A paper written by Michael Eckstut and Lauren Hawks on the implications of the coming Health Care reform on the pharmaceutical industry.

1. Health Care Reform
and the Pharmaceutical
Industry: Thinking
Beyond HR 3200
By
Michael Eckstut
Lauren Hawks
Readers of this article may not yet have taken the time to study the full 1,200
pages of the America’s Affordable Health Choices Act (HR3200) or any of its
revisions or alternatives as presented by President Obama or Senator Baucus.
The nature of the final Health Care Reform bill is uncertain at this time. What is certain is that the debate
has raised public consciousness of the troubled financial state of the current health care system. Rising
health care costs have contributed to the population of 46 million uninsured Americans (and growing), and
since increasing access to health care is a driving force of health care reform, costs will have to come
down. Beyond cost control (and other cost reduction approaches), new laws and regulations will also
bring increased standards, more restricted sales and marketing and a greater emphasis on personalized
medicine.
© 2009 Archstone Consulting. All rights reserved.

2. Outlook for Pharma – Healthcare Reform Will Continue
For those in the pharma industry, the good news is that only a few, relatively minor items are in the
currently proposed bills, although the pharma industry has been “asked” to contribute to the overall cost of
the reform program. Key pharma industry reforms are so far limited to closing a coverage gap in Medicare
Part D and expanding the base of potential customers though a public coverage option. The latter will
likely lead to a lower overall revenue per patient effect for the pharma industry through formulary structure
changes and higher copays.
Ideally, any reform program should balance cost control, important for increasing access to health care,
and innovation, important for driving the quality of life (both lowering total costs and improving health
outcomes). The tremendous life-saving and life-changing value of pharmaceuticals is often overshadowed
by the cost debate. Historically, pharmaceutical innovations have saved lives and money through reduced
hospitalizations and lost work time and increased economic productivity.
While innovation and cost control are not mutually exclusive, they require thoughtful consideration and a
spirit of compromise – two qualities in short supply in today’s Washington, D.C. debate. The critical
balance between innovation and cost control is yet to be determined at the policy level and, more
importantly, within the boardrooms of pharmaceutical companies.
The most important challenges for the current pharma business model are likely to be:
• Decreasing success rates for new drug approvals
• Continued growth of generics and a move to eliminate “pay-to-delay” measures
• Development of a regulatory pathway for Biosimilars, perhaps along the European model
• Increasing pressure on off-label prescribing, media messaging and other marketing restrictions
• Arrival of comparative effectiveness evaluations (Increased funding for comparative effectiveness
research has already passed, and proposals for funding increases are on the table.)
© 2009 Archstone Consulting. All rights reserved.

3. Considerations for the Industry
Internal US Pressures
Continued pressure for increased efficiency Cost Power of
Therapeutic Area Industry
across all sectors will ripple down to the pharma Concentration
Control Consumers
Standards
industry. However, the industry is facing other
business and regulatory “pressures”, which
while under the radar of the current public
debate, are likely to have potentially even more Pharma Industry
lasting implications for the industry.
Summary of Internal US and Global Emerging Industry Increased Developed
Global Pricing /
Contracting
Pressures on the Pharma Industry Sectors Economy Funding Pressures
Global Pressures
Four distinct US pressures will challenge
pharma to both maintain innovation leadership
and increase efficiency:
Therapeutic Area Concentration: Many new compounds face stiff competition from current proprietary
or late stage products in advance of patent expiration. Limited annual growth of the $30B in National
Institutes of Health (NIH) grant funding may hinder movement to new therapeutic areas by slowing the
creation of basic research upon which new compounds are developed.
Increased Cost Control/Pricing Pressure: Individual consumers and employers are less able to support
rising premiums, capping potential price increases. In turn, managed care organizations are using cost
control and cost sharing, such as higher copays, to stem decreasing profitability. The result is the
emergence of low-cost or even free generics and decreased patient compliance.
Increased Power of Indirect Consumers: Continued merger activity within the managed care industry is
driving increasingly complex price negotiations for pharma manufacturers. While not currently planned,
government expansion could lead to direct negotiation by the Federal Government for drug prices. Patient
Interest Groups will also try to push the industry into price concessions or increased research efforts.
Heightened Industry Standards: Fewer approvals for new drug applications and longer windows for
approval decisions, despite amendments to the Prescription Drug User Fee Act (PDUFA), are decreasing
potential drug markets. The emergence of personalized medicine may further limit drug revenues by
introducing gene-specific approval decisions and smaller end markets.
Tighter FDA standards for sales and marketing are resulting in more warning letters and advertisement
clarifications. Off-label prescribing, or use of medications for indications not listed on a drug’s label, is
being increasingly discouraged. The industry will be challenged by these changes and may need to alter
its traditional mix of spending in sales and marketing.
© 2009 Archstone Consulting. All rights reserved.

