Pricing & Market Access Outlook 2012 Edition

Pricing & Market Access Outlook 2012 Edition TM

Pricing & Market Access Outlook 2012 Edition Acknowledgements Thank you to the following people for their contributions to this report: Authors Marc Benoff, Katja Berg, Isabella Chow, Joanne Clark, Justus Dehnen, Stephen Deitch, Carla Niven, Kevin O Leary, Nitin Patel, Andras Ruppert, Adam Sohn, Neil Turner, Meng Zhang Contributors Johannes Buchberger Yi Cai Santi Calore Disha Dewan Colin Fan Ge Ellie Foster Katrin Goldhagen Pia Gugnani Mike Hamilton Stacey Hickson David Jin Hasan Kapar Zara King Berrak Kocaoglu Maria Kosmaoglou Ingrid Liu Natalia Male Laura Massey Steve Millen Elizabeth Mitchell Filip Odquist Gemma Parker Natalie Petrie Zornitsa Petrova Dennis Petry Ana Plata Neha Rao Rachel Rowbottom Michael Schmoeller Chris Schulze-Solce Lavni Varyani Lauren Viehbacher Laura Walton Sofie Willems Copyright IMS Consulting Group 2012 All rights reserved. No part of this publication may be stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of IMS Consulting Group.

Dear Clients, Colleagues, and Friends, Contents As state debt crises deepen, so does the motivation for payers and patients to pay only for drugs that provide improved benefits. Recent payer reforms, as seen in the US and Germany, have stated goals to improve care for patients, as well as to curb overall healthcare costs and drug spend. While direct price cuts, reference pricing and price caps remain the blunt instruments of cost containment, payers are also aware of the need to reward manufacturers for genuine medical innovation. As a result, payers increasingly demand stringent evidence throughout a product life cycle to support their pricing and reimbursement decision making. With payers setting the agenda sometimes on the basis of less rational decision-making than perhaps they believe the burden is on manufacturers to make the right strategic investment decisions in building a strong evidence base and trustful long term relations with payers. There is little point in developing expensive evidence with a relatively low potential return on investment but products that can continually demonstrate their value will be rewarded. In this demanding environment, manufacturers must customize their product development decisions and global market access strategies early to give their products a chance of clearing regulatory, national and sub-national payer hurdles. Even then, without compelling evidence, there is no guarantee of success. 07-20 21-31 PAYER REFORMS USA: Growth of 340B program results in growing net price risks AMNOG: End of the beginning the evolution of benefit assessments and price negotiations China: Building pricing and marketing excellence Pharmerging markets: Refining the model for success ACCESS METRICS Premiums continue, but this time with a twist Time to market: National improvements, regional complexities 07 10 14 17 21 24 This year s P&MA Outlook takes a closer look at the forces driving recent payer reforms, their impact on market access metrics and how manufacturers are strategically investing in building evidence to support the value of their products. We very much hope that you find our analyses stimulating and would welcome the opportunity to discuss these and other pricing and market access issues with you and your colleagues. Yours faithfully, 32-41 Beyond clinical evidence the influence of company perceptions on pricing and market access decisions STRATEGIC INVESTMENT DECISIONS Launching innovations in Europe investing in evidence, or not? 28 32 Should we play NICE? Impact on the UK and beyond 36 When does a companion diagnostic add value to a drug? 39 Marc Benoff Pricing & Market Access Global Head Andras Ruppert Pricing & Market Access European Leader Adam Sohn Pricing & Market Access Americas Leader Meng Zhang Pricing & Market Access China Principal

USA: Growth of 340B program results in growing net price risks Recent trends, such as site of care shifts from the community to the hospital and vertical integration of hospitals and community physician practices, have raised many questions about the optimal commercial model and access to drugs in the hospital outpatient setting. While these are relevant questions over time, the immediate concern over the growth of the 340B program and resultant net price pressure has not been as broadly discussed. Based on IMS Consulting Group s (IMSCG) analysis, this potential net revenue loss to manufacturers of up to $3 billion a year warrants greater focus. Background The 340B Drug Pricing Program requires manufacturers to provide discounts for covered outpatient drugs to qualified safety net providers, including most Disproportionate Share Hospitals (DSHs). On average, participating entities receive discounts of almost 50%. The purpose of the 340B program is to enable these entities to stretch scarce federal dollars, reaching more eligible patients and providing more comprehensive services. However, the program s growth and lack of controls should prompt manufacturers to take a closer look. 340B purchases represent a loss in margin if drugs would have been administered in a setting where the provider pays WAC (wholesale acquisition cost) price instead of 340B price. The program is a gain to manufacturers if patients receive care at qualified facilities they would otherwise not have received. The total program accounted for 2% of US drug sales in 2011, but could represent up to a $3 billion revenue loss for pharma companies. Even more alarming, according to one expert in the 340B program, for every $100 worth of drugs sold through 340B, $30-40 are misappropriated due to double-dipping (providing a discount Copyright IMS Consulting Group 2012 and paying a Medicaid rebate on the same unit) or diversion (receiving a discount on a non-eligible sale), increasing pressure on the industry s margins. With program growth continuing unabated, and disproportionately affecting sales of high-cost injectables, manufacturers need to develop a comprehensive 340B strategy. 340B program growth Since 2006, the number of hospitals receiving 340B discounts has grown at a CAGR of 175%, while the number of non-340b hospitals has decreased at a CAGR of 22% (see Figure 1). In total, there were 16,500 covered 340B entities at the end of 2011. At a minimum, in setting prices and forecasting, manufacturers need to understand the extent to which 340B growth represents incremental revenue opportunity (from care of patients who would not otherwise receive care) or simply a shift of business from higher gross-to-net customers to lower ones (e.g. insured patients receiving care at a 340B hospital rather than a non-340b community practice). In the latter case, 340B sales are likely to dramatically affect net revenue of high cost specialty drugs and biologics. 07

08 FIGURE 1: Growth/decline of select non-340b and 340B entities Number of entities 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Q4 2006 Non 340B hospital 340B hospital Q4 2007 Using Yervoy as an example, 340B business accounts for a large portion of sales (see Figure 2). Other high-cost specialty injectables also may be disproportionately affected because community physicians avoid perceived reimbursement risk by sending patients to outpatient infusion centers that are part of DSH hospitals. Accordingly, revenue from a sale that might have taken place in the community setting is substantially reduced by a shift to a 340B facility. A greater concern, however, is whether the lack of program controls is resulting in discounted sales also being reported as rebate eligible under the Medicaid program, which is not allowed. This is most likely happening because the controls have not been broadly adopted by managed Medicaid plans and contract pharmacies to flag all 340B sales to ensure they are not reported for rebates. Looking at Yervoy again, the mandatory 340B discount combined with some level of doubledipping could be reducing product net revenue by 25% (assuming a 340B discount of 25% and a double-dipping rate of 30% on program sales). Where the growth is coming from IMSCG believes that the increasing significance of 340B, as defined by the number of enrolled facilities, the number of patients receiving care through these facilities, and the accompanying revenue loss, is a result of various factors: Non 340B community cancer clinic 340B community cancer clinic Q4 2008 Q4 2009 Q4 2010 Q4 2011 CAGR: +3% CAGR: -22% CAGR: +175% CAGR: +300% Source: IMS HCOS database, a complete list of 340B eligible entities can be found on the Health Resources and Services Administration (HRSA) website: http://www.hrsa.gov/opa/introduction.htm 1. Cost pressures Enrollment by new entities driven by budget pressures Physicians increasingly referring low margin patients (uninsured and Medicaid) to hospital outpatient infusion centers, many of which may participate in the 340B program Growth of hospital-community oncology joint ventures 2. Regulatory changes The Affordable Care Act s (ACA) expansion of qualifying entities to include sole community hospitals, rural referral centers, critical care hospitals, children s hospitals, and comprehensive cancer centers Removal of the restriction on contract pharmacies, allowing 340B facilities to partner with multiple pharmacies Easier enrollment process for qualifying entities Growth of Medicaid patients (estimated at 8-20 million new lives beginning in 2014) enabling more entities to qualify for 340B under the current DSH formula Reduction in the Medicare Part B reimbursement formula from ASP (average sales price) +6% to a lower threshold. Providers suggest this would result in a greater shift of Medicare patients to the hospital, or force more practices that rely on margin from infusing or administering drugs to merge (often with hospitals). Under either effect, the growth of volume to 340B institutions would likely increase above current trends 3. Misuse of 340B discounts Double-dipping of Medicaid rebates and 340B discounts due to inaccurate or nonelectronic records, especially in light of the extension of Medicaid rebates to managed Medicaid utilization Contract pharmacy transactions identifying non-340b prescriptions as 340B Strategies for pharma Manufacturers cannot stop the growth of 340B, nor should that be their direct objective. The optimal strategy for a manufacturer should: Facilitate administration of drugs in non- 340B settings as much as possible Ensure that Medicaid rebates are not paid on drugs purchased at 340B prices by validating 340B sales and scrubbing Medicaid claims for duplication. Engage policy makers (either directly or indirectly) on the causes and remedies for misfeasance and malfeasance within the program Consider ramifications of reductions to provider reimbursement by Medicare in FIGURE 2: 340B and non-340b sales for Yervoy Portion of ex-mnf sales 340B Non-340B Not known 16% 22% 23% 19% 20% 27% 27% 23% 65% Q2 2011 51% 50% strategic planning efforts and in indirect policy efforts supporting maintaining provider reimbursement levels Pharma manufacturers may take a variety of steps to avoid migration of commercially insured and Medicare covered patients from the community setting to 340B hospitals and the resulting loss of margin, and to exercise greater oversight over program integrity: 1. Reimbursement Support: Address providers concerns around reimbursement by delivering field reimbursement and hotline support to community clinics. Field Reimbursement Managers may offer guidance that mitigates the perceived risk of third party payment by ensuring that correct coding and billing practices are in place and practices have access to local insurers policies 2. Payment Risk Mitigation: Promote innovative payment strategies that help community clinics mitigate risk, such as specialty pharmacy distribution, extended dating, payment plans, or volume discounts 3. Claims validation and Audits of 340B: Address the misfeasance and malfeasance around 340B discounts by intensifying efforts to scrub and reconcile Medicaid claims data to identify rebate claims from 340B transactions and by exercising the opportunity, with HRSA s (Health Resources and Services Administration) approval, to audit certain 340B facilities 58% Q3 2011 Q4 2011 Q1 2012 Q2 2012 Source: IMS HCOS, IMSS DDD, and IMS PADDs database. Shows growth of only select 340B facility types and does not include all community health centers, STD and TB clinics, 638 and urban clinics, family planning clinics and other eligible entities 36% 35% 30% TM 09

