Patients and profits – time for new priorities

pharmafile | July 29, 2013 | Feature | Manufacturing and Production, Medical Communications, Research and Development, Sales and Marketing |  China, McConaghie, andrew, pharma, profits 

Pharmaceutical journalists don’t retire, they just go off patent. Well, I’m not retiring as such, but after ten years as editor of Pharmafocus (and 13 years in total at the title) this will be my last entry.

This is of course the perfect opportunity to look back over the years, and consider how pharma has changed since I began life as a reporter in 1999. But I’ve found myself eschewing a nostalgia trip, and have been drawn to one of the most problematic questions for pharma – how it has struggled to reconcile the competing demands of investors and patients, of profits and ethics – and how it could do this in the years to come.

The pharma industry is unique among businesses in doing so much to improving the health of society, and yet it is perennially found to be breaking the law, or at least acting unethically.

The problem for those of us who work in the sector is that this paradox seems intractable, and we simply shake our heads and move on. Yes, pharma has made much progress in cleaning up its relationships with healthcare professionals in recent years, but the profit motive is still creating fundamental conflicts with the goal of serving patients.

Perhaps this conflict of loyalties can never be satisfactorily resolved – but it is in urgent need of reappraisal.

The blockbuster era

I joined Pharmafocus in October 1999, which happened to be remarkable time to begin reporting on the pharma industry. The sector was just entering what became known as the ‘blockbuster era’, reaping the rewards from a new generation of multi-billion dollar earners, with ballooning profits and double-digit sales growth commonplace across the sector.

Thirteen years on, the blockbuster era is now over – the US patent expiry of Lipitor in November 2011 was the symbolic end to the period, Lipitor’s $13 billion peak annual sales are unlikely (inflation not withstanding) to be matched ever again.

Most medicines launched in the last few years aren’t expected to earn anywhere near this amount, reflecting overall expectations that pharma won’t see this explosive growth for the foreseeable future. Nevertheless, one statistic stands out for me – EvaluatePharma figures show worldwide prescription drug sales fell for the first time ever in 2012 – albeit by a small 1.6 per cent.

This demonstrates the scale of pharma’s success over the last few decades, and also how it has been largely insulated from pressures other sectors have routinely faced. Analysts predict global pharma sales growth will remain around 3-6% over the next few years. 

This is a respectable level, but significantly lower than the ones enjoyed over the last 15-20 years. Ironically, I think this could be the best possible news for pharma, giving a period of more modest growth in which to reassess its corporate values, in which have been severely compromised in these boom years.

The pharma marketing gold rush

This was a period of giddy success and growth for pharma – 1999 saw the global market expand by an astonishing 11.9%, fuelled mainly by the US market, which grew by an incredible 17% that year.

This huge and growing market created a gold rush mentality, and firms threw everything into beating their rivals to win the greatest market share. The sector tripled its US sales reps numbers between 1995 and 2002, deluging doctors with visits.

This intense competition also saw unethical behaviour become endemic, including payments and gifts to doctors and promotion of unlicensed uses – most especially in the US, though Europe was far from immune to this disease.

To add to this, the US relaxed its rules in 1997 and allowed Direct to Consumer advertising for the first time. Billions were soon being spent on prime time TV advertising and other media, with companies once again locked into a marketing battle.

Selling medicine should be different to selling washing powder, Coca-Cola or any other consumer goods, but Americans are still to this day bombarded with adverts for drugs.

Despite a decline in DTC advertising budgets, the industry spent $3.47 billion on it in 2012. Viagra and its rivals have been among the most heavily advertised products, and the adverts continue to attract criticism for failing to abide by a voluntary code of standards. 

Another product destined to be blockbuster brand was launched in 1999 – Merck’s novel painkiller Vioxx. It became a stratospheric success in the US thanks to a massive marketing push – and despite warning signs of its deadly cardiovascular risks from the outset.

