How biopharma companies can thrive in the era of megamergers and shrinking budgets
The historic $160 billion Pfizer-Allergan deal is a big deal—in fact, it's the biggest deal ever, assuming all goes as planned. However, the only thing that makes it unusual is the size of the two companies involved. This deal is really just a super-sized example of an M&A trend that James Crowley, managing director of life sciences strategy at Accenture Life Sciences, said will continue unabated into the foreseeable future.
There’s more. Crowley pointed to a broader consolidation trend that includes not only biopharma companies, but insurers, pharmacy benefits managers and hospitals and healthcare systems. Five payers now control 50% of covered lives in North America, and integrated delivery networks (IDNs) now own 60% of physician group practices.
Add to that the fact that there have been $220 billion worth of biopharma deals for the first nine months of this year, not to mention the Pfizer-Allergan merger, and the trend is clear.
M&A as part of a larger strategy
But does being bigger mean being more profitable? Does it guarantee success? Does standing on the sidelines of the M&A frenzy put a company at a competitive disadvantage?
It depends on how you look at it, but according to Crowley, reshaping business models is one of three key ways that companies can be successful in what is becoming an increasingly competitive and complex marketplace. It’s absolutely true that M&As are an important part of that strategy—a way to recast the traditional in-house R&D model—but there are other ways to reshape business models.
Companies are leveraging their portfolios by purchasing options to products at early stages of development. It’s a way to leverage capital, minimize associated risk and continue to shore up the core therapeutic areas of focus.
Last year, for example, Pfizer bought exclusive worldwide options from Medgenesis for GDNF, a protein that has demonstrated therapeutic potential for Parkinson’s disease. Although the results of the proof-of-concept study won’t be available until next year, if the results are positive, Pfizer has first dibs in all markets.
Another shape-shifting strategy that is being used is the development of companion diagnostics—something which has become part of Roche’s R&D model. Sixty percent of the drugs in Roche’s current pipeline are being co-developed along with biomarker-based diagnostics.
The Value Proposition
The context in which companies are making restructuring decisions is challenging. Operating margins for 11 of the top 16 pharmaceutical companies have fallen by 3% over the last several years. Plus, although the biopharma market is becoming more competitive, it is growing at a slower rate this year compared with 2014.
"Margins are being stretched and companies are bumping up against the limits in the market’s capacity to pay," Crowley explained.
With an overall 13.2% drug price inflation rate and a 25.2% rate for specialty drugs, price sensitivity is increasing. Payers are making decisions based on their own value assessments, while using strong-arm negotiations in which companies are left to compete for top-tier formulary placement.
Fortunately, there are ways that companies can adjust their business models to address the value issue preemptively, including cost-effectiveness clinical trials. Investing heavily in upfront economic, value-oriented analysis can pay off a great deal downstream.
"Clinical trial design should address not only safety and efficacy, but also value," said Crowley. "It’s an opportunity to push boundaries, with the goal of putting economic, value-based data in the product label."
Cross-market, cross-effectiveness trials
Several years ago, Roche wanted to determine whether or not Tarceva (erlotinib) was a cost-effective option for first-line maintenance treatment of patients with non-small cell lung cancer (NSCLC). By developing an economic decision model using patient-level data for progression-free survival (PFS) versus overall survival, researchers were able to determine the cost per life-year gained. In the final analysis, they found that Tarveca is cost-effective for that indication.
Although Roche’s cost-market, cost-effectiveness study was unique in terms of its specific design, there are numerous cost-effectiveness studies being designed and executed. However, many argue that a proper cost-effectiveness trial should be conducted in real-world clinical settings—meaning after the drug is approved.
Generally, reimbursement decisions are made shortly after a drug is approved for a specific indication. Companies that come to the table with a clinical dossier, as well as a reimbursement dossier, are better prepared to address the value issue head on. However, when companies are pursuing additional indications for a drug that has been on the market long enough to collect patient data, then cost-effectiveness trials can capture real-world data to better assess value.
The big takeaway here, according to Crowley, is to be value-driven.
Leveraging big data to address problems, improve efficiency
Big data is not new, but there are many new ways to leverage data analytics across the board—including everything from optimizing drug development, to designing clinical trials, to improving commercial outcomes. This is what Crowley calls "extending brainpower."
Citing an example that affects payers, Crowley referenced Accenture’s research on the impact of using data analytics to identify and target individuals who are pre-diabetic—a total of 86 million people in the U.S. The analysis found that by providing a support system for these patients that includes diet and lifestyle changes, companies can save money. The net result for payers, according to the analysis, would be $3.8 billion per year. Equally important, individuals enrolled in the program would benefit, by having a 20% reduced risk of progressing from pre-diabetes to diabetes.
By combining large amounts of disparate data including clinical-trial data, real-world data, economic data and subjective-feedback data from patients about their experiences, it is possible to design models that can reduce long-term costs.
Putting it all together
Using a proprietary methodology, Accenture has projected the CAGR for top-performing companies versus the rest of the peer group. Based on the results, anticipated average CAGR between 2015 and 2019 for top-performing companies is 4.7%, compared with a meager 1.1% for other companies.
What that means for top-performing companies, including Novo Nordisk, which is expected to have a CAGR of 8% between 2015 and 2017, is that they enjoy competitive advantages even if they are not entering into mega-mergers.
In fact, there are six companies in the small universe of top performers, and neither Pfizer nor Allergan are included. The top-performers, including Astellas, Novartis, Roche and others are benefiting from the efforts they have been making to reshape their businesses, demonstrate value and leverage the vast capabilities of data analytics.
The focus on value increases every month, and as more specialty drugs are launched, payers will become even more stringent about the need to demonstrate value both clinically and economically. In the final analysis, though the margin for error has decreased, opportunities to thrive in the evolving biopharma market still abound.