AMNOG: End of the beginning the evolution of benefit assessments and price negotiations Two significant landmarks have recently been reached in the evolution of the AMNOG legislation in Germany: the completion of the first price negotiations of positively assessed products and the initiation of assessments for alreadymarketed products. With AMNOG no longer confined to its initial focus on evidence-based assessments of innovative new drugs, both landmarks signal an important new phase one that manufacturers need to prepare for. FIGURE 1: Summary of clinical benefit assessment and price agreement for ticagrelor and pirfenidon Indication IQWiG assessment GBA decision Price agreement Duration of agreement Others Source: IMSCG based on GBA Ticagrelor (Brilique) Atherothrombotic events Important additional benefit in 1 out of 4 sub-populations; no additional benefit in the other sub-populations Important additional benefit in 1 out of 4 sub-populations; no additional benefit in the other sub-populations, with one exception 19.5% rebate on list price; no statutory rebate 3 years Acceptance as Praxisbesonderheit for indications with additional benefit Pirfenidon (Esbriet) Idiopathic lung fibrosis No additional benefit Not quantifiable additional benefit 11% rebate on list price + 16% statutory rebate 2 years Acceptance as Praxisbesonderheit for approved indication 10 First products complete price negotiations From the implementation of the AMNOG law in January 2011 to July 2012, 33 products entered the evidence-based assessment process under which manufacturers submit a clinical benefit dossier to the Federal Joint Committee (GBA). Of the total, 22 had been completed and approximately half were found to have some additional benefit at least in one patient sub-population of the licensed indication (see AMNOG: Seven Learnings for Strategic Market Access Decisions in Germany, June 2012, published by IMSCG). After products have gone through a benefit assessment, the next step is for the manufacturer to enter price negotiations with the lead association of statutory sick funds (GKV-SV). To date, two products have completed this final step: AstraZeneca s Brilique (ticagrelor) and InterMune s Esbriet (pirfenidon) (see Figure 1). In Brilique s case, negotiations led to a total rebate of nearly 20%. The negotiation resulted in an additional rebate of 4% on top of the existing mandatory rebate for non-reference priced, patented products of 16%. The list price was unchanged and the negotiated reimbursement price is publicly available and valid for all indications/patient populations, despite the level of deemed benefit in each. Both sides described the outcome as fair. What was unusual about the decision, however, is that the GBA accepted that Brilique should be excluded from physician budgets in indications with additional benefit. This was achieved by declaring Brilique a Praxisbesonderheit, which covers prescriptions that are uncommon for a physician s specialist group and/or result in high prescription costs. The GBA also granted Esbriet Praxisbesonderheit status and a non-quantifiable additional benefit based on its orphan drug designation, although the Institute for Quality and Efficiency in Health Care (IQWiG) found no additional benefit. In price negotiations the GKV-SV and InterMune agreed an additional rebate of 11% on top of the mandatory 16% for patent protected products. There are clear similarities between the Brilique and Esbriet examples. Both were granted Praxisbesonderheit status, which their manufacturers will hope compensates for relatively high additional rebates on the reimbursed price. Although too early to establish, there are signs at least that the GKV-SV is prepared to enter negotiations relatively flexibly. This may come as a surprise to pessimists in the industry who were expecting a sharper focus on cutting costs. In addition to the first GKV-SV price negotiations, changes have also been made to the AMNOG regulations presumably under pressure from industry and political stakeholders. Negotiated rebates must now be made public and manufacturers can submit an updated dossier at any time. Previously, a one-year waiting period applied so the new rule gives manufacturers the opportunity to react quickly to GBA decisions such as failure to submit sufficient information in the dossier. For manufacturers of products granted no additional benefit this new rule allows for collecting and presenting new supporting evidence which might lead if it can demonstrate additional benefit to a higher reimbursed price. Additionally, where price negotiations between the GKV-SV and manufacturer fail, the reimbursed price is set based on the average of prices in 15 EU reference countries the criteria for which have now been defined. Period of grace for established products ends Having concentrated initially on new innovative product submissions, in June 2012 the GBA executed its right under the AMNOG legislation to request benefit dossiers for already marketed products. At this time, the GBA asked for submission of dossiers for anti-diabetics containing the active agents sitagliptin, vildagliptin and saxagliptin, as well as combinations of metformin/sitagliptin and metformin/vildagliptin for a group assessment. The decision was based on the importance of DPP-4 inhibitors in care but was also likely triggered by Boehringer Ingelheim and Lilly s refusal to provide Trajenta (linagliptin) to German patients. The companies did not accept the GBA s choice of comparator for the benefit assessment, fearing it would result in low prices. While a decision on DPP-4 inhibitors is pending, the GBA has signalled its intent to lower prices in this high budget impact therapy area and limit access by controlling patient populations. By asking for benefit dossiers, the GBA is forcing manufacturers to either provide costly additional evidence or to accept that their products are placed in a reference price group with lower prices. The choice of DPP-4s also indicates the types of in-market product classes that might be next on the agenda for benefit assessments: Classes with high sales volume and high budget impact on statutory health insurers Products evaluated under the AMNOG process 11

12 for which comparable products are already marketed Products or product groups for which a number of comparators are already available and which could be leveraged in price negotiations To test these hypotheses, IMS Consulting Group (IMSCG) assessed the top 10 therapeutic classes at ATC level 2 (excluding vaccines), ranked by sales and number of products already assessed or in assessment (see Figure 2). In the DPP-4 case, these hypotheses hold true: high budget impact and new products that underwent AMNOG review triggered an assessment of already marketed products. On this basis, antineoplastics and immunosuppressants could be next. Implications By extending their scope to established products, the full potential of the AMNOG reforms on reshaping the pricing and market access environment are beginning to be felt. Integrating AMNOG assumptions into portfolio and lifecycle considerations will therefore be crucial for manufacturers to secure and optimize future pricing in Germany and globally. From a launch pricing perspective, the expected future publication of price rebates and hence the reimbursed price rather than the list price, could be used by other countries for referencing purposes. This carries the risk of triggering a downward price spiral if Germany re-references against those countries. As a consequence, when entering negotiations, manufacturers must consider the impact a lower than expected price in Germany would have on price potential in other countries. However, given that manufacturer rebates existed before AMNOG and were not typically referenced, it seems unlikely that rebate prices will transform referencing standards across Europe. A further strategic implication of AMNOG is the question of what happens when the manufacturer and arbitration panel cannot agree on a price. Figure 2: Number of products already assessed or in process in the top 10 therapeutic areas (except vaccines) by share of SHI (statutory health insurance) expenditure Share of SHI expenditure 10% 8% 6% 4% 2% 0% Source: IMSCG, WHO Bubble size = total sales volume in Germany MAT/4/2012 Immunosuppressants Anti-Asthma & COPD Antithrombotic agents Antidiabetics Immunostimulating agents Analgesics Psycholeptics Agents acting on the renin angiotensin system Systemic antivirals Number of products already assessed or in assessment process Antineoplastics -1 0 1 2 3 4 5 6 7 In cases where price negotiations threaten an unsatisfactory outcome, manufacturers might willingly let them fail in order to be priced against European reference countries. From a mature brand pricing perspective, it will be essential for manufacturers to prepare for the possibility of a GBA request for benefit dossiers for established products. In the near term, manufacturers should consider whether there is a risk of an established product benefit assessment and whether the preparation of a dossier is justifiable. It is still too early to predict which established products the GBA will target. Looking at the top 10 selling products in Germany and the number of compounds in development in Phase III (or later) for at least one of each product s indications, the number of products in each therapy area is high (see Figure 3). Assuming that more products in development will result in more products entering the AMNOG process, there could be a higher risk of triggering a benefit assessment of established products. For each new product launched into a crowded and costly area, potentially triggering a GBA benefit assessment, there could be negative pricing FIGURE 3: Compounds in development in Phase III+ in therapeutic areas of Germany s top 10-selling products (MAT/4/2012) Rank Name Sales in million Source: IMSCG Therapeutic area 1 Humira 468 Autoimmune diseases 49 2 Enbrel 347 Autoimmune diseases 59 3 Seroquel 269 Psychotic diseases 27 4 Spiriva 237 COPD, asthma 26 5 Glivec 232 Oncology 150 6 Copaxone 230 Multiple sclerosis 16 7 Lyrica 225 Neuropathic pain 23 8 Avonex 221 Multiple sclerosis 34 9 Rebif 214 Multiple sclerosis 34 10 Symbicort 211 COPD, asthma 26 Pipeline products in therapy area implications for both single products and classes overall. On the question of whether the preparation of a dossier is justifiable, IMSCG s analyses of AMNOG benefit assessments to date have shown that a positive assessment was achieved by meeting high standards of evidence. Manufacturers will have to consider whether the available evidence will meet these standards or whether new data will have to be collected to be granted additional benefit over the clinical comparator. It will be important to assess whether additional investments in, for example, clinical trials, data collection and the preparation of a benefit dossier, will realistically support the reimbursed price. Furthermore, even if robust evidence is collected and the outcome is positive, there remains the threat of the GBA creating a reference price group of low priced products. Despite reaching some important recent landmarks, much uncertainty remains over the future evolution of the AMNOG reforms. Manufacturers will therefore need to continue to monitor the GBA s decisions to better prepare their pricing strategies for new and established products in both Germany and beyond TM 13

