There are big differences within the mature markets and over the past few years the differences have been growing.

Collectively, Canada, France, Germany, Japan, the UK and US still generate 59% of the industry’s total revenues (see Figure 1). But they’re becoming more difficult places in which to prosper for one key reason. They’re all demanding better outcomes as a precondition for paying for new medicines – a change we expect to result in new regulatory requirements by 2020.

Crushing burdens
Financial pressures have played a part in hardening healthcare payers’ policies. The mature markets have experienced enormous turmoil in the past five years – and though fiscal stimuli have produced a fragile recovery in the strongest economies, the situation is still dire in the GIIPS countries .

Crushing demographic and epidemiological factors have compounded these economic woes. More than three-quarters of all Americans are overweight or obese. Obesity is also a big problem in the rest of the mature markets, with the exception of Japan. But Japan has other troubles; by 2020, 34% of the population will be 60 or older.

Age and obesity are both associated with more illness and, sure enough, the prevalence of diseases like diabetes has soared. The US has been hit especially hard. Some 11.3% of adults – rising to 26.9% of those aged 65-plus – have diabetes. Another 35% – rising to 50% of those aged 65-plus – have prediabetes. In fact, diabetes now accounts for about one in every 10 healthcare dollars. But the US isn’t alone. The prevalence of diabetes has been creeping up in Europe, too.

Consumer power is increasing the challenge. Patients in the mature economies have higher expectations than ever before. They want medicines for conditions previous generations simply endured. They want medicines that work for them. And they only have to turn to the Internet to find out what’s available – or, indeed, to broadcast their opinions: 16% of US adults in one recent survey said they post reviews of the treatments they take on social media sites.

These financial, demographic and social pressures are driving up healthcare expenditure dramatically. So it’s easy to see why healthcare payers and providers in the mature countries are doing all they can to curb the bill. Their resources are finite – and they’re particularly keen to address the so-called HONDAs (Hypertensive, Obese, Non-compliant, Diabetic Asthmatics) who account for an estimated 70% of healthcare costs.

Affordable care and its implications
Consider the recent healthcare reforms in the US. The Affordable Care Act aims to improve access to healthcare by bringing another 30 million citizens within the insurance net. It also aims, among other things, to reduce out-of-pocket expenses on pharmaceuticals, which should enhance patient compliance.

 The act includes various provisions intended to offset the cost of the changes, some of which will fall on pharma’s shoulders. We estimate that these provisions will reduce the industry’s revenues from branded medicines by $112 billion over the next decade (excluding the effect of introducing a biosimilars pathway). Assuming a modest increase in sales from expanded insurance coverage, the net loss will be about $97 billion.

But the new law has far wider ramifications – and the biggest of all, perhaps, is value-based purchasing. From 2013, all hospitals serving Medicare patients with the most common conditions will be paid for the quality of the care, rather than the quantity of services, they supply. The same concept will be extended to other healthcare providers over the next few years.

The law also encourages healthcare professionals to band together in accountable care organisations (ACOs) to deliver better, more coordinated care, help prevent disease and reduce unnecessary hospital admissions. Those that offer a superior service and cut costs will be allowed to keep some of the money they’ve saved – an incentive that’s generated considerable interest. To date, 65 ACOs have been set up and the number’s expected to double over the coming 12 months.

These changes will inevitably expose medicines to much greater scrutiny. When healthcare providers are paid for the value they create, they’ll apply the same criterion to the therapies they prescribe. In fact, they’re already starting to do so. Four-fifths of the US health insurers we polled in a recent survey now require evidence of cost savings or a clear clinical benefit to include new products in their formularies. 16% have also entered into outcomes-based contracts with pharma companies, while another 33% expect to do so within three years.

So the Affordable Care Act will have a huge impact on pharma. Historically, drugmakers have sold their products by the unit at prices they themselves have set, with discounts for volume buyers. But with the shift from unit pricing to value-based purchasing, it’s what customers think – not what the manufacturer thinks – that matters most. New products will be priced on the basis of the value buyers accord them. And the pharma company’s relationship with the healthcare community won’t stop when the deal’s signed; it will continue for the duration of the patient’s treatment.

