Innovators vs Exploiters: Drug Pricing And The Future Of Pharma

Print 30 August 2016
Life SCi VC

Pharmaceutical pricing got thrown onto the front page again last week, causing the expected anaphylactic reactions among politicians, practitioners, and parents. The root of this crisis: Epipen’s 600% price increase over the past eight years. The biannual upticks underlying that number finally caused a blowback as back-to-school buyers were faced with big out of pocket expenses this year that their insurers passed onto them.

As always happens during public crises around drug pricing, plenty of finger-pointing and pharma-bashing ensued. Politicians tweeted. Biopharma stocks fell. It’s an annual ritual, it seems, that brings out the same arguments and same outcomes.

But it is disturbing: what’s going on in our industry on these issues troubles many of us, so thought it worth opining on the current situation and sharing a few things to consider.

But before that, a wonderful disclaimer: as an early stage venture investor, I’m not actively engaged in the sale of pharmaceuticals, setting prices, or designing marketing campaigns. In fact, I participate in the part of the value chain farthest from it: drug discovery and early development. Our firm, Atlas Venture, focuses on investing in people at new biotech startups that are working to create new potential medicines. Most of our companies get bought (or go public) before they launch their drugs, if they make it that far. So my commentary benefits greatly from my lack of first-hand knowledge, but I’m still going to share it.

Exploiting the system, damaging innovation

In my opinion, Mylan’s EpiPen story is a glaring example of crony corporatism and what’s wrong with the healthcare system: a politically-connected company, selling a half-century old generic product that’s simple to make, manages to exploit its government influence-peddling muscle to drive relentless price increases.

It’s benefited from government-sanctioned regulatory obstacles against its competition (looks at the histories of Twinject, Adrenaclick, and competitor generics). Under the altruistic mantle of “helping schools help kids”, they also used their lobbying skills (and ~$4 million) to get legislation passed to incentivize stockpiling of auto-injectors by schools. A good cause in many instances, for sure, but Mylan helped shape the legislation to effectively make EpiPens mandatory and really the only product with the “right” specifications. Further, the company had created a program that helps schools get “free” pens, another very altruistic move, but required them, at least for a time, to exclude any deals with competitors (now an anti-trust issue).

As expected, the company took advantage of all of this government-enhanced monopoly positioning of a generic drug to jack up prices artificially over the past eight years, extracting profits from insurance companies and taxpayers initially. Patients weren’t supposed to pay out the nose for it, insurance companies were. Until recently, when those increased costs were passed on to families in the form of higher out-of-pocket costs (which is why the issue is blowing up now).

In fairness, Mylan’s EpiPen franchise isn’t all bad: it has done some good by improving awareness of anaphylaxis (with folks like Sarah Jessica Parker) and helping some schools with the issue. And it’s hard to blame them for delivering a very adept marketing campaign over the past decade: the EpiPen brand is (or was before this scandal) very strong. But Mylan’s cozy relationship with Washington has been instrumental, and it’s exploited the current dysfunctional system with impressive effect.

Turing Pharma did something similar with its staggering 5000% price increase of its 50-year old anti-parasitic, which exploded into last year’s annual pricing scandal; they exploited the regulatory obstacles that restrict competition for generic, old medicines in order to create an unnatural monopoly, enabling what can only be called irresponsible price gouging. Bottom line is that generic drugs shouldn’t have massive price increases: they should be near commodity products if the markets are even close to efficient. Many other spec pharma companies have exploited similar artificial, regulatory-enabled monopolies around age-old drugs.

For sake of simplicity, I’ll call these folks the Exploiters. They’ve exploited the opaque, multi-layered and dysfunctional value chain around pharmaceutical pricing to their advantage, leveraging the FDA’s suboptimal regulatory approach to generics to create artificial, unwarranted, and inappropriate monopolies.

What’s disappointing in all this is the damage done to real innovation. The whole industry is tarred and feathered in explosive PR crises like this one, as with Turing.

Companies that make new, high impact medicines, whom I’ll call Innovators, are focused on addressing significant patient needs: these are the companies making new immuno-oncology products or engineered T-cell therapies that are transforming cancer care. They are tackling Parkinson’s and Alzheimer’s with bold and audacious approaches. They are working on cardiovascular illnesses, still one of the biggest causes of death in American and Europe. Many of these companies have programs targeting risky and unprecedented molecular mechanisms that offer enormous potential, but can also result in expensive, catastrophic failures (e.g., CETPs). These Innovators are the core of what’s good and at the forefront of biomedicine today.

Yes, Innovators are profit-seekers – but we seek outsized profits in exchange for taking on the outsized risks, costs, and timelines of making new high impact medicines – that should be worth every penny to patients and society. Such risk-taking needs to be rewarded. In contrast, Exploiters extract rents from the system’s multi-layered opacity, and its regulatory and reimbursement labyrinths, often through extensive governmental influence.

