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Pharma Futures Prescription for Long-Term Value

Pharma Futures

Acknowledgements

This report attempts to capture therich and complex discussion abouthow the pharmaceutical industry and its investors can take proactivesteps to achieve a better alignmentbetween the interests of itsshareholders and wider society, which took place within the secondphase of the Pharma Futures project.As author of the report, I take fullresponsibility for it, including anymistakes. However, neither the report,nor the project as a whole, would have been possible to do without theactive engagement and support ofmany individuals.

I would like to thank Lehman Brothersfor their hospitality and generosity in hosting the workshops in Londonand New York.

The project was provided with critical support by the SustainAbilityfacilitation and research team. Itbenefited massively from the efforts of the indefatigable Ritu Khanna,whose title as Project Managerunderestimates the contribution her intellectual rigour and curiosity,project management skills andstrategic thinking played in keeping it all on track.

At the workshops themselves, MarkLee, SustainAbility’s CEO, exercisedfacilitation skills that successfullysteered the conversation through its peaks and troughs, impassionedinterventions and warier moments in such a way as to appear utterlyeffortless, with impressive results.Huge thanks also to Meghan Chapple-Brown, John Elkington and PeterZollinger for the contributions, skillsand expertise they brought to bear inand outside the workshops. I’d alsolike to thank Philip Gounev for theclarity, speed and rigour with which he undertook project research, andJaimie Ellis, Kate Winter and OriChandler for administrative support.

Most of all, though, thanks go to the Working Group for their activeparticipation in the project. In manyways, these people are the project.The spirit of self-criticism, open-ness to discuss difficult issues, and willingness to listen created anextraordinarily fruitful exchange, which has permitted the project topropose concrete steps goingforward.

Finally, I would like to thank thesponsors in particular, who in seekinganswers to the question ‘what does itmean to be an active and responsibleowner of a whole sector?’ created this ongoing process for which thereare few precedents.

[Signature]

Sophia TickellDirector, Pharma FuturesChairperson, SustainAbility

Contents

Foreword

Executive Summary

Investor Statement

Industry Response

Introduction

The R&D Landscape

Changes in the Payer Landscape

Emerging Markets

Afterword

Appendices

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Disclaimer As a multi-stakeholderand collaborative project, the findings,interpretations and conclusionsexpressed herein may not necessarilyreflect the views of all members of theWorking Group who took part in thisproject in their personal capacity. The report was compiled forinformation purposes only and it isnot a promotional material in anyrespect.

The material does not offer or solicitthe purchase or sale of any financialinstrument. The report is not intendedto provide, and should not be reliedon for, accounting, legal or tax adviceor investment recommendations.Although based on informationbelieved to be reliable, no guaranteecan be given that it is accurate orcomplete.

Pharma Futures

1Pharma Futures

Pension FundForeword

We, ABP, OPERS and USS, convenedPharma Futures: Prescription forLong-Term Value as a follow on to the successful Pharma Futures Iscenario planning project. Theunderlying objective was to move from the hypothetical world ofscenarios to a discussion about the concrete challenges facing the pharmaceutical industry in thisperiod of rapid transition.

ABP, USS and OPERS togetherrepresent over US$474 billion ofassets under management of whichUS$20 billion is invested in healthcare.This sector – and pharmaceuticalswithin it – therefore represents asignificant part of our portfolio. Our fiduciary responsibility as pension funds is to ensure that thefunds we manage, and pharma-ceutical expenditures as applicable,are invested in a way that maximisesvalue over the long term in order to meet the needs of our beneficiaries.To achieve this we need to understand better the differentstrategies industry uses to meet the significant challenges andopportunities it faces.

This project, designed to help guideand inform our investment decisionprocesses and engagements withcompanies going forward, allowed usto discuss a range of issues in greatdepth with company top and seniormanagement, which would not havebeen possible within the traditionalresearch environment. We considerthe findings to be very relevant to our own approaches to investmentdecision-making and to be of im-portance to the investment communityas a whole and to payer and patientconstituencies.

We are pleased to be part of thisongoing process and dialogue. Much of what we encountered in theprocess was refreshing and we aregrateful to all participants for theircandid and constructive engagement.

Finally, we owe a tremendous debt of gratitude to Sophia Tickell and the SustainAbility team, withoutwhose professionalism, commitmentand hard work this project would not have been possible.

2

The R&D Landscape Changes in the Payer Landscape Emerging Economies

Pharma Futures

ExecutiveSummary

Pharma Futures: Prescription forLong-Term Value is a pension-fund-led dialogue between the pharma-ceutical industry and its investorsabout how to manage productivitychallenges, changing societalexpectations, developments intechnology and the growth inimportance of the emerging markets.The project discussed the marketenvironment into which the drugs inearly stage development today will be launched. Specifically it reviewedthree trends, their social conse-quences and the means by whichindustry and investors might respondto them in such a way as to meet both shareholder and societal needs.Critically, Pharma Futures alsodiscussed the means by which theindustry communicates its strategiesto manage these challenges toinvestors and how investors in turnsignal what it is they want to know.

The R&D Landscape

Pharma Futures discussionsunderlined the critical importance ofR&D and the hiatus in productivitytoday. Assessments of current levelsof R&D productivity differ dependingon whether they are made on thebasis of today’s pipeline or today’soutput. Judged against the former,changes in the management of R&Dhave combined with advances inmolecular and cellular biology andbiochemistry to produce promisingresults, and early stage projects haveexperienced very robust growth.Judged against recent output,productivity over the past ten years –the annual number of new molecularentity (NME) approvals of the US Foodand Drug Administration (FDA) – hasfallen slightly, while R&D expenditurehas almost doubled.

The project discussed whether theindustry has achieved the optimalbalance between significant, riskyinnovation and the less hazardouspolicy of maximising returns on areasof known research and the challengesin successfully managing R&D.


Pharma Futures discussionsconcluded that the manner in whichthe industry responds to demands formore evidence-based reimbursementwill be an important determinant offuture success. Payers in all marketsface significant pressures caused byceilings in budgetary allocation tohealthcare, growing demand formedicines for an aging population, the increase in chronic diseasesrequiring long-term treatment andincreasing healthcare costs, includingpharmaceuticals. Consequently,payers everywhere – private andpublic – are seeking to understandbetter the drivers of healthcareexpenditure and to implement reformsto contain them as far as possible.This trend towards evidence-basedreimbursement is particularly strong in Europe. Pharma Futures discussedthe importance of using newpharmacoeconomic metrics toestablish a broad definition of valueand not solely to cut costs.

Emerging Economies

Pharma Futures concluded that it is important for the pharmaceuticalindustry to adopt a strategic approachto the emerging markets although in the short to medium term thesignificance of the USA, Europe andJapan remains undiminished.

Early signals already demonstrate how important emerging markets arelikely to be as opportunities for futuregrowth; the source of continued andincreased demands around access to medicines and accompanyingpolitical risk; and the scene of intensecompetition. Emerging markets pose a dual challenge to the industry toreconcile – within a single market – the commercial opportunities offeredby a growing consumer base whilesimultaneously working withgovernment and civil society torespond appropriately to the ongoingaccess needs of the poor majority.They are an important bridge betweenleast developed countries, which offerfew commercial opportunities, and theindustry’s main markets.

Challenges

Pharma Futures discussionsconcluded that the industry facesseven core challenges relating tothese trends, which the investmentcommunity will need to understand.

Challenge 1To Make a Transition to MoreTargeted PortfoliosThe industry faces the challenge ofensuring that R&D decisions support a smooth transition to more targeted,segmented portfolios. Given thatsmaller markets are likely to equate to higher prices this transition willrequire the industry to work withpayers, governments and others toensure that the right therapies aregetting to the right people. It is likely,therefore, to affect approaches toadvertising, provision of information to patients, and relationships withdoctors, patients, payers andregulators.

Challenge 2To Restructure the R&D FunctionsStrategically Much of the industry has alreadyundertaken a restructuring of the R&D function to improve productivityand creativity. The challenge is todrive out redundancies within thesystem and to stimulate innovation.During this transition the industry willneed to find the appropriate balancebetween incremental and step-changeinnovation, against a backdrop inwhich the decision to continue toinvest strongly in incrementalinnovation is already beingquestioned.

Challenge 3To Select the Right Balance inResearch Priorities A third challenge lies in the choice ofwhat will be researched. The role theindustry negotiates for itself in R&D inareas of commercially limited, unmetmedical need will be critical to itsfuture licence to operate more broadly.

Challenge 4To Price Innovation SustainablyThe industry faces a critical challengein understanding and successfullymanaging the limits of society’swillingness and ability to pay forbreakthrough innovation – particularlyhigh-priced biologicals.

Challenge 5To Become a Trusted Partner inDefining Value for MoneyAs budgetary pressure leads payers to develop institutionalised models for evidence-based reimbursement,the industry is first faced with thechallenge of establishing itself as atrusted partner in the definition ofwhat constitutes value for moneywithin the healthcare system.

Achieving an appropriate definition of value based on a broad assessmentof evidence and cost will requireindustry to rebuild trust.

Challenge 6To Work Within System ConstraintsOnce established as a trusted partner, industry and governments,payers, patients and the healthcarecommunity face the challenge ofdefining how to implement policiesand practices that flow from theagreed definition of what constitutesvalue for money, looking at the issuefrom the perspective of therapeuticoutcome, healthcare systemsefficiency and societal need. Thechallenge is likely to have implicationsfor data collection during the clinicaltrial process and in post-marketingsurveillance, pricing policies,marketing and public affairs functions.

Challenge 7To Respond Appropriately toDemands for More Equitable andExtensive Access to MedicinesAs emerging markets become morecommercially interesting they pose a two-pronged challenge to theindustry: the first requires industry todevelop a pricing policy that capturespremium markets and permits anextension of volume sales to a widercustomer base, while simultaneouslypreventing negative repercussions in mainstream markets. The second is to respond to demand for access to medicines in these markets in sucha way as to defend the industry’scommercial interests while at thesame time persuading key decision-makers that the response is sufficientto overcome mistrust, minimisecriticism and extend licence tooperate.

3Pharma Futures Executive Summary

‘The pharmaceutical industry and the practice of medicine are muddled in many people’s mindswho believe that the industry exists to makeavailable medicines to those who need them. The broader public not only does not understandmarket pressures – it doesn’t want to.’ Investor

4Pharma Futures

Investor Statement

In the course of the Pharma Futuresproject, the representatives of theinvestment community in the WorkingGroup – who collectively representUS$1,163 billion AUM, of which US$51 billion is invested in healthcare– concluded that it would be useful to summarise their findings in thefollowing short statement.

Introduction

—Pharma Futures has led to the identification of much commonground and permitted consensus to be reached on some importantissues.

—Investors want to express great appreciation for the pharmaceuticalrepresentatives’ candour andwillingness to listen.

—Investors have gained a better understanding of their role incommunications problems and their solution.

Context

The background to Pharma Futuresis that the market has alreadydiscounted the sector due to the risksposed by the operating environmentdiscussed throughout the project.That the market is not optimistic aboutthe sector at present is reflected inrecent market-driven changes in themanagement of some large drugsfirms and the fact that the industry isawarded no premium above the netpresent value (NPV) of marketed andvisible pipeline products. This may be compared to the 1990s, when thesector was priced at a 40% premiumreflecting confidence in futureproducts and performance.

Between 2000 and 2006 consensusearnings were indexed to 1, yet forfive consecutive years results wentdown and earnings disappointedoriginal estimates. Irrespective ofwhether it is fair or not to do so, themarket holds the pharmaceuticalindustry responsible for problems, like access to drugs, and behaviours,like predatory pricing and me-toodevelopment, that are creatingdistractions and risks that, if notaddressed more convincingly, willfurther deflate valuations. At the sametime, the signals the market sends can encourage these behaviours.

The project revealed that there is considerable scope for betterinformation to be made available to investors. With increasedtransparency investors will be betterinformed and thus able to makerobust decisions when evaluating thesector. This is likely to be of particularinterest to larger investment houseswith deeper resources and longer timehorizons. Similarly, transparency –particularly around R&D – could yieldthe investor patience requested bypharmaceutical companies and resistthe trend to short-termism thatcharacterises the current market. The conversation singled out thefollowing areas in which improvedcommunications would make apositive difference.

Research

Data is usually provided to investors at later stages of Phase III clinicaltrials. This Phase III data, thoughimportant, if considered aloneencourages short time frames.

‘Increased transparency could yield greater investor patience and help to resist the trend to short-termism that currently characterises the market.’Investor

Investors are interested in betterunderstanding process andproductivity in Phases I and II throughthe provision of more information. In addition to the progress and thenumber of compounds in the pipeline,investors are particularly interested in the quality of the pipeline, howquality changes over time and tounderstand better the underlyingfactors that affect quality. Quality is determined by:

—the percentage of ‘me-too’s versus novel drugs;

—the links between novel drugs and biomarkers;

—the fullness of disease understanding and specificityassociated with the compound;

—cost deflators versus cost inflators;

—the balance between biological and chemical formulations;

—the degree of diversification in the pipeline and exposure to diseasestates;

—the higher response rates of targeted therapies, reflecting greaterdisease awareness;

—progression within the pipeline;

—the provision of pharmacoeconomic data relating to the pipeline;

—rates of and reasons for attrition.