China: Building pricing and marketing excellence As multinational corporations (MNCs) continue to introduce new products and increase investment in China, there remains a persistent lack of appreciation of the market s pricing and market access (P&MA) complexities. The ever changing policy environment, geographic nuances and marked differences from mature markets continue to challenge MNCs and pose potential threats to revenue. It is critical that MNCs review the past and reposition for the future to take full advantage of the P&MA opportunities available. FIGURE 1: Gap in P&MA performance between common and optimal outcomes Process Description Common Outcome Optimal Outcome Provincial Tendering Hospital Listing After pricing registration, products reimbursed or non-reimbursed need to win tender/procurement to gain access Price erosions often frequent and provinces often reference tender prices in other provinces Products must be listed in hospitals, which remain the largest channel for drug sales Significant delay exists in listing timeline due to lack of standard review criteria and process IMS analysis of tendering results in 30 provinces reveals ~14.3% price erosion IMS analysis of 232 tier 2&3 hospitals listings of MNC products suggests that the delay in listings is ~12 months on average and can be as long as 24 months High-performing MNCs achieved minimal price erosion (~2%) High-performing products achieved listing in most hospitals in ~3 months on average 14 The pharmaceutical market in China is expected to continue its strong growth over coming years. This promises robust returns as other markets experience tepid growth. Yet most MNCs are not prepared to fully capture China s potential. Indeed, a closer look suggests that historical management of the P&MA space has led to suboptimal outcomes for many players. A key issue lies in strategy that is not always designed for a uniquely complex P&MA system. As fresh challenges arise, MNCs must assess their performance and reflect on how to deepen their understanding of P&MA in China. An examination of historical operations and future trends sheds light on how driving P&MA excellence can bring greater gains in this booming market. Historical view: high revenue could be higher Industry has indisputably reaped enormous returns in China. Yet even as the country transitions from a traditionally cash-pay to a governmentled payer structure, systemic challenges persist in complicating the market and lowering returns. Some MNCs have not fully accounted for the difficulty of P&MA conditions a cumbersome access process, erratic policy development and geographic diversity to the detriment of revenues. The tendency of many companies to miss the implications of P&MA dynamics is evident in the contrast between common and optimal outcomes (see Figure 1). From significant tendering price erosion to slow hospital listing to delayed reimbursement, the Chinese market is replete with barriers. Only a few have successfully negotiated these obstacles. Future view: emerging challenges demand strategic innovation To improve on previous outcomes, MNCs should refocus their strategies for the future. However, the rapid evolution of the P&MA landscape requires constant vigilance and flexible responses. Government expenditure on healthcare has increased eight-fold over the past decade, with a commitment to increasing access and affordability. Conversely, the government is facing unprecedented budget pressure, with a number of cost-containment initiatives on the horizon. Growing pressure due to price cuts Pricing pressure remains at the forefront of the government s healthcare agenda. Recent years have seen regular price cuts in anti-infectives, cardiovascular, endocrine, CNS, alimentary and other therapy areas at an average rate between 14-21%. Oncology, blood products and immunology are set to be targeted later in Reimbursement Source: IMSCG 2012. One significant trend is a growing focus on narrowing the price gap between originators and generics. Notably, the government has persistently shown interest in using generics as a benchmark for setting originators prices. Given that originators dominate MNC sales, a deteriorating pricing environment could fundamentally challenge their current business models in China. This redoubles the urgency to identify a viable model for newer innovative, patent-protected products. Likely adoption of international price referencing Products have long enjoyed the freedom to set launch prices in China. However, the government labors under the domestic criticism that China s prices remain higher than those in other countries, including neighboring South Korea and Taiwan. In early 2012, the government asked MNCs to submit product prices from nine key markets (Canada, France, Germany, Hong Kong, Japan, South Korea, National and provincial reimbursement allows companies to drive substantial product uptake However, many drugs still have difficulty attaining RDL listing quickly, if at all In contrast to developed markets, China s average time to reimbursement is ~8 years, if a product achieves reimbursement at all The delay to reimbursement can be as long as 15 years Taiwan, UK and USA) the clearest sign yet that it is interested in implementing international price referencing. IMS Consulting Group (IMSCG) estimates that adopting price referencing in China could lower MNC revenues by 15-45% with a devastating impact across portfolios. Early and effective lobbying would be required to defend against such a move. Intensifying hospital budget control A key priority of healthcare reform is to improve public hospitals operating models, to support long-term goals of increased accessibility and patient affordability. Hospital budget controls are therefore on the rise to curb spending at the provincial and city levels. Critically, the early outcomes have proven damaging to industry. Shanghai s hospitals, for example, have exercised a pre-paid lump sum mechanism and seen a significant fall in growth compared to other Tier-1 cities (see Figure 2). MNCs will be hardpressed to account for this trend, heightening Some products have rapidly achieved national coverage within ~1 year post-launch 15

16 FIGURE 2: Slowdown in growth under hospital global budget control in Shanghai Source: IMSCG Before global budget control in Shanghai the importance of assuring continued access at the hospital level. Achieving P&MA excellence in China China will undoubtedly continue to drive dynamic growth in the future. However, greater emphasis needs to be placed on P&MA, as sub-optimal performance persists and fresh challenges lie ahead. Multinationals have historically fallen short of their full potential in China. The P&MA process is constantly changing, buffeted both by unpredictable policy and shifting patient, financial and regulatory needs. MNCs have tended to respond in an ad hoc manner while seeking to capture quick gains. However, owing to the system s uniqueness, much of the conventional P&MA wisdom established in developed markets does not apply, requiring a new vision, fresh thinking and investment in capabilities. First, companies need a well-defined P&MA framework coupled with a feasible execution plan. Global strategies tailored to a changing environment and continued investment in local capabilities will be crucial to grow the market over the coming years. By establishing a systematic approach and identifying best practices, MNCs can proactively tap opportunities rather than simply react to the vagaries of the market. This is of paramount importance as the current lack of best practice exacerbates poor performance, as seen in MNCs loss of tenders or inability to expedite reimbursement. Beijing Guangzhou Shanghai 21% 16% 20% 22% 19% 9% After global budget control in Shanghai Furthermore, companies should prioritize the needs in developing supporting tools and capabilities. From more effectively engaging the government on policy evolution to building key account management teams to optimize hospital access, and from developing value messaging to establishing effective tendering and reimbursement tactics, an enhanced P&MA toolkit is essential to keep up with the pace of change. Second, given fast-evolving policies in China, P&MA implications should be shared across corporate departments, including sales, marketing, R&D, and business development. Rather than being an isolated function, P&MA should be considered in all facets of strategic development. This will be crucial to broader decisions such as resource allocation and portfolio optimization. For example, an informed view of the P&MA landscape will help MNCs to identify and target new areas of investment. Notably, P&MA conditions such as pricing pressure and hospital budget control have contributed to the recent rise of the over-the-counter market. China will continue to lead emerging markets and drive dynamic growth in the future. However, MNCs need to appreciate the market s complexities or face missing opportunities. In crafting strategy, optimistic views of steady growth must be tempered by an understanding of P&MA s existing and emerging challenges. Only then will players be poised to capitalize on TM China s many opportunities In order to sustain future growth, the industry has invested heavily in pharmerging markets. However, sustaining top line numbers masks the underlying challenges and risks associated with investments in pharmerging markets, where the drivers of growth and the nature of business are vastly different from developed markets. In developed countries, patent-protected products drive top line revenue. Further, in reviewing recent launches and development pipelines, it is clear that portfolios of multinational corporations (MNCs) are shifting away from chronic/primary care products and towards higher-cost, more narrowly targeted specialty products. The picture is reversed in the pharmerging world, where generics (both branded and traditional trade generics) dominate the market (see Figure 1). In fact, looking at the portfolio of leading MNCs, multi-sourced products accounted for 75% of pharmerging market sales in 2011 (see Figure 2). Generally, companies have packaged mature, aging portfolios along with brand name reputations and premium pricing to drive sales; newer patent protected offerings contribute more modestly. Pharmerging markets: Refining the model for success Pharmaceutical sales in the developed markets 1 grew at an average annual rate of less than 5% between 2007 and 2011. In contrast, sales in pharmerging markets 2 grew by 16% over the same time period. Looking forward to 2015, IMS Consulting Group (IMSCG) estimates that these 17 pharmerging markets will account for up to 50% of total growth. Thus, while the industry cannot lose focus on the developed markets, it is increasingly dependent on the pharmerging markets as a driver of future growth. FIGURE 1: Volume market share by product class (standard units): BRIC Volume market share(su) 1 Developed Markets include US, Canada, UK, Germany, France, Italy, Spain 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% India China Russia Brazil Retail Unbranded generics Branded generics* Original brands* Source: IMS MIDAS Q411 based on ethical market only. All countries market segment except China. *In China the original brand segment includes originals and licensed products, branded generics includes branded generics and local copies 2 Pharmerging Markets include Argentina, Brazil, China, Egypt, India, Indonesia, Mexico, Pakistan, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, Venezuela, Vietnam 17

18 An evolving competitive picture: indirect pricing pressures While MNCs have enjoyed growth in the pharmerging markets, the established business models face threats. Historically, MNCs benefited from imperfect competition from fragmented local players with inconsistent manufacturing quality. Thus, they were able to establish a premium positioning for mature brands that appealed to specific customer segments. However, the generics industry is now changing in many pharmerging markets. India, for example, has a well developed local industry, with many companies competing directly with MNCs. This transition will be slower in other countries. For instance, the local pharmaceutical industry in China is still in nascent stages but the government has made its development a main priority. Regardless of where a given pharmerging market stands today, the future trends are clear: local players will strengthen their positions, increasingly meeting global standards on quality, while remaining competitive on production costs. As this evolution occurs, one of the historical elements of differentiation on which premium positioning was based will be supplanted. Once supplanted, more intense price competition between local and global payers will follow. Government interventions: direct pricing pressures Pricing flexibility is also being undermined by government policy across pharmerging markets. Public authorities are increasingly seeing price regulation as a means to reduce budget pressures in situations where products are reimbursed or where patients pay out of pocket: Brazil: prices are controlled for all reimbursed and non-reimbursed products. In addition, pricing pressures resulting from auctions and public acquisitions are on the rise China: price controls are increasing with direct price cuts across products (especially those from multinationals), proposals to reduce differentials across multi-source products, and inclusion of more products under the essential drug list intensifying price competition India: new proposals for price controls cover all medicines including generics and branded agents Russia: generics and patent protected branded medicines are increasingly added to the positive drug list to allow government to regulate prices; nevertheless, inclusion does not guarantee reimbursement FIGURE 2: Market share by sales across product types in pharmerging markets 2011 (%) 64% 68% 25% 11% Leading MNCs Source: IMS MIDAS 2011. Leading MNCs include the top 18 MNCs 4% 28% Others Branded generics + multi source brands Single source brands Generics Specialty products: a future driver of growth? Just as price pressures are mounting in the branded generic space, the business model is far from certain for higher price specialty products in the pharmerging markets. While 20% of total global 2010 sales came from pharmerging markets, IMSCG estimates that for a select basket of premium priced specialty products these markets represented only 7% of global sales. These products are generally not reimbursed in the pharmerging markets and when they are, they are subject to very tight budget controls and rationing. Despite the explosive economic growth across many pharmerging markets, income earned by the middle classes is still moderate, particularly relative to the price of many specialty products. Based on IMSCG analysis across the BRIC markets, approximately 3% of the BRIC population could afford a $30,000/year therapy in 2011(see Figure 3). 2015 forecasts suggest that affordability will increase, but by less than one percentage point. FIGURE 3: % of patients in BRIC countries who could afford high cost therapies in 2011 and 2015 40 35 30 28 25 20 15 10 5 30 % who could afford therapy costing > $30,000/year in 2011 % who could afford therapy costing > $30,000/year in 2015 13 19 1 1 1 1 Brazil Russia India China Source: IMSCG based on affordability tool. Calculations include the following parameters: consumption share held by the quintile (%), household consumption expenditure growth (annual %), health expenditure as % of household consumption expenditure (%), minimum basic spending level (per person per day, US$), population growth (%), drug price ($), price growth rate (annual %) and reimbursement rate (%) Percentage represents weighted average across BRIC countries The need for a new vision or redefining expectations of success The industry s recent experience in pharmerging markets has led to tremendous expectations for continued growth. However, owing to fundamental changes in market structure, it is doubtful that success will be easily realized by MNCs employing strategies and tactics that have been effective to date. The chronic care branded generics space is likely to become further commoditized, while the differentiated specialty product space remains difficult to address in a broad fashion. How then can MNCs reap value in pharmerging markets? Pricing and market access design will be an important component of any commercial strategy, as it must reflect both market structure as well as product archetype (see Figure 4). The majority of sales for MNCs today occur at the bottom of this matrix multisource products in reimbursed and cash-pay settings. For these undifferentiated products, growth may remain robust but the dynamics of the market are likely to increasingly resemble a 19

