1. The Future of the Global Pharmaceutical Industry: The Quest for Value Ian Morrison www.ianmorrison.com

2. Page 2 Outline n Good News/Bad News n The Quest for Value n Long Term Scenarios for the Global Pharmaceutical Industry

3. Page 3 Good News: The Top Ten n Healthcare is a superior good n Innovation makes a difference in human health n Powerful New Science n Stem Cell Research Everywhere n Global infatuation with technology n The Obesity epidemic and the aging of the planet will drive raw demand for drugs, devices, and healthcare services n The elderly now have coverage in the US n Consumers and providers are swayed by sales and marketing n The marginal cost of the next pill is small n Bush is in the White House

4. Page 4 The Bad News: Top Ten 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  Are these new drugs safe anyway?  How many hoops do we have to jump through? 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

5. Page 5 How U.S. 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

6. Page 6 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

7. Page 7 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

8. Page 8 Number of Medicare Beneficiaries Soars Beginning in 2010 Source: HCFA, 2000; Census Bureau 2001

9. Page 9 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

10. Page 10 The Five-Tier Formulary Old Generic New Generic Rebated Brands Non-Rebated Brands Look Good / Feel Good Lowest Copay Highest Copay and/or Coinsurance

11. Page 11 James Brown and Fernando Lamas Effect Mortality Morbidity Mobility Feel Good Look Good Quality of Life Affluence of the Individual or Society End-Point

12. Page 12 “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

13. Page 13 Out-of-Pocket Medical Costs in the Past Year Percent AUS CAN NZ UK US 2004 Commonwealth Fund International Health Policy Survey

14. Page 14 Cost-Related Access Problems Percent in the past year who due to cost: AUSCANNZUKUS Did not fill prescription or skipped doses 12911422 Had a medical problem but did not visit doctor 17628429 Skipped test, treatment or follow-up 18820227 Percent who said yes to at least one of the above 291734940 2004 Commonwealth Fund International Health Policy Survey

15. Page 15 Treatment compliance problems Across the board, HDHP consumers have more compliance problems * Currently insured in employer-sponsored or self-purchased plan ** Currently enrolled in high deductible health plan

16. Page 16 Formularies: Who Makes What Decision? Sophisticated Formulary Decision-Making involves: 1. How severe is the underlying disease, or is it self-limiting? 2. What is the cost of treatment, comparing drug and non-drug alternatives? 3. What is compliance with therapy? This is important, because if patients do not comply with certain therapies, the benefit of treatment falls off dramatically. 4. Is the treatment curative or is it palliative? First funding priority is for products which cure disease. 5. What is the complications profile? 6. What percentage of patients do well on therapy? Use these criteria for reimbursement coverage and sophisticated benefit architecture A Hypothetical Example: Statins n Crestor: 50% coinsurance n Lipitor: $40 Allowance n Generic Mevacor: $15 co-payment Porridge: $5 coupon from CMS and the Scottish Parliament

17. Page 17 The Key Challenges for Bio Pharma n Price  Re-importation is a symptom  Cost-effectiveness in formulary design  Reference pricing  World pricing n Innovation  Show me the molecules!  Show me the safe molecules! n Value  “Saving Lives and Stamping out Disease”  Demonstrating Benefits that payers can detect and are willing to pay for  Value In use (in real life) not just in the idealized circumstances of clinical trials

18. Page 18 Health Care Products & Services Rated on “Value For Money”

19. Page 19 Global Pharmaceutical Prices, 2001 International Price Comparisons, Australia =100, Fisher index Source: Center for Strategic Economic Studies, Victoria University, Working Paper 19, Kim Sweeny, April 2004

20. Page 20 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

21. Page 21 % of Patients Do nothing Chronic pill popping (Celebrex) 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

22. Page 22 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

23. Page 23 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 Can you pass the NICE/Kaiser Test? n True Innovation will always be rewarded but payers see innovation differently from pharmaceutical companies

24. Page 24 Scenarios for the Global Pharmaceutical Industry High Technology for Human Health Harmonization Division High Innovation Low Innovation Long Division Consumer Empowerment Global Harmonization

