Economic Issues in Health Care and

1

• Economic Issues in Health Care and
• the Pharmaceutical Industry

MAHU Sales Congress February 3, 2005 Richard
Manning, Pfizer Inc
2
Total US Healthcare Spending 19602003
Millions of Dollars
2003
Source Centers for Medicare and Medicaid
Services available at www.cms.gov.
3
Medical Progress Contributes to a More Healthy
Population and an Aging Population Means More
Spending on Health
Number of People Older Than 100, per Million
Population
300
2000 262
250
200
150
100
1900 46
50
0
1900
1920
1940
1960
1980
2000
Source Caplow, Theodore, et al. The First
Measured Century, Washington DC AEI, 20019
4
Outline

• Pharmaceutical Prices, Spending and the Value of
  Medicines
• Information, Marketing and Advertising
• RD, Profits and Incentives in the Pharmaceutical
  Industry
• Should We Fill our Prescriptions in Canada?
• The Road Ahead

5
Public Overestimates the Amount of Healthcare
Spending that Goes to Pharmaceuticals
What percent of the total healthcare spending do
you feel is spent on prescription drugs?
Unsure
50 or more of healthcare spending is spent on Rx
drugs
19
40
20
30 40
21
Average estimate 44
Less than 30
Source Gallup, Pharmaceutical Image Survey,
2003 N1,011
6
Consumers Pay a Greater Share for Medicines Than
for Other Components of Health Care
100
90.5
85.4
80.2
80
70.5
60.2
60
Percentage Share
37.2
40
20.6
20
10.1
7.6
2.5
0
Prescription Drugs
Hospital Inpatient
Hospital Outpatient
Emergency Room
Physician
Note Totals do not add up to 100 due to shares
allotted to all other payors.Source PhRMA.
Coverage of prescription medicines in Private
Health Insurance lower level of coverage for
medicines than for other items. Winter 2004.
7
Total US Healthcare Spending Excluding
Prescription Medicines, 19602003
Millions of Dollars
2003
Source Centers for Medicare and Medicaid
Services available at www.cms.gov.
8
Pharmaceuticals Account for Just Over 10 of
Total US Healthcare Spending
Share of National Health Care Spent on Each
Category 1960-2003
HospitalCare
Physician Clinical Services
Prescription Medicines
Source Centers for Medicare and Medicaid
Services (CMS) available at www.cms.gov.
9
Copayments for Prescription Medicines Are
Increasing Faster Than Rx Prices
Average Annual Change In Copayments by Medicine
Classification, vs. Price Increase, 2000-2003
Rx Drug Consumer Price Index
3.6
Generics
6.6
Preferred Brands
9.9
14.3
Non-Preferred Brands
0
5
10
15
20
Percentage Increase
NoteThe Consumer Price Index, or CPI, measures
price changes in consumer goods and services.
Calculations based on Kaiser Family Foundation
data and Health Research and Education Trust,
Employer Health Benefits 2003 Annual Survey
(Menlo Park, CA KFF and HRET, 2003). Source
PhRMA. Focus on Health Policy. Spring 2004.
10
Consumer Price Index Annual Rate of Change,
December 2002 - December 2004
Source BLS data, not seasonally adjusted
11
Producer Price Index Annual Rate of Change,
December 2002 December 2004
Source BLS data, not seasonally adjusted Note
PPI sampling for all drugs and pharmaceuticals,
not only prescription drugs
12
Innovative Medicines Have Turned the Tide Against
HIV/AIDS
Monthly Health Spending for AIDS Patients
AIDS Deaths per 100,000 Population
Total 1,811
First New Drugs Introduced, 1995
2,000
Total 1,521
18
Highly Active Antiretroviral Therapy (HAART)
Introduced, 199697
1,600
15
Other Costs Decrease by 41
12
1,200
9
800
6
Drug Costs Increase by 34
400
3
0
0
90
94
98
86
82
Rx drugs
All other costs
Year
While Monthly Costs for AIDS Patients Decreased
by 16 After HAART Introduced
HIV Mortality Declined Dramatically After
Introduction of First Expensive
Antiretrovirals...
Source Costs Bozette S, et al. Expenditures
for the care of HIV-infected patients in the era
of highly active antiretroviral therapy. New
England J of Medicine Vol. 344, No. 11, March 15,
2001 Mortality Centers for Disease Control and
Prevention data on drug development from PhRMA
and the NIH Office of Technology transfer
13
Evidence Suggests that New Drugs Are Not Just as
Good as Old Drugs
Estimated Savings From Use of Older Medications
(Instead of Newer Ones), On Average for All
Patients and All Conditions(Assumes Average
Age of Drug Increases by 10 Years)
-18
Drug Cost Increase
Inpatient Savings
80
Office Visit Savings
24
Home Health Savings
12
Outpatient Savings
10
ER Savings
3
Net Impact 18 Investment Returns 129 in
Savings Ratio of 7 Saved for Every 1
Invested
Source Lichtenberg, F. Benefits and Costs of
Newer Drugs An Update. NBER Working Paper 8996,
June 2002
14
Holding Other Things Constant, Mortality Rate
Declined When Newer Medicines Were Used
Source Lichtenberg, F. The effect of drug
vintage on survival ratesevidence from Puerto
Ricos ASES program. NBER Working Paper,
November 2004
15
It is Possible to Lower Medical Costs by
Encouraging Appropriate Medication Use
City of Asheville, NC, Created a Program Granting
Diabetics Free Access toPrescription Drugs and
Other Services if They Enrolled in a
Care-Management Program. After Five Years,
Program Is Paying Significant Dividends
7,082
All Other Medical
5,882
Rx Expenses
5,843
5,394
5,210
4,651
3,283
5,929
3,508
2,815
1,556
3,596
3,095
2,599
2,579
2,335
1,614
1,153
Baseline
Year 1
Year 2
Year 3
Year 4
Year 5
Avg Sick Days 12.6 6.0 8.5 7.3 7.7 6.4
Source Cranor C, Bunting B, Christenson D. The
Asheville Project long term clinical and
economic outcomes of a community pharmacy
diabetes care program. J of the Am Pharm Assoc,
March/April 2003.
16
Number Needed to Treat to Prevent a Cardiac Event
with Statins, by Prevention Category
Source Ellis, J.J. Journal of General Internal
Medicine, June 2004 19 639-646.
17
Tendency to Remain on Statin Therapy Depends on
Co-pay Level
Adjusted for all available covariates. The
median time to discontinuation was 3.9 years for
0 to lt10 2.2 Years for 10lt20 and 1.0
years for 20.
Source Ellis, J.J. Journal of General Internal
Medicine, June 2004 19 639-646.
18
Higher Co-payments Reduce Medication Use