20 traditional generics space. Margins will decline and greater emphasis will be placed on low operating cost, increased geographic coverage and broad portfolios. At the other end of the matrix (premium priced products targeting niche populations) pricing flexibility is unlikely to alter the reimbursement opportunity or significantly expand the market for these products. The broader opportunities are in the middle: moderately priced specialty products with improved clinical benefit, or premium-priced specialty products with game-changing clinical benefit specifically relevant to pharmerging markets. In these scenarios, pricing flexibility relative to global levels and creative access programs targeting payers and/or patients may be effective in driving growth. In conclusion, growth for the multinational pharmaceutical industry is increasingly dependent on success in the pharmerging markets. While many companies have enjoyed significant success over the past five years, the evolving market dynamics potentially require new approaches to succeed in the future. Success will not only accrue to those with strong products but also to organizations with the right vision and strategy for TM pharmerging markets FIGURE 4: Pricing and market access opportunity across product archetypes in pharmerging markets Small High Product Differentiation Low Low Source: IMSCG Target patient population size Large Moderately priced specialty products with improved clinical benefit Product Price Product Matrix Premium-priced specialty products with game-changing clinical benefit in market-relevant disease areas X Non-differentiated products: Opportunity likely to be further constrained X High X Premium-priced products targeting niche populations Pricing and Market Access Opportunity across product archetypes in the pharmerging markets Price flexibility is unlikely to alter the reimbursement opportunity or significantly expand the market given limited populations In these scenarios, pricing flexibility relative to global levels and creative access programs targeting payers and/or patients may be effective in driving growth Growth may remain robust but the dynamics of the market are likely to increasingly resemble a traditional generic space. Margins will decline and greater emphasis will be placed on low operating cost, increased geographic coverage and broad portfolios Europe: list price premiums against brands the beginning of a trend? In previous years, the majority of NMEs that launched at a list price premium were in specialized therapy areas, with limited competition or unclear or generic comparators. Typical examples in 2010 included Multaq (dronedarone, for atrial fibrillation) and Uloric (febuxostat, for chronic hyperuricaemia). In 2011, despite a small sample size of just six NMEs included in IMS Consulting Group s (IMSCG) analysis, more products launching in areas with significant branded competition achieved list price premiums such as Incivek (telaprevir) in hepatitis C and Eliquis (apixaban) in venous thromboembolic events/stroke prevention associated with atrial fibrillation. The clear implication, in early launch markets, is that manufacturers are responding positively to the increasingly rigorous data demands of payers. What is less clear, however, is whether list price premiums seen to date will hold up in later launch markets, and just what is going on behind the headline list price at the net price Premiums continue, but this time with a twist Many of the new molecular entities (NMEs) launched in Europe and the United States in 2011 achieved a list price premium over their existing comparator. This was despite the ongoing challenges facing the global economy and the squeeze on government spending especially in parts of Europe. However, unlike previous years, several of the products achieving premiums in Europe did so against recent branded competitors, as opposed to achieving premiums relative to unclear or generic comparators. Conversely, the US has seen several specialty products launch at a discount, implying an unwillingness for some manufacturers to price above a certain threshold. But while manufacturers are increasingly gearing themselves to meet the growing demands of payers, the real pressure on pharmaceutical spending is being felt at the net price level through discounts, rebates and other budget impact minimizing tools. level. While discussions at the net price level with regional or local payers, or through tenders, remain generally opaque and not in the public domain, Germany has recently opened a window by making the negotiated net price of products public under the AMNOG process (see pp10-13). It remains to be seen whether other countries bow to the pressure of going public with net prices, and whether or not this has an effect on international price referencing and launch sequencing (see pp36-38). Referencing has historically been based on publicly available list prices so any change particularly as Germany is traditionally an early launch market would reverberate across Europe. US: list price discounts in specialty? Based on a larger sample size of 20 NMEs, list pricing trends at launch in the United States echoed recent years with half launching at a list price premium. Also continuing recent trends, eight out of those ten products were launched at a high premium, defined as a price 35% or higher than the comparator. As in previous years, nine out of ten products launched with a price 21

FIGURE 1: Proportion of EU27 markets accessed FIGURE 2: NME launches in the US during 2011 (specialty vs primary care products) 22 ELIQUIS (BMS) apixaban (C) XARELTO rivaroxaban INCIVEK (Vertex) telaprevir (C) VICTRELIS boceprevir YERVOY (BMS) ipilimumab (C) DTIC dacarbazine TROBALT (GSK) retigabine (C) VIMPAT lacosamide ZYTIGA (J&J) abiraterone (C) JEVTANA cabazitaxel TRAJENTA (BI) linagliptin (C) JANUVIA sitagliptin Weighted by % of total EU revenue 45-190% (120%)* 70-135% (125%)* Source: IMS Consulting Group (IMSCG) analysis covering NMEs launched in Europe in 2011 ** 5-35% (10%)* By % of EU markets in which product launched -35%-0% (-30%)* AT, DK, FR, NO, SE, CH, UK -20-0% (-15%)* DE, NO, ES, UK DK, IE 0 20% 40% 60% 80% 100% 0 20% 40% 60% 80% 100% Indication: venous thromboembolic events Not launched (EU5): FR, IT, UK Indication: hepatitis C (HCV) Not launched (EU5): IT, SP Indication: metastatic/ unresectable melanoma Not launched (EU5): IT, SP Indication: epilepsy Not launched (EU5): FR, IT Indication: prostate cancer Not launched (EU5): IT, SP Indication: type 2 diabetes mellitus Not launched (EU5): FR, IT, SP, DE List price PREMIUM List price PARITY List price DISCOUNT Not yet launched EU27 markets in scope include all 27 EU member states, except Cyprus and Malta, plus Norway and Switzerland Products must have launched in >5 EU markets at the time of analysis in order to be included. Not yet launched indicates sales of NMEs that had not launched yet in 2011, but are now available on the market Products included in the analysis launched in 6-10 of the EU markets in 2011 The analysis period is from first global launch in 2011 and includes all subsequent EU27 launches until the end of 2011 Weighting of pricing outputs uses market revenues between January and March of 2012 (C) denotes the comparator product selected for the pricing analysis *Indicates price range of differential to comparator, followed by median premium or discount **Yervoy price differential was very high, given the price comparator of dacarbazine (DTIC) 2011 NME Launch Corporation Indication Comparator Specialty/Hospital products H ADCETRIS brentuximab vedotin Seattle Genetics relapsed/refractory Hodgkins lymphoma BEXXAR I131-tositumomab+tositumomab H BENLYSTA belimumab GSK systemic lupus erythematosus PLAQUENIL hydroxychloroquine H DIFICID fidaxomicin Optimer Clostridium difficile-associated diarrhea VANCOCIN (ORAL) vancomycin H INCIVEK telaprevir Vertex hepatitis C VICTRELIS boceprevir H NULOJIX belatacept BMS prophylaxis of kidney transplant rejection PROGRAF tacrolimus H VICTRELIS boceprevir Merck hepatitis C PEGASYS peginterferon alfa-2a H XALKORI crizotinib Pfizer metastatic non-small cell lung cancer (ALK+) TARCEVA erlotinib H YERVOY ipilimumab BMS metastatic/unresectable melanoma DTIC dacarbazine L EDURANT rilpivirine J&J HIV-1 SUSTIVA efavirenz P JAKAFI ruxolitinib Incyte myelofibrosis THALOMID thalidomide L EYLEA aflibercept Regeneron/Bayer wet macular degeneration LUCENTIS ranibizumab M TEFLARO ceftaroline fosamil Forest pneumonia and bacterial skin infections ROCEPHIN ceftriaxone M ZYTIGA abiraterone acetate J&J prostate cancer JEVTANA cabazitaxel H ZELBORAF vemurafenib Roche/Genentech metastatic melanoma with BRAFV600E mutation YERVOY ipilimumab Primary care M VIIBRYD vilazodone Forest major depressive disorder LEXAPRO escitalopram P EDARBI azilsartan medoxomil Takeda hypertension BENICAR/OLMETEC olmesartan P LASTACAFT alcaftadine Allergan allergic conjunctivitis PATADAY olopatadine P TRADJENTA linagliptin BI type 2 diabetes mellitus JANUVIA sitagliptin P XARELTO rivaroxaban Janssen venous thromboembolism prophylaxis PRADAXA dabigatran H HORIZANT gabapentin enacarbil GSK restless legs syndrome REQUIP XL ropinirole List price PREMIUM List price PARITY List price DISCOUNT H: Significant premium/discount (35% or greater price differential to the comparator) M: Premium/discount (20-35%) L: Slight premium/discount (5-20%) P: Parity (within 5%) Source: IMS Consulting Group (IMSCG) analysis covering NMEs launched in the USA in 2011 (NME launch date based on marketing start date, not FDA approval) premium were in the specialty/hospital sector, and many of these launched into areas with low branded competition, such as Benlysta for lupus, Dificid for clostridium difficile-associated diarrhea, Nulojix for kidney transplant, Victrelis (at the time of launch) in hepatitis C, and Yervoy for metastatic melanoma. In a notable departure from previous years, however, four of the five products that launched at a price discount were in the specialty/hospital sector, suggesting manufacturers believe in increasing price sensitivity among specialty areas, especially ones with entrenched competition (such as Eylea in wet AMD) or where the comparators already represent premiums over prior alternatives (such as Zelboraf s launch in metastatic melanoma after the launch of Yervoy). New product launches in the primary care sector were also skewed to large and competitive therapy areas. Not surprisingly, four out of five primary care launches were priced at parity to comparators. Looking ahead to the next 12 months, significant uncertainties loom: the possibility of a fiscal cliff resulting in a double dip recession, presidential elections where Republicans continue to seek the repeal of the Affordable Care Act, and questions over the future of healthcare reform. Pricing opportunities especially on the net level are likely to continue to be in flux. In particular, questions around the growth of Medicaid after the Supreme Court ruling, and the roll out of health insurance exchanges which have a one drug/class minimum coverage requirement may create changes to long term gross-to-net price assumptions. Over the longer term, the growth of ACOs (Accountable Care Organizations) has the potential to dramatically increase provider price sensitivity unless clinically significant outcomes data or believable cost offsets are demonstrated, and may affect manufacturer pricing decisions TM over time 23

