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October 29, 2015
The ongoing debate on value of medicine, cost of innovation and pricing sustainability
By: Arda Ural

The value of medicine compared to the cost of innovation is raising questions about drug pricing sustainability.

Recent news about a small specialty pharmaceutical company has put the spotlight once again on the value of medicines, the price of innovation and ultimately the sustainability of shifting portfolios to specialty therapeutics and rare diseases with supposedly inelastic pricing. The company, led by a former hedge fund manager, increased the price of a 60-plus-year-old taxoplasmosis drug, used mostly by HIV patients, from $13.50 to $750 per pill, and effectively evaporated billions of dollars across the entire biotechnology sector.

A pricing debate brews
The first round of the pharma pricing debate occurred last December when AbbVie and Express Scripts struck a pricing deal for Viekira Pak, dropping Gilead’s Sovaldi in exchange for exclusive access, as reported by Reuters on December 22, 2014. At $84,000 per treatment, the health economics case was relatively well-established, especially given the lack of alternative treatments to stop the progression of a disease that frequently leads to liver transplant or death. Since then both AbbVie and Gilead have done phenomenally well, valuation-wise, while thousands of Hep C patients have gained their health back—something that was previously unimaginable.

Next, the industry witnessed price tags of several hundreds of thousands of dollars for rare disease medications, which helped push the valuations of a handful of biotech companies to unjustifiable levels—despite the fact that they had only one or two such medications in the market or in the pipeline. It took the industry several decades and a massive, existential patent cliff to realize the niche market opportunity provided by the Orphan Drug Act of 1983, which allows 7 years of market exclusivity, and to introduce more than 500 orphan drugs.

Shifting product mix to specialty and rare disease
As the product mix of pharma companies continues to pivot to specialty medicine, we should expect that this debate will only become more relevant. According to Bloomberg, 27 branded drugs have shown price gains of at least 20 percent in typical dosages since the first quarter of 2014, and over the past five years, the prices of dozens of drugs have doubled, or more, while the Consumer Price Index rose only 9 percent.

The overall cost of drugs within the total annual healthcare spend remains at about 10 percent, enabled by the expiring intellectual property protection of former blockbusters. However, once this transient effect is over, and with the shifting product mix towards specialty/rare disease portfolios, we should expect this share to increase and to put additional pressure on pharma drug pricing for the next few years. For example, prices for PCSK9 inhibitors (at approximately $14,000 per year), new immuno-oncology drugs and congestive heart failure medications are all coming to market with significant price tags. Additionally, biosimilars, which are expected to exert a downward pricing pressure on the entrenched monoclonal antibodies, have offered a modest 15 percent discount and chosen to build their market share through investing in commercialization.

Systemic reaction
The current debate about drug pricing practices has drawn the attention not only of payers, trade associations, providers and patient advocates, but also of aspiring presidential candidates Clinton and Sanders, who are both including this topic in their campaign platforms.

In fact, there has already been a reaction from the American Society of Clinical Oncologists (ASCO), as they prepared their own cancer drug scorecard this past summer, linking the therapeutic value of cancer medications to their price. In the UK, the National Health Service’s (NHS) Cancer Drugs Fund has announced that they will slash prices of 17 oncology drugs from their formularies. Finally, Aetna and United have already started pushing back on their coverage of PCSK9 Inhibitors.

Path forward: Expectations and strategies
Within this context, here are three potential expectations and corresponding strategies for pharma and biotech companies to consider:

  1. Expect more pricing scrutiny
    In the absence of a clear solution, several ideas will be tested including (but not limited to):

    • Direct Medicare/Medicaid negotiations over drug costs.

    • Re-importation of drugs from Canada or Western Europe.

    • Single drug tier 1 formularies.

    • Shortened exclusivity period of orphan drugs.

    • Accelerated regulatory frameworks for biosimilar approvals.

    • Lots of noise in public forums.

  2. Expect continued investment in innovative therapies informed by precision medicine
    Assuming the 21st Century Cures Act is signed by the President, it will provide the National Institutes of Health (NIH) and the US Food and Drug Administration (FDA) additional funding to streamline regulatory requirements for researchers and accelerate medications to market. The legislation will allow greater use of precision medicine, including biomarkers, and allow new and more effective technology to be used sooner. The act also will create a structured framework for FDA decision-making, and include patient experience data as part of the drug review process.

  3. Expect to test and scale value-driven business models
    Pharma needs to change its business proposition, from taking high risks to develop products and deserving a decent price premium, to developing highly-targeted treatment modalities and taking them to market with a value-based, outcomes-focused model enabled by healthcare technologies and services. Assuming companies have a calculated risk appetite, there is plenty of room for them to design and test value-based contracts with providers, enhanced with healthcare technology solutions and augmented with patient services.

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