1 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Healthcare Forecasting 2.0: How Can Pharma Successfully Harness  New Strategic Planning Models? 

2 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Contents

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The New Pharmaceutical Business Landscape: Uncertainty is a New Certainty.....................................................3

Five Painful Truths That Pharma Now Needs to Face ...........................................................................................4

Survival in the New Landscape Requires a New Approach to Strategic Planning ..................................................5

What It Takes to Make Successful Healthcare Market Forecasts in the New Landscape........................................6

Healthcare Forecasting: A Model Approach...........................................................................................................7

The Model in Action - Obamacare Amidst a Cooling Economy..............................................................................8

The Model in Action - China: Health insurance Expansion Vs Drug Price Cuts.......................................................9

Conclusions.......................................................................................................................................................10

About Us............................................................................................................................................................11

IHS World Markets Healthcare Forecasting Service.............................................................................................12

3 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Lost patents. Risky, expensive R&D. The end of the traditional blockbuster drug era. It’s a familiar tale. Let’s face it: when it comes to sustainable, long-term growth, the odds seem stacked against pharma.

The End of the Golden AgeAs pharma’s ‘golden age’ comes to a close, the new reality is startlingly clear: discovering new molecules that prove to have an effect on complicated, ever-evolving diseases — with minimum side effects — is a phenomenally expensive, risky business.

At the heart of the problem is the basic sustainability of the business model – few industries face such a daunting prospect as pharma companies when they lose patent protection for their best-selling innovations.

Add a troubled global economy to the equation, and it’s clear to see why pharma faces such an uphill battle. Health expenditure growth rates in developed markets are nearing an all-time low, whilst emerging markets generally provide a complex, variable opportunity.

The Gold to Platinum Analogy If pharma’s ‘golden age’ is coming to a close, then perhaps we’re moving into a ‘platinum age.’ The value of gold as a precious metal has typically – like health-care – existed outside normal economic cycles. Associating the industry with platinum reflects an important new reality: healthcare is no longer immune from wider, global economic downturns. But we should also keep in mind that platinum can be more valuable than gold. Pharma Needs to AdaptIn the past, the pharmaceutical industry has been lauded for its nimbleness and dynamism. Now more than ever, it needs to reclaim that reputation. Pharma companies must change in order to take advantage of the opportunities within this new business landscape.

“There is no point dreaming about being in a different world. We have to change.”

GSK CEO Andrew Witty, Forbes Magazine, January 17, 2011

formation s to allow

efficient, intecision making.”

The New Pharmaceutical Business Landscape: Uncertainty Is a New Certainty

Our Top Ten Predictions for Healthcare and Pharma 2012

» View the Slidecast

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4 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Austerity MeasuresIn an age of international reference pricing, events in one market can have knock-on implications in another. With some economies suffering more than others, the measures being taken in low-growth countries are having a spillover effect on pharmaceutical prices and policies in more critical markets. Patent Cliff In 2012, drugs worth over USD 30 billion in annual sales are going off-patent – more than double the normal annual figure. The impact? The commercial value of some of the most well-known branded assets over the last 15 years will be decimated. The 4th Hurdle Drugs are useless unless they reach the patient, and approvals are meaningless unless they’re backed up with reimbursement: a nasty truism, but a truism nonetheless in the most regulated industry in the world. This is all the more pertinent when budgetary concerns are increasingly causing governments to place barriers between patients and new drugs.

Proof: the New Currency of ReimbursementWhile companies are developing innovative new compounds, regulators want more “real world data” and information on relative effectiveness. This leads to more certainty in predicting which patients will respond to the drug – or perhaps more importantly, who will not respond to it.

The bodies which pay for healthcare – e.g. govern-ments and insurance companies – are placing an ever-higher burden of evidence on pharmaceutical companies to prove their new drugs work, leading to higher development costs for pharma. Diminishing Patient Populations…and Returns To make matters worse, one of the great benefits of biotech science is also an enemy of the underlying business model: as we refine our ability to dissect diseases and predict which sub-patient categories are likely to respond to particular drugs, the potential patient population is significantly reduced.

Five Painful Truths that Pharma Now Needs to Face

Consequently, companies are often targeting a fraction of the population they were some years ago. According to traditional market dynamics, a smaller patient population should also mean higher price: but payers are again standing in the way. Why pay 50% more for a drug that may only be 20% better than an older, less differentiated drug?

Relative Efficacy and Effectiveness: The Next Pharmaceutical Market Access Barriers?

» Read the blog post

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5 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Survival in the New Landscape Requires a New Approach to Strategic Planning

Amid all this uncertainty, pharmaceutical companies need to wade through the noise and steer themselves towards a steady, more foreseeable future.