4. The industry is also facing three key Global Pressures:
Emerging Industry Sectors: As emerging economies become more sophisticated, they are specializing
in upstream development through the formation of centers of excellence. For example, South Korea has
developed a strength in stem cell research for use in cell replacement therapies.
Increased Developed Economy Funding: Developed countries are responding to emerging economy
growth with a renewed focus on the link between scientific innovation and pharma industry leadership.
For example, the European Institute for Medical Innovation tracks global competitiveness and discusses
strategies for innovation leadership.
Global Pricing / Contracting: National health care systems are becoming more discerning consumers.
Stringent efficacy reimbursement standards in Germany and the Netherlands seek to lower total branded
drug spend. In China, health care reform guidelines published in April 2009 suggest future use of price
controls to ensure affordability.
Implications for the Industry
Reacting to multiple industry forces demands improved management of knowledge, resources and
information. Each component is discussed separately below, but it is important to note that they may
overlap in execution.
Knowledge Management: Knowledge Management refers to the ability of an organization to quickly
acquire and integrate new knowledge into organizational strategy.
When executed well, a formal infrastructure supports organizational learning. Key competitive and
consumer events are gathered and woven into agile development plans. Alliance agreements and
acquisitions start with a clear vision for mending or strengthening the existing pipeline. In consumer
communications, new insights are incorporated into unique ways for building consumer awareness.
Resource Management: Resource Management refers to the ability to allocate organizational resources
in a structure that is flexible and able to prioritize the most strategically important initiatives.
In demand planning, it means greater cross functional interaction among manufacturing, supply chain and
brand management functions. In outsourcing management, non-core functions are managed externally to
increase organizational flexibility.
Information Management: Information Management involves coordinating various information flows
among organizational groups in a way that supports rapid decision making.
Best-in-class practitioners incorporate multiple suppliers, customers and internal projects through IT
solutions supported by standardized processes. In addition, new technologies, such as social networking,
increase the efficiency of drug monitoring and advertising response tracking. Detailed reporting completes
the information loop by providing visibility to project outcomes, customer results and product performance.
© 2009 Archstone Consulting. All rights reserved.

5. Conclusion
Reform conversations tend to gravitate towards passage of an impending piece of legislation, such as
HR3200. For too long, there’s been an unfortunate perception that pharmaceuticals are somehow a
negative factor in the healthcare equation. In fact, they have been a strong and positive force in
healthcare, but it is important to ensure that the public and representatives in Washington know and
understand the consequences of measures that impact the industry’s future viability.
Healthcare reform is an opportunity for the Pharmaceutical industry to work for positive change – change
that does not diminish the incredible benefits of this industry by reducing its ability to invest in future
innovations and fairly protecting those innovations or otherwise undermining physician and patient choice.
About the Authors
Michael Eckstut is a Principal at Archstone Consulting and is the head of Archstone’s Life Sciences and
Health Care Practice and its Strategy Practice. He has almost 30 years of broad range business and
operational experience in large, small and early stage companies in the life science industries as an
executive, consultant, investor, advisor and board member. Prior to joining Archstone, Michael was GM
and Vice President of Life Sciences Business Operations for Conformia Software Inc. He also headed the
Chemical and Pharmaceutical industry practices at Booz-Allen & Hamilton and then headed the Life
Sciences industry practice A.T. Kearney. Mr. Eckstut holds a BS and MS cum laude in Chemical
Engineering from Rensselaer Polytechnic Institute and an MBA (as a Baker Scholar) from the Harvard
Graduate School of Business Administration.
Lauren Hawks is an Associate at Archstone Consulting. She has six years of experience in the life
sciences and retail / consumer products industries. Prior to joining Archstone Consulting, Ms. Hawks held
positions in marketing, strategy and finance at Wal-Mart Stores, Inc. and Johnson & Johnson. Her areas
of focus include health care reform, change management and strategy. She is also a co-author of
Archstone Consulting publications, “Improving M&A Value Capture” and “Active Carbon Management”.
Ms. Hawks holds a MBA from the University of California at Berkeley and a Bachelor degree in Marketing
from Miami University of Ohio.
About Archstone Consulting
Archstone Consulting is a leading independent Strategy, Operations and CFO Advisory management
consultancy, specializing in delivering strategic, operational and IT advisory services to the consumer
products, retail, life sciences, manufacturing, and services sectors. Archstone Consulting offers
experienced support, efficient execution and measurable results. Headquartered in Stamford,
Connecticut, Archstone Consulting has offices in Amsterdam, Chicago, New York, San Francisco and
Toronto. For additional information, please visit the company’s website at archstoneconsulting.com.
© 2009 Archstone Consulting. All rights reserved.