Much has been written about the difficulties biotechnology and pharmaceutical companies (biopharma) have been experiencing in maintaining profitability. Gone are the halcyon days of marketing a me-too product with slight or no incremental benefit; relying on hoards of sales reps to garner sales with easy-to-see physicians. What happened since those good old days? Doctors are much harder to see, formularies and insurance programs place restrictions on use, patients are better informed on treatments, and generics represent 80% of prescriptions. It is my belief that though the future is challenging, it promises excellent upside potential for those companies that can maneuver and recreate themselves to overcome the obstacles now in place. Brief reviews, commentary, and quick recommendations to pursue to convert challenges into profitable opportunities follow.
The topics to be covered include:
December 2012 key economic performance indicators data for the 215 industries tracked by Yahoo Finance show that "Drug Manufacturers-Major" has the highest Net Profit Margin of leading market capitalization industries (shown are the industries comprising 80% of total market capitalization as defined by Yahoo Finance).
|Industry||Market Cap||P/E||ROE %||Div. Yield %||Debt to Equity||Price to Book||Net Profit Margin (mrq*)|
|Major Integrated Oil & Gas||118,841||4.2||14.2||3.486||26.629||2.06||6.5|
|Money Center Banks||116,140||11.3||6.7||2.333||78.238||1.24||10.2|
|Drug Manufacturers - Major||54,679||17.2||15.8||3.695||85.112||19.89||16.7|
|Industrial Metals & Minerals||46,822||14.9||24.6||3.012||36.425||4.47||26|
|Computer Based Systems||31,536||13.1||14.1||5.085||153.507||3.14||6.4|
|Multimedia & Graphics Software||29,141||64.6||4||1.618||15.864||5.9||5.1|
|Auto Manufacturers - Major||26,006||25.3||7.9||1.783||123.398||1.78||2.9|
|Recreational Goods, Other||17,661||32.2||12.1||0.342||110.282||5.03||5.1|
|Aerospace/Defense - Major Diversified||16,579||8.5||17.1||2.788||94.817||-48.55||7.2|
|Food - Major Diversified||16,220||21.1||9||3.22||75.036||-2.97||5.2|
|Tobacco Products, Other||13,999||18.7||8.1||3.169||263.765||1.07||2.2|
|Beverages - Wineries & Distillers||12,428||18||24.1||2.633||129.253||-22.74||17|
|Chemicals - Major Diversified||11,188||17.4||19.6||3.101||60.499||10.03||7.6|
|Information Technology Services||10,644||22.5||11.7||1.891||9.924||8.37||5.6|
|Independent Oil & Gas||8,940||16.8||11.4||1.904||32.374||2.28||8.2|
|Oil & Gas Refining & Marketing||8,865||14.1||15.3||2.243||383.132||2.08||3|
|Beverages - Brewers||8,272||17.9||20||1.534||57.619||-12.03||20.3|
|Property & Casualty Insurance||7,265||21.8||7.9||1.742||77.936||1.59||8.7|
Within the health care industry sector, the "Drug Manufacturers - Major" segment maintains Net Profit Margin leadership. The margins for other segments are comparatively lower by significant multiples.
|Industry||Market Cap (billions)||ROE %||Div. Yield %||Net Profit Margin % (mrq)|
|Drug Manufacturers - Major||54,679||15.8||3.70||16.7|
|Drug Manufacturers - Other||206||13.4||1.19||14.1|
|Medical Appliances & Equipment||1,700||14.1||1.76||13.7|
|Medical Instruments & Supplies||369||13.5||1.62||13.6|
|Drug Related Products||20||14.9||1.31||9.5|
|Specialized Health Services||22||17.6||1.78||9.4|
|Drugs - Generic||1,291||7.6||0.13||6|
|Home Health Care||6||12||1.52||5.7|
|Health Care Plans||491||17.2||1.38||4.5|
|Long-Term Care Facilities||28||2.4||0.51||0.9|
|Medical Laboratories & Research||104||1.5||1.19||0.8|
Profitability, at least as measured in terms of Net Profit Margin, is comparatively high for Drug Manufacturers. For the industry to maintain this level of financial performance (that has come to be expected by Wall Street) has been the challenge for company leadership. Some of the most common responses by companies to this challenge have been:
Many of these reactions only provide short-term relief and do not address the fundamental challenges that require companies to reinvent themselves on a continual basis. Those companies that can evolve with the changing conditions will be able to maintain or exceed profitability goals.
Understanding a nation’s demographics and related disease epidemiology improves the understanding of populations at risk of disease and the potential need for medical treatment. Importantly to biopharma, demographics and disease epidemiology are also key drivers of the need for reforms in health care policies and related financing strategies. The evolution of health care reform and financing are key forces that biopharma needs to address and to adapt to in order to ensure future success. As neither demographics nor epidemiology are easily and quickly altered, biopharma must develop adaptive strategies to compete in the new environment being mindful of the opportunities these provide.
First, let's take a look at epidemiology.
