May 01, 2006
IMS Health Report: The Quest for Propulsion
For years, rocket scientists were stumped by the challenge of powering a rocket with enough thrust to escape Earth's gravitational pull. The answer came through efficiencies that changed the ratio between the booster's power and the rocket's mass. It follows that today, all spacecraft components must have enormous power relative to their size.
Likewise, the US pharmaceutical industry must now improve its ratio of resources to results, making the most of its assets and introducing new efficiencies into its sales and marketing processes. The magic word within the industry is now “optimization.”
In the “glory days” of the late 1990s, pharmaceutical companies met challenges by throwing more resources at them. That paradigm has shifted with four successive years of decreasing sales growth, creating the need to budget more wisely. Last year, US prescription drug sales grew by 5.4% to $251.8 billion, following 8.3% growth in 2004.
For some individual companies, 2005 was a difficult year of transition as they responded to generic challenges, regulatory setbacks, safety-related issues and relatively meager growth from new or recently launched drugs. It was a time to become more disciplined in managing their operating expenses—increasing their expectations of, control over and accountability for every dollar spent. In general, companies have been striving to realize productivity gains of more than 15% a year—an achievement that requires the ability to track and measure return on investment (ROI) for each element of the marketing mix.
Necessity thus became the mother of many optimization inventions. Through various actions, companies demonstrated in 2005 that they are becoming more receptive to learning and applying lessons mastered by other industries. They will undoubtedly be in a better, stronger position as a result.
Global highlights from 2005
- The growth rate in the global market slowed to 7% in 2005, and the US contribution to growth dropped to 34% of the total. This ended a decade of US market dominance that peaked in 2002, when the US contributed 60% to total market growth.
- Growth slowed in the other top 10 markets as well, although they represent $459 billion in sales and 81% of the total market.
- Attention has swung toward emerging markets in Asia (excluding Japan), Latin America and Eastern Europe, where growth is strong. The Chinese market, for example, continued to grow in excess of 20% in 2005. Some companies are already generating more than 10% of their revenue from these regions.
- The overall growth in the market was driven by increases in the number of patients receiving pharmacotherapy and the number of medications patients are taking, along with extended longevity. In general, price affected growth less in 2005 than it had for at least the past five years.
- The number of blockbusters—those products with a market in excess of $1 billion globally—continued to grow, with 17 new products and a total of 94 exceeding the billion-dollar threshold.
- A diverse range of products is in the global development queue, with a total of 5,955 in preclinical or clinical testing as of the end of 2005.
- Prescription sales grew by 5.4%—the lowest rate since 1969.
- The volume of total US dispensed prescriptions rose significantly over 2004, growing 3.8%, up from 2.3% in 2004 and 2.6% in 2003. This increase demonstrates a growing demand for products at lower prices than the market has offered in the past.
- The mail service channel grew more rapidly than retail distribution channels, with 14% year-over-year growth in prescription volume, compared to 4% for chain pharmacies.
- Generics posted strong sales growth of 20.7%, driven both by 2005 launches and the ramp up of products launched in 2004.
- Among branded products, biotech treatments stole the show, posting an eye-opening growth of 17.2%, bringing this segment of the market to $32.8 billion.
- Cholesterol reducers remained the top therapeutic category, in terms of both sales dollars and total prescription volume.
- The rank order of the top five pharmaceutical companies by US sales was unchanged in 2005, while Eli Lilly was ushered into the top 10. Together, the top 10 companies represent 57% of the market.
- For the fifth consecutive year, Pfizer's Lipitor maintained its position as the leading product, with US sales of $8.4 billion. This product alone commands more than 3% of the US market.
- After a spike in the approvals of new molecular entities in 2004 with a six-year high of 36, the FDA approved only 20 in 2005.
- Among the most notable new products to launch were Amylin, Eli Lilly's Byetta (for type 2 diabetes), Pfizer's Lyrica (for neuropathic pain and seizures) and Sepracor's Lunesta (for long-term treatment of insomnia).
