Health reform and medical industry, part 1: The pharmaceutical industry

This is the first in a series of postings looking at health reform from an industry perspective. Today we assess the pharmaceutical industry, the next posting will look at the medical technology industry.

Pharmaceuticals only represent about 10% of overall US health care spending, but have featured quite prominently in health reform legislation. In part this is due to the decision by Billy Tauzin, former head of the PhRMA industry trade group, to sit down and work with health reformers, instead of simply oppose government rules that impact his industry. Among the PhRMA concessions: 50% price reductions for Medicare drugs to avoid threatened drug re-importation and rebates. PhRMA and industry supposedly made concessions that cost them $80 billion, and it cost Tauzin his job. Some of the challenges, opportunities and unknowns that the pharmaceutical industry faces from health reform:

-Over ten years the industry is expected to lose $105 billion as a result of reform-induced cost savings. A lot of money, but US spending on brand name prescriptions in 2009 alone was $226 billion, so the industry shouldn't suffer irreparable harm.

-Only 21% of US drug spending is on generics, but that's 75% of all prescriptions (since generics are so much cheaper). Encouraging the use of generic substitution is great for the generics industry, but discouraging news to brand-name pharma. Pharmaceutical Executive magazine even named generic giant Teva "Big Pharma's most feared competitor" in a recent profile.

-Effect on pharmaceutical R&D is uncertain, in part due to the 50% price concession made for Medicare drugs. PhRMA reports $65 billion spent on R&D in 2009.

-Increasing health insurance coverage should increase the market for prescription drugs, unless a majority of the newly covered are healthy. Current estimates are for an increase in drug spending of $11 billion a year (or a 5% increase based on 2009 figures).

-Biotech may see a boost from a new provision allowing for follow-up (competitor) biologics to come to market without undergoing extensive, full-scale clinical trials.

Writing in Health Affairs, a VP at pharmaceutical giant Merck sums up by saying that while big pharma awaits to see final rules and regulations, "In economic terms, the impact of the health reform law on them is arguably modest."

Marketing trends:

Pharmaceutical Executive, meanwhile, says "2010 appears to be the Return to Normalcy Year" for media spending. Sales staffing continues to decline. Web-based marketing holds promise but also confusion. Its much cheaper: only about $0.56 to $0.88 per click. A full page add in Women's Health costs $161,000, and a 30 second spot on Grey's Anatomy $240,000. And of course online media is easier to track. Those prices appear responsible for higher ROI from print (1.7:1), compared to TV (1.4:1). Companies are still struggling to find the best approach to social media such as Facebook and Twitter. So all you social media entrepreneurs, prepare pharma-wooing pitches for a plush early retirement!

Photo credit: PhRMA