1. Stakeholder Perspectives on The Pharmaceutical Industry in Transition Ian Morrison

2. Outline n Key Issues for the Pharmaceutical Industry n Perceptions and Attitudes n Medicare Reform: Wholly Inadequate Prescription Drug Benefit for Seniors (WIPDBS) n Consumer-Deflected Healthcare n Implications for Pharmaceutical companies

3. The Ten Big Issues for the Pharmaceutical Industry n Costs for everyone globally, focus on Prices in the U.S(and therefore importation) n Losing the Value argument in the US and elsewhere n Big Ugly Buyers and Tiering n Coverage for the Elderly in the U.S. and Elsewhere n AIDS in the Third World: Capitalism run Amok n R&D productivity: –Is bigger better or is it all a lottery –$ 4 Billion Blockbusters or 40x $100 million n Intellectual Property under assault n Marketing practices as asset or liability: DTC, detailing, rebates and sales force productivity n Losing Friends and gaining enemies n Leadership finally coming out from the bunker of self-righteous, myopic, isolationism

4. How Consumers Rate Industries * In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately ** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002

5. Health Care Tops List of Industries Public Wants to See More Regulated Should Be More RegulatedGenerally Honest & Trustworthy Hospitals Managed Care Companies Health Insurance Companies Pharmaceutical Companies

6. Medicare Drug Benefit Catastrophic Coverage No coverage Partial Coverage up to Limit Deductible 5% $2850 Gap 25% $5100* $2250 $250 Equivalent to $3,600 in out-of-pocket spending: $250 deductible + $500 (20% cost-sharing on $2000) + $2850 (100% cost sharing in the “gap”) Source: Kaiser Family Foundation Out-of-Pocket Spending Medicare Part D Benefit + ~$420 in annual premium

7. A Slight Majority Favor the New Medicare Plan… Source: CNN/USA Today/Gallup, Dec 5 - 7, 2003. Do you favor or oppose the new prescription drug benefit for Medicare recipients?

8. …But Most Elderly are Disappointed with the Specifics Source: Wall Street Journal/Harris Interactive, Dec 3 - 5, 2003. Congress has passed a new Medicare Bill that includes a new prescription drug benefit. Which of the following best describes how you feel about the new Medicare Bill?

9. Disappointment over Expanded Private Sector Involvement and a Lack of a Reimportation Provision How do you feel about the four following pieces of the bill? (Asked of those who “know enough to have an opinion” (58% of all adults)

10. Most Consumers Think the Medicare Bill will Benefit the Rx industry More than the Elderly Source: CNN/USA Today/Gallup, Dec 5 - 7, 2003. Based on what you have heard or read about the new Medicare plan, do you think it will do more to benefit people who receive Medicare or do more to benefit prescription drug companies?

11. Medicare Bill as Three Movies As Good as it Gets n Prohibition on Price Controls on drugs n Medicare cannot use its raw naked purchasing power n Prohibition on reimportation of pharmaceuticals from Canada n Private Sector Handouts for corporations, health plans, PBMs (and doctors and hospitals) n MSAs and HSAs enabled and encouraged for the elderly (The Warren Buffet PPO) n No new Taxes for the rich n And some fresh new coverage for the poor uncovered elderly who are not in states with rich PACE or Medicaid programs

12. Medicare Bill as Three Movies The World is Not Enough n Wholly Inadequate Coverage when it finally arrives because most people will be paying for at least half their medications n Price Transparency now and in the future (discount cards in the short run and donut holes in the long run) n Drug industry will experience the coverage kicking in when many of the big blockbusters are off patent and when huge classes of drugs like statins will be both generic and OTC n Huge incentive for corporate America to phase out retiree health benefits or make them Medicare Compatible (a euphemism for shitty) n HMOs and HSAs will have to find a way to make money on anybody but the rich well elderly (all four of them) n When it comes to healthcare for the elderly we are all poor n Is this bill a platform for future Democrats to go after the drug industry when RX industry is at a low ebb, lacking innovation and subject to five years of public outrage about prices n What would Hillary do with it in 2008?