- Internet pharmacy traffic fell 23% to $349 million (measured in US dollars), making it a much less significant market issue than two years ago.
- Individual insurance co-pay amounts continued to rise and, in one instance, broke the $100 mark for the first time, strengthening consumers' interest in controlling costs.
- There are early signs that the US public's perception of pharma has improved, perhaps in part because of the avian flu scare. In Harris Interactive's annual survey of consumers' views of the job the pharmaceutical industry is doing, the industry achieved a net score of 13 points positive (56% “good job” minus 43% “bad job”). This is a substantial improvement over 2004's net score of 4 points negative but far from the net score of 60 points positive the industry earned in 1997.
Oncology: highly concentrated growth
From a strategic business perspective, the therapy area of greatest importance to the industry today is oncology. Globally, cytostatics (agents that suppress cell growth and multiplication) alone are second only to statins in dollar sales and are growing faster. And, when taken together, the major oncology segments (chemotherapies, growth factors and anti-emetics) compose the leading therapy area worldwide—ahead of statins.
The total global oncology market is worth more than $28 billion and grew by 18.6% in 2005. By 2009, curative and palliative oncology products will become the single largest class worldwide.
Currently, there are more than 1,500 molecules in development targeting cancer—more than for any other medical sector. Of these, 96 are in Phase III through registration.
Although infusions still dominate, many of the medications in development will take oral forms, which will offer convenience to patients but will cut into clinic incomes. It will be interesting to see how the difference between Medicare Part B and Part D reimbursement policies ultimately affects dosage forms and treatment locations.
At this point, the market is very concentrated. The top 10 players in the worldwide oncology market control 78% of sales, and the top three companies—Roche, Sanofi-Aventis and AstraZeneca—account for 46% themselves. However, many new large and midsize companies are poised to enter the market with oncology compounds that are in Phase II development, or later.
The upshot of all this activity is that multiple therapies will be available for each of the main tumor types, creating a level of competition never seen before in oncology. Already this is the case with Erbitux and Avastin for colon cancer. Success in this new environment will thus hinge on being able to demonstrate differential value.
While it is full of potential, the oncology market is not without its potential issues. Due to the high cost of treatments, oncology is likely to be one of the first specialist disease areas to be targeted by US payers in forcing price moderation. New products will be subjected to intense formulary scrutiny and price assessment as a first step. Eventually, payers may try to limit use to high-benefit populations and to restrict off-label use, which historically has proven so valuable to manufacturers and patients alike.
In the oncology space, in particular, payers around the world—including in the US—will increasingly be using pay-for-performance schemes and health technology assessments to ensure they receive value for their money. Thus far, most of the pay-for-performance measurements in practice tend to relate to treatment protocols rather than health outcomes, although interest in the latter seems to be growing. One of the many challenges with health technology assessments will be to understand what reviewers expect in terms of therapeutic benefit and to ensure that the process achieves its noble purpose of better health outcomes—not restricted choice in the rush to cut costs.
Medicare Part D: preparing for full-throttle
No review of the industry would be complete without a discussion of Medicare Part D. However, the year was really one of anxious waiting for pharmaceutical manufacturers, and the real “story” is unfolding in 2006.
Companies set their strategies in the early part of 2005 and have had to wait the better part of a year to get a sense of how they will fare. The Medicare discount card program of 2005 saw relatively little uptake, so it could not be trusted as an indicator of what was to come once the full benefit was launched in 2006.
During 2005, 46.4 million prescriptions, or approximately 1.5% of all retail prescriptions and far less than the potential volume, were dispensed through the discount card program. However, those beneficiaries who took advantage of it did realize a savings; in total, the program saved $601.1 million in prescription drug costs.
Of note was the fact that the 200-plus pharmacy benefit managers (PBMs) created upward of 3,000 prescription drug plans (PDPs), rather than the 500 to 1,000 the industry anticipated. While there may initially be a great deal of consistency across regions from one plan to the next, this could change. The challenge of contracting with more than 200 PBMs is daunting enough, but having to think about dozens of regional variations with each would wreak havoc for manufacturers.
