Biopharmaceuticals: Bring Price and Value Closer Together
It would be difficult to overstate the extent to which prescription drug pricing is a major public policy issue in the US and ex-US these days. However, the public policy discussion has been characterized by a certain degree of misunderstanding about the biopharma industry – its business model and the relatively recent and substantial market pressures to which the industry is still responding/adjusting.
To have a productive policy debate about drug pricing, policy makers and indeed industry personnel need to have a better, more comprehensive, understanding of how the market landscape – and the market risks – have shifted for the branded biopharmaceutical business in recent years. To be clear, price is affected by the newer financial risks that come into play once a product has already made it through the development process and is on the market. This more recent ‘in-market’ financial risk is as significant as the financial risk of the pre-market clinical development process.
What follows is a brief analysis of changes in the U.S. healthcare marketplace and how they may affect drug launch prices. It is important to level-set an understanding about the biopharma business model in general, with the caveat that the general analysis will not apply to all companies or all products uniformly.
The Role of Incremental Innovation in the Biopharmaceutical Business Model
As much as companies would prefer to bring to market only world-changing medical treatments, the reality is that scientific progress is usually incremental. The sum of the increments over time, however, constitutes radical improvement. This is true for medicine and other scientific fields, such as information technology (IT). While we welcome incremental IT advances, we tend not to have patience for the step-by-step improvements in pharmacologics. However, these incremental clinical improvements benefit patients and lead to big change over time. Just as important, incremental innovation is also what keeps the lights on for the research and development enterprise.
There are many skeptics about the value of incremental innovation, and an even larger pool of people who find the launch prices of incremental innovations unjustified or irrational, seeing little alignment between value and price.
It is important to acknowledge that price and value are not always the same. It may be helpful for the policy discussion to think of a drug’s value as the clinical performance and patient outcomes, while the price reflects both the value and the growing uncertainty around in-market risks of market consolidation and restricted access, branded therapeutic competition, mandatory discounts, and restrictive coverage policy.
Healthcare Market Consolidation in the US
One of the in-market risks for biopharma is consolidation among payers, providers, or suppliers. A 2014 survey by KPMG indicates that healthcare executives believe the most significant driver of merger/acquisition activity in 2015 will be the Affordable Care Act (ACA). In this multi-sector survey, healthcare is reported to have the highest level of merger and acquisition activity, with hospitals expected to be the most active players. Hospitals look to consolidations to expand their reach into community/outpatient services to balance the reduction in inpatient census, to increase their market share relative to peers, and to increase their market leverage relative to payers. Competition between and among all healthcare sectors has become particularly acute, partly due to policies in the ACA. As competition heats up, each sector and each entity strives to reduce input costs and maintain or improve prices – and consolidation can be an important tool to accomplish these goals. It is currently a subject of public debate about whether hospital and other types of consolidation will be helpful or harmful to cost containment.
Specific to biopharma, consolidation strengthens payers’ and providers’ ability to press for drug discounts that are contractual, proprietary, and confidential. Payers and providers achieve such discounts/rebates/price concessions by using tools to drive use of preferred products and discourage use of non-preferred therapies. These tools include lists of covered drugs (formularies), cost-sharing tiers, and utilization management, such as step therapy and prior authorization. All of this puts pressure on the revenues of the biopharma industry, and that pressure can be reflected in the publicly available, “list,” or “catalogue” price.
In a recent issue of Health Affairs, Berndt and colleagues highlighted how net lifetime revenues of new biopharma therapies declined from profitability in the late 1990s to slightly negative profitability by the end of the first decade of 21st century. Payer policy and practice such as greater control on patient access through tiering, step therapy, and prior authorization, all drive down utilization and potentially drive up manufacturer price concessions. Berndt found that market risks affect lifetime product revenue, essentially identifying the impact on price of in-market risks.
Diminished Market Exclusivity/Increased Competition
In addition to cross-sector market competition through payer and provider consolidation, there is growing intra-sectorial competition among generics, biosimilars, and branded therapeutic alternatives. This competition creates market uncertainty and risk and can reasonably be expected to affect launch pricing.
First, generics are now almost 90 percent of all prescriptions today and take almost all of the brand market share quickly at patent expiry. Grabowski and colleagues found that 82 percent of all 2012 patent expiries were subject to generic manufacturer patent challenges before the expiration – which also affects the business model of the branded industry. Defending almost routine patent challenges takes significant resources and creates market risks for the brands. There is also the growth of generic competition and the speed of the brand market share at patient expiry is another, newer market risk that affects biopharma costs and revenues.
An average therapy has 12 to13 years of patent life remaining once it is approved for sale, before a generic substitute can come to market (although it can be as little as seven years). However, DiMasi and Faden reported in 2011 that, on average, a first-in-class therapy has a little more than a year before a branded therapeutic alternative comes to market. The important point here is that the patent can be irrelevant to a therapeutic alternative coming to market. The time period between the first in class branded product and the second in class branded therapeutic alternative declined from an average of 13.5 years in the 1960s, to 2.7 years in the 1990s, to just over one year in the early 2000s. Branded competition can increase pressure for price concessions to payers and providers for both the first product and the new branded competitor/therapeutic alternate. Uncertainty about branded competition is potentially a much more significant risk than generic entry post-patent. A company cannot know for certain if a therapeutic alternate will make it to market, how effective a competitor it will be, or how market share or revenues will be affected. Here again, this market uncertainty can affect pricing.