Consequently, good solid data onearly stage pipeline research could be used to increase the overall valueof the pharmaceuticals group –especially if targets are developinginto novel products. While investorsare aware of the constraints inproviding detailed data on specificproducts, it should be possible toprovide more information on overall portfolios.

Data that focuses on trial results, aswell as on the quality, quantity andspeed within the R&D process itself,would be beneficial. Standardised,comparable data would be useful anddata on unmet medical need and onsafety and efficacy particularly so.Information linking these findings toexpenditure – particularly on trials –would be helpful.

Early stage development may be more diversified company bycompany than investors previouslythought. Companies apparentlybelieve that investors are notinterested in this stage, but this isincorrect. For companies to begranted stock value for thisinvestment they will need to provideinformation that assumes a greaterdegree of interest than at present.

Development

Investors are interested to understandhow the industry would support andrespond to a possibly re-emergentrobust FDA. Specifically, investors are interested to see evidence ofsuccessful strategies to addresssafety concerns. At the moment theFDA is highly risk-averse, leadinginvestors to be concerned thatindustry may be cutting off projectsbeyond the safe space of knownmechanisms and classes or evengenerally too early on cost grounds.Better links need to be made byindustry between safety and healtheconomics. Investors are looking for indications of adaptive design, and what companies will do differently to reduce costs andincrease speed of development in particular.

Value for Money: Pricing Power is Under Attack

The industry is under huge structuralpressure, which calls for a concertedeffort to manage costs. Investors are interested in understanding theindustry’s attitude to risk-sharing with payers and other collaborativeventures that prove value for money,including the integration of businessmodels for delivery of services suchas medical devices and diseasemanagement solutions, to guaranteecost reductions. Investors are willingto eliminate the risk discount for thateffort to show society that the industryis able to deliver profit at lower prices.Investors are willing to consider anadaptation to the current businessmodel in which top line growth isachieved by increased sales, even if margins are somewhat lower.

Access

Investors are concerned about theissue of access to medicines in thedeveloping world as a reputation risk and as a potential risk to licenceto trade and to the opportunitiesemerging markets present in future.

The way in which these problems are solved is important to investors.Serving these markets in adifferentiated way, being wellestablished and having stronggovernmental relations are likely to be critical to future success.

The pharmaceutical industry is in the business of partnerships.Relationships are built over decades –particularly where the payers arepublic. Relationships today will bearfruit over 10–20 years. Long-terminvestors want to see companiesinvesting in new markets and are prepared to accept that suchinvestments may negatively affect profit and loss (P&L) in the short term.

5Pharma FuturesInvestor Statement

Industry Response to the InvestorStatement

We welcome the dialogue between the investment community and ourindustry provided by the PharmaFutures initiative. It promises aplatform on which to find the commonground needed to address challengesfrom an inherently unstable businessenvironment as well as the complexpolicy issues related to investment in a globalised market for healthcare.

Research and Development

The industry has demonstrated awillingness to work towards greatertransparency on early toxicity andclinical trials and to document effortsto raise R&D productivity. Forexample, pending and completedclinical trials are available online(www.clinicaltrials.gov). Continueddialogue may help investors andpayers appreciate the limited value ofsome of the early stage data, but werecognise that segments of societyhave prioritised the request for suchdata, and the industry is makingefforts to meet these concerns.

The industry also recognises itsvulnerabilities in being perceived toinvest too much research effort intoimproving existing technologies.Critics have coined the productsresulting from incremental innovationas ‘me-too’ drugs. There is a naturaltension all partners must come toexpect with respect to this issue, asindustry’s primary concern is alwaysto improve patient health. The follow-on products developed as a result ofincremental innovation and observedpatient response to existing therapiesreturn significant value to patients,and often to investors as well.

We believe that the process ofinnovation occurs not only throughbreakthrough discoveries, but alsothrough incremental advances orchanges. For the patient community,incremental innovations such as new formulations and improvementsin safety and side-effect profilesprovide real value.

Moreover, the industry recognises the importance of working closely with the FDA, the European Agencyfor the Evaluation of MedicinalProducts (EMEA) and other nationalregulatory bodies to develop safe and effective medicines of high qualitythat serve unmet medical needs.Although costs have increasedsubstantially due to a moredemanding regulatory environment,the industry continues to becommitted to developing medicinesthat offer benefits to patients andsociety. The industry benefits fromstrong, clear and transparentregulatory behaviour, and we supportcontinued investment in theseregulatory bodies.

Value for Money

Health is an investment that deliversvalue to all societies. One of the great,unexpected results of the investor–industry dialogue is recognition that a singular focus on the cost of medicines without a holisticdiscussion of the value of medicinesto patients, health systems and widersociety is an incomplete conversation.The industry welcomes more dialogueand governmental acknowledgementof this reality. The industry andinvestors would also encouragefurther study and analysis of how thevalue of medicines to patients andhealth systems may contribute to theeconomic and health potential of allcountries, rich and poor.

6Pharma Futures

To be sure, value is a concept thatincurs a different response amongpatients, physicians, payers and other stakeholders. It would be nearimpossible for a single stakeholder or set of interests to create a narrowmethodology for determining it.Regardless of what other valuedeterminants may exist, when itcomes to medicines and other healthtechnologies, it is important to ensurethat the judgement of the physicianand patient experience in the realworld setting remain the keydeterminants in establishing the merits of any healthcare intervention.

Our dialogue demonstrated that theconcept of value is of particularimportance to investors in innovativecompanies and those who pay for ourproducts. For investors, it assures apremium in valuation; and payersbelieve that data-based, demonstrablevalue justifies higher margins inmedicine reimbursement. Significanteffort is being expended by industry to bring higher value products topatients. As these efforts mature andbecome regular features of investorpresentations, there is some hope that market valuations andreimbursement practices will followwith the appropriate rewards. We aredubious about the suggestion in boththe investor statement and the report that investors would trade off lowermargins for higher sales volume. The market still rewards and demandshigh margins, strong sales and robustpipelines. However, as the businessmodel evolves, industry may also becalled upon to offer more integratedapproaches to healthcare delivery, and not simply be consideredpurveyors of individual pharma-ceutical products.

Some companies in the sector haveexperimented with this integratedapproach, and the results have been mixed with respect to investorenthusiasm and payer response and reimbursement practice.

Access to Medicines

Perhaps in no other part of ourdialogue was there more convergenceof opinion than in the area of access.All parties realise that access is acritical issue in every country, not just emerging and least developingcountry markets. Justifiably, there isconsiderable focus on this area of thereport. Industry expends major effortin trying to deliver on access, andthinking through strategies to broadenit, in countries all around the globe.Ultimately, however, the issue of access must be a shared respons-ibility for industry alone cannot solve the global access to medicineproblem. Governments must increasetheir involvement in providing accessto medicines for parts of theirpopulations that cannot afford them, and countries and the industrymust work in partnership to developcreative approaches to facilitate the broadest possible access.

There should also be space for adiscussion of a more equitable anddifferentiated system of reimburse-ment for drugs, where those who can afford to pay do and those whocannot may be supported by publicpayment structures. This could act as an entree to a health insurancescheme that would distribute thefinancial risks inherent in healthcareacross the population, resulting inbetter access for all.

We recognise that a discussion of this kind may strike at the heart of thesocial contract in some regions, but it is a discussion worth pursuing in avariety of countries around the globe,especially those emerging marketswhere the social contract is frayed and tattered due to poverty, but wherethere is also a burgeoning middleclass. Access to medicines should not be viewed as an issue for thedeveloping world only, as it is aprimary concern for health officials in developed countries as well.Structural reforms in these lattermarkets that ensure appropriatereward for innovative medicines willlead to increased access for countrieswith less ability to pay for innovations.

Ideally, the industry would like to be a more integrated part of healthcaresystems, but this depends ongovernments’, regulators’ and third-party payers’ ability to break down‘siloed’ budgeting with system-widedelivery networks, planning systemsand financing tools. This would allowthe industry to demonstrate the truevalue of its medicines as part of thebroader health system.

Going forward, we believe thatproductive public–private partnershipswill be a critical path to collectivelyidentify and address health needs,particularly in resource-constrainedsettings. The industry is committed to working with governments, non-governmental organisations,multilateral agencies, medicalprofessionals, patient groups andacademic institutions to find solutionsto research, develop and delivermedicines to all patients in need.

7Pharma Futures Industry Response

‘Assessment of value should not be conducted by one single entity but by all relevant parties: government, payers, patients and the healthcare community.’Pharmaceutical Executive

Introduction8Pharma Futures

9Pharma FuturesIntroduction

Pharma Futures Pharma Futures: Prescription forLong-Term Value is an ambitiouspension-fund-led dialogue betweenthe pharmaceutical industry and its investors about how to manage a rapidly changing operatingenvironment to deliver long-termvalue. Pharma Futures: Prescriptionfor Long-term Value is a follow-up to the successful Pharma Futures Iscenario planning project (seewww.pharmafutures.org and link tothe first project report). The sponsorsbehind this second phase of PharmaFutures (ABP Investments, the OhioPublic Employees Retirement Systemand the Universities SuperannuationScheme) concurred with the findingsof Pharma Futures I: that significantchange is inevitable for the globalhealthcare sector and that astructured dialogue between theinvestment community andpharmaceutical executives wouldenhance understanding of bothtransition challenges and evaluation of what constitutes good changemanagement.

Pharma Futures: Prescription forLong-Term Value (hereafter PharmaFutures refers to this second phase of the project) was convened in such a way as to provoke a considered and informed dialogue between thepharmaceutical industry and itsinvestors. In doing so, projectparticipants created an environment of increased trust and transparencybetween these two constituencies.Greater transparency permits theindustry to better understandinvestors’ interests and thereforeprovide them with more appropriateinformation. Investors, in turn, are then able to make more informedevaluations of the sector, which hashistorically delivered substantialreturns.

Pharma Futures takes place against a background in which investors have already discounted the sectorbecause of significant risks in theoperating environment. The market is not optimistic about the sector atpresent. The industry is awarded nopremium above the net present value(NPV) of marketed and visible pipelineproducts. This may be compared to the 1990s, when the sector was priced at a 20–40% premiumreflecting confidence in futureproducts and performance.Irrespective of whether it is fair or not to do so, the market holds thepharmaceutical industry responsiblefor problems, like access tomedicines, and behaviours, likepredatory pricing and me-toodevelopment, that are creatingdistractions and risks that, if notaddressed more convincingly, willfurther deflate valuations. At the sametime, the signals the market sends can encourage these behaviours.

Pharma Futures revealed that there is considerable scope to improveinformation flows betweenpharmaceutical executives andinvestors. Balancing commercial and social need is a complex anddifficult challenge to which the mostsuccessful resolution is likely to be an approach that better acknowledgesthe legitimate pressures being broughtto bear on all stakeholders.

Pharma Futures discussed the marketenvironment into which the drugs inearly stage development today will be launched. Specifically it reviewedthree trends, their social conse-quences and the means by whichindustry and investors might respondto them in such a way as to shape the industry’s future success andthereby maximise long-term value.

1 The R&D Landscape

2 Changes in the Payer Landscape

3 Emerging Markets

10Pharma FuturesPharma FuturesIntroduction

The OperatingEnvironment

The pharmaceutical industry isundergoing a process of transition in response to productivity challenges,changing societal expectations,developments in technology and thegrowth in importance of the emergingmarkets. While no one wants to losethe returns they deliver, thegravitational pull of the blockbuster-focused integrated pharmaceuticalbusiness model is weakening as a result of pressure being brought to bear on all segments of the value chain.

Since the breakthrough of the firstblockbuster drugs in the mid-1980sthe dominant industry business modelhas been the vertical integration of thewhole supply chain: controlling andmanaging production from the lab to the factory gate in an attempt tocapture maximum value throughbroad-spectrum blockbustertherapies. However, the assumptionsthat underpin this business model are now being revisited as a result of both upstream and downstreamchallenges.

In-house research is being supple-mented by alliances with academia,biotech companies and start-ups, asare different strategies to developmore creative and innovative researchmanagement structures and cultures.Though not new, in the past decadesuch strategies have significantlyincreased in scope and number. These alliances not only generateaccess to novel drug discoveryplatforms but also supplement thedevelopment portfolio that is internallygenerated. Advances in technology,supported by more predictivebiomarkers, are creating prospects ofbetter targeted medicines for smallerpopulations with greater efficacy.

Within the development process, too, centralised management is givingground to out-sourcing arrangementsbetween ‘Big Pharma’ and smaller,specialised firms, such as clinicalresearch organisations (CROs) anddrug delivery companies (DDCs).