Interestingly, the three PBMs that have captured the largest percentage of beneficiaries to date—Humana, United Concordia and Wellpoint—each used a different strategy to achieve their goals. Humana was aggressive in its benefit design (offering ultra-low premiums and no deductibles), United acquired PacifiCare to round out its patient base and Wellpoint developed partnerships with key retailers and senior groups to attract patients. It remains to be seen if one strategy will prove more successful than another as time goes by.
Information from the early weeks of the program launch in 2006 reflected the fact that administrative processes were overwhelmed and confusion reigned in the back and forth among states, payers, pharmacists and patients. The percentage of prescriptions paid with cash actually increased temporarily as many beneficiaries presented prescriptions without proof of their eligibility. By February 3, 2006, five weeks into the program, 18 million prescriptions had been dispensed under the plan—10% of the total market. For the 65 and older population, prescription volume was up 4%–5% over the same period the previous year.
In all likelihood, the program will expand the market through 2007, but eventually the downward pressure on pricing and a greater push to generics utilization will cast a shadow on the pharmaceutical industry's benefit from the program. From 2008 onward (after the national election), plan sponsors will systematically employ methods of managing access and uptake, posing challenges to manufacturers to secure favorable formulary positions. And there is the distinct possibility that the government could push for direct price negotiation if private means do not do the trick. (The government is currently prohibited from negotiating price by a noninterference clause.)
Marketing excellence—from the ground up
Thus far, US manufacturers seem to have resisted reacting with a knee jerk to declining sales and, in general, have not cut back promotional spending. Nevertheless, their approach to promotion has changed, starting with the budgeting process. With greater competition for the same promotional dollars across the franchise, brand managers are increasingly required to provide proof of
the return expected from any investment. It is not that the dollars aren't there for the asking. It is just that the asking needs to be accompanied with solid evidence that it will be worthwhile.
Brand managers are being held more accountable for the results they promise, and this is infusing more “science” into a discipline that has always had a strong element of “art” in it.
The importance companies are placing on making their promotion as effective as possible is reflected in the growing popularity of “chief marketing officers” responsible for the overall development and coordination of the company's marketing strategies. Companies are looking beyond individual products and franchises to promote a corporate image and overall brand.
There's also a palpable change in philosophy—a recognition that effective promotion does not necessarily equate to a lot of promotion. No longer is it assumed that more is better. Instead, it is understood that better is better. Effective promotion is targeted, specific, proven-to-work promotion.
With that in mind, companies now have the means and motivation to take a very strategic and comprehensive view of how they allocate their resources—across the portfolio and by brand. Companies that take such a systematic approach are finding that they can often increase sales significantly by redirecting, not necessarily cutting, what they spend.
With respect to direct-to-consumer advertising, 2005 saw a shift toward a more appropriate level of spending relative to the size and nature of a given market, and a desire to only advertise where it is relevant. Growth in spending on TV ads was relatively flat, but the medium was still the industry's leading promotional expense at $2.6 billion (MAT Nov. 2005). The year saw a shift in the nature of TV ads, with a growing focus on disease education and more emphasis given to side effects and the need to consult with a doctor; the days of the “reminder ads” are over. Spending on print advertising, a much more targeted medium, increased significantly to $1.4 billion (MAT November 2005).
It is also likely that public relations will emerge as an even stronger part of the promotional mix. Not only is it less expensive than TV advertising, but communiques from professional opinion leaders lend credibility to the message. This shift has been accelerated by PhRMA's issuance of Guiding Principles for DTC Advertising but has its roots in the need to make every promotional dollar work harder. In the early days, there was little science in the use of DTC resources. Now, advertising experts are helping to shape the message and focus spending where it will best achieve the goals of the campaign.