Vioxx’s withdrawal in 2004 was a seismic event for Merck, pharma and the FDA, with both industry and regulators held responsible for their part in exposing patients to unnecessary risk.

Post-marketing safety laws have been introduced around the world to prevent any similar cases, but Vioxx demonstrates the damage that can be done when marketing dominates medicine.

Off-label marketing and bribery

A few years into this blockbuster era, it became clear that off-label promotion of drugs and ‘kickbacks’ were now a major problem in the US market. In 2004, the US government secured its first settlement deal with a pharma company, Pfizer paying a $430 million settlement for its off-label marketing of seizure treatment Neurontin.

In the ensuing years, many more companies were caught by US investigators using these tactics. This culminated in a new record being set in 2012 when GSK was fined $3 billion for off-label promotion of three drugs: Avandia, Wellbutrin and Paxil (also known as Seroxat).  This also included a fine for GSK failing to disclose safety data on Avandia.

Significantly, the settlement with the US federal agencies required GSK to make a number of major changes to how it does business. Firstly, GSK agreed to end incentive payment to its field force for meeting sales targets.

Instead, the sales force would now be performance-managed on “business acumen, customer engagement, and scientific knowledge of GSK products”. The concept of changing salesforce incentives away from sales targets seems to me a very positive step forward – it is just a pity it was forced upon a shamed GSK, rather than being an idea the company generated itself.

The deal also obliged GSK to publish all human research studies, not just those with positive outcomes, as had been the case. “With these ground-breaking changes, GSK has committed to putting patients before profits; science before sales,” Carmen Ortiz, US attorney for the District of Massachusetts, said in a statement at the time. “We hope the rest of the pharmaceutical industry follows suit,” he added.

Over the years, I lost count of the times industry leaders told me that such major transgressions were a thing of the past, only for the latest scandal to emerge soon afterwards.

One of the problems is that these multi-billion dollar fines are relatively insignificant to the pharma companies – and some might even see them as the cost of doing business. It is instructive to note that when such settlements are announced, they tend to make no impression at all on the share price.

Pharma is rarely alone in being to blame in these situations – physicians, insurance companies, regulators and governments must also take responsibility. Wherever you look in the US healthcare system, there is inefficiency, waste, and room for corruption and perverse incentives.

One of the most glaring examples is doctors themselves, who are paid a fee for every procedure carried out, thereby encouraging needless diagnostic tests and procedures.

The American Medical Association is in the top three of organisations spending money on lobbying in Washington, spending $278 million in 2012 – one place ahead of the pharma industry association PhRMA.

It seems likely the number of cases of misconduct emerging in the US is likely to abate – partly because of these tighter controls – but also partly because US market growth is slowing, and the hunt for strong sales growth is shifting to emerging markets.

Emerging markets

Recent events have confirmed that emerging markets are just as vulnerable to this kind of scandal as the developed markets.

In July, the authorities in China arrested four GSK executives in connection with allegations of bribing doctors. The police say the executives had transferred three billion Yuan ($489m; £321m) to travel agencies and consultancies to facilitate bribes to doctors.

The claims are that the travel agencies were used as a secret channel for the bribes to government officials, doctors and hospitals in order to boost sales and prices of their drugs. The Chinese authorities have said that similar transfers were made by other international pharmaceutical firms, but have not named any so far.

Sadly, there was something inevitable about a marketing scandal occurring in China, where bribery in public life is rife. And when the sums of money involved are so huge, and such big markets are at stake, it won’t be long before someone is willing to break the rules.

An industry not on the brink of disaster

One of the obstacles to pharma reassessing its priorities is the fact that its leaders tend to operate in a corporate, finance-driven bubble. Chief executives also spend a great deal of time warning about how the industry and its R&D are under threat of disaster.

But let’s put this in perspective – over the years, no major pharma company has ever come close to going out of business, despite many being embroiled in major crises.

There are a numerous recent examples of actual ruin from other sectors which are salutary – the bankruptcy of Lehman Brothers in 2008 arrived with just a few weeks’ notice, as creditors lost faith in the bank’s assets.