13. Medicare Bill as Three Movies The Ten Commandments n There shall be competition (Even if it is unpopular, doesn’t work and there are no willing HMOs or congressional districts willing to participate in it) n There shall be liberty for seniors to be confused by a myriad of private health plan and drug coverage offerings n There shall be skin in the game (consumer responsibility for payment through co-payments, deductibles and premium sharing) because it is good for consumers to pay at the point of care (it will stop them overusing the Medicare system for recreational purposes and it teaches seniors that they should look after themselves in their forties and fifties) n There shall be no supplementary coverage because supplementary coverage nullifies skin in the game n There shall be no new taxes for rich people, only raised premiums for all n There shall be privatization because private is better than public (don’t argue, this is a commandment) n There shall be unrestricted free choice of plans each of which has a restricted choice of doctors because choice is good n There shall be no Canadian drugs in the veins of Americans even if the drugs are made in America and purchased by Americans There shall be big differences in coverage among seniors but thou shall not covet thy neighbor’s coverage n There shall be no senior left behind……….. in traditional Medicare

14. The Argument For Consumer Responsibility for Payment n Consumers have been progressively insulated from the cost of care for the last 40 years n If they only knew how much healthcare cost and had to pay they would use it less n If they were responsible for paying they would also take more responsibility to become healthy and cost the system less n Consumers should have the right to choose and to trade up to better quality with their own money n When they are make rational consumer choices the market will be working and whatever is spent will be appropriate like any other market or sector of the economy

15. The Argument Against Consumer Responsibility for Payment n The 5/50 Problem: Most consumers that are heavy users have significant co-morbidity or serious illness like cancer, they didn’t choose this health status n One day in an American hospital and they are over their maximum deductible, so…… n Catastrophic coverage is a green light for excessive care by hospitals and procedure- oriented specialists n While skin in the game can clearly move people around does it save money overall? n The equity problems: –A de facto reallocation of resources from poor to rich (my access to the collective social capital of health insurance is better because I can come up with the economic down payment for physician visits and tests) –Poor people with chronic illnesses will be disproportionately affected by consumer responsibility for payment

16. Consumer Exposure to Health Care Costs is About to Increase Percentage of total personal health care expenditures paid out-of-pocket Source: Centers for Medicare and Medicaid Services Projected Per capita amount of personal health care expenditures paid out-of-pocket

17. Who Pays for Drugs? Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data Percent of Total National Prescription Drug Expenditures by Type of Payer Private insurance Out-of- pocket Government programs

18. The Five-Tier Formulary Old Generic New Generic Rebated Brands Non-Rebated Brands Look Good / Feel Good Lowest Copay Highest Copay and/or Coinsurance

19. James Brown and Fernando Lamas Effect Mortality Morbidity Mobility Feel Good Look Good Quality of Life Affluence of the Individual or Society End-Point

20. “Skin in the Game” Matters n Trading down twice as often as trading up n Rapid increase in generic and therapeutic substitution n Poor, chronically ill most effected n Starting to lead to adverse health outcomes like the uninsured n Simple cost shifting without sophisticated disease management is not the right answer in the long-term

21. Big Increase in Trading Down on Drugs Base: Total cost of prescription drugs increased last year (53%)

22. Rx co-pay increase: More bargain-hunting since 2002. Low- and middle-income equally likely to “ trade-down ” Percentage of consumers who did the following in response to an increase in prescription drugs cost sharing Base: Copays for prescription drugs increased a lot or a little in past year

23. The Coming Challenges n Price –Reimportation –Cost-effectiveness in formulary design –Reference pricing –World pricing n Innovation –Show me the molecules! n Value –The Cutler Defense: “Your Money or Your Life” –The Danzon/Fujikawa Defense

24. The Value of Prescription Drugs 14% 21% 24% 32% 35% 36% 43% 63% Health insurance companies Brand name prescription drugs Hospitals Pharmacies Doctors OTC (non-prescription) drugs Medical devices Generic prescription drugs Percentage of consumers rating each of the following a very good or fairly good value Source: Harris Interactive/Wall Street Journal. Aug 19, 2003

