Economic Forecast for Pharma: Winter Weather Advisory Ahead

Pharma has weathered its share of economic downturns, but the data shows that the industry could be in for a tough winter. Prolonged cutbacks by consumers failing to refill prescriptions in tough economic times could become yet another obstacle for drug manufacturers already facing plenty of challenges in the coming year in the form of patent expirations, lackluster pipelines and stricter regulatory oversight.

Pharma has weathered its share of economic downturns, and the industry is widely regarded as one investors bunker down with during a recession –patients always need medicines, the theory goes. But this time around, the familiar reassurances sound a little less comforting.

That’s because more data is emerging showing that patients are cutting back on drug spending, choosing not to refill prescriptions, skipping doses or cutting pills to make doses last longer.

Prolonged cutbacks by consumers could become yet another obstacle for drug manufacturers already facing plenty of challenges in the coming year in the form of patent expirations, lackluster pipelines and stricter regulatory oversight. (See "PSA: What We Have Here Is a Failure to Innovate," IN VIVO, October 2008 (Also see "PSA: What We Have Here Is A Failure to Innovate" - In Vivo, 1 Oct, 2008.).) Drug makers remained cautiously optimistic regarding fallout from the economic downturn during third quarter sales and earnings reporting. However, the positive spin may be short-lived if the economy continues to falter.

IMS Health Inc. released its Global Pharmaceutical and Therapy Forecast October 29, predicting the economic slowdown will become a complicating factor for the worldwide pharma market for the remainder of this year and in 2009. The downturn is expected to depress pharma sales growth in the US by 2 to 3 percentage points in 2008 and 2009, IMS estimates. This year, the US pharma market is expected to grow 1% to 2% to $287 million to $297 million, down from the 2% to 3% rate predicted earlier, IMS says.

"One of the things that we see as different, impacting prescription trends…[is that] we do have higher levels of cost shifting to patients," IMS Corporate Director-Market Insights Diana Conmy said. "Co-pays are higher, premiums are higher, and in some cases, coverage is not as good. That combined with the economic downturn could change consumer behavior."

Other markets with large out-of-pocket spending requirements, such as Brazil, India and Russia, are also likely to be affected by the economic changes, according to IMS. These countries are cornerstones in pharma’s efforts to grow in fast-emerging markets.

Prescription volume has already been trending lower in the US in the first half of the year. Growth in the number of prescriptions dispensed in the first quarter slowed year-on-year to 1.3%, and in the second quarter, dispensed scripts declined 0.4%, marking the first negative quarter in a decade. The situation is likely to worsen if layoffs increase, putting more people out of work and without drug or medical coverage.

"We would expect as people get near the end of their employment or potentially near the end of their employment that there is some uptick in utilization and then that would ease off afterwards," Aetna Business Operations President Mark Bertolini said during the insurer’s third quarter call on October 29.

Forget traditional step therapy pushed on patients by health plans. Some consumers are now adopting their own cost-savings programs; at least that’s what trends reported by drug retailers seem to suggest. "I guess it’s called economic step therapy, right?" CVS Health Corp. CEO Thomas Ryan said during the drug chain’s third quarter call October 30. "Before [patients] go to the emergency room or they go to a doctor, they are going to try to self-medicate. That’s the first-step therapy."

CVS’ cough and cold business is up almost 10% year-to-date and over-the-counter health care is also up as is private label health care. Script growth has slowed, however. Ryan cited several reasons for the slower script growth including the launch in January of Johnson & Johnson’s OTC version of the antihistamine cetirizine (Zyrtec), drug safety issues and the slowdown in the FDA approval process for new drugs. Loss of exclusivity of Zyrtec weighed heavily on Pfizer Inc.’s top-line in the third quarter, while J&J cited its OTC version of the allergy medication as a "major contributor" to growth. "Lastly, while it is difficult to measure the impact, recent stats show that the weak economy has led to fewer doctor visits and more self-medication, which obviously results in fewer prescriptions being written," Ryan said.