Tough talk in the EU, Canada and Japan
The other mature economies have also been reforming their healthcare systems, as we predicted in ‘Pharma 2020: The vision’. And, like the US, they’re taking a much harder stance.

In 2010, the German Bundestag passed the AMNOG health bill, under which all new therapies must be independently assessed against a comparator within 12 months of reaching the market and priced in line with the improvement they offer. The UK will also introduce compulsory, value-based pricing of all new drugs in 2014. Both these systems mark a major departure from previous practice; in the past, economic evaluation of medicines in the EU has been used to determine whether to reimburse them – not to set prices.

Meanwhile, health researchers in Canada are investigating the idea of a pan-national body to negotiate drug prices, thereby reducing the inequities between provinces with more and less buying power. They’re also examining the feasibility of performing real-time evaluations of medicines.

Japan is exploring yet other options, including the expansion of its scheme for re-pricing medicines whose sales are much higher than expected.  It also imposed a 1.26% cut in prices (using total healthcare expenditure as its base) in April 2012. And the Ministry of Health, Labour and Welfare is considering whether to introduce health technology assessments.

Further changes are afoot. Several countries have introduced fixed, all-inclusive hospital tariffs for the treatment of specific diseases, with penalties for emergency re-admissions. And many healthcare payers are looking for opportunities to reduce costs by moving the point of care from the hospital to the doctor’s office or patient’s home.

Above all, the mature economies are encouraging generic prescribing – and some have been doing so for many years. Indeed, as of 2009, the French social health insurance system even offers doctors individual guidance on rational prescribing. Such initiatives have had a pronounced effect on prescribing patterns. Generic spending in the mature markets is forecast to rise by $35-40 billion over the next five years, with 60% of the increase coming from greater utilisation of existing generics.

So the message healthcare payers in the mature markets are sending out is loud and clear: give us new medicines that are clinically and economically better than what’s already available – medicines that decrease mortality or morbidity, make the care pathway more efficient or reduce the total resources a patient consumes. And give us hard, real-world data to back up your claims.

Pharma’s biologics bet
But what’s pharma been doing? It’s been concentrating on biologics for cancer and rare diseases. Nearly 30% of the 7,891 molecules currently in clinical testing cover cancer and autoimmune conditions. An estimated 460 medicines for rare disorders are also in trials, although there’s some overlap between the two areas .

Most such treatments cost far more than chemical molecules. In the UK, for example, the average price of a biologic is about £9,500 ($14,750) per patient per year, compared with £450 ($700) for a conventional therapy. Prices are even higher in the US and some products for rare diseases cost hundreds of thousands of dollars.

The value dilemma
In short, the mature markets have been evolving economically, demographically and structurally, but pharma hasn’t kept abreast of the changes. It’s continued to pursue its old ‘get more, pay more’ approach, even though the mature markets are running out of money and some of the medicines it’s developed arguably provide little extra value.

What healthcare payers want, by contrast, is more value for the same money or the same value for less. And they can afford to play a waiting game. As a growing number of treatments come off patent, they’ll soon be able to buy the same medicines at lower prices anyway.

So pharma’s contributed to the position in which it finds itself. And any company that wants to reach 2020 will either have to offer more value without charging more or prove unequivocally that it can remove costs from another part of the healthcare system to make room for the higher prices it’s charging.

Moreover, since many of the medicines in the industry’s pipeline went into development before these market forces were so strong, some products may be incapable of meeting healthcare payers’ expectations. It takes at least a decade to develop a new drug and only six months to change a clinical pathway. A lot of companies may thus have to slash their portfolios at very short notice.

The outcomes lever
There are other implications, too. In the past, pharma had four ‘profit’ levers: R&D productivity, cost cutting, marketing and extension of the period of market exclusivity. Most businesses relied mainly on marketing, but this lever has become much less effective now that payers and providers scrutinise outcomes so carefully.

No matter how many sales reps a company fields or how many samples it hands out, if a new treatment doesn’t offer more value than competing therapies, healthcare payers in the mature markets simply won’t buy it.