25. The Danzon/Fujikawa Defense n The structure of the entire pharmaceutical market n Brand, Branded Generic, Generic and OTC Prices n Purchasing Power Parity Deflators n Innovation: Novel large molecules n Costs of distribution

26. Unit Volume for Branded vs. Generic drugs Varies by Country Source, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs, October 2003

27. Outside US Prices for Generics are Comparable or Higher than US prices Source, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs, October 2003

28. Based on Health PPPs, All countries Except France appear to have Higher Drug Prices than US Source, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs, October 2003

29. Per Capita Use of Newer Drugs is Lower in Other Countries Compared to US Source, Prices and Availability of Pharmaceuticals: Evidence From Nine Countries, Danzon, Fujikawa, Health Affairs, October 2003 US=100

30. The Missing One-Liners n Hey you elderly, stop bitching that Lipitor is cheaper in Canada and learn how to use the proper purchasing power parity deflators n Sure you pay more for brand name drugs but you’re getting young, long molecules n OK, Brand name drugs are more expensive here but at least we aren’t screwing you on generics and aspirin like the Germans n Who would you rather have the money, American drug companies or French pharmacists?

31. The Transformation of Pharmaceuticals n Discover a unique white powder n Search for a therapeutic action n Establish safety and efficacy n Make sure it’s better than available alternatives n Promote to the profession n Get a passive payer to pay for it n Design a white powder with a predictable therapeutic action n Establish safety, efficacy and cost- effectiveness n Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings n Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press) n Get an active payer to pay for it Past Future

32. % of Patients Do nothing Chronic pill popping (Rolaids for Yuppies) Me-too Fast Followers & Generics Higher Price Higher Efficacy Innovative Technology Big Pharma Success Heavy-duty traditional therapy Evidence-based medicine Consumer payment Marketing Demonstration of clinical efficacy Traditional Pharmaceuticals vs. Advanced Therapeutics Cost

33. Happy Biotechnologist Scenario n We have the best stuff n Sure it’s expensive, but it works n Because it works there are savings elsewhere n This is complex – do not try this stuff at home n As generic competition makes costs go down for some technologies, there will be more gross margin left for us n Catastrophic drug coverage insulates consumers from caring about price

34. Biotechnologist’s Nightmare Scenario n Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom n It’s complex brewing not chemistry, but how hard could it be? n Big ugly buyers and providers incensed about price of technology n High efficacy focused on small sliver of needy, desperate patients n Payers/purchasers –Medicare inpatients – the stent effect –Medicare hospital outpatient – the value case –Administering Physicians e.g. oncologists n zero-sum game on incomes n “Plop, plop” vs clinical efficacy –Consumers n Co-insurance on top tier n All drugs in CDHP n Can you pass the NICE/Kaiser Test?

35. Meeting the Business Challenge n Marketing –Increased consumerism: reaching the patient –Sales force Productivity –Doctors as economic gatekeepers for patients –Tiering will continue: positioning products in tiers –Coverage and contracting: PBM negotiations become more complex n Development –Global role of payers in the development process e.g. NICE –Embedding market understandings in go/no go decisions –Regulatory and reimbursement hurdles become more complex n Research –New science versus traditional R&D –R & D Productivity and the only 2 problem

36. Innovation Imperatives n Consumers love new technology n Innovation is you ace in price control debates n But if you don’t truly innovate in a way consumers appreciate and pay for……. n The new environment shifts responsibility for payment increasingly and transparency of pricing to consumers n Delivering innovation to an end user consumer that has value they are willing to pay their own money for n Do not overestimate (even) Americans willingness to trade up n Are we comfortable with overt tiering?

37. Little R, Big D, Enormous M PBMs Pharmacists Payers Patients Physicians Marketing R R R R R R R R R Development Big Pharma Selected Partnerships

38. Five Industry Giants 2014 n The Initial Company n GSKBMSJ&J n The Latin Root Company n AstraAventiNovarticus n The Mother of All PBMs n Advanced MedcoExpress Care-Scripts n AmgenaMerck n Biotech Baby eats an Adult n Pfizer