24 Time to market: National improvements, regional complexities Average time to market (TTM) for new molecular entities (NMEs) across the EU27 member states in 2010 was marginally faster than in 2009 (9.3 months compared with 10.4 months) continuing a slow but long established trend (see Figure 1). Bucking that trend, however, provisional data for 2011 indicate a more significant reduction of over 3 months to 5.7 months, although these results are so far based on a smaller sample size and are subject to revision. While payers continue to stress the impact that a high volume of product evaluations has on potentially slowing TTM, this is not supported by the data. For instance, average TTM for 19 NMEs in France in 2009 was less than the TTM for 5 NMEs in 2010, although a range of factors are noticeably behind those figures. Time to market Among the EU5, TTM has remained relatively consistent in Germany and the UK since 2006. In France, Italy and Spain, however, recently announced European Medicines Agency (EMA) targets for faster reimbursement timelines appear to have accelerated TTM (see Figure 2). Significantly, these are countries in which formal payer negotiations are part of the process. France s average TTM in 2010 was inflated by Prolia, which initially received an insufficient SMR rating and was only fully reimbursed 23 months after central approval. As a result, TTM may quicken in 2011, especially as seven products have already launched six of which gained temporary authorizations for use based on their innovative nature and high unmet need in oncology, hepatitis C and orphan indications. There are several ways to obtain temporary funding in France to accommodate for the relatively slow reimbursement decision making process. Sales up to six months before even formal EMA approval are not uncommon for products granted ATU (Autorisation Temporaire d Utilisation) status for pre-registration use. The same is the case in Switzerland where a separate approval pathway is available. Germany, too, has shown some encouraging signs in relation to TTM. Fears that the AMNOG process, introduced in January 2011, may affect the choice of manufacturers to launch early in Germany owing to reference price risk and publicly available rebate prices have not so far materialized. However, the full effect of AMNOG has not yet been felt. Only two products (Brilique and Esbriet) had completed both benefit assessment and discount negotiations by August 2012 and a further two had been reference priced after they were found to offer no additional benefit to existing comparators (see pp10-13). In other AMNOG related developments, two products have been withdrawn from the market FIGURE 1: Average time (months) for launch of products EMA approved between 2006-2010 as of April 2012 (EU27) Months 22 20 18 16 14 12 10 8 6 4 2 0 2006 Markets (in English alphabetical order) Markets (in English alphabetical order) 2006 (n=17) 2007 2007 (n=25) 2008 2008 (n=14) 2009 FIGURE 2: Average time (months) for launch of products EMA approved between 2006-2011 as of April 2012 (EU5) Months 18 16 14 12 10 8 6 4 2 0 AT BE BG CZ DK EE FI FR DE GR HU IE IT LV LT LU NL NO PL PT RO SK SI ES SE CH UK (n=13) (n=16) (n=12) (n=19) (n=5) (n=7) (n=16) (n=24) (n=14) (n=24) (n=11) (n=21) (n=16) (n=19) 2009 (n=25) Source: IMSCG, excludes products that took over 24 months to launch; includes products launched up to six months prior to EMA approval (eg through the ATU process in France) (n=11) Methodology Time to market is measured from the EMA approval date to the first month in which sales reached a threshold indicating that they were not attributable to stock filling. A threshold of 1% of the first 24 months peak sales was selected Products launched more than six months prior to central approval are excluded from the analysis (pre-approval launches up to 6 months prior are still included, e.g. through the ATU process in France). While sales of products observed more than 6 months prior to EMA approval are shown in Figure 3 [outliers <-6m], these are not included in the overall analyses of TTM Figures 1 and 2 and where noted in Figure 3, products launching more than 24 months post central approval are excluded to prevent outliers from skewing averages. In Figure 3, number of outliers >24m denotes the sample difference between the first and the second column TTM analyses A list of NMEs was drawn from new molecules appearing in IMS MIDAS globally. This was then cross-referenced against EMA approved products and classified according to EMA approval year NMEs exclude generics, biosimilars, indication expansions and vaccines Products sold under two different brand names within the same market are considered as one NMEs launched in different fixed dose combinations are recorded as separate products if the products were separately EMA approved in the same year EU27 excludes Malta and Cyprus but includes Norway and Switzerland 2010 (n=18) FR DE IT ES UK (n=8) (n=4) (n=17) (n=23) (n=14) (n=20) (n=9) (n=10) (n=16) 2010 (n=12) 2011 (n=22) (n=24) (n=14) (n=23) (n=7) (n=18) 25

due to receiving no additional benefit and in anticipation of reference pricing (Xiapex), or unacceptable price negotiation (Trajenta). Another seven products were classified as offering no additional benefit. These are available and reimbursed but awaiting final pricing decisions. Any change to TTM to date is therefore less a consequence of the regulatory process itself, and more to do with manufacturers wishing to avoid international price referencing, jumbo reference price grouping and publicly available rebate prices. Launch sequencing The standard European launch sequence remains relatively unchanged, beginning with launches in the historically freely priced markets of Germany, Denmark and the UK, before moving on to partially free price markets such as Sweden, and finally to price controlled markets. The impact of the AMNOG reforms (see pp10-13) and lower launch prices in the UK (see pp36-38) may yet change that scenario in the years to come. Eastern Europe Average TTM is slowest in Eastern Europe (see Figure 3). Many products wait in excess of two years to complete the process and the average TTM was 12-22 months. This implies either a deliberate policy to delay launch or significant differences in evaluation and decision making processes. Despite slow average TTM in Eastern Europe, there are clear signs of improvement in countries where approval and reimbursement processes are changing rapidly. Bulgaria, Estonia, Latvia, Poland, Romania and Slovakia have shown the most dramatic reductions in TTM. In Poland, for example, the market authorization agency is now better able to cope with the workload because of increased staffing following shortages resulting from EU integration and corruption charges. Conversely, some member states average TTM is lengthening. Examples include Czech Republic, Greece, Ireland, Italy, Netherlands and Portugal. It is perhaps no coincidence that some of these countries are among the worst affected by the economic crisis and in which the reimbursement authorities face the toughest budgetary challenges. Outlook The EU Transparency Directive (89/105/EEC) asserts that member states should provide patient access to new drugs within 180 days of EMA approval, with plans to lower the time to 120 days. Only Germany and Denmark met the directive in 2010 and 2011 and it is unclear how the EU expects its members to achieve this goal in the near future. Even in established markets with optimized reimbursement processes, faster TTM is not achievable without radical reform of the decision making process. Clearing the national hurdle is not just about the formal evaluation processes and capacity constraints, but is also dependent on negotiations between payers and manufacturers. These tend to prolong TTM in most EU markets. To complicate the TTM metrics further, there is growing evidence of increasing variability in sub-national funding and regional access independent of the national decision. In the UK, for instance, while TTM is among the fastest, a newly launched reimbursed product might face limited funding by Primary Care Trusts (PCTs) until the National Institute for Health and Clinical Excellence or Scottish Medicines Consortium issue an opinion. Formulary changes and product adoption can be especially slow for specialist products. On the other hand, a product can be neither reimbursable nor funded by PCTs but still obtain funding through other sources such as the Cancer Drug Fund for oncology products. While TTM remains an interesting metric, especially in the slower markets of Eastern Europe, developments in the EU5 show increasing complexity in reimbursement levels, funding and regional access mainly owing to product characteristics, healthcare priorities and funding pathways. Exploring these issues in greater detail may in future provide more valuable insights into a product s launch prospects possibly influencing EU launch sequencing than merely traditional TTM metrics at the national level TM FIGURE 3: Average time to market and availability of products Average time (months) until launch of all products EMA approved between 2006-2010 as of April 2012 Time to market (months) 1-4 5-8 9-13 14-18 19-24 Market TTM (m)* TTM (m)** Total products included in the analysis: 2006-2010: 96 * Includes products that took over 24 months to launch ** Excludes products that took over 24 months to launch No. outliers (<-6m) No. outliers (>24m) Germany 3 3 1 1 Denmark 5 5 1 2 UK 5 5 2 1 Norway 7 6 5 5 Sweden 8 6 0 6 Austria 9 6 0 7 Finland 9 5 0 11 Ireland 10 7 0 5 Poland 10 8 5 8 Switzerland 11 8 11 8 Spain 11 11 1 2 Greece 12 9 0 10 Netherlands 13 9 0 8 France 13 10 6 8 Slovakia 15 11 0 9 Belgium 15 12 0 9 Italy 15 13 0 12 Luxembourg 15 14 0 7 Slovenia 17 12 1 15 Hungary 18 11 0 19 Czech 18 14 1 14 Latvia 19 14 0 11 Lithuania 19 13 1 14 Estonia 20 14 0 8 Romania 20 14 0 16 Bulgaria 21 14 0 19 Portugal 22 12 0 31 Source: IMSCG. See methodology Figure 1 and 2 % of all products EMA approved 2006-2011 that launched to date in each market Availability of products (%) 0-20 21-40 41-60 61-80 81-100 Market % (to date)* % (after 24m)** Germany 97% 96% Sweden 90% 85% UK 90% 89% Denmark 83% 82% Finland 83% 73% Spain 83% 81% Norway 82% 77% Italy 77% 66% Slovakia 76% 67% Austria 75% 69% France 69% 62% Slovenia 66% 53% Belgium 65% 57% Czech 64% 52% Portugal 64% 37% Poland 63% 56% Greece 63% 54% Ireland 62% 57% Switzerland 60% 53% Hungary 59% 43% Netherlands 58% 51% Bulgaria 48% 31% Romania 47% 33% Lithuania 38% 26% Luxembourg 35% 29% Latvia 34% 24% Estonia 23% 17% Total products included in the analysis: 2006-2011: 115 * Includes products that took over 24 months to launch. To date: April 2012 ** Availability at 24 months post EMA approval 26 27