Perhaps more importantly: in today’s climate, pharma – like so many other sectors – needs to better equip itself to anticipate impending obstacles and reforms that require nimble maneuvers. Historically, little need for macro forecasting In the past, pharmaceutical companies have not typically had access to sophisticated healthcare forecast models. This is primarily because there was very little demand for them: the pharma business model was a successful one, based on launching new blockbuster drugs to mass populations in developed markets.

There wasn’t an underlying need for a more robust macro-based forecasting model in strategic planning, and, hence, the industry generally relied on fairly simple – yet effective – models.

Global shifts demand a new approach As pharma companies increasingly look towards emerging markets and niche patient populations, the need for better data and modeling is becoming more apparent. In particular, pharma needs to quantify the impact of cost containment measures among payors around the world, whilst understanding the underlying socioeconomic trends.

It is equally as critical to understand how the shifting dynamics of individual diseases affect the way in which we forecast market sizes, disease populations, and treatment patterns. A greater need for data clarity In today’s drastically changing landscape, as the drive for commercial innovation and survival intensifies among major pharmaceutical players, access to data on the complex, variable growth trend of healthcare expenditure is becoming increasingly sought after. At the core of the emerging healthcare expenditure model lie global macro forecasts, which are key drivers of health spending.

“Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology…”

Robert Fogel, Forecasting the Cost of U.S. Health-care, The American Magazine, September 3, 2009

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6 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

The simplest model for forecasting health expenditure is to assume that the rate of growth this year will be the same as last year — aptly labeled the “naive” model.

But simple models won’t cut it in the new pharma business landscape. A successful model requires an amalgam of reliable data, proven econometric models, and expert analysis. Quantitative data needs to take centre stage While year-on-year historical data has been used for short-term (one-year) forecasting, it isn’t effective for medium-to-long term forecasts, as it doesn’t capture the impacts of macroeconomic factors on health spending.

To accurately forecast growth trends in healthcare and pharma markets, macro values need to take a more central role in the modeling process. A rigorous econometric approach provides a far sharper analysis of the true market opportunity.

Fusing quantitative and qualitative is critical While quantitative data provides a solid foundation, the pharma landscape is prone to rapid change, through scientific innovation and shifts in policy. A truly successful strategic model needs to factor in both quantitative and qualitative factors. It is precisely in the area of qualitative analysis that forecasts so frequently fall short. If these developments are ignored, there are huge gaps in the forecasts that don’t reflect the critical drivers impacting the industry – just think of healthcare insurance expansion in China, major price cuts in Southern Europe, and the expansion of health technology assessments across almost all markets. By integrating quantitative and qualitative information, pharmaceutical companies are better equipped to anticipate how complex, inter-relating factors may impact their businesses.

What It Takes to Make Successful Healthcare Market Forecasts in the New Landscape

“ Qualitative Analysis Needs to Feed Intelligently into the Quantititave Forecast”

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7 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Healthcare Forecasting: A Model Approach

Top Level Data and Information

Use of robust regression series

and advanced modelling

Modeling

- Healthcare expenditure- Pharmaceutical sales

AnalysisQualitativeQuantitative

Macro Data

- Strategic scenarios

Example outputs:

Event speci�c alterations and

process variation

Real-time analytical input from industry

experts

A granular-level forecast integrates data with real-time analysis providing more effective,

actionable forecasts

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8 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

1. We first observe health spending and real GDP move in similar growth trends in several periods, suggesting macro forecasts as a key driver of health spending.

2. However, we also note periods when the two indicators take different growth trends.

3. From 2010 onward, the economy is projected to have a “U-shaped” recovery, dragged by sovereign debt problems in the US and in Europe, while health spending growth is projected to have only a modest dip in 2011, before rebounding steadily during the period.

The spending growth trend projection results from the model incorporating both quantitative and qualitative factors, with the net outcome reflecting the impact of the qualitative factor (boost to health spending by the “Obamacare”) overriding that of the quantitative factor (slow GDP growth).

The Model in ActionObamacare Amidst a Cooling Economy

Our Forecast•The domestic evidence has remained upbeat

in early 2012—with a much better than ex-pected employment report for January.

•There are hints that a virtuous circle may be building where employment, incomes, and consumer spending move up together.

• It will still take a few years before the economy fully recovers, considering its debt to GDP ratio.

•Meanwhile, the healthcare cost-cutting mea-sures will hurt health spending growth.

•However, the headwind of slow recovery and cost containment will not be enough to offset the spending growth momentum unleashed by the “Obamacare” push.

Against such backdrop, we expect health spending to grow at a solid single digit pace this year and next.

-4

-2

0

2

4

6

8

10

1998 2000 2002 2004 2006 2008 2010 2012 2014

US Health Spending Growth (%)US GDP Growth (%)

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9 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

1. We first observe health spending and real GDP in similar growth trends over a long period, suggesting macro forecast being a key driver of health spending.