Walgreen Co. CEO Jeffrey Rein pointed to the economy as the biggest contributor to lackluster growth on the pharmacy side of the retailer’s business during its third quarter sales call September 29. The number of prescriptions filled in Walgreens stores was up 0.6% over the year-ago period. Several consumer surveys also suggest patients are cutting back on prescription medicines to curb spending during the rough economic period. An AARP survey released in May back before the downturn had hit a full blown crisis evaluated the impact of the economic slowdown on middle-aged and older Americans. It revealed that consumers were already cutting back on prescription medications.

Results showed that 14% of respondents age 45 years and older and 10% of those 65 and older said they had cut back on medications because of the economy. Seniors covered under Medicare Part D also face challenges. When they reach the gap in coverage known as the donut hole, they must pay the full cost for drugs. In 2008, the gap begins when a beneficiary’s out-of-pocket spending totals $2,510 and ends after spending reaches $4,050. A Kaiser Family Foundation study, released in September, showed that many seniors stopped taking medications or switched to other drugs upon reaching the Part D gap.

Another survey, conducted in July by the National Association of Insurance Commissioners, looked at the economy’s impact on insurance coverage. It found similar results: 22% of respondents said they had reduced the number of times they see the doctor and 11% had reduced the number of prescription medications they take or the dosage to make the prescription last longer as a result of the downturn.

The higher cost of drugs coupled with less insurance coverage or higher insurance costs are why this economic downturn may be having more impact on consumer behavior. Retail prescription prices (reflecting both manufacturer price changes for existing drugs and changes in use to newer, higher-priced drugs) increased an average of 6.9% annually from 1997 to 2007 (from about $35.72 to $69.91), more than two-and-a-half times the average annual inflation rate of 2.6% over the same period, according to data from the Kaiser Family Foundation.

Health plans have addressed the price increases in turn by raising costs for beneficiaries through cost-sharing programs, co-payments and deductibles. Last year, three-quarters of workers with employer-sponsored coverage (the leading source of health insurance in the US) had a cost-sharing arrangement with three or four tiers based on drug type, from generic drugs typically in the lowest tier up to specialty drugs in the highest. In 2000, only 27% of workers were in such a plan, the non-profit says.

Co-payments have also increased. Co-pays for drugs not on a formulary or preferred drug list increased 48% from an average of $29 in 2000 to $43 in 2007. Co-payments for preferred drugs rose by 67%, from an average of $15 in 2000 to $25 in 2007.

Drugs that treat chronic conditions appear to be the most at risk in an economic downturn. That could be because reducing their use doesn’t have an immediate, notable impact on patients’ health. In Kaiser’s Medicare Part D study, the drugs patients reported halting most frequently included osteoporosis drugs, proton pump inhibitors, antidepressants, angiotensin receptor blockers, statins and ACE inhibitors.

Sleep aids are another category that could experience softening. Brand versions could be particularly vulnerable given that a generic version of Sanofi’ zolpidem (Ambien) is on the market. Sales of Sunovion Pharmaceuticals Inc.’s eszopiclone (Lunesta) were off 3.7% over the year-ago period at $154.7 million in the third quarter.

"There’s no doubt that this year there has been some impact across all chronic disease areas in this economy," Sepracor CEO Adrian Adams acknowledged during the firm’s quarterly call October 29. "Where patients go through pharmacists, we’re finding that a lot of patients in chronic disease areas are missing prescriptions and then going back into the system, which is affecting a lot of products."

Sanofi reported sales of the Ambien franchise, including the controlled-release version, were down 8.3% in the US in the third quarter to €132 million. Other manufacturers have pointed to niche products with high out-of-pocket expenses as being 2008800180

vulnerable in a weak economy. Merck KGAA, for example, mentioned the infertility treatment follitropin alfa (Gonal-F).

"Roughly just short of 50 percent of the Gonal-F turnover is paid out-of-pocket by the patients," Chairman Karl-Ludwig Kley said. "I could imagine that if you go deep into a recession that we will see some effect there."

Jessica Merrill