That said, the industry now has another lever in the form of outcomes data. Instead of ‘creating awareness’, it can demonstrate the worth of its products with real-world evidence of lower mortality and morbidity rates or savings in total healthcare costs .

But pulling the ‘outcomes lever’ will require major changes, and three functions will be particularly deeply affected: R&D, health economics and  marketing and sales. Rather than focusing on commercial potential, for example, the R&D function will have to focus on creating value for customers when it decides which medicines to progress through the pipeline. It will also have to collect proof of that value, using real-world outcomes data.

Similarly, rather than using unit prices and sales volumes to produce budgets and forecasts, the health economics function will have to use outcomes-based modelling and make sure that investors understand the approach it’s adopting. It will also have to set up systems capable of managing an intricate network of contingency payments and rebates.

The marketing and sales function will have to make even bigger adjustments. It will have to grapple with rigorous scientific data and complex economic studies, as well as developing the skills to negotiate with healthcare payers equipped to perform their own sophisticated analyses.

Maximising the molecule
So what, more specifically, can pharma companies do to ‘maximise the molecule’? We’ll look at four ways to create more value for customers: plugging ‘leaks’ in the healthcare system; collecting real-world evidence of a medicine’s effectiveness; measuring how patients feel; and developing companion diagnostics for specialist therapies.

Plug leaks in the healthcare system
Since healthcare payers want better clinical and economic outcomes, one logical place to start is by analysing the care pathway to identify where the outcomes from existing treatments are impaired. Our research shows that, in the US alone, roughly $210 billion a year is wasted on overuse or misuse of medicines and procedures. Care for conditions that could be corrected through lifestyle changes costs another $303-493 billion a year.

The first step is to map out the different stages in the pathway for a given disease – from the stage at which the patient is at risk to the stage at which the disease is no longer controllable through medication. The next step is to find the places in the care pathway  where value is lost, because of the patient’s behaviour or failings in the healthcare system. Many of these leaks occur at transition points in the care pathway, where there’s unnecessary duplication and waste.

Once a company has pinpointed the leaks, it can identify the sort of interventions that might help and where they’re required. This might include screening for a disease while it’s still in the asymptomatic stage, offering dietary advice, reducing a drug’s dosing frequency, providing reminders or, indeed, many other things .

A number of medical technology firms are already exploring new ways of creating added value, as we noted in ‘Owning the disease’. A few pharma companies have started doing likewise. In June 2010, for example, Pfizer launched a vascular health check service in British pharmacies. Similarly, GlaxoSmithKline (GSK) has linked up with specialist technology provider MedTrust Online to offer an iPhone app that lets US oncologists search for clinical trials by cancer type and automatically identifies the trial centres nearest their patients.

Meanwhile, Boehringer Ingelheim is piloting a digital health management service for patients with diabetes. It combines a personalised action plan and digital coaching with wireless monitoring to measure the impact of behavioural changes. But many more opportunities for stopping the leaks and enhancing outcomes exist.

Collect real-world evidence of value
We’ve talked about maximising molecules that are already on the market. What about those that are still in the pipeline? With value-based purchasing, it’s imperative to collect the sort of information healthcare payers want – and traditional randomised controlled trials don’t capture that data. They’re designed to measure the safety and efficacy of a new medicine in carefully managed conditions, not how well it works in the real world.

But, among other things, they entail setting up a real-world data infrastructure. Most companies will have to collaborate with other organisations to do this, since much of the information that’s needed to develop medicines with a better clinical and economic profile lies outside pharma’s walls. EMRs, electronic prescribing data, patient compliance data and the like are important pieces of the jigsaw puzzle.

The industry will also have to convince healthcare payers of the reliability of its data and that could be an uphill struggle. Only 5% of the US health insurers we recently surveyed are very confident of the quality of the economic data pharma companies provide, and only 7% are very confident of the quality of the information they receive on a drug’s comparative effectiveness.

There are several things the industry can do to foster trust. For instance, it can sponsor independent research on the cost-effectiveness of its products or get independent verification of its data. It can also agree on a set of common measures for assessing clinical and economic value to reduce the administrative burden on its customers.

