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Ann Thorac Surg 1995;60:1537-1540
© 1995 The Society of Thoracic Surgeons
Glaxo Inc, Research Triangle Park, North Carolina
Abstract
The pharmaceutical industry has been irreversibly affected by the changes occurring in healthcare. Despite the obvious contributions of pharmaceuticals to human health, our customers are demanding that we help the patient and contribute to value, whether it be in terms of cost, clinical outcomes, or quality of life. We are learning to balance the variables to ensure that cost plus quality equals value in the marketplace in three ways: by focusing on the needs of the customers and demonstrating value through outcomes research, by maintaining an emphasis on innovation, and by taking an active role in the public arena to direct the course of our future. Outcomes research proves the value of what we do. Economic data will have to be correlated with clinical data. In addition to standard clinical and economic parameters, we must also provide quality of life data. Collaboration between the academic and the practicing community produces a win-win situation for both parties. Industry and practitioners are bonded together ineluctably in the service of the patient. Working together we can shape our future and the future of our patients.
We live in a time of great and rapid change for our healthcare system. I have been on both sides of the fence, having worked in academia and now in industry. It has been quite a change for me, perhaps best illustrated by a comment made by my trustee when I left the general directorship of Massachusetts General Hospital and moved to the pharmaceutical industry. He said, ``Charlie, you're leaving academia and you're going to industry. And if you give an order, somebody is liable to take it.''
Although change is something we all have to live with, the pace at which it occurs can be daunting. We are all having difficulty adjusting to the current environment, whether we are practicing medicine or whether we are in the business of innovation and creating products and selling them in a new marketplace.
I have been asked to address those changes that affect my industry, such as our changing customer base and the challenges confronting us in the marketplace. In thinking about those, I have tried to identify the lessons from our own experience that might be of value to you as your own profession struggles to deal with healthcare reform brought about by the changing healthcare marketplace.
Although I do not have any startling insights, I do know that even highly skilled, highly talented professionals like yourselves are not immune to the effects of this changing marketplace. Certainly our industry has been affected. The pharmaceutical industry of 5 years ago rested too securely on the belief that high-skill, high-tech research and the obvious benefits to society that come from our products would be readily apparent and appreciated in that same society.
We both might argue convincingly that we provide value because we save lives and improve the quality of life; however, the reality is the government and market pressures are redefining the meaning of value. In today's healthcare environment, value is increasingly defined in terms of cost.
Despite the obvious contributions of pharmaceuticals to human health, our customers are demanding that all of us in the healthcare professions also demonstrate that we not only help the patient, but also contribute to value, whether it be in terms of cost, clinical outcomes, or quality of life.
The danger now is that the pendulum of the marketplace may swing so far that single-mindedly focusing on cost may actually reduce the quality of care for the patient. Although we recognize the reality of cost containment, it is our challenge to ensure that society does not lose sight of the quality and the humanistic components of value so important to improving outcomes.
In our business we are learning to balance the variables to ensure that cost plus quality equals value in the marketplace in three ways: by focusing on the needs of the customers and demonstrating value through outcomes research; by maintaining an emphasis on innovation; and by taking an active role in the public arena to direct the course of our future. We are doing that now because although we are not going to have healthcare legislation this year, reform in the marketplace has already been under way for a number of years. It is affecting the way healthcare is provided at all levels. It has also dramatically changed the way we do business in the pharmaceutical industry.
This, by the way, is permanent change. Too often I have heard in the past year that the decrease in medical inflation results from the concern over healthcare legislation. Everyone is on their good behavior, and as soon as the threat disappears, healthcare costs will spiral out of control again. That is not true. There has been a significant structural change in the healthcare marketplace that cannot be rolled back.
The industry environment is one characterized by increasing generic competition, which is only appropriate. As drugs go off their patent and become generic, they should be provided to patients at lower costs. However, what concerns me is that we are increasingly moving toward therapeutic substitution, which is the substitution of one class of drugs for another, with the goal of achieving the same therapeutic effect. That can be bad medicine, because one class of cheaper drugs, such as beta blockers, may not be as effective as another, such as angiotensin-converting enzyme inhibitors. The problem is that cost is dictating these decisions.
Our industry has also encountered increasing resistance to raising prices. We no longer have the ability to increase price at will. The double-digit price increases of the 1980s are a thing of the past. Lower introductory prices are more the order of the day. There is increased discounting. Thus, pharmaceutical sales now grow primarily on the basis of volume, as we respond to a very competitive marketplace due to big buyers having so much leverage on our pricing structure. If we are to get the order, we must discount. That is free enterprise, the American way of life, and it is changing our industry significantly and permanently.
Margins are under pressure. As you may have noted from reading the various financial analyst reports, the industry is no longer as profitable as it was. This has been reflected in a decline in market capitalization. In early 1992, the ten largest publicly traded American companies had a market capitalization of $289 billion. By September 1994 that had fallen to $164 billion. What this says is that the financial analysts view this industry as becoming less profitable, no longer the safe haven for widows and various pension funds in providing predictable returns.