Epidemiology is defined by Merriam Webster as:
HONDAs (patients who are/have Hypertension, Obesity, Non-compliant, Diabetics, Asthmatics) are a prime example of the importance of epidemiology in assessing the importance and corresponding value of treatment. This patient group reportedly accounts for 25% of patients but for 70% of health care cost. Obviously, any improvements made in pharmacological treatments and/or medical care practices that would change outcomes in these patient would have significant impact on health care costs.
Let's review just one treatment scheme for improving health for type 2 diabetics as an illustration of the opportunities for biopharma to provide value for both health care and branded products:
Sandra Tunis, in “Cost effectiveness of self-monitoring of blood glucose (SMBG) for patients with type 2 diabetes and not on insulin: impact of modeling assumptions on recent Canadian findings”, studied the benefit of SMBG in type 2 diabetes patients not on insulin, based on its potential to help manage glycemic control, and thereby reduce the risk for diabetes-related complications.
Study conclusions that are related to how challenges facing biopharma may be converted into opportunities:
The highlighted sections are potential areas of opportunity for pharma:
The world's population is 7.1 billion and that of the US is 315 million (4.5% of total world). Assuming that the ancient Mayan's prediction of the end of the world has safely passed us by, an understanding of the world's and the US' burgeoning populations and their characteristics are essential to developing current and future strategies both for biopharma and for all of us as citizens of the US and the world.
Aging and the Macro-economy: Long-Term Implications of an Older Population", published by the National Academies Press, provides an excellent analysis and assessment of population and its impact on the economy, health care, and way of life in the US.
The report states: "The aging of the U.S. population is the result of two long-term trends:
With people living longer and fewer children being born, it is virtually certain that the population will age substantially in the next few decades. Health at older ages has also improved over the last half century as disability rates have fallen, and many of the additional years that people are living are healthy ones.
There is already a very broad consensus that population aging will place fiscal pressure on the major government programs that help support older persons in this country. Social Security, Medicare, and Medicaid are on unsustainable paths, and failure to remedy this situation raises a number of economic risks (emphasis added). Health care costs per eligible person have been growing substantially faster than per capita income for decades, and if this pattern continues, it will interact with population aging to drive up public health care expenditures strongly. Recent reforms attempting to address this problem could lead to fundamental change in the delivery, quality, and cost of care, but their impacts are as yet unclear."
Their suggested options for resolution:
Assumably, the resolution of the problem will involve a mix of all four with their proportions being legislated and debated.
US Demographic Situation
An example of the importance of demographics and its impact on health care is the overall aging of the US and its implications related to health care provision, policies, and the Affordable Care Act (ACA).
US Census Department data show that the median age of the US will increase from 36 years of age in 2010 to 39 years of age in 2050:
Median Age in the US
Importantly, those aged 0-14 years as a percentage of those 65+ has been decreasing from 200% in 1980 to the current 144%, down to 114% in 2023 (a 20% decrease), and continues to decrease to 93% in 2050. Thus, more of the dependent population is being composed of those 65+ in age.
Note: “The average nonretired American now expects to retire at age 67, up from age 63 a decade ago, and age 60 in the mid-1990s.”; from Gallup's annual Economy and Personal Finance survey, conducted April 2012.
Young (0-14 years) as a Per Cent of The Elderly (65+ years) in the US, 1980-2050
Moving forward, more of the US population will be composed of those over age 65 who have higher health care needs (a definite opportunity!).
The dependency ratio is calculated by dividing the sum of those aged 0-14 and 65+ (in general, those not working and not paying much, if any, in taxes) by those aged 15-65 (theoretically those working and paying taxes). A high ratio generally means those of working age, and the overall economy, face a greater burden in supporting the aging population.
A key result of changes in demographics is an increase in the dependency ratio from 51% in 2013 to 66% in 2050:
US Dependency Ratio, 1980-2050
Ten years from now, the old-age dependency (ratio of those 65+ to those 15-64) increases 30% and increases by 57% by 2033.
US Old-Age Dependency Ratio, 1980-2050
Consider the implications of the dependency ratio increases and the changes in balance of age groups, coupled with the expansion of health coverage mandates set forth in the Affordable Care Act: more of the population will have higher health care needs with increased health care coverage being paid for by fewer people. The need for improving health care economics is apparent and urgent.
The aging population (those over age 65) is not a US-only phenomenon as seen in the figure below adapted from “World Population Aging 2009”, a 2009 United Nations’ report on world population aging.
Population Aged 60+: World and Development Regions, 1950-2050
Some key conclusions from the UN report:
In summary, an assessment of the population projections for the next 25+ years suggests the following conclusions related to health care:
Understanding the changing demographics as a key driver for payers and health care policy makers provides the rationale for their high level of motivation in ensuring that the health care systems they manage will get the most efficient health care for the budget resources allotted. Importantly, understanding this allows biopharma to develop clinical and commercial strategies and programs that will address the needs of payers and policy makers.