25. Page 25 High Technology for Human Health: Scenario Summary n Global acceptance of medical technology as the key to longevity and quality of life for the global baby-boom n Accepted definition of human health and well being extends to quality of life issues such as appearance, sexual function, and sense of well-being n The New Millennium belongs to molecular biology not silicon n The fruits of R & D creates new, innovative and cost- effective technologies

26. Page 26 High Technology for Human Health: How the Scenario Happens n Medical breakthroughs receive broad public acclaim n Public opinion favors science and technology in creating clinically superior outcomes that matter to individuals n Proportion of population using and valuing health care technology increases sharply n Public health weaknesses exposed by bio-terrorism threats n Growing understanding that pharmaceuticals, technology and public health are the key n Therefore, Aging baby-boom values both individual patient interventions and broader population based societal responses such as public health (the selfish and the selfless) not just in the U.S. but around the world

27. Page 27 High Technology for Human Health: Industry Responses n R&D Intensive Pharmaceutical industry commits to using science, technology, and educational capacities to enhance human health and well being on a global basis  Global Research Consortia (Sematech Model) established on basic science, orphan drugs, AIDS and vaccines for the Third World  Partnerships developed with public health stakeholders to measure, monitor and manage chronic diseases (such as asthma and diabetes) and eliminate preventable diseases (such as tuberculosis)  R&D engine embraces new tools to create drugs faster, better, cheaper and works with global regulators to bring drugs to market faster  Promotion is based on science and clinical acceptance (pull model) not push model  The Public wants ScienceCare  The Public wants science that is safe, effective and Green

28. Page 28 High Technology for Human Health: Industry Responses (continued)  Industry focuses DTC ads on compliance and public health issues as well as product marketing  Disease State Management reframed as a public health and compliance issue: optimal chronic care  Industry works with media, public opinion surveys and spokespersons to reinforce extended definition of health and well being to include end-points of well-being and quality of life. Focus on issues such as pain and cancer; appearance, anxiety and depression; mobility and active lifestyle enhancers, and sexual dysfunction.  Promote “Clinical Patient Bill of Rights”: pain free, optimal medication,compliance with prescribed treatment,and responsibility for healthy lifestyle

29. Page 29 Global Harmonization: Scenario Summary n 20 year Global convergence of health systems: around universal tiered coverage with consumer payment n Healthcare R&D processes are globalized as regulators are harmonized and plug compatible in Europe, Japan, and U.S. n Pricing and costs more harmonized as global budgets in Europe and Canada are supplemented by consumer willingness to pay n In U.S. universal tiered coverage, and reference pricing by private payers leads to lessening of cost and price differentials with the rest of the world

30. Page 30 Global Harmonization: How the Scenario Happens n European Community harmonization of currency and regulation including pharmaceuticals leads to further globalization of R&D, pricing and finance n U.S. begins to adopt technology assessment and budget controls as inevitable components in the base programs of Medicare, Medicaid and basic private coverage n Europe, Canada and Japan accepts limits to social/mandatory insurance and embraces (reluctantly)a greater role for consumer payment and supplementary insurance

31. Page 31 Global Harmonization: Industry Responses n Pharmaceutical industry becomes a globally integrated business with global scale and cost structure  Consolidation of the industry into four or five major companies  R&D economies of scale particularly on development and commercial market launches  Global outsourcing to achieve economies of scale and scope  U.S based experience with DTC, tiering, and pluralism pays huge dividends in the emerging tiered markets of Europe and Japan  The industry responds to a global healthcare business

32. Page 32 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

33. Page 33 Global Harmonization: Industry Responses (Continued)  Industry pushes for DTC ability in other countries  Industry leads and supports efforts to standardize and harmonize global regulatory processes  Industry supports tiering and public policy initiatives globally that make markets similar  Industry focuses on global efficiency and scale in all key areas finance, marketing, DTC, regulatory affairs, and R&D

34. Page 34 Long Division: Scenario Summary n Healthcare systems globally are caught between an unwillingness to raise taxes and consumer resistance to paying out of pocket for care or for supplementary healthcare insurance n Growing division between countries and within countries based on individuals ability to pay n Technology is very unevenly distributed based on the specifics of coverage and income n Desperate stakeholders such as poor countries, payers or patients use desperate measures such as electronic smuggling, ignoring IP rights, and rigid price controls or reference pricing to limit exposure to rising costs of drugs