The ensuing economic turmoil then tipped the ailing General Motors into bankruptcy in 2009. More recently, Eastman Kodak went bust in January 2012 after 133 years in business, after it failed to adapt to the rapid changeover to digital photography.

Unlike the big banks, no pharma company is ‘too big to fail’ – i.e., that the entire system depends on them. But the level of jeopardy that the big companies face is in truth not considerable, and this serves to insulate pharma from customer pressures. Can patients or doctors choose to boycott a drug if they don’t like the price or ethics of the firm? Generally not.

This isn’t pharma’s fault, but it does mean it is shareholders, not patients who hold sway over pharma companies.

I witnessed this detachment from reality when I interviewed an industry chief executive around 10 years ago, and it has always stuck in my mind. AstraZeneca’s then-chief executive Sir Tom McKillop, asserted during the interview that the US healthcare system was the best in the world, much to my astonishment.

Regrettably, I didn’t have the facts to hand to challenge him, but there are many: the US spends twice as much on healthcare per capita than any other nation, but doesn’t get any better outcomes; more than 25% of all US adults are without health insurance either permanently or temporarily; those with insurance could still face financial ruin if they become ill, because co-payments on medicines are so high. The list goes on, and President Obama’s 2010 reforms barely begin to address these many problems.

I don’t blame chief executives for maximising profits from the world’s most lucrative market, but nobody should be under any illusions that the US healthcare system was or is the best in the world. Sir Tom’s assertion says a lot to me about how pharma leaders can get caught up in a restrictive world view, believing that the country that spends the most on medicines must have the best healthcare system.

My impression of Sir Tom was that of an honest man, with integrity – the same as most pharma leaders, and most people in pharma. I think that illustrates how easy it is for essentially ethical people to get blinded to major problems.

Sadly, McKillop will probably be most widely remembered for being the chairman of the RBS bank, which had the now notorious Fred Goodwin as its chief executive. Sir Tom failed to see the danger in Goodwin’s aggressive expansion plan, which eventually required a bailout from the UK government to prevent its collapse.

What have shareholders ever done for patients?

One of the biggest fallacies is that the interests of shareholders and patients are perfectly aligned. The proposition is that stock market listed, growth-driven pharma companies need to continue increasing their profits, and can serve these aims and those of patients simultaneously by discovering new and better medicines.

However, the pressure for short-term returns on investment from investors is well known, and this is not conducive to good behaviour in companies trying to match those insatiable expectations; nor is it conducive to good R&D.

So has the high-octane form of growth-driven capitalism accelerated the development of new breakthroughs for patients? There is little evidence to suggest it has, and many argue that market-led R&D has created a more conservative, herd-like mentality in drug research, which may have held back progress in some fields.

The shareholder-led model of corporate governance has a superficially democratic feel to it – the idea is that shareholders will hold chief executives and boards to account, and make sure they act in the common good.

But in reality, their overriding concern is that shareholder returns continue to rise (or at least remain high), and the interests of other stakeholders pale into insignificance. This pressure is no different to other sectors, but is more dangerous for pharma, because pursuit of profits can conflict with the interests of patients.

One of the clearest examples of where this can distort priorities is in share buybacks. This is the widespread practice of cash-rich pharma companies spending billions on buying back their own shares, thereby boosting the value of shares remaining on the market.

I have continued to be astonished by the sums spent on buybacks – a practice that has no benefits for the business, other than to please shareholders. Pfizer has gone further than any firm in the sector, spending a jaw-dropping sum of nearly $40 billion on stock repurchase programme over the past three years.

Share buybacks also show just how cash rich many pharma firms are, making it clear that large scale restructuring programmes and job losses are not done under extreme pressure to balance the books.