Before an update on the ACA, let’s take a brief look at where and how health care expenditures in the US compare to other countries that spend a lot on health, including countries with a lot of private insurance (Switzerland, France, and Germany), using data from the OECD's Health Indicators 2011 datasets.
Per capita spending in the US on health care, on a purchasing power parity (PPP) basis, is 1.5 to 2.7 times that of the surveyed countries.
Per Capita Spending on Health Care, US and Selected Countries (US$ PPP)
The OECD report states: “The growth in the various components of care reflects in part the relative stage of development of health systems. With inpatient care being highly labor intensive and therefore expensive, certain high income countries with developed health systems have sought to reduce the share of spending in hospitals by shifting to more day surgery, outpatient, or home-based care. However, this shift can also reflect regulatory issues. Public spending in the United States is largely Medicare- and Medicaid-related for which prices are tightly controlled. Thus, it can be in the interest of hospitals to shift patients to ambulatory care where there are no controls on the price of interventions. On the other hand, lower-income OECD countries seeking to invest in and expand their health systems have generally seen the growth in hospital inpatient care outpace other areas of spending such that it has been the main contributor to overall health expenditure growth.”
US Health Care Spending Per Capita vs. the Average of Selected Countries
Total health care spending in the US is almost 200% that of the average of the five selected markets’ spending.
US Per Capita Health Care Spending as a Per Cent of Health Care Spending Average of Selected Countries
Why the Need for Reform in the US?
What has been driving the forces for health care reform in the US? One factor has been the significant disparity of health care costs in the US compared to those of other countries and the negative impact of costs on accessing health care. Data developed from the “2010 Commonwealth Fund International Health Policy Survey” illustrates the variation across countries of the percent of adults who said the cost of health care was responsible for problems accessing medical care.
Percent of Adults Who Had Any of Three Access Problems* in Past Year Because of Costs
*Did not get medical care because of cost of doctor’s visit; skipped medical test, treatment, or follow-up because of cost; or did not fill Rx or skipped doses because of cost.
A bit off-topic, but the data I saw in the report provided an interesting perspective on assessing the health care market opportunities in different countries that can be derived from an assessment of: the annual average growth in real per capita spending on health compared to per capita GDP growth.
In the figure (which only captures OECD countries), the area shaded in tan would represent those markets with an above OECD average growth in per capita GDP and health care spending. It is logical to assume that countries that fall into this zone could represent higher than average markets of opportunity for investment in health care. It could be argued that these markets were in a maturation phase when these data were produced (2000-09) and that the growth phase has passed by. More diligence and more current data are obviously warranted but this could serve as a first-step filter in identifying markets with enhanced potential.
Annual average growth in real per capita expenditure on health and GDP, 2000-09 (or nearest year)
A short list of key elements of the ACA and the projected timings for implementation from The Henry J. Kaiser Family Foundation and HealthCare.gov:
A current issue in ACA implementation is the notification by each US state on their decision regarding on how they will provide an insurance exchange.
From The Henry J. Kaiser Family Foundation’s tracking on this issue: “State-based health insurance exchanges, or marketplaces, are a key component of the Affordable Care Act (ACA), and the places where individuals and small businesses will be able to shop for coverage. States have the option of operating their own exchange or partnering with the federal government to run an exchange. States choosing neither option will default to a federally-facilitated exchange. All exchanges, regardless of how they are administered, must be ready to begin enrolling consumers into coverage on October 1, 2013 and must be fully operational on January 1, 2014.”
State Decisions for Creating Health Insurance Exchanges in 2014 (as of January 4, 2013)
Note: Those states that have decided to default to the Federal Exchange (and mostly all other default positions) like Pennsylvania, have likely submitted an Exchange Planning Grant for funds to develop strategies, infrastructure, etc…to implement the exchange. The Budget Narrative for Pennsylvania is available here. The State requested over $38 million for the project with $23 million for consultants and third-party contractors for exchange planning and development. A potential opportunity for appropriate individuals and contractors!
The fundamental and most beneficial outcome of the ACA to biopharma will be that over time, the percentage of adults in the US without health insurance will dramatically decrease as shown below. The increase in number of covered adults should increase access to and acceptance of medical treatment; thus, an increase in market potential for all products.
Pre- and Post-Reform: Projected Per Cent of Adults Ages 19–64 Uninsured, by State
How the changes in coverage are developed and implemented is still evolving, with continued and spirited debate between opponents and supporters.
Fundamentally, the ACA should provide biopharma with opportunities to market medicines and developing treatment options for an expanded target population that should be more willing and able to accept and afford therapy.
Contact Partners in BioPharma Consulting to see where we can assist you with developing or assisting you and your organization with responding proactively to these changes in the environment. We can develop solutions, manage a project from beginning to end, provide contracted support, or suggest talented experts from our alliance partners to help you achieve your goals. Click here for an outline of services that can be aligned to meet your needs.
The following links provide additional background and insights on the topics discussed in this newsletter. I hope you find them useful!