CROs now manage 35–40% of Big Pharma’s volume – a figure that is expected to rise to 60% by 2008.1

Finally, the financial impact of thecurrent wave of patent expiries nowover-shadowing the sector illustrateshow a cyclical trend has come to havegreater significance because of itsincreased focus on a reduced numberof blockbuster drugs.

Once something of a Holy Grail, theprioritisation of a handful of thesemedicines now seems close to placingall your eggs in one, rather fragile,basket. As the industry grapples withthese internal challenges, it also facessignificant changes in the outsideworld. The first relates to what payersare willing and able to pay for, which isundergoing a transformation, partlybrought about by new technologiesand partly by price constraints. The second is the emergence of newimportant markets in countries withdifferent demographics and incomedistributions from more traditionalmarkets.

These emerging markets challengepharmaceutical companies to respondto the opportunities for commercialexpansion at the same time asworking in partnership with govern-ments and others to respondappropriately to the need to increaseaccess to medicines for people on lowincomes in these markets. The accesschallenge in these emerging marketsis similar to, but not the same as, such challenges in least developed or developing countries, where themarket potential is extremely limited.

These internal and external demandscombine to require the developmentof increasingly networked,collaborative business models, which in turn will require a sea change in management attitudes and approaches. Pharma Futuresspent considerable time reviewing the importance of trust in thepharmaceutical sector and theconsequences of its substantialdecline in the early 2000s.

The tangible costs of mistrust havebeen cited as inhibiting cooperation,the adoption of contractualism, theinterruption of the customerrelationship and regulation andrestriction.2 To meet future challengescurrent levels of mistrust need to beovercome. There is a significantopportunity to achieve this. A newgeneration of management is takingover the helm and there is evidence of a desire actively to reframe thenature of the relationship between the industry and society.

The changes in the operatingenvironment, outlined above, willrequire the application of newmanagement skills in the short and medium term. Investors want tobetter understand the range of optionsopen to managers and how they arebalancing the needs and interests of their many stakeholders.

11Pharma FuturesPharma FuturesIntroduction

‘The rise of the “Googleverse” is likely to have implications for how and where people buy medicines, and also radically altersunderstanding of what determines value.’ External Expert

12Pharma Futures

The R&D Landscape

13Pharma Futures

The R&D Productivity Challenge

It is a truism – but no less true forthat – that R&D is the life-blood of the pharmaceutical industry.Success is predicated on being able to manage the vicissitudes of scientific research in such a way as to result in a steady outputof medicines being sold at a pricethat people are prepared to pay.There are three critical successfactors to this: one, a strong R&Dprocess; two, a reward system that encourages innovation and discovery of medicines thatpeople want or need; and three,affordability and accessibility of medicines to everyone whoneeds them.

Talk of the industry’s currentproductivity ‘crisis’ stems from animbalance in these factors. In the past ten years, the annual number ofnew molecular entity (NME) approvals 3

approved by the FDA has fallenslightly while R&D expenditure hasmore than doubled.

The number of new product launchesin 2007 is expected to be in the range of 25 to 35, roughly the same as the average of 30 launches in thepreceding five years.4 (See Figure 1.)The attempt to plug this gap through a wave of mergers and acquisitionsover the past decade has causedconsiderable upheaval in the industrybut has not yielded convincing results.One major recent study found nosignificant growth rates in a firm’ssales, number of employees, R&Dexpenditures or market value in thethree years following a merger.

Although these findings do not bydefinition reflect what would havehappened if no transaction hadoccurred, nevertheless, they do show that such firms’ R&Dexpenditures grew more slowly than those of comparable firms that did not merge, suggesting thatmergers may – at least initially – divert resources away from R&D.5

This is a classic example of where the desire to meet short-term earningsper share (EPS) and growth targetsencourages management to make astrategic decision that may not beappropriate for the long term.

What Influences Innovation in R&D?

R&D productivity is determined byinnovation and process efficiency,which in turn are influenced by anumber of driving forces: scientificand technological advances; the availability of raw materials;market demand; the nature of the competition; societal needs;government legislation and regulation;and the company’s scientific, techno-logical and market specialisations.6

In-house research is no longer yielding the catch it used to, leadingfirms to spread new nets wide anddeep in the search for promisingleads. Research alliances betweenlarge pharmaceutical companies andwith academia, biotech and start-upsare all being embraced. In additioncompanies are in-licensing newcompounds and seeking strategies to develop more productive researchmanagement structures and cultures.7

Source: FDA, Lehman Brothers,Pharma Pipeline Estimates, PhRMAE = estimated

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Figure 1FDA Approvals andPhRMA Spending on R&D

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Pharma FuturesThe R&D Landscape

14Pharma FuturesPharma Futures The R&D Landscape

At the same time some companies arerestructuring the management of in-house R&D to create more of a ‘smallcompany culture’, rewarding scientificcreativity and innovation. This ismainly in response to concerns thatan over-bureaucratised approach –coupled with early killing of promisingleads on commercial grounds – isstifling innovation.8

Another strategy is to seek to increasethe success rates of drugdevelopment by applying advances in pharmacogenomics – the study oflikely reactions to a drug given thepatient’s inherited genetic make-up –though the human genome is stillstubbornly yielding more complexitythan results. Scientists are alsolooking for new technologies to predict toxicity earlier in thedevelopment process in order to kill off drugs that will not meet safetyand efficacy standards before theyenter late – and expensive – stageclinical trials.

These technologies are also beingharnessed to salvage projectspreviously abandoned because of low response rates in the broadpopulation. Biosimulation – usingcomputer software to simulate drugbehaviour in patient tissue, cells andorgans – is already changing the wayclinical trials are designed.9

Regulatory Environment

The regulatory process through whicha drug starts as a promising scientificlead and ends in successful trials inhumans is a slow and complicatedprocess. Trials today are now longerand involve more people than everbefore. In part this is becauseregulators are increasingly risk averseand in part because companies hopeto use data collected in these trials toexpand the potential market for thesedrugs to a wider range of patients.Though things are expected to changewith an increased use of biomarkerstranslating into more stratified patientgroups, the implications of thissituation on costs and bringinginnovative drugs to market have not gone unnoticed.

In recognition of the need tostreamline the regulatory process,both the FDA – through its CriticalPath Initiative – and its Europeanequivalent, the EMEA – through itsRoad Map to 2010 – have recentlytaken steps to ensure that basicscientific discoveries can translatemore quickly into new and bettermedical treatments.

The Crystal Ball

Of course, what comes to the markettoday is the result of investmentsmade at least ten to fifteen years ago,making predictions of what the marketplace will come to look like a crucialmanagement skill. And it is this time-lapse that explains why today’sproductivity ‘crisis’ is so hotly andpublicly disputed.

The dispute concerns whetherassumptions about future prospectsshould be made on the basis oftoday’s pipeline or today’s output.Judged against the former, advancesin molecular and cellular biology andbiochemistry have led to promisingearly stage development.

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Figure 2.1The Pharmaceutical Pipeline:Preclinical compounds indevelopment

Source: Pharmaprojects / GoldmanSachs, PAREXCEL PharmaceuticalR&D Sourcebook 2005/2006


Industry observers point out thatdiagnostics and other predictivetechnologies are transforming theindustry. In addition, progress in basicbiomedical sciences has substantiallyexpanded technological opportunities,having, for example, expanded thenumber of ‘druggable targets’ in thehuman body from 500 to at least3,000 over the past two decades. And they point out that the pipeline of compounds in early stages ofdevelopment has never been fuller.Industry analysts identified almost4,500 compounds in pre-clinicaldevelopment in 2004, up from lessthan 2,900 in 1995; with nearly 900 in Phase I of the development process(preliminary clinical testing in humans)in 2004, up from just over 400 in 1995 (Figures 2.1 and 2.2).10

Despite the increased number of early phase drugs in development, the stock market does not appear to agree that they will translate intopositive assessments of future value.

Superficially it appears as if no valueis being afforded to any drug that hasnot reached late-stage clinical trials(though it could also be that themarket is over-valuing the NPV ofmedicines already on the market,possibly reflecting current discountrates being too low, peak salesestimates being too high or a beliefthat profit margins will remainunscathed). Significant price cuts are almost certainly not discounted in current valuation models.

Much of the public debate, bycontrast, is judged against recentoutput and in particular the fact that a growing share of the drug industry’sR&D has been directed towardproduct improvements. The drugs that result from this incrementalinnovation compete for market valueby claiming to be best in class ratherthan a breakthrough technology in anew class. The strategy of ten yearsago – to focus on the development of broad spectrum blockbustermedicines in chronic diseases areas,such as in anti-psychotics, calciumantagonists and beta-blockers – has now entered choppy waters.

The problem stems from a perceptionthat industry has failed to strike theoptimal balance between significant,risky innovation and the lesshazardous policy of maximisingreturns on areas of known research.Critics argue that this incrementalinnovation results in ‘me-too’ drugs,which do not meet the criteria of beingnew, inventive and useful, or havingindustrial applicability, which wouldmake them eligible for the full range of intellectual property rights. Inessence they argue that the rewards –translated as price and intellectualproperty protection – being sought forincremental innovation are notcommensurate with the risks taken.Even where such medicines showdemonstrable additional therapeuticvalue to the patient, such asdecreased toxicity or side effects, orsavings to the health system, societyhas grown increasingly unhappy aboutaccepting novelty that is based onincremental therapeutic outcome. This is evidenced by arguments thatincremental innovation should bepriced at lower rates than those paidfor breakthrough innovation.

A final pressure on R&D rises from a broader concern about thesustainability of the existing industrycost base because of pricingdemands. This puts pressures on all elements in the pharmaceuticalvalue chain to deliver cost efficiencies,including in R&D, and is distracting forthose focused on driving innovationand speed of delivery.

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Figure 2.2The Pharmaceutical Pipeline:Phase I compounds in development

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Source: Pharmaprojects / GoldmanSachs, PAREXCEL PharmaceuticalR&D Sourcebook 2005/2006


R&D: Scope for Action

Pharma Futures’ discussions ratifiedthe critical importance of R&D andhow it is managed to the industry’sfuture. All participants agreed thatsocietal expectations arising from the successful development of new,more targeted therapies, coupled with current perceptions of lowproductivity, were likely to havesignificant impact. Investors in theproject expressed an interest inunderstanding how R&D decision-making will be part of an adjustmentto a business model that relies less on broad spectrum blockbuster drugsand seeks new niche markets for more targeted medicines. They alsoexpressed interest in understandinghow the following challenges will bemanaged through the receipt of morespecific, detailed information.

Challenge 1To Make a Transition to MoreTargeted PortfoliosThis will involve R&D decisions that support a smooth transition tomore targeted, segmented portfolios.Given that smaller markets are likely to equate to higher prices, without a commensurate increase in healthbudgets, governments and payers will face their own challenges. Theyare likely to use more diagnostics to ensure that new, more expensivetherapies get to those patients whowill obtain maximum therapeuticbenefit from them, and simultaneouslyto undertake education of patients to explain that novelty does notnecessarily result in the besttherapeutic outcomes. Thus thetransition will require industry toreview its approaches to advertising,and its relationship with doctors,patients, payers and regulators, and challenge it to rebuild trust with key stakeholders.

Challenge 2To Restructure the R&D FunctionsStrategically Much of the industry has alreadyundertaken a restructuring of the R&Dfunction to improve productivity andcreativity. The challenge is to drive out redundancies within the systemand to stimulate innovation. This is likely to entail allocating R&Dinvestment between incrementalinnovation, targeted innovation andbreakthrough innovation (balancingrisk and potential), demonstratingforward-thinking management of theR&D portfolio and increasing overallR&D investments in response to itsimportance as the life-blood of theindustry. The transition will take placeagainst a backdrop in which thedecision to continue high investmentsin incremental innovation is alreadybeing questioned. As industrydemands high prices for innovativeproducts, this will only increase.

Challenge 3To Select the Right Balance inResearch Priorities A third challenge lies in the choice of what will be researched. A moresegmented approach – at least intheory – could lead to a wider range of targets – an important challenge to the industry, which some criticsargue has focused its R&D efforts toonarrowly on those therapeutic areaswhich offer greatest commercialpotential. There are numerousexamples of societal unease at beingreminded that there is a private entityat the heart of drug development. The commercial constraints toinvesting large amounts into diseasesof the developing world have led someto question whether the commerciallydriven public companies are the bestvehicle for drug development.

The role the industry negotiates foritself in R&D in areas of commerciallylimited, unmet medical need, such assome antibiotics and diseases thatpredominantly or only affect thedeveloping world, e.g. malaria andChagas disease, will be critical to itsfuture licence to operate more broadly.It is possible that unless the industrytakes the initiative to step up itscommitment to the social contractunder which it operates, civil society,politicians and other stakeholders mayencourage changes in the operatingenvironment that damage theindustry’s reputation even further.

