In my previous column, I discussed how pharmaceutical and medical device companies are adapting their commercial model approaches in critical areas to address growing economic, market and other competitive pressures. This adaptation is underscored in our new Numerof & Associates 2023 Commercial Model Report, which reveals the strategic changes that manufacturers are making in how they engage with customers, manage large enterprise accounts and restructure their sales teams. Our survey also found that manufacturers are being forced to quickly rethink many other long-held assumptions about their commercial model playbook, prompted by profound shifts taking place in the global regulatory environment.
For some time, U.S. manufacturers have been bracing for the impact of the Inflation Reduction Act (IRA) and its drug price “negotiation” provision, now law. The IRA was a stunning and predictable legislative defeat for big pharma, as I explored in a previous column. While it is the most significant U.S. healthcare policy change since the passage of the Affordable Care Act (ACA) and Medicare Part D, what has now come to pass is just the tip of the regulatory iceberg.
For years, countries in the EU have been trying to reduce the high cost of prescription drugs, and are far ahead of the U.S. with regard to government price negotiation. Germany offers a case study.
In 2011, the country enacted the Pharmaceutical Market Reform Act (AMNOG). This measure subjected new drugs coming to market to more stringent clinical standards, meaning these drugs had to demonstrate the ability to improve overall survival (OS) against existing treatments, as opposed to progression free survival (PFS), which had been previously used as a measure of value. Recently, Germany has taken additional steps to make this measure even more concerning.
Last year, the country passed the “Financial Stabilization of the Statutory Health Insurance System” law. This regulation stipulates that prices for new medicines must be capped at the price of “patent-protected comparators” if the new drugs offer only “minor” or “non-quantifiable additional benefit” relative to the current standard of care. In many cases, the comparator is generic.
Alexander Natz, secretary general of EUCOPE, a trade group representing small and mid-sized European pharmaceutical and biotech companies, said of these measures: “this is a big change that limits how much companies can negotiate.” He added, “around two thirds of new products get a minor or non-quantifiable rating and companies are concerned.” Among other changes, the law also requires manufacturers offering a combination therapy drug to accept a 20% markdown.
As I explained before, this further tightening of the regulatory environment has huge financial implications for manufacturers in terms of the cost of research and development (R&D). If they must collect overall survival data, it adds years and significant costs to development, and if in addition they are forced to take a mandatory markdown because the combination drug isn’t “new”, it may dissuade them from launching such products in the German market. It may even convince them to not pursue such products if the return is to be so arbitrarily limited. As a result, we may see manufacturers cut back on advanced clinical trials. Patients, especially those with life-threatening illnesses like cancer, stand to lose here. We see the ramifications already unfolding.
Earlier this year, Bristol Myers Squibb (BMS) announced that it was scrapping the launch of its cancer drug Opdualag, to treat advanced melanoma, in Germany due to the country’s stringent comparative pricing structure. Other companies have made similar decisions. Across Europe, other winds of change are afoot.
Earlier this year, the European Union (EU) proposed sweeping industry reforms to its existing pharma regulatory framework. This includes shortening the exclusivity period of new drugs coming to market by two years, which one pharmaceutical executive said could have a “catastrophic impact” on R&D. But even before the new EU proposals were rolled out, some pharmaceutical companies were already rethinking their market priorities. As another major drug company executive said, “we are really shifting our commercial footprint and the resourcing of our commercial footprint much away from Europe.”
So, given all these titanic shifts taking place, the question is: what implications does this hold for the future of the commercial model, especially in the wake of the IRA?
One important finding of our Commercial Model survey was that interviewees expect the law to have broad downstream impacts on both their portfolios and pricing. Specifically, if a product is selected for negotiation, and therefore subject to deep discounts, the implication is that other competing products in that drug’s class could also be subjected to heavier negotiation with commercial payers and Pharmacy Benefit Managers (PBMs). As one executive told us, “even if you do not have a product that is scheduled to be negotiated by the government in the first couple of rounds starting in 2025, you are naïve if you don’t feel you will be affected by the IRA.”
Interviewees also said that they are rapidly evaluating the near-and long-term impacts of the IRA. This includes revisiting their product pipelines to identify disease states/products most insulated from government price controls as well as pressure testing their current pricing strategy to insulate products from IRA-associated rebates while ensuring optimal ROI. Additionally, manufacturers are looking at other countries where barriers to market entry are less onerous to ensure sustainable growth, while mitigating risk.
It’s clear that the push by policymakers to rein in the pharmaceutical industry through regulations that force lower drug prices shows no signs of slowing. Therefore, manufacturers need to urgently re-examine their core assumptions about budgets and underlying costs, profitability and commercialization strategies, among other considerations. As one executive said, “the industry will continue to innovate. They have to innovate. But how they innovate will be very, very different,” than before.
The policy and regulatory landscape has forever changed–and as the damage caused by government imposed price controls continues to unfold, both in the U.S. and abroad, the forecast portends more difficult days ahead for an industry in the throes of transition.