But the general public, and politicians, aren’t hearing with clarity the vast differences between the Exploiters and the Innovators. 

Part of the challenge is because the differences are not just about Exploiters being the only ones pushing prices upwards: unsurprisingly, the story is more complicated.

Innovators: Funding post-market R&D or addicted to price increases?

Most patent-protected “branded” medicines marketed by Innovators have also seen significant prices increases over the last decade. Matt Herper’s excellent piece in Forbes on Friday highlighted a few of them: one example were drugs for multiple sclerosis (MS), where prices have done up significantly since their launches in the 1990s (here). In their defense, a huge amount of R&D spending goes into lifecycle management for marketed, on-patent products. For example, Biogen has done at least 54 company-sponsored studies since 2005 with Avonex, an MS therapy approved in the 1990s (according to clinicaltrials.gov). By contrast, Mylan sponsored zero clinical trials, according to that website, in the same period.

Clinical work post-launch can be extensive. Any new indication or medical claim requires clinical studies and regulatory engagement. Pharmacovigilance and the monitoring of safety events continues to be funded by the company. Broadening to new age groups (e.g., pediatrics, elderly) or ethnicities often requires new studies. These and other lifecycle costs can consume upwards of a third of most large pharmaceutical company R&D budgets – amounting to tens of billions of dollars invested annually. These expenditures are important, and most would agree should justify reasonable price increases above inflation, as they expand the scope of patients these medicines can help.

However, the key word is reasonable. The simple fact is the industry – including the Innovators – have gotten irresponsibly addicted to large biannual price increases for most of its products. Price rather than volume drives the revenue growth for many specialty products today. Innovators need to take responsibility for these aggressive increases and justify them more clearly going forward. Cost effectiveness questions should be explicitly asked, as I’ll get to later.

But wouldn’t it be great if only that would solve the problem. Unfortunately, the pricing issue is even more complicated than that.

Opaque pharma value chain: the spread between list and net prices

“List” prices of drugs have become meaningless, as they’ve been obliterated by the many handoffs across intermediaries in the value chain today: PBMs, payors, pharmacies, hospitals, and distributors all need to make their cut through price reductions, rebates, and discounts.  But most of these adjustments off of list price are deeply hidden trade secrets and not widely shared.

An April 2016 IMS Health report, titled “Medicines Use and Spending in the U.S.”, highlights the issue head-on: while aggregate list prices of branded drugs went up 12.4% in 2015, the net price back to drug makers only went up 2.8%. That’s a huge spread, and a big difference that appears to be widening in recent years. Some drugs can have gross-to-net price differences of greater than 50% (see Tasigna and Affinitor, here), as can entire drug classes in competitive fields like diabetes drugs. This is because the use of steep discounting is a competitive tool, a sort of inefficient price competition measure. But every drug is its own story when it comes to these discounts, which is part of what makes it so hard to deconvolute and understand (as was shown by this excellent data-rich Bloomberg piece earlier in 2016).

The lack of transparency around real sale prices of drugs back to their manufacturers, and the burgeoning spread between list and net prices, is unsustainable for many reasons, but especially so in the current volatile political climate. Further, different conclusions will be drawn about where solutions may lie in the system depending on these net price realities and discounting practices.

Better accounting of actual prices can begin to enable open and more efficient price competition, which has been incredibly hard to do historically given the secrecy around these gross-to-net differences. Opaque bundled rebates gave manufacturers the opportunity for inside deals with PBMs/payors across different product lines, often with loss of choice or access for patients. Price transparency would help level the playing field, and enable Innovators distinguish themselves as leaders in the industry.

Innovators vs Exploiters: winning the battle for our industry’s future

On the issue of drug pricing, Innovators and Exploiters are all being lumped together today. We can’t keep failing to explicitly address the difference. The novel nature of the products, and the R&D required to develop them both before and after initial product launch, are totally different. One creates value through new medicines and gets rewarded; the other only extracts value from the system’s inefficiency.

For those of us in the business of making medicines, I think we face an existential industry crisis around this issue. Simply put, if Innovators aren’t able to step up and lead on these issues, we’re doomed as a sector to a world of price controls, where risk-taking isn’t rewarded and our innovative R&D core will be hollowed out.

Now is the time to engage in the dialogue and push for positive solutions. How do we do this?

Let me first declare that I don’t have any breakthrough answers. Many others recently have opined on a number of ideas in the past few days, including Matthew Herper (here) and Luke Timmerman (here), and you’ll find some echoed below. So here’s my take on a handful of general themes we, as Innovators, should consider – all aimed at evolving to a better system of price competition and clarity on value that creates the much-needed “room” in future budgets required for the next wave of Innovator products to be rewarded.