Challenge 4To Price Innovation SustainablyThe sustainability of a policy of high-priced biologicals is increasingly beingquestioned. There is no doubt thatsociety – at least in the main US,European and Japanese markets – is willing to pay a substantial premium for breakthrough innovation,particularly on cancer treatments, butthere are limits. The industry faces a critical challenge in understandingand successfully managing the limitsof society’s willingness and ability topay for breakthrough innovation –particularly in those markets with acommitment to socialised medicine. In such markets payers are required to balance the need to match demandfor therapeutic breakthrough withaffordability and the commitment to distribute drugs equitably amongthe population, irrespective ofpeople’s personal income.


R&D: What Investors Want to Know

Research

Investors in the Pharma Futuresproject expressed considerableappetite to have more detailedinformation about earlier stages ofpipeline development. In addition to the progress of the number ofcompounds through the pipeline they are particularly interested tounderstand better productivity metricsin Phases I and II. Investors assessthe quality of the pipeline, evaluatehow quality changes over time, andseek to understand the underlyingfactors that affect it. Informationincludes – among other things – thepercentage of incremental versusnovel drugs, the links between noveldrugs and biomarkers, cost deflatorsversus cost inflators, the balancebetween biological and chemicalformulations, the degree ofdiversification in the pipeline andexposure to disease states, the higher response rates of targetedtherapies reflecting greater diseaseawareness, progression within thepipeline, the provision ofpharmacoeconomic data relating to the pipeline, and rates of andreasons for attrition.

Consequently, good solid data on the early stage pipeline could reducethe risk associated with investmentsand consequently be used to increasethe overall value of the pharmaceuticalsector – especially if targets aredeveloping into novel products. While investors are aware of theconstraints against providing detaileddata on specific products, it should be possible to provide moreinformation on overall portfolios. Data that focuses on trial results, aswell as on the quality, quantity andspeed within the R&D process itself,would be beneficial as would relevant,comparable data. Data on unmet need and on safety and efficacy isparticularly useful. Information linkingthese findings to expenditure –particularly on trials – would behelpful.

Early stage development may be more diversified company bycompany than investors previouslythought. Through the course of theproject it became apparent thatcompanies believe that investors arenot interested in this stage, partlybecause the risks of failure are highand partly because of the difficultiesof predicting success. However, the adoption of novel discoveryplatforms may have traction within the investment community. Forcompanies to be granted stock value for this investment, they willneed to revise their perception of lack of investor interest and providemore information.

Development

Investors in the Pharma Futuresproject expressed interest inunderstanding how the industry would support and respond to apossibly re-emergent robust FDA.Specifically, investors were interestedto see evidence of successfulstrategies to address safety concerns.At the moment the FDA is highly risk averse, leading investors to beconcerned that industry may becutting off projects beyond the safespace of known mechanisms andclasses, or even generally too early on cost grounds. Better links need to be made by industry betweensafety and health economics.Investors are looking for indications of adaptive design: what companieswill do differently to reduce costs and increase speed of development in particular.

‘The interaction between absolute and market value of a company relates to how managementsdeals with the expectations of the market.Companies garner trustworthiness over time.’ Fund Manager

18Pharma Futures


19Pharma FuturesPharma FuturesChanges in the Payer Landscape

Pharmaceuticals account for less than 20% of average overallhealth expenditure. Advances inpharmaceutical therapies savelives, and improve health andquality of life. In addition, timely,early interventions can help to savecosts on other types of secondaryhealth expenditure – hospitalisationor residential care. Despite this,these arguments about the cost of pharmaceuticals as a proportionof total health expenditure and the possible savings to the overallsystem – while acknowledged bypayers to be important – havetended to be overshadowed byconcerns about the immediatebudgetary impact ofpharmaceuticals.

Healthcare Costs Increase – and Pharmaceutical Costs Increase Faster

In the past two decades averagepharmaceutical expenditure as apercentage of total health spend inOECD countries rose from an un-weighted average of 13% in 1980 to 18.1% in 2003. During the sameperiod, healthcare expendituresincreased from an un-weightedaverage of 6.9% of GDP in 1980 to 8.8% in 2003. Pharmaceuticals are taking a bigger slice of anincreasingly large pie.11

In 2006, the global pharmaceuticalsmarket generated total revenues of $555.5 billion, representing acompound annual growth rate (CAGR)of 6.6% for the five-year periodspanning 2002–2006.12 The largestmarket remained the USA, followed by the EU and Japan (see Figure 3).

Payers in all markets face significantbudgetary pressures, which arereshaping the payer landscape. These pressures are caused byceilings on budgetary allocation tohealthcare, an increasing demand for medicines among an agingpopulation, and the growth in chronicdiseases requiring long-termtreatment and increasing healthcarecosts. Consequently, payerseverywhere are seeking to understandbetter the drivers of healthcareexpenditure and to implement reformsto contain them as far as possible.One result is that pharmaceuticalcostings and expenditure are undergreater scrutiny than ever before and findings are being translated into public policy. This trend towards demanding that healthcareexpenditure delivers value for money is visible everywhere – and particularly in Europe.

Figure 3Global PharmaceuticalMarket SegmentationShare by value 2006

Source: Datamonitor

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20Pharma FuturesPharma FuturesPharma Futures Changes in the Payer Landscape

Government Remains the Biggest Payer

In Europe and Japan governmentremains by far the biggest payer for healthcare services – and forpharmaceuticals within the overalltotal. In the USA the bulk ofpharmaceutical expenditure hashistorically fallen to insurers andpatients through out-of-pocketexpenditure (Figure 4). This ischanging. The Medicare Modern-isation Act (MMA) of 2003, whichoverhauled the health insuranceprogramme for US seniors aged 65 and over, will bring the balancebetween public and privatepharmaceutical expenditure to roughly 50:50 as it makes provision for a much more comprehensivegovernment drug coverage (see Table 1).

By 2010 it is predicted that the USgovernment will pay for 37% of alldrug expenditure under Medicaid andMedicare, while employer providedprivate insurance will pay for 39%.13

The remaining 24% will be paid for as out of pocket expenses by theuninsured. Table 1 shows the keyhealth spending indicators for 2003.The pressures facing health payers –be they government or private sector– are compounded by changes in bothdemographic trends and diseaseburdens with an increase in chronicdiseases, requiring more sustainedmedication over lengthy periods oftime (see Table 2). As the average ageof the OECD population rises, so toodo overall and per capita consumptionof healthcare resources (see Figure 5).In the USA, for example, it has beencalculated that health expenditure forpeople over 65 is three times that forpeople between 19 and 65.

Price Control and Cost Containment

The combination of these pressureshas led governments and healthinsurers across the OECD to seekgreater efficiencies from their healthsystems. It is already possible to seehow governments are acceleratingand systematising attempts to containcosts across the OECD. For example,in the past three years Australia,France and many other countries have implemented reforms which setreference prices and aim to encouragegreater use of generic drugs and morecompetition within generics markets.In Canada, provincial and territorialgovernments have proposed that the federal government assumesresponsibility for public prescriptiondrug plans with the objective ofincreasing standardised access to prescription drugs across thecountry and containing costs.

Table 1Key Health Spending Indicators 2003

Source: World Health Organisation(WHO) and EIU 14

Australia 09.5 67.5 32.4 2,874 250

Canada 09.9 69.9 30.1 2,989 403

France 10.1 76.3 23.7 2,902 505

Czech Republic 07.5 10.0 90.0 1,302 177

Germany 11.1 78.2 21.8 3,001 415

Italy 08.4 75.1 24.9 2,266 342

Japan 07.9 81.0 19.0 2,244 463

Spain 07.7 71.3 28.7 1,853 358

Netherlands 09.8 62.4 37.6 3,088 255

United Kingdom 08.0 85.7 14.3 2,389 367

USA 15.2 44.6 55.4 5,711 687

Total expenditureon health aspercentage ofGDP

General govern-ment expenditureon health aspercentage oftotal overall health spend

Private expend-iture on health as percentage oftotal expenditureon health

Per capita totalexpenditure on health atinternationaldollar rate (US$)

Pharmaceuticalper capitaexpenditure(US$)


Source: Centre for Medicareand Medicaid Services (CMS)

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Figure 4Spending on PrescriptionDrugs in the USA

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22Pharma FuturesPharma FuturesPharma FuturesChanges in the Payer Landscape

Meanwhile, in Germany, thePharmaceutical Prescribing EfficiencyAct, effective as of May 2005, is an explicit attempt to reducepharmaceutical costs by, among other things, punishing physiciansindividually and collectively forprescribing above clearly definedlimits. Reference pricing – calculatedas a median price for a group oftherapeutic equivalents – has longbeen used in Europe. In a worryingmove from an industry perspective,reference prices in Germany areincreasingly a de facto proxy for upper limits on price. And genericchallenges are changing – nowimpacting branded products within the same class, either through formalreference pricing (Germany) orrestrictions on prescriptions (USA).

The Growth of Health TechnologyAssessment Bodies

The number of health technologyassessment organisations dedicatedto evaluating cost effectiveness in Europe is increasing. The UK’sNational Institute of ClinicalExcellence (NICE), set up in 1999, has turned out to be something of afrontrunner in the field with Germany,Sweden and France all subsequentlycreating equivalent bodies tasked withbalancing health and budgetaryoutcomes. There is talk of Spain and Portugal following suit. Thoughpriorities differ – with greater or lesser emphasis on broader societal or industrial implications – themeasurement of value for money is at the heart of all this work. This trend towards evidence-basedreimbursement is also visible in the USA.

Attempts to contain healthcare costsin the private healthcare marketplacehave contributed to the significantincrease in managed care 16 – preferredprovider organisations (PPOs) andpoint of service organisations (POSs),which now account for 70% of overall coverage and an increase in beneficiary co-pays. While theemployer contribution has remainedsteady, the past two decades haveseen the average monthly employeecontribution between 1988 and 2001rise from US$8 to US$30 for singlecoverage and from US$30 to US$150for family coverage. And retirees aretypically paying a larger share of theoverall premium and an increasedpercentage of prescription costs.17

Employers’ desire to contain costs isdemonstrated by the consortium ofinfluential business groups, which hasrecently formed the Partnership forValue-Driven Health Care.

2005 2015 2030

Central nervous system 1 1 1

Cardiovascular diseases 2 3 3

Cancers 3 2 2

Respiratory diseases 4 4 5

Sensory organ diseases 5 5 4

Musculoskeletal diseases 6 6 6

Digestive diseases 7 7 8

Diabetes 8 8 7

Endocrine disorders 9 9 10

Genitourinary diseases 10 10 9

Table 2Top Ten Disease Burdens of High Income Countries Based on projected DALYs 15

Source: Report author’s calculationsbased on WHO data

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Figure 6Patient Advocacy GroupsUK & USASource: Derived from Wood 2000and Wall Street Journal


Its Purchaser Guide helpsorganisations that purchasehealthcare meet US Department of Health & Human Services calls for employers to implement ‘fourcornerstones of value-driven healthcare’, which include: using healthinformation technology, andmeasuring and publishing priceinformation. Health insurers aremoving in the same direction andinsurers are making tough decisionsas well. The recent decision byUnitedHealth to remove Nexium from its formulary, on the grounds that equally effective and cheaperequivalents were available, wassomething of a line in the sand in this highly competitive market inwhich patient choice is consideredparamount.

These trends are also visible in stateprovision of healthcare to low incomeand needy people under the jointfederal–state Medicaid programme,which is seeking to containpharmaceutical costs throughstrategies such as diseasemanagement programmes, preferreddrugs lists and counter-detailing(providing information about cheaper,roughly equivalent therapies).Therapeutic substitution – thereplacement of one drug for anotherwith a different chemical composition– is also a growing trend, taking placeat times without physicians’knowledge.

The passage of the MMA – extendingpharmaceutical benefits to the elderlyand in the process significantlyincreasing the government’s drug bill – adds significant financialincentive to government attempts to contain costs. The politicalimplications are already evident inDemocrat calls to overturn the Act’sprohibition of government involvementin direct price negotiations withpharmaceutical companies.Irrespective of whether this changes,the impact of Medicare Part D is likelyto be significant over time. Critically,it aligns the interests of two equallypowerful groups of purchasers,government and employers, and linkstheir fate.

By 2010 the combined financial mightof these two bodies will account for76% of the total market.18 In addition,it will increasingly be using the sameorganisations – pharmacy benefitmanagers – to deliver cost-effectivedrugs. It is not difficult to anticipatehow cross-referencing on strategy andoutcomes – whether concerted or not– will lead to greater demand for valuefor money. After all, the growth inmanaged care itself is a direct result of attempts to cut costs of Medicaid inthe 1980s. There are early indicationsthat industry is taking note of theresistance to the high price ofoncology medicines by respondingwith explicit voluntary price caps, but current prices are still difficult formany payers to sustain.