Measure the feel factor
It’s not just clinical and economic outcomes that count, though. Nearly a third of the quality measures initially used for value-based purchasing of healthcare services in the US rest on patient satisfaction. So healthcare providers will have to take account of how patients feel.

The number of pharma companies that measure the patient experience is still very small. But Incyte’s recent use of patient-reported outcomes with myelofibrosis drug Jakafi shows just how valuable a tool it can be.

The FDA stated that it was a vital element in the decision to approve Jakafi and, unusually, let the company include information about symptom relief on the packaging. Incyte’s efforts have been recognised in the marketplace, too. Jakafi sells for $84,000 a year in the US – compared with the $40,000-60,000 it was originally expected to fetch.

But capturing patient-reported outcomes in clinical trials requires a lot of upfront planning, particularly when new measurement tools must be developed and validated first. So it’s essential to start early in the process. It’s also important to capture the patient perspective from as many sources as possible. Social media can be a rich source of information here – and the number of people using such outlets will only increase. In the US, for example, 83% of Internet users aged 18-29 use social networking sites, compared with just 33% of those aged 65-plus.

Online patient groups and blogs provide an opportunity to listen to patients talking openly about their experiences. Several firms have already set up disease-specific communities and sell the insights they collect. With new technologies for processing natural language and analysing unstructured data, it’s also getting easier for pharma companies to monitor the digital grapevine themselves.

That said, it’s imperative the industry secure proper patient consent and treat all such data responsibly. Privacy and security violations can cause serious reputational damage, in addition to other problems like the loss of vital clinical data. Yet our research shows that nearly three-quarters of US healthcare organisations (including pharma companies) use health data for secondary purposes other than those for which it was collected, and less than half have put robust safeguards in place.

Develop companion diagnostics for specialist medicines
Another way companies can maximise the molecules they’re developing is to create companion diagnostics that let doctors maximise the value of those molecules themselves. There’s no point in prescribing therapies that target one disease subtype for patients who suffer from another, as healthcare payers recognise. And they’re prepared to reward innovations that help them direct precious resources more effectively.

The FDA has also signalled that it would like to see more specialist medicines paired with companion diagnostics and sometimes accelerates the review process for such products. But when the ‘carrot’ doesn’t work, it’s ready to wield the stick. In 2010, the agency refused to approve leukaemia treatment Omapro without a diagnostic to identify the target patient base.

NICE rejected melanoma therapy Yervoy for reimbursement on the same grounds in 2011. So failing to develop a diagnostic test for a costly treatment that’s aimed at a tiny patient population may damage its prospects of commercial success. Indeed, we think that, by 2020, companion diagnostics will be mandatory for approval of all such medicines.

What’s it worth?
To sum up, the message healthcare payers in the mature markets are sending is clear: they want more value for their money, they’re measuring the value they get more carefully and they’re not prepared to pay thousands of dollars for medicines that offer only incremental improvements in outcomes. Their pockets aren’t deep enough.

But what healthcare payers mean by ‘value’ is also becoming clearer, as the pricing and reimbursement processes they use become more transparent. And the scope for helping them make savings is huge. Thus far, pharma’s focused on the roughly 15% of the health budget that goes on medicines.68 That leaves another 85% from which it can generate revenues by reducing consumption of more costly medical services. If it succeeds in doing this – and in surmounting sociopolitical opposition to the rebalancing of the mix – we think its share of healthcare expenditure in the mature economies could rise to 20% by 2020.

Maximising the molecule will involve major decisions about which diseases to concentrate on, which medicines to pursue, what data to collect and how best to plug leaks in the healthcare system. The vast majority of companies will also need to revise their budgeting and forecasting processes, billing and payment systems and the way they go to market.

Most importantly of all, they’ll need to keep the big picture in mind at all times. Treatments that prevent disease, cure otherwise incurable diseases, reduce the overall use of resources and let patients stay as productive as possible for as long as possible: these are the sort of medicines governments and health insurers in the mature markets will buy.

And, in the end, as the Roman writer Publilius Syrus once noted, “A thing is worth only as much as it can be sold for.” So it’s what payers, providers and patients value that will determine the value pharma creates for its shareholders.