AstraZeneca’s announcement of further cost-cutting measures in 2012 was one of the most extreme examples of this. It announced job cuts of around 3,750 in sales, general and admin jobs, 2,200 positions in R&D, and another 1,350 in operations. These came on top of 21,600 positions already eliminated at the company since 2007. The reductions will cost $2.1 billion and save $1.6 billion a year by the end of 2014.

At the same time, then-chief executive David Brennan announced plans to spend a further $4.5 billion on buybacks and increase its dividend by 10%. This was on top of the $5 billion it spent the year before – a massive sum of money, and virtually matches AstraZeneca’s annual R&D budget ($5.2 billion in 2012).

The company had seen its revenues fall 2% in 2011, but managed to ensure its profits rose a massive 11% to $12.4 billion, achieved mainly through earlier reductions in headcount across the business.

Taken together, this puts out a clear signal – thousands of employees are expendable, but shareholder returns must be maintained, even when the business is in deep trouble.

Despite all of Brennan’s efforts to curry favour with them, the investor community could plainly see that these returns weren’t sustainable when less and less was being invested in the business each year.

Under pressure from shareholders, AstraZeneca jettisoned Brennan in 2012, and his successor Pascal Soriot halted the $4.5 billion buyback programme half way through.

A new business model for pharma

Regardless of all its shortcomings, this profit-driven model is the only viable one we have, so then the solution must lie in a recalibration of the priorities. How can pharma re-engineer its business model, so that it still pursues profit, but is no longer a slave to the bottom line? 

This question is of course not unique to pharma, in the wake of the financial crisis, many have looked around for a more sustainable and ethical form of capitalism – unfortunately there are no easy answers.

Boehringer Ingelheim is an example that proves that a pharma company need not be answerable to markets and shareholders in order to be very successful. The privately-owned German firm has enjoyed considerable success as a pharmaceutical business without recourse to the investor community.

In 2011 its R&D budget was equivalent to 23.5% of its pharma sales, nearly double what its stock market-listed rivals spend on research. Naturally I’m not proposing all pharma companies should be privately-owned, but Boehringer shows that the prevailing shareholder-controlled model is not the only option.

Many business gurus and academics have explored this subject over the last 20 years, and ‘corporate social responsibility’ (CSR) is one concept which has been widely adopted by blue-chip corporations, including pharma.

All the major pharma companies now carry out hugely impressive and large-scale philanthropic programmes, many of them tackling diseases in the least developed nations.

This is very laudable work, but somehow CSR still seems compartmentalised away from the main business, and therefore doesn’t address the conflict of interest between profits and patients in its core markets.

One approach which aims to explicitly balance interests of different stakeholder groups is the ‘Triple Bottom Line’ strategy, which makes it clear that maximising shareholders returns is not the only goal. Novo Nordisk has been following the Triple Bottom Line approach since the 1990s, and has won praise for its policy on pricing in developing countries.

However, ethical dilemmas can still arise – Novo was pilloried in Greece when it withdrew its modern insulin devices from the country in 2010 when the government there demanded a 25% price cut. The firm aimed to mitigate the situation by making its glucagen insulin available free of charge.

High prices

Prices of cancer drugs and other specialist treatments have been causing controversy for many years now, and in the UK, battles between health technology assessment body NICE and the industry are now a part of life in the sector.

But the US market has been the overwhelmingly important one for pharma, and its willingness to accept ever-rising prices has sustained pharma profits for many years. Resistance to these high prices is now growing among physicians, who are increasingly protesting at the US system which automatically reimburses drugs at the price pharma companies’ demand.

Three doctors at Sloan-Kettering addressed the issue in an opinion piece in The New York Times newspaper in October last year. They had refused to prescribe Sanofi’s new colorectal cancer drug Zaltrap, which cost twice as much as rival Avastin, but did not show any additional benefits. 

“Ignoring the cost of care is no longer tenable,” they wrote. “Soaring spending has presented the medical community with a new obligation. When choosing treatments for patients, we have to consider the financial strains they may cause alongside the benefits they may deliver. 