Beyond clinical evidence - the influence of company perceptions on pricing and market access decisions FIGURE 1: Research design for testing payers perceptions of companies Inclusion/Exclusion criteria Payers and advisors at national/sub-national level interviewed in/for projects Double-blinded 1:1 interviews with available write ups in English from our projects out of our UK office 100 projects 2008-2011 With >2000 interviews Selection process Distribution of national & regional interviews Recent years have seen the much-vaunted shift to evidence-based medicine in which pricing and market access (P&MA) decisions are taken on a rational, scientific and consistent basis. Or has it? The P&MA record actually shows remarkable differences between countries and even between regions within the same countries. For example, Cymbalta received unrestricted access in Australia, was rejected in Canada, England and France, and accepted with access restrictions in Scotland and Sweden. Factors beyond the pure evidence Definition: expression of value, emotion or opinion indicating a judgmental view/ perception of pharma industry, a company, its representatives or a drug Perceptions not directly prompted; no leading questions asked in research/interview 543 interviews analyzed Selection process 48% 52% Distribution of national & regional quotes base are clearly at work, yet the literature shows relatively little published research in this area. Clear expression of perceptions, easy summarized in a buzz-phrase 900 relevant payer quotes identified 78% 22% To test the impact of payers perceptions of companies in the P&MA environment, IMS Consulting Group (IMSCG) developed a new methodology for analyzing payer perceptions, based on the thousands of payer interviews it conducts every year. In many of those interviews, payers express unprompted perceptions about the pharmaceutical industry in general and companies in particular (unrelated to the opinions being sought in the research). A database of 900 quotes was developed by collecting research from over 100 projects carried out between 2008 and 2011. Over 2,000 interviews were reviewed for unprompted quotes from national and regional payers that demonstrated a perception or judgment good or bad on the industry as a whole or a specific company (see Figure 1). These quotes were analyzed more deeply to identify the precise key words and phrases that payers used to express their perceptions. The dataset was cut into quotes that referred to specific companies to see if there was a difference compared with the broader perceptions of the industry as a whole. On this measure, perceptions of specific companies are far more positive than perceptions of the overall industry with 57% of quotes classified as positive versus 27% for the industry in general. Looking more closely at company perceptions, regional payers were much more positive than national payers with 70% of regional payer quotes classified as positive compared with 54% for national payers (see Figures 2 and 3). Key words and phrases were then grouped into five main categories (research, product/portfolio, people/staff, interaction/collaboration, and company ethics/reputation related) to identify the most important factors (see Figure 4). It was found in the case of regional payers that interaction/collaboration is the most important Source: IMSCG, the split of national (red) and regional (blue) payer interviews was similar, though more quotes were harvested from regional payers because of higher frequency interactions with companies factor shaping payers perceptions. National payers, on the other hand, are influenced by ethics/reputation, based on a company s broad reputation in the industry and media, rather than on individual interactions and experience with payers. Although difficult to measure empirically, it was possible to identify certain quotes (around 5% of the sample) in which payers spontaneously and directly linked their perception of a drug/company to a specific P&MA decision. Significantly, all such perceptions having an impact on P&MA were negative and would impact market access far more than price, with payers citing overpriced product and misusing market position most frequently. As one US payer put it: Because of a bad relationship with [company X] we moved their drug to tier three even though it meant losing a lot of money. Implications It is clear from this qualitative research that payers P&MA decisions are only partly taken as a result of the hard evidence base and that payers subjective perceptions of different companies appear to be a factor in decision-making. As a result, companies need to consider how best to manage payers on a company-wide basis, given that all interactions (positive or negative, by any department, HQ or local team) will actively contribute to the perception of the company by payers. In a competitive environment with a thin line between success and failure, any edge is worth pursuing. 28 29

FIGURE 2: Word cloud of key words mentioned by national payers referring to pharmaceutical companies Source: IMSCG, note: size of key words represents relative frequency of mentions; pink represents negative sentiment, blue positive sentiment The risk of an overall negative company reputation is even greater at the national level. This is because national payers perceptions of companies are driven by the type, nature and frequency of company interactions. These tend to be more transactional in the form of dossier submissions and one-off negotiations on a per product launch basis than at the regional level. As a result, it is important to understand the perceptions that payers develop from predominantly transactional relations and build long term partnerships accordingly. Even for breakthrough products, companies must uphold the very best of reputations to preserve a positive environment. If a company s reputation is soured, P&MA decisions on subsequent launches could be compromised. As this comment from Germany shows, payers can have long memories and it is very difficult to shake off a bad reputation: It might have been possible to get into agreements with sick funds to reimburse [product X] individually with some hard medical evidence behind, but they burned themselves with their stubborn behavior with [product Y] and then with [product Z]. So any argument for [product X] in Germany is currently forbidden especially since it is [company A]. This IMSCG pilot opens a window on the subjective world of payer perceptions but raises as many questions as it provides answers. Further research is already underway to develop a more comprehensive database to explore the complex relationships between company perceptions, national and regional payers in different countries, product performance and TM P&MA outcomes The fact that company perceptions are more positive than general industry perceptions and that regional payers have a more positive opinion than national payers implies that it is possible to change perceptions over time, and mend a bad reputation via the frequency of positive interactions with company representatives. The closer and more long-term the relationship, the more trust it is possible to build. Companies should therefore pay special attention to their dealings with regional payers in building these relationships. Interactions carry risk when handled badly at the regional level and that reputation is, in turn, likely to impact national payers via the overall company reputation. Global companies therefore need to consider their local reputation at the early stages of planning for new products. FIGURE 4: Most mentioned categories of key words referring to pharmaceutical industry in general Distribution of key-words by category, national vs. regional payers (%) Science/ 10 National Research 9 Regional FIGURE 3: Word cloud of key words mentioned by regional payers referring to pharmaceutical companies Products/ Portfolio 11 5 People 9 17 Interaction/ Collaboration 24 37 Company ethics/ Reputation 45 32 Source: IMSCG, note: size of key words represents relative frequency of mentions; pink represents negative sentiment, blue positive sentiment Source: IMSCG 30 31

Launching innovations in Europe investing in evidence, or not? FIGURE 1: How outcome evidence at launch affects access in France, Germany and Italy (Veneto) Access decisions Vs. POO evidence IQWiG assesment Vs. POO evidence Veneto, access decisions Vs. POO evidence (2010-2011) (2011) (2010-2011) Healthcare budgets around the world have been cut in real terms. Drug budgets, always a soft target, have been hit especially hard with a variety of changes to systems influencing pricing, reimbursement, access and uptake. This has affected European payers evaluation of drugs at launch 31% 100% 100% 50% 67% 33% 44% 60% in particular the increasing expectation for both absolute and comparative evidence of a drug s effectiveness versus perceived standard of care. 69% No drugs showed improvement 50% 33% 66% 55% 40% Payers evidence expectations continue to evolve In the past, drug development has focused on the significant hurdle of passing regulatory scrutiny to secure a license to launch in the European market. This provides satisfactory evidence of efficacy and safety, but although it shows that the drug does something at an acceptable balance of risks and benefits, this is no longer sufficient for payers. Increasingly, they demand stringent descriptions of both absolute effectiveness and comparative data versus standard of care. Clinical design-wise, efficacy measures are often surrogates: drug A lowers blood pressure, or drug B causes reductions in HbA1c. Today s payers are more insistent on harder outcomes that express absolute effectiveness: drug A reduces cardiovascular mortality by 100 events per million people per year, or 100 less patients in France will progress to dialysis each year with drug B. While this type of data would typically be available some years after launch, payers are now living in the Prove It era. Payers increasingly require data to be available at launch for national decisions on pricing and reimbursement, regional decisions on market access, and local decisions on formularies and appropriate use or face the risk of conditional reimbursement, price concessions or access limitations. In France, Germany and the Italian region of Veneto, for example, products without outcome evidence at launch were frequently denied access in 2010-2011 (see Figure 1). Encouragingly, there is already some evidence that manufacturers are moving to meet these requirements, as the proportion of launches with outcome evidence in the form of patient oriented outcomes (POOs) has increased somewhat over the past five years (see Figure 2). However, while this overall percentage has increased, it should be noted that not all therapy areas lend themselves to measuring outcome evidence. But absolute outcome evidence is not the only factor that payers use. Increasingly, relative effectiveness, using the most appropriate comparator, is crucial for pricing and market access decisions. Current payer demands in markets such as France and Germany are set up to limit pricing and reimbursement for drugs that cannot demonstrate superiority versus payer-perceived standard of care, forcing manufacturers to make the strategic choice of comparator. In an IMS Consulting Group (IMSCG) assessment of data likely used during national access decisions relative to a product s EMA label, out of 29 new molecular entities between January 2010 and December 2011, seven were found to have no appropriate comparator, nine had data against the EMA labeled indication, seven had data for one or several sub-populations within the EMA Full Access (n=14) Source: IMSCG Source: IMSCG Partial Access (n=2) No Access (n=3) Improvement (n=0) labeled indication (but not entire population within labeled indication), and six opted for no comparative data (or placebo) versus standard of care. The data suggest that in France, a risk of no or limited access increased without active head-to-head comparator data (see Figure 3). In Germany, either full or partial (sub-population) active and appropriate comparator data was Improvement in subpop (n=6) No improvement (n=6) FIGURE 2: POO evidence presented by EMA-approved products 2007-2011 64% 36% 56% 44% 56% 44% Full Access (n=3) 2007 2008 2009 2010 2011 Partial Access (n=9) required in order to gain price flexibility and avoid low/generic price benchmarking; however, the full effect between the outcome of an AMNOG benefit assessment and price potential is yet to be felt (see pp10-13). While not included in the analysis, in the UK active comparator data remains one of several levers that can strengthen a cost effectiveness argument (see pp36-38). 56% 44% No POOs 41% 59% POOs No Access (n=15) 32 33

