Strategy

Guest Commentary: The Tipping Point

Why the Express Scripts/AbbVie deal transforms biopharma

That boom you heard on Dec. 22 followed by the thud of Gilead Sciences Inc.'s stock price was the opening shot and initial casualty of a major price war. It had been long in coming -- indeed, making itself felt in 2014 with some ugly skirmishes in COPD and insulin. But this war has now breached the industry's most valuable territory: specialty therapeutics.

We can't predict the immediate effects of the discount-for-market-share contract between Express Scripts Holding Co., the largest U.S. pharmacy benefit manager, and AbbVie Inc. for the newly approved HCV treatment Viekira Pak ombitasvir/paritaprevir/ritonavir/dasabuvir. It's not clear, for a variety of reasons, whether Express Script's customers will actually accept the requirements of the deal -- in particular, making Viekira Pak available to virtually any covered beneficiary with genotype 1 HCV -- and compensate AbbVie with a market share boost at least equivalent to its discount (which we figure at a minimum of 20%, and probably 25% or more).

But we do know that payers are willing, in effect, to reward a drug with clear disadvantages in dosing and monitoring requirements with virtually complete exclusivity on its formulary, at least for most people with HCV, in return for a major discount. That is, they are willing to challenge head-on, as far as we can see for the first time in a major, potentially fatal disease, the resistance of physicians and patients in order to provide their customers with a mechanism for bending the cost curve in specialty drugs.

And that means that we will see similar deals in all significant competitive specialty categories -- including in some areas of cancer.

Whether the biopharma industry acknowledges this fundamental change in the competitive landscape is another question. GlaxoSmithKline plc's challenges with its recent respiratory launches and Sanofi's in diabetes -- along with the subsequent profit challenges and layoffs -- would argue that not all do.

Another stark example: just a week before the AbbVie contract was announced, Pfizer Inc. said it would pay $295 million up front, and another $275 million based on regulatory milestones, for Opko Health Inc.'s Phase III, once-a-week version of human growth hormone.

For all we know, the Opko hGH's improvement from daily to weekly therapy may indeed be a game changer. But at least in HCV, Express Scripts and AbbVie clearly don't believe that convenience alone, without substantial evidence of not merely improved adherence, but clinical payoff, deserves market share without a big discount. And from what we hear from our payer customers, neither does the rest of the insurance world.

The so-what of all this: pharma needs a different way of demonstrating value, one that gives payers, and through them, payer customers, a complete and communicable understanding of how drugs stack up against each other. Such a system would incorporate price, of course, but as only one element in a holistic assessment of all competitive drugs in a therapeutic category.

What Express Scripts got

It's far too early to say whether the Viekira Pak deal represents a major success for either party. We don't know the price Express Scripts extracted from AbbVie in return for putting Viekira Pak on the National Preferred Formulary.

On a Leerink Swan call, Steve Miller, CMO of Express Scripts and one of the loudest critics of Gilead's pricing of Sovaldi, couldn't be bullied into revealing much at all about the discount. But Miller was quoted in The New York Times as saying that it would narrow the price gap between what U.S. and Western European countries pay for Sovaldi.

Sovaldi is about $84,000 in the U.S. and runs from $51,373 in France to $66,000 in Germany. We heard that an AbbVie sales rep had offered one mid-sized regional firm a 20%-plus discount, claiming it was the same deal AbbVie had signed with Express Scripts. Given the PBM's clout in the marketplace, we would bet it got a better price -- maybe 25-30% off the $83,319 list price. That puts Express Script's net price below $63,000 -- the price we'd specifically predicted in our previous article in BioCentury (and for which we received some scathing, albeit private, criticism).

We also don't know the specifics on the cost for 24 weeks of Viekira Pak therapy (required for genotype 1 post-transplant and some genotype 1a cirrhotic patients). We know that it's not double the cost of 12 weeks of therapy and have heard unconfirmed rumors that Express Scripts won't pay any more for 24 weeks of Viekira Pak than for 12 weeks.