2. The projected health spending growth peaking in 2011 reflects the impact of health insurance expansion—ending by the end of 2011—outweighing a cooling economy.

3. In addition, the projected lower spending growth beyond 2011 is driven by a combination of quan-titative and qualitative factors (slower GDP growth and deep drug price cuts). Still, sustained by the massive healthcare insurance expansion, health spending growth will maintain a double-digit pace during the period.

Our Forecast•The economy is being hurt by a recessionary

Europe through trade linkage.

• Despite this negative externality, the govern-ment seems committed to correct its policy errors and fix the housing market all the way through this time around, before loosening credit lending.

• Meanwhile, significant drug price reductions are hurting growth in health spending.

• However, the headwind of slower economy and lower drug prices will be more than offset by the health spending growth momentum unleashed by China’s massive health insurance expansion.  

Against such backdrop, we expect health spending to continue growing at a double digit pace this year and next.

6

8

10

12

14

16

18

20

22

1998 2000 2002 2004 2006 2008 2010 2012 2014

China’s Health Spending Growth (%)China’s GDP Growth (%)

The Model in Action China: Health Insurance Expansion Vs Drug Price Cuts

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10 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

So how can successful forecasts soothe pharma’s pain points?

•Patent cliffs become manageable – because they are adequately quantified and understood in the context of specific geographies and therapeutic areas.

•Austerity measures become manageable – because they become predictable and understood in the context of the global presence of the company.

•The 4th Hurdle becomes predictable – because the overall likely market size of key assets becomes knowable.

• R&D Productivity is enhanced – because the attractive areas for therapeutic investment become visible based on scientific advances.

•Segmented Populations can be maximised – because the underlying patient dynamics, epidemiology and demographics are under-stood within the context of asset valuation.

Conclusions

Quantifying the Impact By quantifying the impact of ongoing, fast-paced developments in the industry, and funneling them into your forecasts, simple information is given actionable meaning.

On the one hand, we are in a time of great political and economic turmoil. But on the other hand, it’s also a time of dramatically shifting scientific developments. If these two forces are successfully harnessed into a strategic business model, the “platinum age” of pharma really can become a time of high growth.

To help major pharmaceutical companies gauge health spending growth trends and plan strategies accordingly, health spending forecasts that reflect macroeconomic values as the key drivers of healthcare markets are critical.

In achieving this, pharmaceutical companies are more readily prepared to deal with the vagaries of drug development, regulatory hurdles, and the unique market dynamics of our industry.

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11 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHS

Gustav Ando

Director of Healthcare Practice, IHSGustav Ando leads the Healthcare Practice at IHS. Formerly a healthcare analyst, he has extensive experience in the fields of market access, therapeutic development, drug safety, emerging markets, and health outcomes. » Connect with Gus on LinkedIn» Read Gus’s latest blog posts

More Information

Visit the IHS Healthcare and Pharma blog Here you’ll find regular insights from our team of experts covering the global healthcare and pharma-ceutical industries.

Join us as we look at issues in Healthcare Policy, Market Access, Pricing and Reimbursement and R&D.

Comments are welcome!

» www.ihs.com/healthcareblog

Jing Zhang

Healthcare Economist, IHSJing Zhang is responsible for healthcare and pharma forecasts and analysis. He holds a Ph. D degree in economics from Temple Uni-versity. Before joining IHS, Jing worked as an economist in the federal government at FDIC, National Credit Union Administration, and IRS. » Read Jing’s latest blog posts

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IHS World Markets Healthcare Forecasting Service

IHS World Markets Healthcare Forecasting Service In this environment of rising healthcare costs, post-reces-sion strapped budgets, and complicated regulations, it’s critical to have a clear view of the true growth potential of global healthcare and pharmaceutical markets. The IHS World Markets Healthcare Forecasting Service supports your strategic planning process by providing a comprehensive view of healthcare markets, their key drivers, and the market impact of key events. This service helps you:

•Plan budgets and sales targets more effectively

• Identify and target new markets for growth

•Hedge exposure to contracting markets

•Understand how macroeconomic forces and industry events drive future healthcare spending

Key features:

•Macroeconomic forecasts

•Quarterly updated database:

• Ten-year healthcare expenditure forecasts for 36 countries

• Pharmaceutical sales forecasts for 30 countries and 11 therapeutic areas

•Same day analysis of major healthcare and regulatory events

•SWOT analysis tables providing a clear view of market conditions in each country

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13 | Healthcare Forecasting 2.0: How Can Pharma Successfully Harness New Strategic Planning Models? Copyright © 2012 IHSCopyright © 2012 IHS