Some of the meetings I go to are a little dull, others are quite the opposite. I recently facilitated a ‘deep dive’ for a successful and well-respected pharmaceutical company, in which the emotional temperature became very high and the language became rather colourful. By its end, however, this group of smart and impassioned people had learned something. So, I’m going to share what we talked about with you, in the hope that you will also gain from it.
Innovation reduction
The deep dive was about the implications of the Inflation Reduction Act, the recent US legislation that allows Medicare to negotiate the prices of some innovative drugs. It is a controversial topic and many in the industry see it as discouraging innovation. Merck has filed a lawsuit to contest the negotiation and other senior industry figures have also criticised it. In my meeting, predictably, my clients were strongly negative, jokingly referring to the ‘Innovation Reduction Act’. It took me a little while to remind my clients that they were not in the room to vent their feelings but to think through the implications of the act, not just in the US, but globally.
Stepping back
We began by putting the act in perspective. It only affects some drugs and only Medicare negotiations, which is significant, but not the whole market. On the other hand, these measures were part of a global pattern in which payers, especially government payers, are pushing back on the prices of those innovative drugs. These are a minority of prescriptions, but they account for the large majority of drug spending and industry profits. So, as we talked, the conversation shifted from the implications of this particular American act to those of this generalised global trend. Our question became: ’What will be the consequences of governments applying their buyer powers to reduce prices?’ Now, that’s a question we all ought to be asking.
Old lessons
The first, instinctive answer to our important question was the industry mantra: it will kill innovation. But this implies a simple, almost mechanical relationship between market change and industry behaviour, so my challenge to the group was about that. “Is this how our industry works?” I asked. The group was educated and experienced, and they quickly began to suggest parallels. Regulation in the 1960s, the emergence of Health Technology Assessment at the turn of this century. Further back, the shift from ‘secret remedies’ to research-based medicines in the early 20th century. In each case, the history of the industry shows not a simple response to market change, but a complex, nuanced one. So, as these ‘deep dives’ go, I allowed the question to evolve to: ‘How might the industry adapt to governments applying their buyer power to reduce prices of innovative medicines?’ Another worthwhile question for all of us to consider.
Answers to questions
Answering this question was helped by the finance expert in the room. She pointed out that profit margins are only a company’s proximate goal. Their ultimate concern is with RAROI (risk-adjusted return on investment). This rephrased the question again to: ‘How might the industry maintain its RAROI if governments apply their buyer power to reduce prices?’ Another good question, but subtly different from our starting point. It focused attention on what was in the industry’s zone of control and away from angry criticism of payers. And it resulted in a flood of answers. Some were about reducing costs by obviating or improving traditional practices, especially in commercial settings, and others were about improving R&D efficiency, mostly via technological improvements. Some were about reducing risk, both technical (via translation science) and commercial (via diligent strategising). Some were about demonstrating value (via real-world data), and some were about distributing that value better (via making the market function more like a normal market). There was no shortage of possible answers and, while none was a panacea, none of these answers excluded the others. At this point, we concluded that the industry might be able to preserve both RAROI and innovation in the face of price pressure by adapting in multiple, complementary ways.
The art of the possible
This allowed me to evolve the question again, this time to my favourite challenge: ‘What would have to be true for the industry to adapt in that way?’ Now we were getting to the nitty-gritty of evolution. Evolution works when change is gradual and the environment sends clear signals. In other words, if governments allow the industry time to change, encourage valuable innovation and avoid distorting the market, the industry will adapt. Eventually, we will have a pharmaceutical industry that not only delivers innovation but delivers the innovations we need at the prices governments can pay and can stay economically sustainable while doing so.
Be the change
Towards the end of the meeting, when passions had cooled and thinking prevailed, there came a useful conclusion that you might find valuable. Today, much of the industry is focused on fighting governmental buyer pressures. A better approach might be to shape it towards reducing innovation risk, encouraging valuable innovation and sharing that value between industry and society. If we can do that, our industry will have been the instrument of change we want to see.