The same is true with professional promotion. The trend is definitely toward developing a precise understanding of the physician's motivations and behaviors. With this deeper level of segmentation, pharmacos are learning what promotion receives the best response, by segment and by physician. Thus, they can be more specific and targeted than in the past, with a consideration for local market issues. This is particularly true of messaging. A company is more likely now than ever before to craft specific messages for specific prescriber segments for a specific use of a brand. Not surprisingly, there's been an infusion of consumer-packaged-goods executives into pharma companies in recent years. These executives are well versed in advanced segmentation techniques and are helping their new firms understand their clients more precisely.
However, segmentation doesn't simply impact messaging. More companies are using segmentation insights to drive their sales force resource optimization decisions. Simply put, understanding physicians and their responses to promotion helps a company better allocate their scarce resources.
Putting more “force” in the sales force
For the past three to four years it has been clear that the number of sales representatives for office-based physicians in the US marketplace was, like a swollen river, straining its embankments. Still, no company could bring itself to get out of the raging current. Finally, in 2005, the dam burst and three of the largest players—Pfizer, GlaxoSmithKline and Wyeth—announced major reorganizations of their US sales forces. Pfizer and GSK used attrition to trim their ranks, whereas Wyeth cut deeply through transitioning 30% of its head count to part-time sample distributors.
While it is too soon to declare the “arms race” of the past few years over (it has been predicted regularly since 1960), the pattern has at least been interrupted. The market saw a substantial decline in the number of details received by physicians in 2005 over the prior year—down 14.7% in primary care products and 3.9% in specialist products. While some adjustments to the number of details reflect changes in the product portfolio, others stemmed from the realization that it should be possible to alter sales structures while optimizing growth.
There is no question that the need to come to grips with the productivity of the sales force is high on the management agenda of every major pharmaceutical manufacturer. It is easy to imagine that since Pfizer, GSK and Wyeth made their announcements, every other VP of sales in the country has been asked, “What are we going to do about our sales force?” Ideally, the question is, “How can we best use our sales force to optimize profitability?” It is not just a matter of cutting, and perhaps not one of cutting at all. It is a matter of ensuring that sales resources (including sampling, dinner meetings and details) are directed at the physician segments most responsive to that particular channel of promotion. By better understanding their customers and deploying resources accordingly, pharma companies will be able to optimize their operating income via a more precise marketing mix.
Historically, pharma has followed a spending model that directed the lion's share of resources to the back end of the sales management continuum—on setting alignments, call plans and compensating reps. Companies that want to get more bang for their sales buck are realizing the need to invest in the earlier steps in the process, beginning with physician segmentation.
If marketers don't thoroughly understand their customers and the differences between them, decisions they make downstream—such as how often to call on them—will be less than optimum. It's a new rendition of the old “garbage in, garbage out” maxim.
Consider two “decile 10” physicians. If a company approached both in the same way with 24 calls per plan of action (POA) cycle, without heeding the fact that one makes time only for medical science liaisons, while the other is amenable toward reps but conscious of managed care constraints, there's little doubt that they'd have more success with one than the other.
Interestingly, specialty pharma companies have been quicker to recognize and adopt this than top-tier companies, simply because they've had to be more precise in how they spend their money in order to compete with the giants in the market.
At its best, physician segmentation takes into account volumetric measures of the physician's performance, longitudinal behavior and managed care profiles, and integrates them with attitudinal information gathered from primary research. For the segmentation to be actionable, this information must first be analyzed, then discrete segments formed and segment membership for all prescribers predicted. This last piece is the most difficult, but without it, segmentation is not usable by a sales force.
The result of segmentation drives the next step, which is to test the promotional responsiveness of each segment to each form of promotion and to forecast the financial return to be had. Then it is a matter of optimizing message, method and frequency of delivery, again segment by segment, either across the portfolio or brand by brand. These findings eventually inform decisions about the sales force size, structure, call plans and reward system. In this way, it is possible to find the optimum balance between costs and profit—the peak of the curve.