FIGURE 3: Access outcomes in France and Germany in relation to extent of comparative data submitted at launch (January 2010 December 2011) FIGURE 4: Payer expectations of evidence by budget impact and unmet need in selected therapy areas 34 % products % products 100 80 60 40 20 Source: IMSCG 0 100 80 60 40 20 0 Access outcomes of new products in France 8 5 4 Full comparator ASMR 4 37% 67% 50% ASMR 5 63% 33% 50% Assessment outcomes of new products in Germany Full comparator Partial comparator Partial comparator Type of data at launch The risks of innovation a balancing act In the Prove It era it is clear that significant investments of time and money are needed to convince payers that a new drug is both innovative and highly effective. But how are manufacturers to know whether these are risks worth taking? And is there a way of targeting development investments wisely? It seems that in expectations of absolute and comparative evidence, not all drugs are viewed equally by payers. One way of looking at these variations is by therapy area, where it appears that two dimensions determine payers threshold for requirements for POOs and comparative data: budget impact and the perceived level of unmet need (see Figure 4). 3 4 No data vs SoC/placebo 2 No data vs SoC/placebo Full access Partial access No access Improvement in all populations Improvement in sub-population(s) No improvement Payer scrutiny and expectations of POOs and comparative data are likely to be at their highest in therapy areas of high budget impact and low unmet need, especially within chronic and/ or preventative treatment, such as asthma and diabetes. Conversely, payers are likely to have a lower threshold for evidence where budget impact is low and unmet need is high. Even with a targeted development strategy, inherent risks remain. Exposing a drug s hard outcome measurements could risk failure to demonstrate the level of improvement payers require for true innovation, or fail to meet endpoints altogether. Even if successful, the additional information could be used by payers to limit the positioning and use of the drug, Perceived level of unmet need Orphan Melanoma or a generic standard of care could become the benchmark for entry price into the market. On the flip side of the same coin, there could be a rewarding strategic pay-off, such as the opportunity for differentiation, the ability to support positioning, and greater leverage in pricing negotiations if a strong clinical advancement is proven over standard of care. Only play the game if you know you are going to win It is evident that the risks and benefits of preparing a well-developed and comprehensive evidence package for payers requires a deep understanding of the drug, the competitive landscape and the therapeutic context. At the current time, it is mostly European markets that are ramping up the requirements for evidence at launch, but this is likely to spill over to the US and emerging markets in the coming years. While manufacturers need to make global decisions for their development programmes, individual national and regional requirements will need to be considered when planning launches in these markets. Payers are often open for discussions early in the development process, enabling manufacturers to understand the challenges they are likely to face but without the actual commitment to keep to their guidance. Of all these factors, the most important is to have an honest appraisal of a drug s overall performance. Low High Source: IMSCG HIV HCV Low Alzheimer s Prostate cancer NSCLC MS RA Hyperlipidemia Budget impact Diabetes Asthma Atrial fibrillation High Key Payer Expectation of POOs Low High In today s payer environment, poorly performing products face an uphill battle for access and head-to-head comparison may in fact jeopardize their chances of success. Non-differentiating comparative data may result in nonreimbursement, heavy discounts, reference pricing, access concessions or poor uptake. However, choosing not to submit head-to-head data could equally risk non-reimbursement and severe access constraints. For high performing products, manufacturers still need to prove value, increasingly in regard to both outcome and comparative evidence, but with more flexibility. Unless no appropriate comparator exists, or trials are difficult to power (as in rare diseases), a head-to-head comparison is a good investment if it can show differentiation over a high-cost (branded) standard of care. Before exposing a molecule to the rigors of testing for hard outcomes and comparative performance, manufacturers must assess whether the product will make it through the soaring level of payer scrutiny, and whether there is enough time to collect outcome data before launch. If not, collecting real-world evidence may be a powerful approach to mitigate payer concerns, and even to rectify product challenges post-launch. Increasingly, however, poor performing drugs will never recoup the investment in evidence gathering as the systems for assessment in the Prove It era only reward TM proven innovation 35

Should we play NICE? Impact on the UK and beyond It is a common perception that decisions by the National Institute for Health and Clinical Excellence (NICE) have a major impact on pricing and market access (P&MA) not only in the UK, but also in countries that directly or indirectly reference NICE. To test this assumption, IMS Consulting Group (IMSCG) examined NICE decisions to investigate whether the guidance has a real effect on UK market access, whether companies are indeed pricing for cost effectiveness, and what influence this has on pricing and market access beyond the UK. FIGURE 2: UK price of selected oncologics reviewed positively (+) and negatively (-) by NICE indexed to EU4 average (index 1.0) + - UK price indexed to EU4 average 1.0 0.9 0.8 0.7 Iressa Vidaza Mepact Tarceva Source: IMSCG based on NICE, www. http://www.nice.org.uk/ Yondelis Votrient Sutent Afinitor Arzerra Nexavar 36 Impact of NICE guidance in UK At the most basic level, Single Technology Appraisals (STAs) published by NICE from 2006 to 2012 show that a positive recommendation is an essential cost to play in the UK market (see Figure 1). While this is no guarantee of commercial success, positively reviewed NICE products face significantly fewer P&MA hurdles than negatively reviewed ones. There are exceptions, however. Avastin, for example, has significant uptake in the UK despite a negative review. This is mainly the result of funding through the Cancer Drug Fund, which was set up specifically to improve access to high cost oncologics. Conversely, some products reviewed positively by NICE have failed to secure expected access and use. Even though NICE guidance is compulsory, additional funding is not made available, leaving local payers at times to struggle with the affordability of NICE recommended drugs. In these instances, local prioritizations tailored to meet finite budgets will ultimately decide a product s success. Pricing for cost effectiveness Given the importance of positive NICE guidance to a product s commercial prospects in the UK, FIGURE 1: UK sales per capita of selected products reviewed positively (+) and negatively (-) by NICE indexed to EU4 average UK sales/capita indexed to EU4 average 4 3 2 1 + - Herceptin Angiomax Votrient Cimzia Toctino Victoza Sutent Stelara Revlimid Actilyse Nplate Abilify Xarelto Tysabri Velcade Efient Actemra Vidaza Multaq Baraclude Pradaxa Adenuric Source: IMSCG based on NICE, www. http://www.nice.org.uk/ 4 3 2 1 Avastin Lucentis Nexavar Orencia Promacta Sebivo manufacturers face a challenging question: what price level do they set to achieve NICE s cost effectiveness thresholds? On the evidence of oncology, it would appear that manufacturers have traded price for access by lowering list prices to end up within NICE s cost per QALY range (see Figure 2). To achieve this UK threshold, list prices of selected new products both positively and negatively reviewed by NICE were below the average price in the other four major European markets (France, Germany, Italy and Spain). On top of lower list prices focussed on QALY thresholds, discounts are also offered in the form of patient access schemes, further lowering overall net prices. But even in cases such as Vidaza, where the list price is lower than the EU4 average and a patient access scheme has been agreed, access in the UK remains limited compared with the other major European markets. On this evidence, pricing for cost effectiveness in the UK and with patient access schemes in place, is still no guarantee of access success as local stakeholders cannot always afford recommended drugs. NICE S influence beyond UK It has long been assumed that NICE decisions have an impact beyond the UK. This can be both formal, in the case of countries that directly price reference the UK, or informal in situations where payers simply share information and learning. Most payer research conducted by IMSCG between 2011 and mid 2012 supports this assumption, although there is significant variation by country. Regional payers in Italy and Spain, for example, take a close interest in NICE guidance. As one regional Spanish payer put it: NICE has a very significant influence on decisions made at the regional and local level, particularly for specialist hospital products. There is also evidence that payers in these markets pay closer attention to negative NICE decisions than positive ones: If NICE makes a negative recommendation or recommends a lot of restrictions to a compound, this has much more influence than in cases where NICE makes a favorable recommendation. We try to restrict use to specific patient groups with the biggest benefit and so when the NICE decision is negative, we tend to agree with it more, said another regional Spanish payer. In such countries within certain more sophisticated regions, it can be difficult to reject NICE guidance. We now have two treatments [within the indication] that NICE didn t find cost effective. We are in an interesting place, deciding what to do. The evaluation committees in each region will need to approve them in order for them to be used, explained an Italian regional payer. But it would be wrong to assume that the influence of NICE and the UK is all pervasive. Even in countries like Italy and Spain, payers 37