He Who Pays the Piper: Show Me Value for Money

These cost containment efforts areleading to demands that the industryprove it is offering value for money asnever before. There are considerablechallenges in doing so. There is noconsensus on precisely what is beingmeasured. Value is an amorphousconcept, with different stakeholdersapplying different criteria to judge it.For some, the therapeutic value to a particular patient is the mostimportant outcome. But this is acomplex thing to measure, affected by social and psychological factors,potentially complicated by co-morbidities and the effects of multipletherapies, and/or side-effects, with the possibility of significantly differentoutcomes if the patient or his or herdoctor is making the assessment.

Value assigned by a payer – be theypublic or private – may lead to verydifferent outcomes as the impact of a particular therapy on a particularpatient will need to be balancedagainst the impact on the overallhealth budget, the relative value ofdifferent diseases and relative costs of different stages of treatment. And some countries explicitly measurethe value offered to society as a wholeas well, by evaluating such factors as the economic productivity of thepatient or demands made on thesocial security or pension system.

All these considerations are madesubstantially more difficult by the factthat the budgetary management offew – if any – health systems arestructured in such a way as to balancethe benefits to the overall system ofpharmaceutical interventions thatprevent future secondary expenditure.The International Society forPharmacoeconomic Outcomes andResearch, a newly created initiativebringing together industry andacademics, has identified 11 differentissues that need to be resolved inorder to address the disconnectbetween the way decisions are madeby healthcare decision-makers.

Will Patients Save the Day?

One important constituent is oftencited as likely to be the most effectivecounterweight to payers’ attempts tocontain cost pressures by restrictingaccess to medicines on price or efficacy grounds: the patient.Access to information – as a result of globalisation of communications,and in particular the internet – hastransformed the means by whichpatients, particularly in OECDcountries, obtain health information.There is limited hard data on thesubject. The growth in number andmedia profile of patient advocacygroups (PAGs) suggests they play anincreasingly influential role in providinginformation about the availability andrange of treatment options, prices and side-effects of their condition ordrugs. The activities of such groupstypically include educating, andproviding resources and support toindividuals with disease. In addition,they publicly advocate on healthcareand public policy – lobbyinggovernment to address payment and regulatory issues or to make more research funding available.Sometimes they manage statisticalinformation on a particular disease to inform their activities and formnational or international alliances toincrease their effectiveness, e.g. theGlobal Alliance of Mental IllnessAdvocacy Networks, the InternationalDiabetic Association and the GlobalHeart Federation.

24Pharma FuturesPharma FuturesPharma FuturesChanges in the Payer Landscape

The number of such groups, theirglobal reach, their credibility and theimmense power of the story of theindividual, all combine to suggest that patient empowerment is anunequivocal good for the pharma-ceutical industry. However, anyassumption about the automaticalignment of the interests of these two groups is worth reviewing.

The Power of the Voice: Lobbying in Whose Interest?

In OECD and developing countriesalike, it is possible to point to concreteexamples of how patient advocacychanged public policy. In 2006 in theUK public outcry focused on theavailability of Herceptin – the ‘miracledrug’ for breast cancer patients, oftenyoung mothers. Despite NICE openlydisagreeing with the level of efficacydemonstrated by clinical trials ofHerceptin to treat early stage cancer,the organisation’s guidelines wereoverridden as government intervenedto respond to public demand.Likewise, in Brazil, articulate andpolitically well-connected HIV/AIDSactivists successfully argued that thenew constitution provided for theirdrug needs, a stance which eventuallyled the federal government to allocatealmost 80% of its drug budget ondrug therapies for HIV/AIDS, eventhough only around 1% of thepopulation was HIV positive.19

However, in signalling the speed with which things can turn, HIV/AIDSactivists – this time in the USA – were one of the most outspokencritics of the pharmaceutical industryfor not acting fast or comprehensivelyenough to make antiretroviralsavailable to HIV positive people in the developing world, and particularlyin Africa. These groups, connectedthrough the internet, linked with SouthAfrican HIV/AIDS groups to highlightthe disparities between treatment inrich and poor countries in a campaignthat ultimately led the pharmaceuticalindustry to withdraw a landmark legalchallenge to the South Africangovernment’s Medicines Act, which, it was argued, violated internationalintellectual property law.

The prevailing assumption thatstronger patient advocates willincrease demand for treatments isdifficult to challenge. Where thisdemand will be directed, however, isvolatile. If the predicted increase inpatient co-pays does indeed becomea feature of most markets, it will nottake long for the patient to take on –at least some – characteristics of apayer and – potentially – of theactivist. The more patients arepersonally exposed to the cost ofmedicines, the more unpredictable thelandscape becomes for the industry –as demands for access to medicinesin developing countries hasdemonstrated. It is not implausiblethat PAGs will become moreinterested in developments in whatconstitutes value for money, andwebsites could come to carryassessments of cost-effectiveness as well as efficacy. Likewise, theinformation they carry aboutalternative treatments that by-passpharmaceutical products could beinfluential as the use of cannabis tohelp relieve the symptoms of MultipleSclerosis has shown. It is not onlygovernment that will be at thereceiving end of these demands.

Patient groups have much in common,but also significant conflicts ofinterest. Critically, they are competingfor funds from the same pot. Publicconcern has already been expressedat the disproportionate funding ofbreast cancer over other cancertherapies in socialised healthcaresystems, a concern which is beingvoiced by patients and doctors whohave research and treatment needs in other disease areas.

One of the most controversial aspectsof PAGs 20 is their funding, and thesuspicion that the pharmaceuticalindustry may be influencing them toput commercial considerations overhealth outcomes. Critics point to theconcentration of funding oforganisations working on conditionsaffecting a large number of people, forwhich a specific therapy exists andwhich require long-term treatment – allof which combine to offer significantreturn on investment.

PAGs deny that funding influencestheir behaviour or priorities and point to strict guidelines that governcorporate relationships and protectagainst conflicts of interest. Despitethis, as budget pressures mount, theythemselves are likely to come undergreater scrutiny to prove impartiality.

Trust Me: Tell Me: Show Me

Convincing payers – be they public orprivate – patient or institution – thatpharmaceutical products offer valuefor money is therefore a significantchallenge. It will require a greaterevaluation of customer needs as far upstream in the R&D process as possible. In the light of scientificchanges it probably requires muchgreater targeting of sub-populationsand willingness to accept a portfoliobased on a range of more targetedmedicines, rather than today’s broadspectrum approach. It is likely toinvolve calls for the industry tobecome more involved in preventativeprogrammes and a holistic approachto healthcare. And all of these willhave a profound effect on marketingand sales strategies.

Industry is fully aware of these trendsand has undertaken a number ofinitiatives on the issue ofpharmaceutical value.21 Nevertheless it is worth reflecting on how importantthe development and underpinning oftrust will be in this new environment. It is interesting to note how Shell, in a comparably besieged industry,adjusted to changing stakeholderexpectations by moving through atrust me–tell me–show me continuumas it too realised that an evidencebase was required for people to trust the firm.


Payers:Scope for Action

Participants in Pharma Futuresdiscussions acknowledged the growing importance ofpharmacoeconomics and that the manner in which individualcompanies and the industry as awhole responds to demands formore evidence-based reimbursementwill be an important determinant offuture success. Investors areinterested to understand how thefollowing challenges will be managedthrough the receipt of more specific,detailed information.

Challenge 5To Become a Trusted Partner inDefining Value for MoneyAs budgetary pressure leads payersto develop institutionalised modelsfor evidence-based reimbursement,the industry is faced with the primarychallenge of establishing itself as atrusted partner in the definition ofwhat constitutes value for money. As seen above, this is no easy task inan era of high pharmaceutical pricesand within a context of mistrust.

Challenge 6To Work Within SystemConstraintsOnce established as a trustedpartner, industry and its corestakeholders face the challenge ofdefining how to implement policiesand practices that flow from theagreed definition of what constitutesvalue for money. This will entaillooking at the issue from at leastthree (sometimes divergent)perspectives: therapeutic outcome(which may look different to patientsand payers), healthcare systemsefficiency (in a context of siloedhealth budgets) and societal need(which is extremely difficult toquantify and attribute). Industry willneed to participate in this process in such a way as to acknowledgebudgetary and political constraintson payers who will be seekingevidence that their pharmaceuticalexpenditure meets the patient,systems and societal demands for which they are accountable. In markets that operate within asystem of socialised medicine, thiswill be compounded by the need topreserve commitment to equity inhealthcare delivery. This challenge is likely to have implications for data collection during the clinical trial process and in post-marketingsurveillance, pricing policies,marketing and public affairsfunctions.

Payers:What Investors Want to Know

Investors in the Pharma Futuresproject expressed interest inunderstanding industry’s attitude torisk-sharing with payers and othercollaborative ventures that provevalue for money including theintegration of business models fordelivery of services such as medicaldevices to guarantee cost reductionsor the guarantee of clinical benefit,thus reducing waste. Theyacknowledged the difficulties indefining ‘value’ as perspectives of different stakeholders varyconsiderably. Consequently, theywere keen to understand howcompanies are applying lessons ofpast risk- and cost-sharing initiatives.Investors in the project considered it possible to eliminate the riskdiscount for successful efforts toshow society that the industry is ableto deliver profit at lower prices.Investors in the project expressed awillingness to consider an adaptationto a current business model in which bottom line growth is achievedby increased sales, even if marginsare somewhat lower.

‘The extent to which consumers are the end users but are not the ultimate payers is part of the problem.’ Financial Analyst

26Pharma FuturesPharma FuturesPharma Futures

Emerging Markets

27Pharma FuturesPharma FuturesEmerging Markets

The significance of thepharmaceutical industry’s mainmarkets (the USA, Europe andJapan) remains undiminished in the short and medium term. Thereseems little doubt, however, that intime emerging markets (countrieswhose economies have started togrow but have yet to reach a maturestage of development and/or wherethere is significant potential foreconomic or political instability) willcome to play a key role in shapingthe industry’s future fortune.22

Early signals already demonstrate howimportant these markets are likely tobe as opportunities for future growth,the source of continued and increaseddemands around access to medicinesand accompanying political risk, andthe scene of intense competition. This competition is taking place inmarkets where highly competitive,domestically domiciled, genericmanufacturers already have a stronghold. It will also take the form ofintellectual competition, as manyemerging market governments areactively nurturing their own R&Dcapabilities, and of efficiencies inmanufacturing costs.

Emerging markets that offer promisinggrowth prospects, such as China,India, Mexico and Brazil, differsignificantly from developing and least developed countries,23 whichoffer limited or no commercialopportunities. It is these poorercountries – particularly those in Sub-Saharan Africa – which havebeen the focus of many demands on the industry, and they tend to bewhere companies undertake manyaccess and donations programmes.The challenge emerging markets pose is not the same one of lack ofcommercial opportunity.

Rather it is how to balance – within a single market – the commercialopportunities offered by a growingconsumer base and the ongoingaccess needs of the poor majority.Across the developing world (andincluding developing countries andemerging markets – where theincomes of the poor can be extremelylow) the access equation that isprevalent in industrialised markets –whereby a relatively small percentageof the overall population does nothave access to medicines – isreversed. Meeting these access needs is and should be primarily achallenge to governments – both ofthe countries themselves and alsomultilateral and bilateral donors – buthistory has demonstrated that theindustry too will be held to account todo all it can to address unmet need.

Five years ago the incremental sales in this industry were largely generatedin the USA. In 2001 the absoluteincrease in sales was US$47.5 billion,with around US$28 billion comingfrom the USA, US$14 billion fromEurope and less than US$3 billionfrom the emerging markets.24 In 2005,over 30% of incremental sales camefrom emerging markets. In 2006,though Medicare Part D had swungthe pendulum back to the USA, thecombination of economic growth (9% and 8% for India and Chinarespectively in 2006), changingdemographics, the limits to payercapacity in OECD countries andchanging disease profiles combined to offer significant growth prospectsthat only the most blinkered observercould ignore. And for reasons theprevious section outlines, manyinvestors feel more confident aboutfuture growth calculations based onvolume rather than price increases.

The Resurgence of the East

The Asia–Pacific pharmaceuticalsmarket generated total revenues of$102.7 billion in 2006, representing aCAGR of 4.7% for the five-year periodspanning 2002–2006. This regionalpicture hides a telling finding. Whilethe Japanese market (which todayaccounts for over 60% of the regionalmarket total) grew by 2%, China(accounting for 12% of the total) grew by a whopping 17%.25 China is predicted to become the seventhbiggest pharmaceuticals market in the world by 2010, with annual salesof $37 billion.26 India comes in behindChina with an average CAGR between2006 and 2011 predicted at 7.3%.27

By contrast, the Japanesepharmaceutical market is predicted to increase by only about 2% per year,though the market will continue torepresent 56% of regional sales.28

Changing Disease Burdens

One characteristic of this growth-leddemand is a – perhaps surprising –change to the disease burden, with a sharp increase in what are oftenwrongly characterised as ‘diseases of the affluent’. In many people’sminds developing countries are stillassociated with infectious diseases,and in particular HIV/AIDS, malariaand TB. These diseases do indeedcontinue to pose enormouschallenges, but they are not the onlyproblem. As a result of urbanisation,more sedentary lifestyles, bettertransportation, more pollution, lessphysically demanding work, changingdiets and an increase in smoking, the picture is changing rapidly.

