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Back to School: Paying the piper

22nd BioCentury Back to School Issue: Time to try new pricing schemes

Pharma has lost its pricing power in many countries, as evidenced by reimbursement authorities' willingness to delay or outright deny access to drugs whose costs are deemed unacceptable. Now, the availability of a costly drug in the U.S. that could be given to millions of people has sparked the strongest backlash against drug pricing the industry has yet faced - in the last major market where the government has not adopted any form of drug price controls, according to the U.S. Department of Commerce.

Last year, in "Facing Reality," Back to School argued biopharma companies can no longer assume the market will support premium pricing, even for drugs that deliver meaningful and measurable improvements over the standard of care.

This year, BioCentury's 22nd Back to School essay goes on to argue that the last bastion of free pricing is crumbling, and biotech and pharma had better start experimenting with new pricing models based on value for money while they still have the chance.

The wake-up call was the launch of Sovaldi sofosbuvir from Gilead Sciences Inc.

Payers, reimbursement authorities and health technology assessment agencies almost universally - with the exception of Germany - acknowledge the drug is a breakthrough for patients with HCV.

At $84,000, the drug is clearly cost effective for a subset of HCV patients who would otherwise progress to expensive sequelae such as liver transplant. But its broad indication includes a majority of patients whose disease won't progress to the point of costly interventions. And doing the math makes it obvious that treating even a fraction of eligible patients would be a staggering sum for payers to absorb.

Payers are shelling out for Sovaldi - for now, while there are no comparable alternatives. However, government and private payers in both Europe and the U.S. are rationing access. One U.S. pharmacy benefits manager is considering measures akin to a boycott the minute new drugs are approved (see "Sovaldi Nightmares," page 3).

Yet Sovaldi is merely the straw that is about to break the camel's back. Stakeholders - including drug developers - have been quietly discussing for years the fact that while the system can absorb one, two, or even dozens of high-priced new drugs, it will collapse under the burden of hundreds - no matter how good they are.

The only way this won't occur is if the vast majority of these drugs actually reduce total costs to the system. But prices are set by individual companies, which don't have the power to influence, much less lower, total healthcare outlays.

With Sovaldi as the stimulus, government officials, payers, reimbursement authorities and patient groups are fighting back against high drug prices with renewed vigor. For these stakeholders, biopharma's arguments that drug developers must be compensated for the cost and risk of creating medical breakthroughs don't hold water.

The easiest response of payers and consumers to industry's argument is: not my problem.

Far worse, biopharma's historical arguments about the cost and risk of drug development are giving ammunition to academics, legislators, health technology assessment bodies and payers to argue that the costs of developing and manufacturing drugs plus a "reasonable" margin should be the basis for price.

Industry needs to wrest the discussion away from a cost-plus system that would essentially turn biopharmaceutical companies into utilities, cutting off the lifeblood of innovation.

Changing the course of the discussion will require a commitment to a frank and transparent discussion about drug prices that focuses on the patient-defined value of a given medicine and the realities of ensuring global access.

Changing course also will require the drug companies to give healthcare stakeholders new ideas by piloting new payment models for their newest and best drugs. Specifically, Back to School exhorts companies to test models in which the cost of a given treatment is based on the market value of expected benefits, rather than on the number of pills or injections dispensed.

Drug companies also should accelerate experiments with payment models that require them to shoulder some of the risk that the expected benefits of a treatment won't be realized, but also allow them to reap some of the rewards should benefits related to clinical outcomes or health economics prove greater than expected.

Finally, for acute treatments that deliver long-lasting benefits, companies should explore models that would compensate them for the benefits over time, rather than entirely up front.

For all these models, there are potential confounding factors for both drug developers and payers - such as poor patient compliance and inadequate data systems - though both sides are already working on these challenges.

Additional pitfalls can be found in U.S. regulations and reimbursement systems. But experiments outside the U.S. and within Medicaid and Medicare populations can begin to fill in some of these potholes and provide data to be used as grist to make necessary regulatory changes.

Experimenting with new models for breakthrough drugs will encounter resistance from boards and shareholders. But Back to School argues managements must take a stand against short-sighted views in order to avoid a cost-plus system and preserve incentives for the innovations that medical progress and patients depend upon.

The situation

PhRMA's 2013 Biopharmaceutical Research Industry Profile did not explicitly discuss drug prices, but it did highlight the costs and risks of developing new medicines, as well as the limited period of time in which manufacturers are able to recoup their investments. The document argued the average cost to develop a drug - including the cost of failures - was $1.2 billion in the early 2000s, and "some more recent studies estimate the costs to be even higher."

We've all sat through presentations in which biopharma executives declare the figure is now $4 billion - or more.

For every 5,000-10,000 compounds that enter the pipeline, PhRMA noted only one receives approval.

After approval, by PhRMA's reckoning, drugs must generate enough revenue during an average of 12 years of remaining patent protection to fund development of the pipeline of future medicines.

"Only 2 of every 10 brand name medicines earn sufficient revenues to recoup average R&D costs," the industry profile said.

PhRMA noted generics can be sold at low cost because their manufacturers can rely on research conducted by innovator companies for approval of the brand-name drug.

It is true that biopharma companies must rely on revenues from successful drugs to generate returns on all their investments, including those that fail.

But it is hard for the public to swallow the argument that attrition rates require today's drug prices when the average gross margin for 10 big pharmas was 77% in 2011, 77% in 2012 and 76% in 2013, in line with the 77% average in 2002.

From the public's point of view, drug company efforts to improve R&D success rates by developing targeted drugs, plus the combined efforts of industry and regulators to truncate development and approval pathways, have perversely resulted in drugs with higher, not lower prices. Indeed, industry's strategic shift toward targeted medicines has spawned a proliferation of specialty drugs that cost in the neighborhood of $100,000 per course of treatment, or more (see "Fast, Not Cheap," page 5).

According to Aetna Inc., specialty drugs accounted for just 1% of prescriptions in 2013, but they accounted for 50% of the U.S. insurance company's drug spending. Biologics were responsible for about 75% of the specialty outlays.

For Aetna, specialty category spending is growing at about 15% per year, with 75% of that amount going to biologics. Non-specialty drug outlays are growing at 5%.

Industry has been fond of pointing out that the expiration of patent protection for its biggest-selling blockbusters - which came nearly all at once and were mostly over in 2013 - would free up room in healthcare budgets for new innovator drugs.

In the 2013 profile, PhRMA

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