• May 2004 study published in JAMA showed that when
  copayments were doubled, there were substantial
  reductions in use of medicines for important
  conditions

• For patients with diabetes, asthma, and gastric
  disorder, reductions in medication use were
  associated with a 17 increase in annual ED
  visits and 10 increase in hospital days

Source Goldman D, Joyce GF, Escarce JJ, et al.
Pharmacy benefits and the use of drugs by the
chronically ill. JAMA. May 2004.
19
Outline

• Pharmaceutical Prices, Spending and the Value of
  Medicines
• Information, Marketing and Advertising
• RD, Profits and Incentives in the Pharmaceutical
  Industry
• Should We Fill our Prescriptions in Canada?
• The Road Ahead

20
Information Is a Good Much Like Any Other
Price
Demand for Information
Quantity
21
Physicians reported largely positive impact of
advertising on their interaction with patients
Did the fact that the patient saw an
advertisement have a positive impact on the
interaction? have a negative impact on the
interaction?
56
66
15
9
Yes Saw Positive Impact
Yes Saw Negative Impact
Yes Saw PositiveImpact
Yes Saw Negative Impact
No 44
No 85
No 34
No 91
High Cholesterol
Mood/Anxiety Disorder
Ref Page C6, C8
Ref Page MA6, MA8
22
Physicians reported that patients asked about
products that were appropriate for them and their
condition
High Cholesterol
Mood/Anxiety Disorders

• 851 of physicians reported that patients
  inquired about a medicine that was appropriate
  for them
• 72 1 of physicians found the discussion to be a
  valuable part of the office visit.

• 83 1 of physicians reported that patients
  inquired about a medicine that was appropriate
  for them
• 76 1 of physicians found the discussion to be a
  valuable part of the office visit.

1Rated 5,6,7 on a 7-point scale (Ref Page
C13,C MA13,MA7)
23
Most Patients Are Not Taking Medicines Properly
High Cholesterol
High Blood Pressure
Diabetes

• Nonacceptance 10 15 11
• Nonpersistence
• At 12 months 34 38 37
• At 18 months 47 49 51
• Noncompliance 47 46 46