35. Page 35 Long Division: How the Scenario Happens n Ability to pay for pharmaceuticals becomes a key issue for government, business and households around the globe in tough economic times n Consumers unwilling to pay much out of pocket for supplementary insurance or co-payments n When pushed to pay more, consumers trade down more often than they trade up n A cascade of “best pricing” responses take place: Large payers in U.S. want VA prices, governments like Canada want Indian prices n Many countries simply ignore patent and intellectual property claims

36. Page 36 Long Division:Industry Response The Pollyanna Alternative n The Pharmaceutical industry commits to making necessary drugs available to the neediest and to promoting the value of pharmaceuticals  Industry supported drug coverage for the neediest groups particularly the low-income elderly in the U.S.  Free medicines for certain low income patients with chronic diseases  DTC and marketing efforts concentrated on segmenting the population based on need and ability to pay  Industry unites to make the value of pharmaceuticals case and forestall states, private payers, and nations who want to usurp intellectual property rights and pricing freedom  Global effort by industry and humanitarian groups to focus on providing AIDS drugs to the global community

37. Page 37 Long Division:Industry Response The Tough it Out Alternative n The Pharmaceutical industry fiercely defends their intellectual property rights using legal and macro-economic defenses  Industry strongly supports intellectual property rights globally and finds common cause with other high technology industries such as software and semi-conductors  Appeals to governments (particularly in Europe) that pharmaceuticals is a key element of the economic base for the 21st century  Industry defends right to set prices for new products  Industry makes the value case, that R&D yields off-setting health benefits

38. Page 38 Consumer Empowerment: Scenario Summary n Consumer Empowerment means the consumer has to pay more out of pocket n Globally consumers embrace the principle you get what you pay for in healthcare n But, drugs have become insurable events and consumers prefer implicit and explicit subsidies for their drug insurance coverage by employers and government n While some healthcare systems remain more socialized than others, healthcare consumerism grows globally n Consumers recognize the value of and demand access to specific healthcare technologies and brands n Consumers are willing to pay for care that they see as valuable (both as taxpayers, premium payers, and patients) provided the costs are shared among stakeholders

39. Page 39 Consumer Empowerment: Industry Responses n The Pharmaceutical industry commits to supporting the empowerment of consumers including consumers being asked to pay more (albeit with significant subsidies) for better health care technology, information and service  Industry works with consumer advocacy groups to encourage a larger patient voice and better insurance coverage for the care of chronic diseases  Industry supports supplementary coverage initiatives  Industry comes to terms with open-access tiered formularies  Industry supports efforts to increase the information available to consumers e.g. multi-company disease-specific websites

40. Page 40 Consumer Empowerment: Industry Responses  Individual companies compete fiercely for hearts and minds of segments and individual patients  Disease State Management retooled for either genomic- based mass customization or public health improvement  Industry encourages market-based, consumer pay models globally  Industry accepts continued movement of potent medications to OTC? If not why not?

41. Page 41 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 and reference pricing  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

42. Page 42 Little R, Big D, Enormous M PBMs Pharmacists Payers Patients Physicians Marketing R R R R R R R R Development Big Pharma Selected Partnerships

43. Page 43 Innovation Imperatives n Consumers love new technology n Innovation is your 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?

44. Page 44 Implications n Value needs to be demonstrated everywhere but increasingly in the US n Cost-effectiveness in end use will be a hurdle that payers will use to decide on reimbursement n Patients will be engaged through benefit design and incentives n The Coming Development Paradox  Even though we are all moving in the same direction the development process will become more complex and pluralistic because payers are demanding more and more sophisticated information n None of this will make drug development any cheaper n The Industry will need to radically redesign its own strategy and business processes

45. Page 45 The New Business Model: Some Final Thoughts n Demonstrated Scientific Innovation will always win n Payer sensitive innovation  Novel Clinical pay-off compared to all available therapies  Payer’s dream: reduction in PMPM cost for therapy n Radical restructuring of the sales and marketing function  Focus on evidence and guidelines  Consultative selling  Reduction in traditional channels  Making the value case to end user consumers  Focus sales effort on compliance, adherence and persistence among chronically ill not just new Rx n Conditional Approval to Market Entry  Monitoring in real clinical use  Reference Pricing n Global Scale, Global Pricing, Global Product Launches n It is still a great business