Whatever the discount, Express Scripts will make additional margin on the regimen since AbbVie agreed to distribute it exclusively through the PBM's own specialty pharmacy.

One other bit of murkiness: the length of the contract. If Express Scripts was able to sign a mere one-year deal, then it will be free to negotiate even more discounts once the Merck & Co. Inc. and Bristol-Myers Squibb Co. regimens reach the market. Both are expected this year.

What AbbVie gets

On the other hand, if the contract lasts for several years, then AbbVie has scored a major coup -- keeping its competitors off the Express Scripts formulary while it builds market share and reinforces prescribing habits.

But whatever the contract length, starting Jan. 1, AbbVie gets some period of virtual exclusivity for Viekira Pak for patients with genotype 1 HCV. Gilead's Sovaldi sofosbuvir and Harvoni sofosbuvir/ledipasvir, and Johnson & Johnson's Olysio simeprevir will continue to be available for patients who have already begun treatment regimens. Sovaldi also will be available for patients with other HCV genotypes who have advanced liver disease.

AbbVie also gets another advantage: breadth. Plans and employers who subscribe to the Express Scripts National Preferred Formulary will make Viekira Pak available to all patients -- not merely the sicker patients, a strategy many plans, particularly Medicaid plans, are using to limit their costs. Likewise, Express Scripts also said it would allow doctors other than liver specialists and infectious disease specialists to prescribe Viekira Pak, further widening the market.

No guarantees

Still, both AbbVie and Express Scripts have their marketing work cut out for them. From AbbVie's point of view, there's no guarantee that its discount will result in an equivalent market share gain. In fact, it's just possible that Express Scripts has over-reached in requiring customers to make the drug available to virtually all people with genotype 1 disease.

One of our payer customers, for example, is reluctant to accept a big discount from AbbVie precisely because AbbVie insists that Viekira Pak be available, without restriction, to all customers. Even at about $63,000-$65,000, the cost of treating additional "healthy" HCV patients -- for whom the plan does not pay now -- will more than outweigh the economic benefits of the discount. Gilead could make a contracting decision easier for plans and employers by offering a relatively modest discount without the AbbVie-like restrictions.

And then there's the fact that Viekira Pak comes with some major disadvantages. Patients have to take three pills in the morning and one in the evening, and some patients need ribavirin as well. The regimen forces patients and physicians to manage a number of drug-drug interactions. Viekira Pak also requires hepatic monitoring for the first four weeks of treatment.

Gilead's Harvoni, on the other hand, is a single pill taken once a day, with fewer drug interactions and no additional monitoring beyond guideline standards. AbbVie will thus need to convince physicians that its more inconvenient therapy does not mean that their patients will be getting second-tier medicine, particularly as Gilead counter-attacks with new clinical information. For example, Harvoni now requires 24 weeks of therapy for prior-failure genotype 1a/1b patients with cirrhosis, but the company hopes to cut the duration to 12 weeks in 2015 by adding ribavirin. And of course Gilead could offer its own discounts

Major implications

Whatever happens specifically in the HCV market, biopharma companies and their investors need to recognize the fact they have so long avoided: payers are learning to buy in the way businesses do in virtually every industry outside of healthcare.

Certainly, the effects of this behavioral change on specialty therapeutic categories beyond HCV will come faster if Express Scripts is successful in building Viekira Pak into an important competitor, despite the regimen's disadvantages.

But they'll come in any event to companies with development-stage assets in therapeutic categories now in payer cross-hairs including hypercholesterolemia, multiple sclerosis, rheumatoid arthritis, HIV, and even some cancers, like chronic lymphocytic leukemia (CLL) (see "Vulnerable Categories").