Note acceptance means patient filled original
prescription persistence means patient remains
on therapy by a given date and compliance means
the patient is taking the medicine appropriately.
Source Integrated Healthcare Information
Services, Inc. (IHCIS) (30 health plans, 11
million members HL analysis Age 2564, N8839
HTN analysis Age 2564, N11,422 Diabetes
analysis Age 1864, N6090).
24
Patient-Reported Reasons for Non-Adherence
Dont like being dependent on drugs (7.3)
Dont like being told what to do (0.6)
Too expensive (1.8)
Other (3.6)
I just forget (54.9)
If I dont take them, supply will last longer
(1.3)
Side effects (6.4)
Dont think drugs are working (3.4)
Hate taking drugs (7.1)
Dont think its always necessary (13.7)
Source Cheng JW, Kalis M, Feifer S.
Patient-reported adherence to guidelines of the
Sixth Joint National Committee on prevention,
detection, evaluation, and treatment of high
blood pressure. Pharmacotherapy. 2001. Accessed
at http//www.medscape.com/viewarticle/409745 on
July 12, 2004.
Cheng JW, et al. Pharmacotherapy.
200121828-841.
25
US Government Finds Pharmaceutical Industry
Spends 50 More on RD than Marketing
Total promotion includes DTC, retail value of
samples, office hospital promotion, and
professional journal advertising. Source U.S.
General Accounting Office (GAO). FDA Oversight of
Prescription Drug Advertising Has Limitations.
October 2002.
26
Product Samples Are a Significant Share of Total
Promotional Spending
Pharmaceutical Industrys Annual RD Investment
Far Exceeds the Total Value of Marketing
Spending, as Reported by GAO
30.30
Marketing
Expenditures in Billions ()
10.50
4.80
2.70
0.70
0.40
RD
Retail Value of Samples
Office Promotion
Direct-to-Customer Advertising
Hospital Promotion
Journal Advertising
Sources GAO Report. October 2002.
27
Undiagnosed and Untreated DiseasesRemain
Significant
Untreated
Treated
50
50
Depression
60
40
HIV
Cholesterol
65
35
Anxiety
70
30
Source NHANES Internal Analysis
28
Outline

• Pharmaceutical Prices, Spending and the Value of
  Medicines
• Information, Marketing and Advertising
• RD, Profits and Incentives in the Pharmaceutical
  Industry
• Should We Fill our Prescriptions in Canada?
• The Road Ahead

29
Public Does Not Believe That Private Industry
Invents New Medicines
Public PerceptionPercent of credit assigned to
pharma by public for discovery of new medicines
RealityPercent of new medicines discovered and
developed by private industry
Survey participants allocate 100 across seven
stakeholders Source Consensus Research,
Stakeholder Value Research, General Publics,
Phase II, July 2003 N1,000 PhRMA estimate, 2003

