In early January, we released our 2019 Global Healthcare Outlook. We’re already seeing developments in the US and around the world that illustrate several of our forecast trends – and the interaction of the cost pressures, technological advances, and political/policy developments that drive the rapidly evolving global healthcare arena.
In this post, we will summarize some of the key points in our outlook, provide examples of the trends occurring, and suggest some important takeaways.
We strongly believe that understanding the macro environment—the political, policy, and macroeconomic context in which every global healthcare company operates—is a prerequisite to developing a sound growth strategy and to mitigating risk. This is the lens through which we approach all our analysis, from the US to emerging markets. So, we’ll start in two countries where economic and political pressures are driving industry policies: the US and Saudi Arabia.
The United States and Saudi Arabia – from largesse to cost reduction and reference pricing
The US and Saudi Arabia are not frequently compared with one another, but there are some surprising similarities in the economic contexts and policies they are pursuing in healthcare. In our 2019 outlook, we wrote that Gulf Cooperation Council (GCC) countries—long the most lucrative emerging markets for healthcare MNCs due to high oil prices and generous social welfare policies—would begin to pay more attention to the cost of innovative therapies. And we wrote that the US and its now $3.6 trillion healthcare economy—where politics over drug pricing brings the Trump administration and congressional Democrats together, and where public attention on drug prices is acute—would consider a range of policies to control drug costs, from allowing Medicare to negotiate with drug-makers, to allowing importation of prescription drugs from Canada, and perhaps most intriguing—international reference pricing.
Saudi Arabia is increasingly centralizing its procurement through its national procurement office. It is now more than ever emphasizing generics. And, as the need for fiscal rationalization remains acute, the country is monitoring notoriously cost-focused Turkey—instead of Europe—for its reference pricing, as well as a model to generate savings in its healthcare system while also expanding coverage. Saudi Arabia also recently expanded the list of countries in its reference price basket from 30 to 40, to include countries such as Brazil, Malaysia, Mexico and South Africa. And, where do the majority of GCC countries look for their reference pricing? Saudi Arabia.
In our outlook, we wrote that the Trump administration’s proposal to use international reference pricing for Medicare Part B could have global ramifications for drug pricing, amplifying a trend occurring globally. While the fate of this proposal in the US is unclear, the knock-on effects of the US and Saudi Arabia’s approach suggests biopharmaceutical firms should increase their efforts to scenario plan around a reference pricing ‘race to the bottom,’ in which companies can no longer count on significant profits in markets that have historically been highly profitable.
New payment models
We covered this topic in our outlook as part of efforts to lower drug prices in the US, but a couple of 2019 developments merit attention.
First, Pfizer has entered a pay-for-performance deal with a Chinese insurer for its breast-cancer drug Ibrance. Second, results for Australia’s 2015 ‘Netlix model’ deal with several drugmakers providing Hepatitis C drugs are in, and the government now forecasts 85 percent savings in per-patient costs. While the US government talks about new ways to pay for drugs, other countries—and even US states such as Louisiana and Oklahoma—are enacting policies to do so. Other countries and even subnational entities may increasingly provide the testing ground for innovative payment models, while the geographic sequencing for approvals and R&D is shifting as well. Together, these evolutions require MNCs to reconsider their global R&D, approval, and commercialization playbook.
Currency depreciation and the impact on healthcare spending and MNCs
In our outlook, we wrote that tightening monetary policy in Europe and the US, combined with high levels of emerging-market debt, creates fertile conditions for currency depreciations/devaluations in 2019 in countries such as Indonesia, South Africa, and Egypt. DuckerFrontier still puts a 20% probability on a global liquidity crisis. To demonstrate the impact of a liquidity crisis on healthcare spending and MNC profitability in emerging markets, we’ll turn to last year’s big currency depreciation story: Turkey.
The Turkish government sets a government tender exchange rate for pharmaceuticals, revising it every February to reflect changes in market dynamics. However, in the last few years the severe depreciation in the Turkish lira has significantly widened the differential between the government’s tender rate and the official exchange rate. This February, the government tender exchange rate of the lira to the euro was revised up 26.4%, close to the rate of depreciation between February 2018 and 2019. However, this still leaves a significant gap between the tender rate of TRY3.4 to the euro and DuckerFrontier’s annual average exchange rate expectation of TRY6.7 to the euro for 2019.
While the total market opportunity remains large in Turkey, this exchange rate differential, combined with strong localization and price pressures from the government, are undermining the profitability of pharmaceutical companies.
Innovative partnerships and deal-making
We wrote about the integration trend we’re seeing in the industry, and the types of partnerships that are forming to tackle healthcare in a more holistic manner. Technology firms and more traditional healthcare players are sometimes competing, and other times partnering, to provide better health outcomes at lower costs. In January, Click Therapeutics and Otsuka US announced a partnership to develop and commercialize a prescription digital therapeutic to treat Major Depressive Disorder. Click’s behavioral application is viewed as an alternative therapeutic approach to treat diseases in some cases, while in others it is used in conjunction with medication.
We also wrote about “Dr. Big Tech” – the idea that tech firms would employ doctors in their quest to use their consumer relationships, data, and technologies to upend the healthcare industry. In February, Apple hired a prominent obstetrician to help lead the company’s efforts to improve women’s health and other areas, including health-related applications of the Apple Watch.
These partnerships indicate that the successful healthcare companies of the future may evolve from traditional players, such as pharmaceutical firms, or they may evolve from tech firms. Neither the tech firms nor the life sciences companies of today can win in a world where health systems focus on value-based treatment, and where economic incentives emphasize prevention and holistic health over ‘sick care.’