Currently, companies that go through this business planning exercise tend to do it only once a year due to the extensive time and expense required of the historic approaches. However, with new analytical engines, it is now possible to refresh the entire process quarterly (indeed, the parameters can be refreshed virtually on the fly) so that quarterly POAs can be done with most current and precise information instead of information that is up to a year old. Dale Hagemeyer, Gartner's customer relationship management analyst, has indicated that this constitutes real-time CRM in the pharmaceutical industry, as the information and insights are as fresh as the quarterly plan. This doesn't compare to the real-time analyses done in the fast-moving consumer goods industry, but the day is coming in the next few years when it will. Three to five years hence, companies will have the benefit of continuous POAs, dynamic targeting and dynamic alignments.
So, what new structures have companies been creating as they find the sales approaches that work best? Wyeth has created a sampling force—part-time representatives charged only with delivering samples; others have dispensed with their mirrored forces so that a single rep can build a deep relationship with a given physician, while still others have created structures of primary contacts backed by product specialists who are called in as needed. Some are even experimenting with sales territories that carry as few as 25 prescribers; the goal of the sales representative is to build the deepest relationship possible without regard to frequency.
Realizing the power of APLD
Given their operating environment, US pharmaceutical companies are becoming more thorough in looking for growth opportunities, more intent on proving the value of their product and more eager to react immediately to any hint of underperformance in their sales and marketing execution. Consequently, companies are seeking a solid understanding of physicians and the patients they treat through anonymized, patient-level data (APLD). By having a better understanding of the treatment context, the underlying drivers of physician behavior and the resulting impact on patient outcomes, they can improve their growth prospects in new ways.
To spot new opportunities, companies can now use APLD to model the flow of patients through the treatment process to understand where their products fit into the larger picture and to identify where they should be directing their marketing efforts. Is the issue that patients with certain conditions don't present themselves for treatment? DTC may be the answer. Is it that physicians don't administer the appropriate test to make the diagnosis? Physician education may be the answer. Is it that physicians are prescribing a competitor's product? A change in message may be in order. Is it that patients are switching off of a product before a new dosage is tried? Again, physician education may be required.
Increasingly, with private managed care organizations and now with Medicare Part D, companies are called upon to prove not only the safety but also the cost-effectiveness of their products. APLD supports evidence-based healthcare by providing measures of health outcomes in the real world.
It is possible to measure changes in patients' healthcare utilization—information that can form the basis of negotiations with managed care organizations. By the same token, APLD reveals the types of patients who are taking a medication, for post-marketing surveillance.
APLD also supports marketing excellence by using the same metrics to measure sales results as were used to set the marketing goals in the first place by revealing the types of patients being treated. The prescription volume a product generates is certainly one gauge of a product's success in the market, but without insight into the types of patients who are using those scripts, a brand manager cannot tell if the target population is being reached and if the plan is being met. Even if prescription volumes are on target, APLD may still reveal a huge untapped market for growth from an underserved population.
2006 market outlook
The US pharmaceutical market will continue to grow at a compound annual growth rate of 5%–8% over the next five years. New product launches will contribute to growth, along with recovery from Cox-2 withdrawals and increased pharmaceutical utilization through the Medicare Part D prescription drug benefit.
In the near term, the outlook for blockbusters continues to be positive, with strong results from such products as Tamiflu, Concerta, Vytorin, and Boniva, all of which seem destined to cross the billion-dollar threshold to become blockbusters.
In the longer term, we see more challenges looming: the prospect of a tighter price environment in the US market and the resulting pressure on pharmaceutical manufacturers to forego annual price increases in older products. One prime driver will be the flood of generic introductions; more than $19 billion worth of products are expected to lose their patent in the US in 2006 alone. Another will be the Centers for Medicare and Medicaid Services, which will focus on aggressive controls over growth in prescription drug spending.
Such external pressures are inducing US pharmaceutical companies to pursue new revenue opportunities, practice greater discipline in budgeting, avail themselves of new tools for marketing excellence and enhance the efficiency of their sales forces. All this will optimize the impact of their sales and general administration expenses, ensuring that they are not only put to good use but to the best use—a critical success factor for the times ahead.
Diana Conmy is corporate director, market insights, at IMS Health