Policy makers need to understand that ‘the price is not the price.’ In crowded therapeutic classes, payers can pit the manufacturers of different patented products against each other because they have similar treatment targets (think about hepatitis C, diabetes, and cardiovascular disease). The result is that manufacturers provide deep discounts in order to be listed on a payer’s formulary and provide even deeper discounts to be listed on a tier with lower required patient out of pocket costs. These discounts can bear little resemblance to the public list price – the prices that generate so much concern. It is important to understand that the provision of price discounts/rebates from manufacturers to payers is common for drugs in crowded therapeutic classes. While policy makers used to rail against ‘me too’ products (therapeutic alternate products), they actually serve an important role in the healthcare economy. While their role is important to payers and patients, me-too products/therapeutic alternates affect the revenues of all manufacturers with products in those therapeutic classes.
Mandatory Discounts and Price Concessions
We should not underestimate the potential effect of mandatory price discounts on drug launch prices. There are several programs that require significant discounts for large populations. First, by law, pharmaceutical manufacturers must give Medicaid programs a 23.1 percent discount off the average of all commercial market discounted prices provided by a manufacturer. (Recent changes to the formula by which the average of all market discount prices is calculated effectively raised the discount rate higher). There is also a price increase penalty rebate in the Medicaid formula, which requires additional rebates when a drug price increases faster than the rate of inflation. Next, the 340B Drug Discount program gives certain purchasers Medicaid-level discounts. This program is projected to affect up to eight percent of brand sales in the near future. Finally the Medicare Part D 50 percent point of sale discount for beneficiaries, and the Veteran’s Administration federal discount affect revenues. Taken together, the populations covered by these national programs are greater than the populations of Germany, Great Britain, or Canada which all have drug price controls. Furthering market uncertainty, these U.S. programs have undergone major changes and expansions in just the past few years – creating new and unknown in-market risks for the biopharma industry. These are significant market events to which the industry is still adjusting.
Restrictive Coverage Policy
Finally, Medicare, creates significant in-market risks for the industry through coverage policy – or, decisions regarding what services and technologies it will and will not cover. Recent analysis shows that Medicare coverage policy has become more restrictive in recent years. In addition, another recent analysis shows that Europe moves more quickly and more often to facilitate access to new technologies through reimbursement policy than does Medicare. All of these trends affect the biopharma industry somewhat uniquely in the healthcare marketplace.
In-market risks for biopharma are very significant today. Because of rapid changes in the market environment (many related to the ACA), revenue expectations established when the decision is made to proceed with product development can be very different than actual revenue several years later when a product is launched. These dynamics seem to have already significantly impacted biopharmaceutical pricing. However, the Congressional Budget Office and other analysts anticipate that there are limits to the industry’s strategy of raising launch prices to account for in-market risks. In fact, the strategy may be more limited than it was five years ago for a variety of reasons:
- Payer and provider consolidation creates more market leverage in discount negotiations with biopharma, so the launch price might rise, but so will the actual amount of discounts;
- Payer cost-shifting to consumers limits the effectiveness of launch price increases and can limit patient access and sales;
- Competition among brands in crowded therapeutic classes is increasing payer and purchaser ability to extract non-public price concessions that make the launch price less and less relevant; and,
- As launch prices rise in response to market uncertainties, payer, policymakers and patient disapproval becomes louder.
The current set of market dynamics creates almost a cognitive dissonance – we see more approvals for products that we consider incremental innovation, coming to market at ever higher prices that do not seem to reflect their value. However, because of the biopharma business model and the changing business models throughout the healthcare sector, a new product launch is not a sure bet anymore. The variable by which a company seeks to minimize in-market risk is price.
There are potentially a number of ways to address drug pricing issues. In fact, there is a notable increase in the number of drug pricing policy proposals at the US federal and state legislative levels due in part to the fact that we are heading into the 2016 national election year. Aside from legislative policies, industry may consider taking the initiative. One approach for industry consideration could be to do a better job at defining the value of a product and creating the value that patients and payers would more appreciate. Industry could be more open to a discussion about how pre-market and in-market risks affect product pricing. Finally, and most difficult, industry should work to better align price and value. Until we all understand the complications of this market in more detail, and until manufacturers are better able to address the information gap, the public outrage and debate will continue and we will have the unproductive result of limited patient access to important new cures and treatments.
ABOUT THE AUTHOR
Jane Horvath, MHSA leads 3D’s Market Access and Vale Communications team with nearly 25 years of experience in health policy and reimbursement issues. Prior to joining 3D, Jane was the Executive Director of Health Policy and Reimbursement at Merck where she identified the business implications of state and federal policy developments. Jane has also worked in academia and has held a series of high profile government positions. Connect with Jane on LinkedIn.