Moreover, HCV has taught payers they can in fact limit access to valuable drugs even when there's no competition at all. Five years ago, it would have been unthinkable to deny a relatively healthy but HCV-infected patient a curative drug. Today it's routine. Think of the implications, for example, for Vertex Pharmaceuticals Inc. Its Kalydeco ivacaftor for a tiny segment of cystic fibrosis patients works brilliantly and is priced to match -- more than $300,000 annually.

Vertex's Phase III VX-809 will treat a much larger segment of the CF population -- but with varying degrees of efficacy. If Vertex prices the drug at the same level as Kalydeco, it's logical to ask whether payers, given their experience with HCV, will demand some proof that the therapy is working before they continue to pay for it, just as they demanded HCV patients prove, among other things, that they had fibrotic livers. Our bet is they will.

Biopharmas and investors also should take note of the speed with which Express Scripts created a coverage policy around Viekira Pak. Traditionally, insurers have waited 3-6 months before introducing the specific rules for when and how they would pay for new drugs. But Sovaldi changed the math: prescribing exploded almost immediately upon launch and so did pharmacy costs.

Once plans realized what was going on, they found themselves scrambling to ratchet back prescribing and restrict usage to sicker patients. Those are costs they're unwilling to incur again. And the Express Scripts policy for Viekira Pak, and UnitedHealth Group's almost equally fast work creating a coverage policy on Harvoni, show that at least the larger payers have learned their lesson. Coverage policies were implemented virtually on day 1.

One implication for manufacturers: they'll have significantly less time to create demand for their products -- getting them into the hands of physicians and patients -- ahead of what are likely to be increasingly restrictive coverage policies.

Less time and less flexibility. Pharma's current marketing strategies for drugs in competitive areas will inevitably lead to greater discounts. What drug companies need to do is to demonstrate incremental value that payers, and payers' customers, can believe in and for which they are willing to spend incremental dollars.

In our view, the only way to do so is to demonstrate the value of a drug comparatively against all competitors, and across all relevant elements of value, with each element weighed as payers value them. Otherwise, payers won't see what they're getting for their money -- or rather, they'll see what they want to see.

And it's also the only credible way payers will be able to communicate that value to their customers: the employers, states, pension plans, unions, public and private exchanges and other customers who need to know that their insurance provider is looking out for good, not just low-cost, medicine.

In short, the market -- less fragmented and increasingly dominated by cost-conscious institutional buyers -- has caught up to biopharma. Payers will be buying the way other industrial buyers do -- they'll comparison shop. It's crucial that biopharma provide them the appropriate measurement tools. If they don't, buyers will settle on the easiest point of comparison: price.

-- Real Endpoints is an information and analytics company focused on pharmaceutical reimbursement.

Companies and Institutions Mentioned

AbbVie Inc. (NYSE:ABBV), Chicago, Ill.

Bristol-Myers Squibb Co. (NYSE:BMY), New York, N.Y.

Express Scripts Holding Co. (NASDAQ:ESRX), St. Louis, Mo.

Gilead Sciences Inc. (NASDAQ:GILD), Foster City, Calif.

GlaxoSmithKline plc (LSE:GSK; NYSE:GSK), London, U.K.

Johnson & Johnson (NYSE:JNJ), New Brunswick, N.J.

Merck & Co. Inc. (NYSE:MRK), Whitehouse Station, N.J.

Opko Health Inc. (NYSE:OPK; Tel Aviv:OPK), Miami, Fla.

Pfizer Inc. (NYSE:PFE), New York, N.Y.

Sanofi (Euronext:SAN; NYSE:SNY), Paris, France

UnitedHealth Group (NYSE:UNH), Minnetonka, Minn.

Vertex Pharmaceuticals Inc. (NASDAQ:VRTX), Boston, Mass.

References

Longman, R. "Price cuts in HCV." BioCentury 21-22 (Oct. 6, 2014)

Pollack, A. "AbbVie deal heralds changed landscape for hepatitis drugs." The New York Times (Dec. 22, 2014)