Job losses are very significant. Sandoz, with 500 job losses, has suffered least, whereas Bristol-Myers Squibb has laid off 5,000 employees. Overall, the total for the industry exceeds 35,000 jobs lost. These changes are reflected in mergers, acquisitions, and various alliances, all occurring for somewhat different reasons. Roche acquired Syntex for $5.3 billion. Some say it overpaid, but Syntex had run into a very dry period in its research pipeline. It did not have a bright future in this increasingly competitive marketplace. It was a ripe target for acquisition.
By contrast, Merck and Medco merged, at a price tag of $6.6 billion for Merck, in response to the changing marketplace. Merck wanted a distribution system for its pharmaceuticals, a preferred position as it approached large buyers such as General Electric and General Motors. The combination created a vertically integrated system, and in the process Merck became more of a healthcare company, not just a research-based pharmaceutical company.
Smith Kline-Beecham has done two things: they bought a pharmaceutical benefit management company, Diversified Pharmaceutical Services, to improve their distribution system, and they bought Sterling Winthrop for their over-the-counter business because they felt their future is in ethical pharmaceuticals and in over-the-counter products.
Similarly, Lilly paid $4 billion for McKesson's PCS to buy a distribution channel. American Home Products and American Cyanamid combined the pharmaceutical aspects and over-the-counter operations to provide greater breadth in the marketplace.
The industry is consolidating as a result of this very exacting and competitive marketplace. That is free enterprise.
As we go through our strategic plans in our industry, the name of the game is to become the low-cost producer. If you have too much money, as Ross Perot says, ``you can get stupid.'' Well, the money is no longer there, we have to work smart and we must spend smart. The sharpest focus is on responding to the customer's needs. Although we know the customer is always right, that statement has never been more true than it is today.
What this means is that market reform is causing us to expand our focus beyond our traditional emphasis on discovery and development of innovative medicines to meet a broad spectrum of needs. We will remain true to the goal of innovation, finding and developing medicines for unmet medical needs, and we will become less of a pharmaceutical industry and focus more on being a healthcare industry.
At Glaxo we have been fairly successful so far. Last year in the United States we had revenues of $3.6 billion. Sales grew in double digits at three times the rate of the overall market, almost exclusively due to volume. However, that wonderful performance did not receive any particular credit from the financial analysts because they are very concerned about what is going to be happening in this marketplace in the future. No one is really sure what this industry is going to look like 5 years from now. Success in 1994 may not be a predictor of success in 1999.
As we have responded to the changing marketplace and been successful with introducing innovative products, we now have to respond to another challenge already referred to by Glen Nelson, MD, in his presentation: outcomes research. In our business, as a matter of course, clinical trials are short-term outcomes research to demonstrate efficacy and safety.
Now we must focus upon how our products add value to the treatment of a specific disease. A study published recently in the New England Journal of Medicine illustrated two important points [1]. In a study of schizophrenic patients limited by the state Medicaid program to three prescriptions per month, such rationing was found to save the prescription drug program $5 per patient per month, an improvement of 23%. However, the increased clinic and emergency room costs far outweighed those savings. Patients inadequately treated ended up going into the emergency room and receiving their care in the most expensive settings, increasing the cost to $139 per patient per month.
This type of study proves the value of what we do, be it through providing pharmaceuticals or better technology. Increasingly, we must focus on providing that kind of information as well as new types of information and analyses to payers, policy makers, and patients.
Economic data will have to be correlated with clinical data. Very importantly, we must provide quality of life data. We can talk all we want about mortality and how this or that technology does or does not improve mortality. The important thing to me as a physician, and were I the patient, is not so much whether I live longer, but did I live better? That is the issue we must focus on, in addition to standard clinical and economic parameters.
To repeat what Mr Perot said, we have to move more toward computer-based patient management. This approach provides a comprehensive individual patient database with long-term tracking of personal history, diagnoses, treatment, and outcomes. The value is obvious to the referring physician, other providers, and all those who pay the bill at the end of the day. There are also considerable potential benefits for physicians in reducing paperwork, lowering administrative costs, improving patient care, and providing data for outcomes research.
To emphasize the point, a recent article on the effectiveness of invasive cardiac procedures suggested that these procedures did not significantly improve the longevity of older patients [2, 3]. A significant criticism of that study was the lack of data on quality of life. The implication of the study was technology may have been inappropriately used. However, if quality of life for those patients had been improved, would that not have questioned the authors' conclusions?
Outcomes research also has its place in demonstrating the value of products and services in a highly competitive environment. It is the new and innovative products and services that will demand the greatest value in the marketplace. In our company we continue to place our emphasis on innovation, remaining true to our core business of discovering and developing innovative medicines to meet unmet medical needs. That is what will distinguish us as a company in the future if we are to be successful. If we are not able to be innovative in research and development, we will go the way of those companies who have fallen on hard times.