Encouraging and accelerating competitive generic markets.  Innovators, as the major voice in the industry (and at PhRMA and BIO), need to encourage generics and price competition after patent-expiry. We are fortunate to have a system where innovation is rewarded with a temporary patent-protected monopoly and reasonably free-market pricing in the US, which stimulates the risk-taking required for R&D. But in that social contract is the explicit end of the monopoly period whereby competition should drive prices down: patents need to expire to make room for new things. Generic players that bring these low cost solutions aren’t exploiters: they are the free-market players that efficiently deliver lower prices and more cost-effectiveness. They might not be the nicest players in the space, and can play dirty at times, but they are important. Generic utilization has been a wonderful governor on industry-wide sales growth: 9 out of 10 prescriptions are now filled by generics. In many ways, these are the wolves that keep the herd healthy. Every Innovator tries to defend their products from generics as they approach or even pass their rightful patent expiry, but it’s a prisoner’s dilemma of sorts: the system would benefit from more wolves, thinning the herd of branded products to allow for more focus on new, stronger, next generation therapies. At least three things to think about here:

  • Enable generic regulatory reform. The FDA’s approach to generics has created the Mylan’s, Valeant’s, and Turing’s of the world. We need to mandate faster approvals of ANDAs (generic drug applications), and streamline the process. We watched as Momenta Pharmaceuticals waited years after filing its ANDA for the approval of generic enoxaparin; there’s plenty of room to innovate on faster regulatory models for generics. For example, if generic manufacturers exist in other developed markets with standards similar to the FDA, let’s get them fast-tracked here in the US. This may require more FDA funding. Further, sole-source generic drugs should be under the microscope. As Herper writes, big price increases in these drugs should be considered a “crisis”. As one example, voucher systems could work to encourage multi-sourcing of low utilization generic products.
  • Stop with the pay-for-delay This is also a piece of regulatory reform, and is rightly being battled by the FTC, but I’ll call it out separately for its egregiousness: these deals were/are an absurd affront to the social contract we have with the public.
  • Stop the blocking and foot-dragging around biosimilars. We are almost there, I hope, but I recall biogeneric investment proposals in the early 2000s claiming the market was around the corner. It wasn’t. In large part because supposed Innovator companies blocked biosimilar development at every turn. But the time is now. We should support things like automatic substitution for biosimilars. It’s just the right thing to do. If pushed aggressively (like for small molecule drugs) by all of us, the genericization and dramatic price reductions of the early waves of biologic drugs (recombinant proteins like EPO and G-CSF, and antibodies like Enbrel, Remicade, Humira) will create lots of financial headroom for premium pricing of new Innovator products in the future.

Insist on and be the vanguards of price transparency in the healthcare value-chain. Consumers, politicians, and pundits largely don’t understand the large gross-to-net price differences caused by the opacity of the system. This lack of visibility creates an ugly value chain that conspires to support higher list prices, which have become a lightning rod for the sector. Secretive backroom deals with rebates, discounts, kickbacks, bundling, or whatever else you want to call them aren’t helpful to the cause, and certainly run afoul of most of our versions of the “red-face test”. Coming clean on actual net prices will also begin to put true price competition into the system. The reality is that the rest of the healthcare system, including the big cost players like hospitals and physicians, are equally opaque with their pricing approaches, which creates huge inefficiencies in the weakly competitive healthcare market. The pharma sector could lead the way.

Embrace value-based pricing that integrates real cost-effectiveness: it’s the only path forwardAs a sector, we’ve talked about this a lot over the past decade: using explicit cost-effectiveness and pharmacoeconomic arguments to justify pricing relative to health value contributed. This has never been more critical than now. Every new drug price should have its cost effectiveness justification. We can and should argue about the relative merits of different measurement approaches, but there’s extensive science behind a number of different cost effectiveness methodologies. For instance, QALY-based approaches are well established, and at the end of the day different societies may make different QALY tradeoffs. This doesn’t mean all drugs will be cheap. Weak, less effective drugs will be unable to support high prices. But great high impact medicines will continue to be priced at a premium. Gilead’s Solvadi and Harvoni effectively cure HCV and pass the cost-effectiveness test with flying colors, even at $80-100K per treatment. NICE recently came out with range of $600-800K for a curative engineered T-cell therapy. Gene therapy cures for lifelong genetic diseases could easily have >$1 million prices and still be cost-effective. Lastly, “money-back guarantees” are going to happen where they can be measured, and Innovators should support and encourage them – just as Timmerman’s piece also suggested. Give drug to a patient and only pay for it if it does what it says it will do. You buy a car, it should drive. If it doesn’t, you get your money back. This will certainly drive the adoption of precision medicine approaches as well – picking the right patient to get the drug.