30
Private Companies and the NIH Invest Billions of
Dollars in Research Every Year
31
Pharmaceutical Companies Spend More as a Share of
Sales on RD Than Any Other Industry
Research-Based Pharmaceutical Cos1
17.0
Domestic Research Development
Industrial Sector Comparison2
10.5
Computer and Software Services
8.4
Electrical and Electronics
7.8
Office Equipment and Services
5.3
Telecommunications
4.7
Leisure Time Products
3.9
Automotive
3.8
Aerospace and Defense
1.2
Metals and Mining
0.7
Paper and Forest Products
3.9
All Industries
0
2
4
6
8
10
12
14
16
18
1 Research-Based Pharmaceutical Companies based
on ethical pharmaceuticals sales and ethical
pharmaceutical RD only, tabulated by PhRMA. 2
Standard and Poors Compustat 4-digit SIC
codes. Source PhRMA Pharmaceutical Industry
Profile 2000 Research for the Millennium.
32
New Product Development A Risky and Expensive
Proposition
Compound Success Rates by Stage
Years
0
0
2
5,00010,000Screened
2
Discovery (210 Years)
Preclinical Testing Laboratory and Animal Testing
4
4
250Enter Preclinical Testing
250Enter Preclinical Testing
6
6
Phase I 2080 Healthy Volunteers Used to
Determine Safety and Dosage
8
Phase II100300 Patient Volunteers Used to Look
for Efficacy and Side Effects
8
10
5Enter Clinical Testing
10
Phase III1,0005,000 Patient VolunteersUsed to
Monitor AdverseReactions to Long-Term Use
12
12
14
FDA Review Approval
1Approved by the FDA
14
Additional Post-Marketing Testing
16
16
Net Cost 802 Million Invested Over 15 Years
Source PhRMA Pharmaceutical Industry Profile
2003, Chapter 1 Increased Length and Complexity
of the Research and Development Process. And
DiMasi, JA, Hansen, RW, Grabowski, HG. The Price
of Innovation new estimates of drug development
costs. J of Health Economics. 200322151-185.
33
Ongoing Research Investment Depends on Healthy
Returns For a Handful of Successful Products
Value of After-Tax Net Lifetime Sales of New
Drugs ( Millions)
3,000
2,500
2,000
1,500
1,000
Average RD Cost
500
0
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
10th
New Products Grouped in Tenths According to
Financial Success
After tax H. Grabowski, J. Vernon, and J.
DiMasi, Returns on Research and Development for
1990s New Drug Introductions, Pharmacoeconomics
20 (2002)
34
Wall Street Journal Finds That Pharmaceutical
Stocks Have Lagged for Five Years, Ranking 65th
of 76 Major Industries
Five-Year Average Compound Annual Total Returns
for Selected Industry Groups, Through Year-End
2003
29.3
28.8
Pharmaceuticals
Office Equipment
Drug Retailers
Airlines
Source Leaders and Laggards The Best and Worst
of the Rankings. The Wall Street Journal. March
8, 2004 (R4).
35
Operating Environment Has Led toSignificant
Industry Evolution
Pharmaceutical Industry Consolidation, 19802003
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Sanofi
American Cyanamid
Hoechst Roussel
Merrill Dow
Rhone Poulenc
Beecham PLC
Parke Davis
Warner-Lambert
Synthelabo
American Home Products
Hoffman
Squibb
Geigy
Ciba
Glaxo
Pharmacia
Marion
Myers
Bristol
Sandoz
Wellcome
French
Smith
Kline
Pfizer
Monsanto
Upjohn
Roche
Glaxo Wellcome
LaRoche-Syntex
MarionMerrill Dow
Rhone Poulenc Fissons
Bristol-Myers
Beecham PLC
Warner-Lambert
Pha and Upjohn
Wyeth
Hoechst
Squibb
Sandoz
Pfizer
French
SmithKline
Ciba Geigy
Sanofi-Synthelabo
Monsanto
Rhone Poulenc Fissons
HoechstRoussel (MMD)
Bristol-Myers Squibb
Beecham PLC
Sanofi-Synthelabo
Glaxo Wellcome
SmithKline French
Novartis
Pharmacia
Hoffman LaRoche
Pfizer
Wyeth
Bristol-Myers Squibb
Glaxo Wellcome
SmithKline Beechman
Hoffman LaRoche
Novartis
Aventis
Pfizer
Wyeth
Sanofi- Aventis
Bristol-Myers Squibb
Hoffman LaRoche
Glaxo SmithKline
Wyeth
Pfizer
Novartis
7
6
5
4
3
2
1
36
Effect of Generic Entry on Prices
Share of New Prescriptions for Zantac Generic
Rantidine
100
Generics
80
60
Share of Sales ()
40
20
Zantac
0
Jun
Aug
Oct
Dec
Feb
Apr
Jun
Aug
Oct
Dec
Feb
Apr
Jun
1997
1998
1999
Source IMS
37
Outline

• Pharmaceutical Prices, Spending and the Value of
  Medicines
• Information, Marketing and Advertising
• RD, Profits and Incentives in the Pharmaceutical
  Industry
• Should We Fill our Prescriptions in Canada?
• The Road Ahead