‘Despite all the predictions of growth in emergingmarkets, we are not yet sure whether it’s hope orreality. The price points are still problematic.’Pharma Executive

28Pharma FuturesPharma Futures

Even in poorer communities, diabetes,cardio-vascular disease and cancerare increasing at alarming rates.Figure 7 shows the global marketshare of leading diseases.

Worldwide, cardiovascular disease(CVD) is the single largest cause ofdeath and is responsible for one inthree deaths. The assumption thatCVD is largely a disease of wealthymen is outdated: it is the single largest cause of death among womenworldwide (causing 18 times moredeaths than breast cancer) and 80%of the 17 million annual deaths causedby heart disease occur in low andmiddle-income countries. Nor is it onlya disease of the elderly. Children areat increasing risk, for example,through tobacco smoking (active andpassive), being overweight or obeseand lack of physical activity.

And more than one-third of thesedeaths occur in middle-aged adults:globally, cardiovascular diseasesaccount for as many deaths in youngand middle-aged adults as HIV/AIDS.29

Likewise, and surprisingly, over halfthe world’s cases of obesity are foundin China and India. Diabetes, to whichobesity can give rise, is set to increasefrom 194 million to 333 million peopleby 2025. Its complications includeheart disease, stroke, blindness andrenal failure.30 These trends offersignificant market potential to thepharmaceutical industry, reflecting as they do a match with today’s top-selling therapeutic areas (seeTable 2 on page 22). Forward-lookingcompanies are already mapping thespread of diseases and marketpotential arising from the spread ofmalaria or TB into mainstream marketsas a result of increases in travel, andsome companies’ R&D portfoliosalready reflect these changes.

From Potential to Reality

Despite these changes, however,emerging markets show – at best –partially realised potential. And thereasons are not difficult to gauge.First, even the wealthier emergingmarkets are dwarfed by theirindustrialised country equivalents.Significant volume growth is likely tobe provided over time from the 150million middle class Indians and the100 million Chinese consumers whoare already stretching their financialmuscles, but their ability to pay prices equivalent to their westerncounterparts is extremely limited. Per capita health expenditure in Indiatoday is US$82 and in China US$278,compared with US$2,500–3,000 inWestern Europe and US$5,900 in theUSA. Though these composite figuresmask the high health spend of largenumbers of people, the transitionchallenge is very real.31

Pharma FuturesEmerging Markets

Figure 7Global Market Share ofLeading Diseases

Source: Adapted from LehmanPharma Pipelines 2006

100

90

80

70

60

50

40

30

20

10

%

Central Nervous System

Anti-infectives (non-chronic)

Cardiovascular

Respiratory

Diabetes

Oncology

Others

15%

10%

18%

07%

04%

09%

37%


At the same time many companies arewary of the barriers to entry posed byweak intellectual property laws (orpoor evidence of effectiveenforcement of such laws), non-transparent regulatory structures, andpoor or non-existent registrationsystems.

Second, these markets are highlyfragmented with the burden ofpharmaceutical spend in emergingmarkets, developing countries andleast developed countries falling toindividuals as out-of-pocketexpenditure. Widespread poverty isthe greatest obstacle for many. Evenwhere people can afford to pay,limited government involvement as apayer and the health insurance markettends to be limited, meaning that theprice discounts that can follow frombulk purchasing arrangements are notcaptured by the consumer. Accordingto the World Health Organisation,though the private sector tends tohave more chronic disease medicinesavailable than the public sector, pricesare much higher and range from threeto one hundred times the internationalreference price at country level. Thesituation is frequently caused as muchby taxes, duties and mark-ups as theoriginal manufacturer’s price.

The role the industry plays in manyemerging markets is judged againsteconomic development and povertyreduction considerations as well ashealthcare. Politically, both the Indianand Chinese governments arecommitted to supporting thedevelopment of their domesticindustries while remaining compliantwith trade-related aspects ofintellectual property rights (TRIPS), butwhat that means in practice is subjectto different and divergentinterpretation.

Likewise, registration decisions maywell be affected by future affordability.Emerging markets are also newlydefining and offering areas in which tocapture competitive advantage.

R&D

Recent studies by consultants andanalysts alike are urging globalpharmaceutical companies to seekcost efficiencies by undertaking moreR&D in India and China. A recentstudy, for example, calculates thatclinical trials conducted in India costup to a third less than those in theUSA or Europe, and points out thatthe country also boasts a large pool of well-educated, English-speakingpersonnel, relatively smoothadministrative procedures for theapproval of clinical trials and fastpatient recruitment times. It highlightsChina’s competitive advantage inbiological research and manufacturingcapacity.33 Many large pharmaceuticalcompanies have already takenconsiderable note of the opportunitiesto invest in India and China witnessedby recent, substantial investmentsthere.

The competitive advantage ofoperating in these countries is not,however, necessarily best captured byglobal pharmaceutical companies.Both countries also have significantgeneric industries, eager to takeadvantage of recent patent expiries inthe USA and Europe to consolidatetheir presence in those markets. Themanufacturing efficiencies of thesefirms have been a source of interest tomultinational pharmaceuticalcompanies for some time, and havenot been easily understood.

Access to Medicines and Political Risk

A final reason for considering theimportance of emerging markets is forthe political risks that extremeinequality poses. The combination ofunmet medical need and chaotic,opaque private markets poses anongoing challenge to thepharmaceutical industry as itconsolidates its presence in thesegrowing markets. A key challenge tothe industry going forward will be tomanage successfully expectationsabout the most appropriate role for itin providing access to medicines. Theindustry has historically taken theposition that issues of access aregovernments’ problem and not itsresponsibility to solve. However,efforts by individual companies andindustry associations to date havefailed to quell demands and a numberof significant policy challenges remaindiscernable. If anything, it is likely thatthese demands will grow rather thandiminish.

Current and Future Challenges – Least Developed Country Needs

The manner in which the industryresponds to the ongoing needs ofpoor people in least developedcountries is likely to haverepercussions on its licence tooperate, not just in these markets, butalso in emerging markets where largenumbers of people are very poor.Despite impressive efforts to meetneed through public-privatepartnerships (PPPs) and individualcompany initiatives involvinggovernments, industry and civilsociety, there is still a huge gapbetween provision and medical need.

‘The top selling therapeutic areas of the pharmaceutical industry match the diseasescausing death and morbidity in a growing number of emerging economies.’Global Health Expert

30Pharma FuturesPharma FuturesPharma FuturesEmerging Markets

02 04 05

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

03 06

Figure 8India Pharmaceutical MarketValue and Growth 2002–2006Source: Datamonitor

US$ Million

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

%

Market ValueGrowth

Case Study: India 32

India forcefully illustrates the dilemmafacing pharmaceutical companies inemerging markets.

Underlying Market Fundamentals . . .

Market value is growing (Figure 8).Stable macroeconomic performanceis predicted to result in graduallyincreased per capita expenditure onhealthcare and pharmaceuticals.Though there is no consensus aboutthe precise size and purchasing powerof the middle class, by somecalculations 50 million Indians –presenting a market only a fifth smallerthan the UK – can afford to buywestern medicines. Life expectancy isincreasing: by 2025, an estimated 189million Indians will be 60 or older. Thegrowth of chronic diseases and risinghealthcare expectations will boost thedemand for cardiovascular,neurological, metabolic and cancerdrugs. The majority of healthcareservices in India are provided by theprivate sector. In 2002 fee-chargingprivate companies accounted foraround 82% of overall healthcareexpenditure, with various levels ofgovernment covering the remaining18%.

. . . Juxtaposed Against Terrible Poverty

In the same country, however,approximately 300 million people liveon less than a dollar a day, more than50% of all children are malnourished,and 90% of the elderly have either nostate pension or lack families to takecare of them. Although publicspending on healthcare is predicted torise, the prospect of large andsustained increases is low and no oneis predicting the sort of massivebudget increases that would beneeded to make serious inroads toaddress unmet medical need. Wherethe government does providehealthcare it is largely theresponsibility of individual states.Most health expenditure thus falls toindividuals, of which 75% of the totalis spent on drugs, in both rural andurban areas. The industry is thereforefaced with the challenge of managingcommercial prospects and enormousunmet medical need. Though it isunfair to ask the industry to assumegovernment responsibility forhealthcare provision its actions arejudged, in part, by their contribution toincreasing access to medicines.

‘ What are the ethics of trials using people whoare unlikely to benefitfrom any successfultreatment?’External Expert


Though precise figures are notoriouslydifficult to come by, the WHOestimates that antiretroviral therapies(ARVs) now reach an unprecedented1.5 million people in low and middle-income countries, but out of a total of 37 million. This is up from onlyaround 240,000 in 2001.34

More than 90 million TB patients were reported to the WHO between1980 and 2005; 26.5 million patientsundertook directly observed treatmentshort course (DOTS) programmesbetween 1995 and 2005, and 10.8million new smear-positive cases wereregistered for treatment by DOTSprogrammes over the same period.35

And existing treatments and therapiesare insufficient to tackle extensivelydrug resistant TB. In the case ofmalaria, although 3.2 billion peoplelive in areas at risk of malariatransmission, and 350–500 millionclinical malaria episodes occurannually, in most malaria-affectedcountries of Africa, Asia and SouthAmerica, less than one-fifth ofhouseholds have access toinsecticide-treated nets.36

And this situation means that pressureon both government and industry is unlikely to ease. Recent accesschallenges to the industry – aroundintellectual property and internationaltrade, ‘bio-piracy’, research intoneglected diseases, and price andaccess – have not gone away. At thetime of writing this report three high-profile challenges were ongoing inIndia, the Philippines and Thailand. In April 2007 the UK governmentlaunched its Medical TransparencyAlliance (MeTA) project calling forgreater transparency in workingpractices on the part of those involvedin the registration, distribution,procurement and sales of medicines in developing countries. More salutaryperhaps is the evidence that morethings are being added to this list.Demands for action on chronicdiseases – in middle income countriesas well as in least developed countries– are increasing in frequency.

Questions are being asked aboutgood clinical practice in theapplication of quality protocols inundertaking trials in these challengingenvironments and the ethics ofundertaking clinical trials amongpatients who may not benefit from any successful treatment. And mostrecently there have been rumblings –an echo of the mid-1980s – ofconcerns about marketing ethics to which the International Federationof Pharmaceutical Manufacturers has responded with a revisedmarketing code.

2005 2015 2030

Central nervous system 1 1 2

Respiratory infections 2 8 6

Perinatal conditions 3 4 5

Cardiovascular diseases 4 3 3

HIV/AIDS 5 2 1

Diarrhoeal diseases 6 7 9

Childhood-cluster diseases 7 11 12

Sensory organ diseases 8 6 4

Malaria 9 9 10

Chronic respiratory diseases 10 5 7

Cancers 13 10 8

Table 3Top Ten Disease Burdens of Low Income Countries 37

Based on projected DALYs

Source: Report author’s calculationsbased on WHO data

32Pharma FuturesPharma FuturesPharma FuturesEmerging Markets

Emerging Markets:What Investors Want to Know

Investors in the Pharma Futuresproject expressed interest in seeingthe industry adopt a strategicapproach to emerging markets anddeveloping countries. In particularthey were interested to understandthe overall strategy to deal with thecomplexities of markets in whichthere is a segment of the populationwhich cannot afford to pay formedicines at all, a segment who can afford them, but who cannot pay developed world margins, and a third segment who can pay fullmarket prices.

Investors in Pharma Futuresidentified the issue of access tomedicines in the developing world as a reputation risk and, in parallel,as a potential risk to licence to tradeand to the opportunities emergingmarkets present in future.

Making the problem go away isimportant to investors, but how this is achieved is also vital. Servingthese markets in a differentiated way,being well established and havingstrong governmental relations arelikely to be critical to future success.

The pharmaceutical industry is in the business of partnerships.Typically, relationships are built overdecades – particularly where thepayers are public. Relationshipsformed today are likely to bear fruit over 10–20 years. Long-terminvestors want to see companiesinvesting in these new markets and are prepared to accept that such investments may negativelyaffect the profit and loss in the short term.

Emerging Markets:Scope for Action

Participants in Pharma Futuresacknowledged the importance ofadopting a strategic approach to theemerging markets. Pharmaceuticalrepresentatives were somewhatsurprised at the extent of the interestexpressed by mainstream investorsin the Working Group, as it is notcommon from this constituency. The following challenges werediscussed by the group and ratifiedas requiring management response.

