common blockbusters in the US, where they are arguably the highest in the world. The prices of generic versions or equivalents of these drugs would range between 10-30% of the indicated costs. 

Table 1. US average monthly consumer prices of selected blockbuster drugs

Commercial drug	Consumer price (US$/month)
Celebrex	$130.27
Zyprexa	$423 - $1,242
Seroquel	$272 – $1,197
Prozac	$225
Lipitor	$161
Singulair	$131
Actos	$305
Avandia	$202
Humira	$2,034
Enbrel	$2,648
Plavix	$214
Exelon	$228
Lyrica	$306

How are high drug prices determined and justified, and have drug companies been making excessive profits? The American Federation of Labour Congress of Industrial Organizations states that for every US$ 100 of a prescription drug’s price, 15% is for R&D costs, 26% is for manufacturing, executive and staff costs, 35% is for marketing and administrative costs, and 24% is net profit. Measuring the cost of intangible input (i.e. R&D) is an ambiguous practice - as the financial impact of failed compounds needs to be priced in to the cost of successful ones for the companies to operate. Taking the whole pipeline into account, a price-determining reagent becomes apparent: the productivity of R&D - which is, or theoretically should be, inversely proportional to medication costs. Thus, the higher the ratio of failed to successful compounds, the more financial compensation needs to take place via consumer prices.  Considering the poor pipeline output of the past decade, it isn't surprising that prices have witnessed such a sharp rise.

Crippling drug prices have a particularly dramatic effect in emerging economies where out-of-pocket payers constitute the majority of patients. Globally, pharmaceuticals account for nearly a fifth of all health spending, and payers on average pay four times more for branded medication where generic versions are available. In China, the brand premium reaches up to 13.2 times. According to recent WHO statistics, even generic medications are beyond the reach of many patients in middle- and low- income countries. On average, generic treatments cost over 2 days’ wages in half of the emerging markets studied, whilst originator medications would consume between 10 days’ and over 30 days’ salaries. In instances of chronic illness in low-income countries, treatment with branded medication becomes entirely unsustainable. Figure 3 demonstrates the affordability of a course of antibiotics by country, exposing the harsh reality that it would take some patients up to 50 days of work to pay off just one course of branded medication.

Pharmacoeconomics: Generic Uptake and Pricing Pressures

The immense rise of generics during the cliff presented governments with novel possibilities to re-budget healthcare systems by increasing generic uptake. Widespread legislation changes took place throughout Europe and the rest of the world in the wake of financial crisis, which took advantage of vast generification. The risk added by health reforms, and the imminent end of pharma’s honeymoon in the US were the main factors attributing to sharp price increases of medicines last year. New legislation almost inevitably leads to temperamental price spikes, but the picture appears gloomier for pharma this time around.

In Europe, the industry has been the worst hit by pricing pressures. Amidst widespread austerity measures European governments are under more strain than ever to lower healthcare costs, and in this respect the patent cliff has been a great empowerment in negotiations with large pharma. European price cuts were triggered by Greece’s austerity measures, but EU governments commonly cross-reference to prices in other countries, which so far lead to an EU-wide pandemic of stringent savings in Spain, Portugal, Italy, France, Ireland, Denmark, Germany, Sweden and the United Kingdom (Table 2). In addition, an EU-wide sales tax of 1.6% will be imposed on the industry in 2012, 2013 and 2014.

Table 2. Selected EU pharmaceutical price cuts, 2010

Country	Price cut	Details
Greece	20-27%	-27% on drugs priced over €100, otherwise -20%
Germany	6-16%	Discount increase on non-fixed-price products from 6% to 16%
Italy	10%	€2.2 billion savings on medicines, particularly in hospital sector
Spain	7.5%	Mandatory 7.5% discount on list price

The UK National Health Service (NHS) instated a Pharmaceutical Price Regulation Scheme (PPRS) in 1957, and will be adopting a more stringent Value-Based-Pricing approach in 2014. France unveiled an austerity package which aims to cut €700 million over the next two years, mostly by slashing prices of branded and generic drugs. The French government also pledged to increase the time-frame of cost-benefit evaluations of new drugs in 2011. Germany, Europe’s largest drug market, introduced a benefit system in 2011 which requires all companies marketing new medication to provide proof of the drug’s superiority over other available treatments. According to BMI, this system, along with other measures, lead to savings of €1.9 billion in 2011, three times higher than the savings in 2010. In addition to a mandatory 7.5% discount on medication list prices, Spain has, in recent years, passed legislation enforcing savings altogether amounting to 23% on prescription medication and 25% on generics, which will amount up to US$ 2 billion.

Sadly for the industry, the price-slashing pandemic hasn’t been confined to European borders: many of the emerging markets and, most notably, the major Rx market of Japan have all initiated healthcare savings in recent years. Healthcare expenditure in developing markets is on a steady increase, instigated by novel government regulations and a growing number of private insurers, which has led to a burgeoning focus on cost containment and on generic substitution.

Japan exercises a bi-annual price cut system, with the next round of roughly US$ 7 billion savings anticipated in April of 2012. Furthermore, having previously boasted a notoriously low level of generic penetration, faced with a growing ageing population the Japanese government now aims to bring generic volume up to 30% by 2013 and onwards to new generic heights, which will inevitably stifle the growth of the pharma industry in Japan over the coming years.

Meanwhile, South Korea uncovered plans of introducing 14% price cuts of pharma products, which sparked a protest rally of pharma CEOs and employees in Seoul. The Chinese pricing authority, the National Development and Reform Commission (NDRC) introduced tighter controls over the pricing of foreign pharmaceuticals in 2010, outlined in its New Methods and Regulations on Drug Prices protocol. Since 2011, 174 medicines ranging from antibiotics to heart medication marketed by Lilly, Merck, Novartis, Pfizer, Roche and Bristol-Myers saw an average price cut of 19%, generating savings of roughly US$ 300 million a year. It has been further rumoured that the country is aiming to adopt a pharmacoeconomic drug assessment model, and will make use of a price-referencing system with countries such as South Korea and India.

In Russia, novel regulations unveiled in 2010 will allow the government to decide on maximum mark-up prices for drugs, and to slash prices that it believes are too high.

Time for Pharma to implement drug costs into the foundations of the drug development model

All in all, the unsustainability of the pharmaceutical business model is affecting far greater layers of society than the industry itself. Government pricing pressures are further driving the model towards extinction. The fundamental truth which finally dawns upon Big Pharma is that payers can no longer compensate for lavish pipeline ethics, and this will inevitably serve to instil the notion of the importance of smart-cost drug development, which has for so long been overdue in the pharma world. 

Stay put for our next post: The Pharma Industry and Public Trust Part 1: Medicalization and the Placebo Effect next week, and read about everything we cover in detail in Bioassociate's White Paper: "The Significance and Apparent Repercussions of the 2009-2015 Pharmaceutical Patent Cliff".