Reduce our industry’s reliance on differential premium pricing in the US.  Although the US GDP per capita leads most other large countries, we need to work to reduce the extent to which the US consumer subsidizes the world’s pharmaceutical R&D effort through the higher prices we pay. Just because a drug is priced higher in one market than another is not, by definition, wrong.  Differential pricing for the exact same product is common when you have different subsets of buyers with different price/demand curves (like the example of museums or movie theaters with elderly and student tickets that are far cheaper than “regular” admission, under assumption elderly and students may have less discretionary income). The US GDP is higher than many countries of Europe, but not by as much as the price difference of most pharmaceuticals. This gap needs to shrink.

Decades ago, Big Pharma made a Faustian bargain with differential pricing in the developed markets of Europe and the US. Each marginal sale was still profitable as long as they maintained their profitability in better markets like the US.  So pricing differentials increased over time. Not in all disease areas (e.g., orphan disease and gene therapy drug pricing in Europe is robust), but in many. And this spread has come back to bite the industry, as critics protest why the Brits, French, and Canadians have cheaper drugs than we do. This is of course complicated by the price discounting that goes on in different markets as well. Generic NCEs are, interestingly, often cheaper in the US than in Europe. In general, though, relative prices differentials need to tighten in the developed markets of the world. This is where better trade agreements are actually important, as free trade (a good thing in principle) raises these price and grey import issues around the world. Global price-setting in the major developed markets, around a narrow band of prices, needs to happen. It probably can’t happen for existing on-market drugs at this point, but new drug launches should certainly think through these permutations. We need to tackle this issue head-on rather than continuing to kick it down the road and avoid it.

Stop shooting ourselves in the foot with expensive direct-to-consumer(DTC) marketing. Only tangentially-linked to the issue of pricing, but we need to look critically at our industry’s marketing practices, especially the much-maligned DTC advertising. Enough already. We’re hurting the industry here. Cancer drugs advertised on TV with images of hopeful patients?  Come on. This may seem Pollyannaish, especially since for decades the axiom that more marketing spend meant more sales held true, but can the Innovators in our sector just take the high road, drop DTC, and focus on proper medical marketing. Physicians are the key prescribers, so let’s educate them and advocacy groups with the clinical data and science around our products – rather than playing to the hopes and dreams of patients watching their TVs. Further, the marketing budgets will likely reduce overall without these campaigns. Take your DTC spend and turn it into patient assistance programs and savings cards for the high deductible/co-pay plans that payors have used to pass costs onto patients.

Lastly, long-term investors are important Innovator stakeholders: let’s keep putting our money where our mouth is. Investors also need to lead the charge for change by backing innovative emerging companies that are aspiring to improve/replace the standard of care (keeping the herd healthy), encouraging them to adopt new pricing models, greater transparency, etc…

One subset of the long-term investor universe is venture capital, where my firm participates. The VC-backed biotech industry, some 1000 or so companies in the US, is the nursery for new Innovator pharmaceutical companies and a prolific creator of new potential medicines. Many of our medicines end up in the hands of larger pharmaceutical companies to commercialize. It’s fair to say that the biotech venture capital community has already heard the call: the vast majority of VC funding is going towards new medical entities. In fact, funding for reformulation/generic spec pharma plays reached its lowest share (~5%) of venture funding in a decade last year, continuing a trend in place since the financial crisis of 2008-2009. Funding for real medical innovation – cutting edge cell and gene therapy, novel cancer programs, Alzheimer’s and many other diseases – is up considerably. As an example, Atlas Venture hasn’t made a new investment in the spec pharma space for at least a decade; all of the nearly 40 companies created or funded in our last three funds are working on fundamental new medicines. I’m sure other early stage VC firms are similar: we’re all in the business of building the next crop of Innovators. This needs to continue, and be reflected in long-term public market investors’ focus as well.

***

Those are few themes to consider. I’m sure there are many more, but after nearly 3700 words I think I should stop.

The public dialogue on these topics is clearly gaining steam – it will likely come to a froth over the coming months. In this election season, this issue risks becoming an irrational and uninformed political hot potato if Innovators don’t step up and lead.

The pharmaceutical industry has great fundamentals – and biomedical science has never been richer with opportunities. It can get through this existential crisis by embracing more transparency, encouraging competition, and more clearly articulating the value of our products.  A focus on real medical improvements, based on innovative science, will continue be rewarded, and that’s where the positive power of competition productively drives the sector.

What George Merck said remains true, and is at the essence of our industry’s important social contract: “We try never to forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they never fail to appear.”

Source

Return

All Portfolio

MEDIA CENTER