Challenge 7To Respond Appropriately toDemands for More Equitable andExtensive Access to MedicinesParticipants in Pharma Futuresdiscussed the importance ofstrategically positioning the industryin the emerging markets to ensurefuture licence to operate. Asemerging markets become morecommercially interesting they pose a two-pronged challenge to theindustry, which requires asignificantly different managementskill set from those needed inindustrialised markets. The firstprong requires industry to develop a pricing policy that captures notonly the premium markets butpermits an extension of volume sales to a wider customer base. And this must be achieved whilesimultaneously preventing negativeimpacts – such as reference pricingor inappropriate parallel trade – inestablished markets. The secondprong is to respond to demand foraccess to medicines in thesemarkets (and in countries that areless commercially promising) in sucha way as to defend the industry’scommercial interests while at thesame time persuading key decision-makers that the response is sufficientto overcome mistrust, minimisecriticism and extend licence tooperate. Developing strategies toposition the company for the futurewill need to encompass responses to chronic diseases, which mightinclude involvement in preventionprogrammes as well as seekingmarkets.

The challenges posed by emergingmarkets, developing countries andleast developed countries will bedifferent, but some issues willoverlap all three and all are likely to require government and industryto work together with otherstakeholders to facilitate thebroadest possible access tomedicines. And all will be undertakenagainst a background of inequalityand chronic poverty in which thesechallenges are further compoundedby an often lukewarm governmentcommitment to public health relativeto other priorities.

The industry also needs tounderstand how continued demandfor access to medicines in thepoorest countries will have a bearingon emerging markets and vice versa.For example, the industry couldreview whether least developedcountry markets, which offer nocommercial opportunity, are sufferingthe consequences of TRIPScompliance on the part of countriesthat formerly supplied them with lowpriced generics, and, if so, what anappropriate strategy to address thiswould be. Recent disputes overintellectual property recognitionunderpin a societal concern toensure that developing countryTRIPS compliance does not come at the expense of placing medicineprices beyond the level affordable by many people. A similar principleapplies to medicines for neglecteddiseases and drug formulations that are applicable and usable indeveloping countries; the currentpatent scheme does not rewardindustry sufficiently to direct R&Dresources to this much-neededeffort. Civil society critics argue that the impoverished within thedeveloping world have had to accept TRIPS and TRIPS Plus with no healthcare benefits accruing to them.


Pension Fund Afterword

As pension funds concerned tosecure long-term value of ourhealthcare portfolios, ABP, OPERSand USS identified the followingareas as being of significant interestin the future.

Leadership

More demanding consumers, thegrowing importance of emergingmarkets, a conservative FDA andpowerful managed healthcare bodiesall mean that pharmaceutical businessmodels will need to be morenetworked and collaborative than theyhave been in the past. The pace ofevolution from monolithic, centralisedorganisations towards more flexiblepartnership-orientated ways ofworking will need to accelerate. Thisposes huge challenges tomanagement attitudes and leadershipapproaches in the industry. Seniormanagement will need to be sensitiveto the needs and expectations of verydiverse stakeholders, within theirorganisations as well as outside them.Their responses to these pressureswill need to be finely balanced in orderto regain and maintain the trust ofthese stakeholders without losingsight of shareholders’ interests. Thetalent and quality of the topmanagement team, successionplanning to refresh and adapt them,and their incentive structures will be akey focus for investors in this newenvironment.

Communication

A key challenge which emanated fromPharma Futures I and is prevalentthroughout this current report is theneed for improved communicationchannels and systems between theinvestment community and thepharmaceutical sector. Morestructured, regular and comprehensivecommunication will enhance investors’understanding of the ways in whichpharmaceutical executives perceiveand are addressing the key valuedrivers for the sector and the currentchallenges, risks and opportunitiesthey face.

In turn, improved communication willhelp pharmaceutical executives toidentify the scope, quality andtimeliness of information required byinvestors to permit them to assess thelong-term prospects ofpharmaceutical companies withconfidence. A more fluid two-waycommunication is therefore needed toimprove levels of trust, understandingand a greater alignment of interestsbetween investors and pharmaceuticalexecutives.

Trust and Reputation Management

The debate about trust in thepharmaceutical industry tends toconcentrate on the expectations ofsocietal stakeholders – governments,patients, payers and doctors.However, investors too work on thebasis of trust. Trust underpins thediscretion they are granted to invest inthe assets of others. To comply withtheir obligations, and to make moreinformed decisions, investors seekinformation from pharmaceuticalexecutives that provides them with arange of variables and sufficientlypredictable behaviour to permit themto monitor the status of the asset overtime. Trust breaks down whenexpectations are not adequatelyaligned and reputation damageensues. Investors are thereforeinterested to ensure thatpharmaceutical management pursuesan approach to reputationmanagement that is built on rebuildingrelationships with core stakeholders inincreasingly networked, collaborativebusiness models in order to takeadvantage of the market opportunitiesthey face.

34Pharma FuturesPharma FuturesPharma FuturesAppendices

Appendix 1References

1 Arthur D Little multi- client study 2000/2001,American ClinicalResearch Professionals.

2 Dr Ulrike Schulze, Future Challenges andOpportunities for thePharmaceutical Industry,Swiss Re Life ScienceForum, 2006.

3 New molecular entities differ from non-NMEs,which include modifica-tions of, or new approveduses of, existing drugs.BLA stands for BiologicLicense Application.

4 IMS Health, Changing Market Dynamics in 2007, 4 December 2006. http://open.imshealth.com/webshop2/IMSinclude/i_article_20061204a.asp

5 Patricia M Danzon, Andrew Epstein and SeanNicholson, Mergers andAcquisitions in thePharmaceutical andBiotechnology Industries,Working Paper Number10536, Cambridge,Mass., National Bureau of Economic Research,June 2004.

6 B Achilladelis and N Antonakis, ‘The Dynamics ofTechnological Innovation:the Case of thePharmaceutical Industry’,Research Policy, Volume30, 2001, pp.535–588.

7 Frost and Sullivan, Innovation Decline isConcern for PharmaCompanies, 11 May 2006.www.laboratorytalk.com/news/fro/fro230.html

8 R Mullin, ‘Priming the Pipeline’, Chemical &Engineering News,Volume 82, Number 7, 16 February 2004.http://pubs.acs.org/cen/coverstory/8207/print/8207pharmabiz.html

9 A Motluk, ‘Unblocking the Drugs Pipeline’, NewScientist, 6 August 2005.www.sciencejobs.com/data/pdf/insider/insider143.pdf;jsessionid=CNPHELEACBCM

10 I Cockburn, ‘Is the Pharmaceutical Industryin a Productivity Crisis?’,paper prepared for theNational Bureau ofEconomic Research’sInnovation Policy and theEconomy Conference,Washington DC, 19 April 2006.www.nber.org/books/innovation7/cockburn4-29-06.pdf

11 E Mossialos, D Brogan and T Walley, ‘Pharma-ceutical Pricing in Europe: Weighing out theOptions’, InternationalSocial Security Review,Volume 59, Number 3,2006; also, OECD HealthData 2005: Statistics and Indicators for 30Countries, Paris, OECD,2005, quoted inMossialos et al.‘Pharmaceutical Pricing inEurope’.

12 Datamonitor, Global Pharmaceuticals –Industry Profile, London,December 2006.

13 Rod Cavin, ‘Forecasting Medicare: Price Controlsin the Years Ahead’,Pharmaceutical Executive,December 2006, p.65.Rod Cavin is Principaland Managing Director ofHealth Strategies Group.

14 World Health Organisation, The WorldHealth Report 2006 –Working Together forHealth.www.who.int/whr/2006/en/index.htmlPharmaceuticalexpenditures data areown estimates based onEconomist IntelligenceUnit, Pharmaceutical andHealthcare Forecast:World, June 2005, andCIA population data fromJune 2006.

15 ‘The Disability Adjusted Life Year (DALY) is ahealth gap measure thatextends the concept ofpotential years of life lostdue to premature death toinclude equivalent yearsof ‘healthy’ life lost byvirtue of being in states ofpoor health or disability.The DALY combines inone measure the timelived with disability andthe time lost due topremature mortality. One DALY can be thoughtof as one lost year of“healthy” life and theburden of disease as ameasurement of the gapbetween current healthstatus and an idealsituation where everyonelives into old age free ofdisease and disability’(source: WHO).


High-income countriesinclude: Andorra, Aruba,Australia, Austria,Bahamas, Bahrain,Belgium, Bermuda, BruneiDarussalam, Canada,Cayman Islands, ChannelIslands, Cyprus,Denmark, Faeroe Islands,Finland, France, FrenchPolynesia, Germany,Greece, Greenland,Guam, Iceland, Ireland,Israel, Italy, Japan,Kuwait, Liechtenstein,Luxembourg, Monaco,Netherlands, NetherlandsAntilles, New Caledonia,New Zealand, NorthernMariana Islands, Norway,Portugal, Qatar, Republicof Korea, San Marino,Singapore, Slovenia,Spain, Sweden,Switzerland, United ArabEmirates, UnitedKingdom, United Statesof America, and UnitedStates Virgin Islands.

16 Managed Care is a system through whichhealthcare providerscombine with insurers tooffer insured peoplepreferentially discountedhealthcare.

17 Kaiser Family Foundation, Kaiser/HRET Survey ofEmployer-SponsoredHealth Benefits: 2002.

18 R Cavin, ‘Forecasting Medicare: Price Controlsin the Years Ahead’,Pharmaceutical Executive,Number 65, January2007.

19 A Downie, ‘Brazil Pushes for Cheaper Drugs andFree AIDS Diagnosis’,Christian ScienceMonitor, 23 August 2005.

20 This section, unless footnoted otherwise,draws on New Scientist,patient groups specialissue ‘Swallowing the Best Advice?’, 17 October 2006.

21 For example, the European HealthcareInnovation LeadershipNetwork and TheInternational Society forPharmacoeconomicOutcomes and Research.

22 Definition from Pearson Education, 2007.

23 Least developed countries refer to theworld.

24 IMS Health, MIDAS and MAT data, quoted bySeyed Mortazavi, VPSales Europe, IMS Health,in his presentation‘Review of the GlobalPharmaceutical Market’.

25 Datamonitor, Pharmaceuticals in Asia-Pacific, December2006.

26 The size of the Chinese market has been acontested issue. BMIargues that the IMS formsits estimates relying ondata from major hospitals,while BMI also includessmaller hospitals insidethe country. (BMI, ‘BMI Stands by itsForecasts’, Asia PacificPharma and HealthcareInsight, February 2007;Datamonitor,Pharmaceuticals in China:Industry Profile,December 2006).

27 Datamonitor, Pharmaceuticals in India,December 2006.

28 Datamonitor, Pharmaceuticals in Japan,December 2006.

29 World Heart Federation, Annual Report 2004, p.4.

30 International Diabetes Federation, DiabetesAtlas: Regional Estimatesfor Diabetes (20–79 agegroup) 2003 and 2025.www.eatlas.idf.org/prevalence/all_diabetes

31 WHO, The World Health Report 2006 – WorkingTogether for Health,www.who.int/whr/2006/en/index.html

32 Datamonitor, Pharmaceuticals in India: Industry Profile,December 2006; BusinessMonitor International,India Pharmaceuticals and Healthcare Report Q3 2006;PricewaterhouseCoopers,India: Prescription forGrowth, 2005; EconomistIntelligence Unit, Health-care and PharmaceuticalsForecast, June 2005,pp.155–162.

33 The Boston Consulting Group, Looking Eastward:Tapping China and India to Reinvigorate the Global BiopharmaceuticalIndustry, BCG, August2006.

34 World Health Organisation, AIDS Epidemic Update,December 2006, p.2;WHO, 2006 Report onGlobal AIDS Epidemic,p.152.

35 WHO, Global Tuber-culosis Report 2007: Key Findings.www.who.int/tb/publications/global_report/2007/key_findings/en/index.html

36 WHO, World Malaria Report 2005. www.rbm.who.int/wmr2005/html/toc.htm

37 Low income countries, according to the WHOdefinition, include:Afghanistan, Angola,Armenia, Azerbaijan,Bangladesh, Benin,Bhutan, Burkina Faso,Burundi, Cambodia,Cameroon, CentralAfrican Republic, Chad,Comoros, Congo, Côted’Ivoire, DemocraticPeople’s Republic ofKorea, DemocraticRepublic of the Congo,Equatorial Guinea, Eritrea,Ethiopia, Gambia,Georgia, Ghana, Guinea,Guinea-Bissau, Haiti,India, Indonesia, Kenya,Kyrgyzstan, Lao People’sDemocratic Republic,Lesotho, Liberia,Madagascar, Malawi,Mali, Mauritania,Mongolia, Mozambique,Myanmar, Nepal,Nicaragua, Niger, Nigeria,Pakistan, Papua NewGuinea, Republic ofMoldova, Rwanda, SaoTome and Principe,Senegal, Sierra Leone,Solomon Islands,Somalia, Sudan,Tajikistan, Timor-Leste,Togo, Uganda, Ukraine,United Republic ofTanzania, Uzbekistan,Vietnam, Yemen, Zambiaand Zimbabwe.