38 do not reference UK discounted net prices e.g. commercial, in confidence agreed upon patient access scheme discounts. That could change in the future, however, with a precedent having been set by the AMNOG reforms in Germany which now make rebate prices publicly available (see pp10-13). Moreover, other countries, including France and Germany, have their own national evaluation processes that rely less on NICE s focus on cost per QALY. In Germany, for example, the AMNOG process is based on entirely different methodologies to NICE. Nevertheless, AMNOG s potential impact on prices and market access in the rest of Europe is equally significant at a time when payers across the continent (and beyond) are looking to control their drug budgets. The influence of positive and negative NICE decisions in non-uk markets is clearly a factor in P&MA decision-making, but typically at subnational levels. However, while health economists and payers undoubtedly talk with each other and share their findings (in NICE s case, transparently via its website), not that many use the same methodologies as the UK. NICE s influence is therefore uneven, often informal and payers have a wide variety of reference points, including other health technology assessment bodies on which to base their decisions. What is perhaps more challenging for manufacturers is that payers can review the same data for the same product and come up with entirely different conclusions largely due to differences in healthcare systems and policy, evaluation processes and metrics, national priorities and heritage. While these differences exist, a global strategy will need to continue to be customized for optimal access per country. Value based pricing where next? NICE s future influence on pricing and market access in both the UK and beyond remains a matter of speculation. The government is committed to introducing value based pricing (VBP), the precise mechanisms of which have yet to be agreed but which is likely to limit access to drugs that are not innovative or offer limited clinical benefit over standard of care. While NICE s survival is not in doubt former Health Secretary Andrew Lansley told the NICE annual conference in May 2012 that its role, and by inference its future impact, would change: Under the new system of VBP, NICE will no longer be obliged to make yes/ no decisions on access, based on its own cost per QALY thresholds. Instead, you ll be free to focus on the rigorous appraisal of evidence to show the relative benefits of a new medicine. There will be price ranges under VBP, reflecting the contributory aspects of value, including the additional therapeutic benefits, the quality of innovation, the response to unmet need, and societal benefits. The resulting pricing thresholds will be set as part of the VBP pricing mechanism, by Government, rather than by NICE. It seems whatever the future mechanism or responsible body, cost per QALY is likely to remain as the basis of cost effectiveness evaluations in the UK. As other countries national and sub-national cost effectiveness evaluation processes mature outside of the UK, NICE is likely to become less and less important for access decision making, particularly as cost per QALY draws upon country-specific dimensions. Should we play NICE? As the Avastin case shows, positive NICE guidance is not necessarily a pre-requisite for market access in the UK. Neither, as in the Vidaza example, is it a guarantee of access and uptake in the local context, where funding becomes an issue. Even so, manufacturers might still be tempted to price for NICE cost effectiveness if they were only looking at the national perspective. But that is not the case, as the UK price has an impact on other markets and manufacturers must consider the risk of a lower list and net price in terms of formal and informal international price referencing. On the other hand, negative NICE guidance is most likely (though not always) to result in limited access in the UK. It, too, can have an impact in other markets, particularly on regional payers in Europe. Manufacturers must therefore make their decisions on a case-by-case basis depending on the value and benefit of the product itself and the therapy area it is entering. There is no one-size fits all solution to how best to play NICE, but careful planning and effective implementation can lead to optimal outcomes at both the UK national and European levels TM When does a companion diagnostic add value to a drug? Herceptin (trastuzumab), the first targeted therapy in oncology launched in 1998, achieved blockbuster status along with the HER2 companion diagnostic (CDx). This strategy of identifying responders a priori to treatment heralded a generation of drug development linked to CDxs, exploiting rich scientific discoveries on oncology signaling pathways. Many Phase 2 or earlier clinical trials now include exploratory analysis of data by biomarker status based on signaling pathway hypotheses. When the hypotheses can be satisfactorily addressed in Phase 2, pivotal trials may be designed to address the relevant sub-population; the product gains regulatory approval with an indicated subpopulation and is launched along with a CDx. The implied benefits of greater patient specificity and enhanced efficacy are multi-fold: higher probability of clinical success, shorter development timelines and lower resource investment. Vemurafenib for BRAF mutation positive and crizotinib for ALK-positive patients are the latest examples of such personalized therapies. As of 2012, however, trastuzumab remains the standard-bearer in terms of overall sales achieved; thus the debate persists as to the impact of CDx on commercial potential. As a first step in analyzing the value of CDx in pricing and market access (P&MA), IMS Consulting Group (IMSCG) developed a framework to test opportunities for CDx along three basic parameters: launch environment, clinical benefits and costs (see Figure 1). A CDx is defined in this context as a test performed prior to treatment selection that predicts the likelihood that a patient will respond to therapy. In some cases, biomarker selection status predicts an additional level of benefit over that experienced by patients without the relevant gene mutation or protein expression. In other cases, non-selected patients experience inferior clinical outcomes on experimental therapy compared to on control. Diagnostics that provide only prognostic information are excluded from this discussion. Launch environment The availability of a CDx along with predictable improved efficacy benefit poses an essential competitive advantage in therapy areas with multiple options, and may help secure commercial opportunity even in areas with limited options The competitive environment at time of launch poses an important backdrop to P&MA and commercial potential. In therapy areas with multiple options, the availability of products with CDx provides payers with leverage of price and access against all-comer products addressing a broader patient base but providing similar level of benefit. All-comer products are also at greater risk for being pushed to later line therapy within the CDx population, with the logic being that personalized products be used as early as possible to derive greatest clinical benefit. Clinical benefits The availability of CDx does not forgo the need to demonstrate incremental clinical benefit and clarity of patient segmentation 39

FIGURE 1: Framework for assessing potential impact of a CDx on P&MA FIGURE 2: Incremental clinical benefit versus volume of patients positive for the CDx Number of products and/or diagnostics in the indication Launch environment Does a CDx add value from a P&MA perspective? Clinical benefit of Product X* compared with existing SOC Clinical benefits Cost of testing vs savings to be made Costs % incremental clinical benefit over SoC at launch 20% 60% Xalkori (ALK)? Tarceva (EGFR) Herceptin (HER2) Tykerb (HER2) Vectibix (KRAS) Erbitux (KRAS) 50% improvement Influencing factors Source: IMSCG. *Product X is associated with CDx Source: IMSCG Percentage of patients that test positive to CDx 40 Historically, a product launching into a market without limited options has generally enjoyed strong pricing, market access, and uptake opportunities. It has been argued by skeptics that in these cases a CDx in fact serves as a selflimiting parameter. In reality, however, there are cases where a product demonstrated meaningful clinical benefit in an all-comer population yet the manufacturer proactively pursued a CDx subpopulation. Furthermore, acceptable thresholds for efficacy continue to heighten as more options become available and payer budgets dwindle. Several recent reimbursement decisions have focused on the lack of clarity regarding patients who benefit most as opposed to simply those who experience some benefit even in therapy areas with limited options. The bluntest example of such a reaction from payers may be seen in regions where provisions are made to retrospectively carve out a responding population, and enforce it through payment by results. Providing a CDx in interpretation of signaling pathways is one logical strategy for manufacturers; other strategies have included stratification by performance status or age. Costs The costs and yield of CDx testing also impact access and uptake Metrics around CDx testing are a further factor driving P&MA potential. The size of the patient population requiring testing relative to the expected yield of patients identified is one important ratio. If too high a proportion of the population tests positive, the CDx might be deemed unnecessary. If too low a proportion tests positive, the infrastructure and process investments required to implement a new CDx protocol might be deemed to lack costeffectiveness. In comparing the incremental clinical benefit over standard of care versus the percentage of patients testing positive to the CDx, it is possible to assess different thresholds at which products have been successful to date (see Figure 2). Furthermore, in therapy areas already defined by subtypes for example, in NSCLC, where biomarker profiling exists it is even more critical that new products address how the newly targeted population is inadequately addressed by existing therapies, especially if the level of incremental clinical benefit appears to be comparable. In these scenarios, it is also crucial that products address the relationship between the newly identified and existing sub-populations, as well as the role and positioning of a new diagnostic relative to existing testing protocols. Crizotinib is a potential nichebuster in ALKpositive NSCLC. However, even given a strong biological pathway rationale and clinical data, it is still undergoing P&MA evaluations in Europe where general challenges with the affordability of high-cost oncologics persist. From a health economics standpoint, if a CDx test is too expensive and the patient yield is too low, costeffectiveness may be lacking. From an integrated payer perspective, assuming drug and CDx are paid for by the same budget, the cumulative costs of testing in a high volume therapy area/low patient yield scenario may simply be deemed too high. Implications The next generation of drug therapies are anticipated to provide increasingly fine points of differentiation. With many more CDx-Rx combinations in the pipeline, payers will continue to become more sophisticated in: Demanding data on relative improvement across and within sub-populations, and how performance in these groups compares with that on existing standards of care Factoring in costs of CDx testing in FIGURE 3: What factors impact commercial success for CDx-Rx combinations? Launch environment Clinical benefits Costs Commercial trade-offs Source: IMSCG evaluations and/or demanding financial recompense Further deepening the stringent thresholds below which clinical benefit does not justify the cost of testing for the entire population especially in larger disease states Granting access and reimbursement status only to sub-populations demonstrating greatest level of benefit, not merely those where favorable benefit/risk exists Balking at any additional premium conferred for CDx products ability to define a selection of patients is a requisite TM expectation There should be an existing precedent for CDxs in the therapy area (it may be an investment step too far if there is no demonstrated need) The CDx should be available at the same time as the launch of the drug in order to be able to influence pricing and market access There must be demonstrated incremental clinical benefit in CDx sub-population vs. SoC (improvements of 50% or greater will not be questioned) The CDx patient population should be in a range not too high so that the CDx is judged unnecessary; and not too low that it lacks cost-effectiveness The direct costs of testing should be affordable; ideally testing should fit with existing infrastructure and treatment paradigm also limiting indirect costs The gains in price and/or access for the CDx positive patient population should outweigh the price and/or access which would have been achieved for the population as a whole 41

TM Key IMS Consulting Group Hubs IMS Consulting Group is the world s leading, specialized advisor on critical business issues in life sciences. With a global presence and local expertise across five continents, we know the pulse of the market anticipating change, understanding its impact and resolving the challenges it brings. From pricing and market access and marketing issues to product, portfolio and geographic investment decisions our life sciences consulting teams offer insights that drive results. All backed by the strongest evidence and analytics. Additional information is available at http://www.imsconsultinggroup.com AMERICAS 485 Lexington Avenue, 26th Floor New York 10017 USA Tel: +1 917 542 5800 3 Lagoon Drive, Suite 230 Redwood City, CA 94065 USA Tel: +1 650 596 5000 EUROPE 210 Pentonville Road London N1 9JY UK Tel: +44 203 075 5000 1 Quayside Bridge Street Cambridge CB5 8AB UK Tel: +44 1223 350553 Erika-Mann-Straße 5 80636 München Germany Tel: +49 89 457912 6400 Tour Ariane 5-7 Place de la Pyramide 92088 La Défense Cedex Paris France Tel: +33 1 41 35 10 00 Viale Certosa, 2 20155 Milano Italy Tel: +39 02 69 78 61 ASIA 41F, The Center No. 989 Changle Road Xuhui District Shanghai 200031 China Tel: +86 21 3325 2288 10 Hoe Chiang Road Keppel Towers #23-01/02 Singapore 089315 Tel: +65 6227 3006