Unusually, the protest worked – Sanofi announced that it would cut the cost Zaltrap by 50 per cent. Then in April this year, an outspoken editorial in the journal Blood joined the attack on rising cancer drug prices.

Hagop Kantarjian, chair of MD Anderson Cancer Center was the lead author, backed by 120 leukaemia experts from over 15 countries who added their names to the article’s demand for dialogue on prices.

Kantarjian pointed out that of the 12 drugs approved by the FDA for various cancer indications in 2012, 11 were priced above $100,000 per year. Cancer drug prices have almost doubled from a decade ago, from an average of $5,000 per month to more than $10,000 per month. 

“I’m hoping that this will be the trigger for a national dialogue on cancer drug prices, and the prices of drugs in general,” he commented. “Patients are suffering. And some patients are dying.”

What about patient power?

It is frequently asserted that internet and social media has put power into the hands of patients – but this remains a wild exaggeration in relation to exerting influence on the pharma industry.

The industry remains directly answerable to shareholders, but not to patients, or any other stakeholder group. What is clearly required from pharma’s leaders is courage and a conviction to do what is right for the long-term health of the business, and do right by patients. In April this year, GlaxoSmithKline boss Sir Andrew Witty made a startling break from the industry consensus on drug prices.

“It’s not unrealistic that new innovations ought to be priced at or below, in some cases, the prices that have pre-existed them,” he remarked at a conference. “We haven’t seen that in recent eras of the [pharma] industry but it is completely normal in other industries,” Sir Andrew said.

He went on, saying that $1 billion price tag often quoted as the cost of developing one new medicine is “one of the great myths of the industry”. The figure is an average which includes products which fail, he says, so “if you stop failing so often you massively reduce the cost of drug development”, he said.

Wonders of medical science

The issue of the industry’s R&D productivity has certainly been a major problem over the last decade or so, although as Sir Andrew Witty hints, the rising cost of research has often been used to justify rising drug prices, when a slightly closer examination shows there is no direct link.

Thankfully, there are signs that pharma’s massive increase in R&D spending is finally paying off. The FDA approved a total of 39 novel medicines last year (11 of them cancer treatments) a rise of 30% compared to the previous year. The figure represents a 15-year high in 2012, far above the average of 23 approvals a year in the last decade.

The reason while all of this matters so much is simple – the pharma industry produces medicines which help people live healthier, longer lives. Despite all its woes, pharma can redeem itself when it launches a new product which advances medical treatment. The ingenuity and expertise of today’s pharmaceutical R&D is dazzling, and a true scientific wonder.

And pharma is right to push for greater access to its medicines, as long as it is a ‘fair fight’ – arguing its evidence base with an organisation such as NICE, rather than the free hand it has in the US market.

As Ben Goldacre points out in his latest book Bad Pharma, people within the pharma industry itself have the power to improve their company’s ethical behaviour, rather than having to wait for outsiders to once again expose failings; the battle for the heart and soul of the industry should be fought within the industry, and within individual companies.

The industry can call on its history for inspiration. Johnson & Johnson has its own company Credo, which stands in pride of place in the company’s New Jersey HQ, and eloquently proclaims its mission and responsibility to patients, society and shareholders.

The treatise was written by J&J chief executive Robert Wood Johnson in 1943 just before the company became publicly traded, but remains strikingly relevant to the 21st century.

Perhaps unsurprisingly, the existence of the company Credo hasn’t stopped J&J making the same mistakes as its peers, including numerous cases relating to the marketing of its antipsychotic Risperdal. Nevertheless, the Credo does show that pharma can have its own moral sense, and doesn’t need to have this imposed on it by law or new regulation.

Some may look back at the blockbuster era as a golden era for pharma, but it was most definitely tarnished by misconduct in the sector. We may well be entering a golden era for pharmaceutical R&D, and there is no reason why it can’t be a golden era for the industry as a whole, and for patients and wider society. But this requires pharma to re-evaluate its moral obligation to society, alongside its obligation to shareholders.