Pharma FuturesAppendices


Sponsoring Pension Funds

Name Title Organisation

Martin Eijgenhuijsen Senior Portfolio Manager ABP Investments

Scott Streator Director, Health Care Ohio Public Employees Retirement System (OPERS)

Daniel Summerfield Co-Head, Universities SuperannuationResponsible Investment Scheme (USS)

Pharma Futures Working Group


Stewart Adkins Director Stewart Adkins Advisors Ltd

Viggo Birch Managing Director Novo Nordisk UK

Paulo Costa Chief Executive Officer Novartis Corporation

Martin Eijgenhuijsen Senior Portfolio Manager ABP Investments

Niall Kirk Director, US Equities F&C Management

Guy J Lebeau Company Group Chairman Johnson & Johnson

Robert Mallett Senior Vice President, PfizerWorldwide Public Affairs and Policy

John McHale Senior Vice President Pioneer Investment Management Ltd

Viren Mehta Principal Mehta Partners

David Norton Company Group Chairman Johnson & Johnson Pharmaceuticals Group

John Schaetzl Vice President GE Asset Management

Scott Streator Director, Health Care Ohio Public Employees Retirement System (OPERS)

Daniel Summerfield Co-Head, Universities SuperannuationResponsible Investment Scheme (USS)

Ian Talmage Senior Vice President, BayerGlobal Business Strategy

Lynn Tetrault Executive Vice President, AstraZeneca Corporate Affairs & Human Resources

Andrew Witty President, GlaxoSmithKlinePharmaceuticals Europe

These individuals took part in this project in their personal capacity and organisational affiliations are shown for identification purposes only.

Appendix 2Project Participants

37Pharma FuturesPharma FuturesAppendices

SustainAbility

Name Title

Sophia Tickell Chairperson

Ritu Khanna Project Manager

Mark Lee CEO

Supplementary input

John Elkington Founder & Chief Entrepreneur

Peter Zollinger Vice-President

Meghan Chapple-Brown Associate Director

Philip Gounev Researcher

External Experts


Per Batelson Chief Executive Officer Global Health Partner, Plc

Ted Bianco Director, Technology Transfer Wellcome Trust

Perry Bridger Vice President, Avalere Health LLCReimbursement

Andrew Chivers Clinical Executive Committee Oxfordshire Primary Healthcare Trust

Matt Clark Equities Analyst Universities Superannuation Scheme (USS)

Kenneth Cleaver Consultant Medical Product Consultant

Jeremy Curnock Cook Executive Chairman BioScience Managers Ltd

Angela Coulter Chief Executive Picker Institute, Europe

David Dworaczyk Vice President King Pharmaceuticals, Inc

Richard Ernst President and Hitachi Medical Chief Executive Officer Systems, America, Inc

Richard Evans Analyst Sanford C Bernstein

Elizabeth Fernando Equities Analyst Universities Superannuation Scheme (USS)

Eric Ghorayeb Diplomat of the ABIM American Board of Internal Medicine

Pauliana Hall President and PCH Integrated Consultant Regulatory Services, Inc

Nigel Jones Partner Linklaters

Mohga Kamal-Smith Senior Policy Adviser Oxfam

Hank Kearney President and PHM InternationalChief Executive Officer

Hannah Kettler Programme Officer, Gates FoundationHealth Policy & Finance

Richard Laing Medical Officer, Policy WHOAccess and Rational Use

Anders Olauson President European Patient Association

Bernard Pecoul Director Drugs for Neglected Diseases Initiative

Stig Pramig Director Oxford Health Alliance

Philippa Saunders Director Essential Drugs Project


Appendix 3Funding and Governance

Pharma Futures wasconvened by pension funds Algemeen BurgerlijkPensioenfonds (ABP, theNetherlands), the OhioPublic Employees Retire-ment System (OPERS, USA) and the UniversitiesSuperannuation Scheme(USS, UK). The project waspaid for by sponsors andparticipating pharmaceuticalcompanies.

The project was directed by Sophia Tickell. The project contractedSustainAbility to undertakeproject management,research and facilitation.

Appendix 4Project Process

The original aims of PharmaFutures (developed bymembers of the WorkingGroup) were:

—to identify early markers of the structural changeslikely to result in positiveor negative effects on the competitive standingof the healthcare industryin general and thepharmaceutical industryin particular

—to identify end points in which society andshareholder expectationsare better aligned, therebyensuring long-termshareholder value

—to develop new means of engagement to enableinvestors to incorporatelong-term and extra-financial considerationsinto research anddecision-makingprocesses.

The project centred aroundtwo two-day workshops inOctober 2006 and March2007, which broughttogether the core WorkingGroup of industryexecutives and investors.These workshops wereinformed by interviews with the Working Group and a significant number of senior external expertsand commentators on theindustry. The process wasenhanced by ongoing deskand primary research.

The project was under-taken on the basis of the‘Chatham House’ rulewhereby ‘Participants arefree to use the informationreceived, but neither theidentity nor the affiliation of the speaker may berevealed; nor may it be mentioned that theinformation was received at such a meeting orgathering.’

The first workshopexamined the core valuedrivers of the industry:research and development(R&D), sales, general andadministration (SG&A) –primarily sales andmarketing – top-line revenueand trust. Discussionsfocused on currentapproaches to managingthese value drivers andwhether a greater emphasison the delivery of long-term value over short-termresults would lead tochange. It acknowledgedthe considerable challengesfacing executivesattempting to balanceinvestor demand to maintainhigh quarterly returns withthe needs of an industrywhich requires long leadtimes to make strategicinvestments.

In the second workshoppharmaceuticalmanagement and investorsexamined the interplaybetween market forces and societal expectations(including those of payers,patients, regulators and so on) and how themanagement of thesefactors would determinevalue creation. Specificattention was paid to whatthe group considered to be the most significantchallenges in the futureoperating environment: themanagement of R&D, thechanging payer landscapeand the growth of emergingmarkets. The WorkingGroup decided that othercontentious issues – suchas marketing or intellectualproperty enforcement – are likely to be shaped andinformed by the degree ofsuccess in managing thesethree core value drivers.Consequently they were not discussed as themes in their own right.

39Pharma Futures

Appendix 5Glossary

BiosimulationThe use of computersoftware to simulate drugbehaviour in patient tissue,cells and organs.

PharmacoeconomicThe attempt to use clinicaland therapeutic data todetermine appropriate levelsof reimbursement.

Pharmacogenomic The study of likely reactionsto a drug given the patient’sinherited genetic make-up.

Phase I Clinical Trials Initial studies to determinethe metabolism andpharmacologic actions ofdrugs in humans and theside-effects associated withincreasing doses, and togain early evidence ofeffectiveness; may includehealthy participants and/or patients.

Phase II Clinical TrialsControlled clinical studiesconducted to evaluate theeffectiveness of the drug fora particular indication inpatients with the disease orcondition under study andto determine the commonshort-term side-effects andrisks.

Phase III Clinical TrialsExpanded controlled anduncontrolled trials afterpreliminary evidencesuggesting effectiveness ofthe drug has been obtained;they are intended to gatheradditional information toevaluate the overallbenefit–risk relationship ofthe drug and provide anadequate basis forphysician labelling.

Phase IV Clinical TrialsPost-marketing studies to delineate additionalinformation including thedrug’s risks, benefits andoptimal use.

Source: National Institutesfor Health, US government


ABP Algemeen Burgerlijk Pensioenfonds

ARV Antiretrovirals

BLA Biologics License Application

BRIC Brazil, Russia, India and China

CAGR Compound Annual Growth Rate

CEO Chief Executive Officer

CNS Central Nervous System

CROs Clinical Research Organisations

CVD Cardiovascular Disease

DALY Disability Adjusted Life Years

DDCs Drug Delivery Companies

DOTS Directly Observed Treatment, Short course

EIU Economist Intelligence Unit

EMEA European Agency for the Evaluation of Medicinal Products

EPS Earnings Per Share

FDA Food and Drug Administration (US)

GDP Gross Domestic Product

HHS US Department of Health & Human Services

HMO Health Management Organisation

IPO Initial Public Offering

IPR Intellectual Property Rights

MeTA Medical Transparency Alliance

MMA Medicare Modernisation Act

NCDs Non-Communicable Diseases

NCE New Chemical Entity

NGOs Non-Government Organisations

NICE National Institute of Clinical Excellence

NME New Molecular Entity

NPV Net Present Value

OECD Organisation for Economic Cooperation and Development

OPERS Ohio Public Employees Retirement System

PI, PII, PIII Phases I, II, III of clinical trials

PAG Patient Advocacy Group

POS Point of Service Organisations

PPAR Peroxisome Proliferator-Activated Receptors

PPO Preferred Provider Organisations

PPP Public Private Partnerships

R&D Research and Development

S, G & A Sales, General and Administration

TB Tuberculosis

TRIPS Trade-Related Aspects of Intellectual Property Rights

USS Universities Superannuation Scheme

WHO World Health Organisation

Appendix 6Acronyms

UniversitiesSuperannuation Scheme Ltd (USS)

The corporate trustee ofone of the largest privatesector pension funds in the UK with approximately238,000 members andassets at 31 March 2007 of around £30 billion. It was established in 1974to administer the principalpension scheme foracademic and senioradministrative staff in UK universities and otherhigher education andresearch institutions.

The Fund has made acommitment to long-term,responsible and activeshareownership, anapproach which isrecognised as one thatgreatly increases thelikelihood of long-termvalue creation andtherefore to be in theinterests of pension fundbeneficiaries.

Algemeen Burgerlijk Pensioenfonds (ABP)

The pension fund foremployers and employeesin service of the Dutchgovernment and theeducational sector. With an invested capital of !200billion, ABP is the secondlargest pension fund in theworld. It is ABP’s objectiveto be in a position toguarantee for its fundparticipants an adequatepension at all times at thelowest possible premiums.ABP Investments aims tomeet these objectives byachieving the highestpossible return on investedcapital, while taking well-considered risks.

For the purpose ofachieving the highestpossible return at lowcosts and acceptablerisks, ABP Investmentsinvests on its own as muchas possible. Given thatABP is a pension fund, theinvestment managers ofABP can operate with alonger time horizon thancommercial operators. This offers potentialopportunities to achieveextra return. Because ofthe size of the capital with which it operates ABP Investments plays a leading role in thefinancial world.

The Ohio PublicEmployees RetirementSystem (OPERS)

With assets of $77.6billion, serving more than930,000 members andinvolving 3,200 publicemployers in Ohio, OPERS is the 14th largestretirement system in theUSA. OPERS membershipincludes:

—380,000 active members, currentlyworking in publicemployment andcontributing to theirretirement;

—347,000 inactive members who maintainretirement accountsfrom past publicemployment;

—206,000 retirees and beneficiaries receivingmonthly pension and/orhealth benefits.

With over 200,000 retireesand beneficiaries and$1billion in annualhealthcare expenditures,OPERS is considered one of the largest non-federal health plansponsors in Ohio and theUSA and has taken anactive leadership role tohelp secure affordablehealthcare coverage forthe future.

SustainAbility

Established in 1987,SustainAbility is a values-driven organisation with a clear purpose – to helpbusiness contribute to a world that futuregenerations want to inherit.We advise clients on therisks and opportunitiesassociated with corporateresponsibility andsustainable development.Working at the interfacebetween market forcesand societal expectations,we seek solutions to socialand environmentalchallenges that deliverlong-term value.

SustainAbility providesconsultancy services to a growing portfolio ofmultinational businesses.We work with beaconcompanies whoseinfluence extends acrossindustry, as well asfocusing on six key sectorswhose strategies webelieve will have the mostprofound impact on thesustainability agenda. In addition to healthcare,these are chemicals,energy, finance & capitalmarkets, food & beverageand knowledge economy.

Publication Pharma Futures: Prescription for Long-Term Value First Edition 2007

ISBN 978–1–903168–19–6

Copyright 2007SustainAbility Ltd. All Rights Reserved. No part of this publicationmay be reproduced, storedin a retrieval system ortransmitted in any form orby any means, electronic,electrostatic, magnetictape, photocopying,recording, or otherwise,without permission in writing from thecopyright holders.

PublisherSustainAbility Ltd20–22 Bedford RowLondon WC1R 4EBUKT +44 (0)20 7269 6900F +44 (0)20 7269 [email protected]

SustainAbility Inc1638 R Street, NWSuite 301Washington, DC 20009USAT +1 202 315 4150F +1 202 315 [email protected]

www.sustainability.com

PhotographyFC Geoffrey Stewart/

The Medical File/ Still Pictures

08 Howard Sochurek/The Medical File/ Still Pictures

10 Argus/ Hartmut Schwarzbach/ Still Pictures

12 Robert Holmgren/ Still Pictures

18 Bill Bachmann/The Medical File/ Still Pictures

26 Sean Sprague/ Still Pictures

DesignRupert Bassett

PrintSeacourt

PaperRobert Horne Revive 50:50 Silk

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