38
Prices Differ for Most Products Between Canada
and the US, Not Just Medicines
US vs Canada Income and Prices
100
75
50
25
0
Average Income
Market Basket Average
AOL
Quicken Software
Brand Name Drugs
US
Canada
Source Fraser Institute (Canada), Public Policy
Sources Prescription Drug Prices in Canada and
the US Part 2, 2002.
39
Many Automobiles Are Much Less Expensive In Canada
Buying one of these cars in Canada would save
4,442 on average
Source MSRPs from Manufacturer websites
Exchange rate as of 13 May 2004
1CAN0.7177 accessed at quote.yahoo.com
40
As a Practical Matter, Canadian Drug Supply Too
Small to Serve US Need
Total Prescriptions Filled in US vs Canada, in
Millions - 2002
gt3.4 Billion
After exhausting all Canadian supplies, still
would need to supply medicines for 3.1 billion
prescriptions
331 Million
Source IMS Health.
41
Canadian Association of Retired Persons (CARP)
and Other Groups Have Concerns About Canadian
Supply Integrity
From the October 22, 2004 statement from CARP,
Canada must stop cross-border exports
There is no way that a pharmaceutical supply
chain built to meet the needs of 32 million
Canadians can meet the needs of more than 300
million Americans. Canadians will pay the price
if this practice continues," said Dr. Jeff
Poston, Executive Director of the Canadian
Pharmacists Association. "As a pharmacist, I also
have serious concerns about safety. Medications
are potent and patients need proper care to
ensure they are used correctly. Drugs are a
therapy, they should not be treated as a
commodity to be bought from anywhere in the world
at the cheapest price."
Available at www.50plus.com accessed Dec 20,
2004.
42
Counterfeit vs. Authentic Can You Tell the
Difference?
Authentic
Counterfeit
43
Cross-Boarder Sales from Canada Have Increased
but Quality Is Questionable
Canadian Pseudo-Generics Three Imported Drugs
Tested by the FDA for Quality
Source FDA News July 13, 2004 FDA test results
of prescription drugs from bogus Canadian website
showing products were substandard
(http//www.fda.gov/bbs/topics/news/2004//NEW01087
.html)
44
In Other Countries, Majority of Potential Savings
From Importation Captured by Middlemen
Share of Economic Gains Captured by Importers vs
Payers in Other Countries Where Reimportation
is Allowed
Source Kanavos P. The Economic Impact of
Pharmaceutical Parallel Trade A Stakeholder
Analysis. London School of Economics, 2004.
45
Those Under Price Controls Have to Wait for New
Therapies
Average Delay for Products That Are Launched
(number of months between initial global launch
and launch in country)
Percentage of Global New Medicines Reaching
Country
86
USA
4.2
US Consumers Get More Medicines, and Get Them
More Quickly
78
Germany
8.8
73
Sweden
7.8
12.2
66
Canada
58
Spain
15.7
France
14.9
53
Italy
17.2
52
36
Poland
20.5
31
Portugal
22.1
Percent of 85 global launches 19941998 that
were launched in each country by end of
1999. Source Danzon P, et al. The impact of
price regulation on the launch delay of new
drugs. NBER Working Paper 9874, July 2003.
46
Outline

• Pharmaceutical Prices, Spending and the Value of
  Medicines
• Information, Marketing and Advertising
• RD, Profits and Incentives in the Pharmaceutical
  Industry
• Should We Fill our Prescriptions in Canada?
• The Road Ahead

47
Keeping Focused on the Opportunity Ahead
Number of Deaths per 100,000 Population per Year
Major Cardiovascular Diseases (Heart Disease,
Stroke, High Blood Pressure)
600
1997 352
400
1900 345
200
1997 201
Cancer
1900 64
0
1900
2000
1920
1940
1960
1980
Source Caplow, Theodore, et al. The First
Measured Century, Washington DC AEI, 2001137
48
An Aging Population Will Demand More Cures
Number of People Older Than 100, per Million
Population
300
2000 262
250
200
150
100
1900 46
50
0
1900
1920
1940
1960
1980
2000
Source Caplow, Theodore, et al. The First
Measured Century, Washington DC AEI, 20019
49
Florida A Healthy State Program Milestones and
Performance Metrics
BehaviorChanges
ClinicalChanges
Reduced Need for Services

• 39 of patients improved medication compliance
• 54 of patients improved mental health scores

• Heart Failure
• 4347 reduction in number of patients with most
  severe HF
• Hypertension
• 48 of patients lowered blood pressure

• Utilization
• Inpatient Days ? 12.6

• Year 1 Savings and Investment
• 15.9M

Patients Under Care Mgmt
17,700
4,800
June 01
June 02
Sept 02
Dec 02
March 03
June 03
Sept 03
50
Closing Points

• Health Care Spending Is Rising and Probably Will
  Continue to Do So
• Prescription Drugs Are not the Primary Reason
• Health Care Is a Highly Valuable Dynamic Good
• Patients and Society Have Reaped Exceptional
  Returns from Medical Innovation and have an
  Enormous Stake in Continued Progress
• Challenge of the Future is More than Controlling
  Costs
• Continue Progress Against Illness
• Use Health Care Resources Appropriately
• Establish Financing Mechanisms that Encourage
  Appropriate Utilization of Medical Resources and
  Make the Fruits of Medical Progress Widely
  Available

51
BACK UP SLIDES
52
Inspection Activities Are Not Without Cost
The blitz operations were FDA and Canadian
Boarder Patrol conducted short-term intensive
evaluations of drug products that were entering
the U.S. through specific international mail
facilities. November 2003
53
Survival Curves for Discontinuation of Statin
Therapy, by Prevention Category
Adjusted for all available covariates. The
median time to discontinuation was 3.7 years for
secondary prevention and 3.4 years for primary
prevention.
Source Ellis, J.J. Journal of General Internal
Medicine, June 2004 19 639-646.
54
Role of Medicines in Employers Annual Premium
Increases is Modest
2005 Forecasted Premium Increasesfor Plans With
and Without Rx Coverage
Source Segal Health Plan Cost Trend Survey, 2005
edition, October 2004.