Our research strategy has two major thrusts. One thrust is to continue to grow our various research programs internally. Fortunately, we have been very successful. Zantac, of course, is the drug that has made Glaxo both in the United States and worldwide. However, we have new products such as Zofran for chemotherapy-induced emesis and postoperative nausea and vomiting; Imitrex, the first new drug in 25 years for treatment of migraine; and Serevent, a new and novel long-acting treatment for asthma. We also have a new drug called Remifentanil, a short-acting anesthetic, which literally can be turned on or off like a light switch. Hopefully it will come to the market in the next 3 or 4 years. If we are not successful with our in-house research, our future is far from assured.
It reminds me of a true story about a new research building being dedicated at another company. One of the senior managers went up to the chairman and in what was probably a career-ending statement, said, ``Mr Chairman, I sure am glad we have a new research building because we didn't find anything in the old one.'' It is a very risky business we are in.
The second part of our strategy is to follow research collaborations. Before doing that, let me review how medical research has been funded in the United States over the last 15 years. In 1980 some $8 billion was spent in biomedical research. That figure rose to $30 billion in 1993. However, the contribution of the participants has changed. In 1980 industry had about 30% of that $8 billion, whereas the National Institutes of Health had 60%. In 1993 industry's component had risen to 48%, whereas the National Institutes of Health, although rising in absolute dollars, had fallen to 40%. Incidentally, in 1995 the proposed Clinton budget will increase the National Institutes of Health budget by 4.7%, about half a percent more than the projected inflation rate. When all is said and done, and with the congressional vagaries at work in terms of passing budgets, the actual figure will probably be only 3%, which will be a loss. Unhappily, that overall flat-to-diminished funding from the government is the order of the day, and increased funding from industry, so long as it is successful, is the way the mix will continue to evolve.
Examining the growth of industry and academic relationships is interesting. Over the past 20 years, we have been able to identify some 114 collaborations involving $2 million or more. Funding has totaled over $2 billion.
Glaxo has been involved in a number of such relationships. At the University of North Carolina, we are funding a project with the pulmonary division to explore development of a drug treating cystic fibrosis. We recently signed an agreement with Duke University to fund basic research in Allen Rose's Alzheimer laboratory to explore the potential to inhibit gene expression. The same approach applies to our collaboration with Gilead Sciences, an antisense company, whose research deals with blocking genetic expression by either neutralizing or replacing the gene or blocking RNA expression.
In other areas we are involved in outcomes studies with the company Circadian to determine the cost and benefits of using particular compounds in treating asthma. We have also developed relationships with individual investigators, laboratories, and universities to look at specific issues relating to disease outcomes in other treatment settings.
Thus, a major portion of our research strategy depends on collaborating with the academic community in areas of mutual interest. Indeed, it is quite clear that no matter how big or successful we may be, we cannot be so broadly encompassing in research and development that we cannot fail to use both the academic and the practicing community. Done properly, it is a win-win situation for both parties.
So far, I have discussed two points of the triangle: value and innovation. The third, being involved and leading change, is equally important, although it is perhaps a somewhat uncomfortable fit for all of us.
The healthcare reform debate of the past year illustrates my point all too well. Specifically, our industry would have suffered substantially in our ability to innovate if healthcare reform had passed and led to price controls.
With no exaggeration, I have spent roughly half of my time in the last 12 months in Washington talking to the Congress. I have not made any headway at all in talking to the Clinton administration. What happens with those people is they give you a pat on the back, look you in the eye and say, ``Sure am glad you came,'' and then they go on doing what they were doing. Congress is a different story. They still give you the pat on the back, the look in the eye, and say, ``Glad you came,'' but if you bring enough of your colleagues with you they will pay attention. The one thing congressmen pay attention to is votes. If you represent votes, or if you represent a point of view that represents votes, they will pay attention. In the final analysis those votes—those special interests—are the votes of our patients.
That is the message you have been hearing throughout this program. Ross Perot is exactly right: you count. You may not think you count, but you do. You may not think you have time. Make time. You can make a difference if you will just get out and tell your story. Do not oppose just to oppose. It is not enough to say ``I do not like this.'' You should say ``I do not like this; we can do this a different and better way.''
We share a great deal in common. Although I happen to work in the pharmaceutical industry, we are concerned with patients. All of your work ultimately is focused on the patient. We are bonded together ineluctably in the service of the patient. If we work together, if we pull together in ways that show we add value, that we are committed to innovation that meets unmet medical needs, then we can make a difference. We can shape our future and the future of our patients.
Footnotes
Presented at Preparing Your Practice for Change: Thoracic Surgery Into the Next Decade, Atlanta, GA, Sep 24–25, 1994.
Address reprint requests to Nancy Pekarek, Glaxo Inc, 5 Moore Dr E-3006, Research Triangle Park, NC 27709.
References
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