Anthony Walker, PhD, Managing Partner, Alacrita Consulting
December 2018
The past 25 years has seen numerous “end of the world is nigh” scenarios for pharma and biotech, yet as a whole the sector has proven remarkably buoyant with biopharm positively thriving. Since “Hillary 2” in 1993, attention has been focused on drug pricing and reimbursement and this has spawned a whole new discipline in US and European pharma launch planning. There were scare stories about drying pipelines and falling FDA approval rates yet currently innovation and new launches abound. We’ve had financing droughts (outbreaks of the “Money Shortage Virus”) yet 2018 has seen several records being smashed not least the >$600m IPO of Moderna in December 2018. Lobbyists howl about regulations, price controls, biosimilars, parallel imports and a host of other threats, yet the industry continues to give the appearance of defying the law of gravity. How much longer will this go on?
Fundamentals Remain Intact
Unmet medical needs remain painfully apparent in many, many therapeutic areas providing opportunities galore for innovative pharma R&D. Biological science advances at a breakneck speed and new tools are opening up even more targets and avenues for therapeutic intervention than have been hitherto dreamed of. Markets may be more demanding, but novel treatments or even the possibilities of cures are still being bought and reimbursed aplenty. Opportunities abound and there are more experienced people able to access greater pools of finance to apply superior research tools than ever before. It’s an optimist’s paradigm! Or is it?
Payers’ Radar is Getting More Sensitive
Alacrita’s pharma payer research has found signs of a tightening up by payers in the USA in several areas. Orphan and ultra orphan drugs have achieved ultra high pricing partly by flying below the radar of many payers. But a possible 200 new products coming down the pike in the next decade each targeting $1 billion sales represents a huge chunk of pharma spending. Some have argued that this is offset by continuing benefits of patent cliffs for major blockbusters with the new products simply taking up the budgetary slack, but if the budget is focused on small and ultra small populations, the bulk of the patient base (who pay for the majority of the health insurance budget) will feel less and less benefit despite rising premiums.
A ramping up of pricing pressure seems inevitable. Twitter diktats from on high may provide some background noise in this respect but seems hardly likely to drive more than token responses (e.g. six-month delays in price rises on selected drugs). More importantly, grassroots pressure acting in concert with the huge market power of every major PBM (all of which are tied up with insurers after a wave of M&A) will increasingly focus attention on pharma pricing. Bodies such as ICER (which uses a similar cost-effectiveness-based approach to the UK’s NICE) seem to be gaining traction and although state regulation of pricing is anathema in the USA, ICER may become a highly influential broker as far as US pharma prices are concerned.
The Glass Ceiling
The recent two years have witnessed some almost miraculous efficacy produced by cell and gene therapy. CAR-T has produced unprecedented levels of complete responses in terminal cancer patients (hitherto only hematological tumors) and gene therapy has also crossed a major therapeutic threshold (e.g. spinal muscular atrophy). The speed with which some of these therapies have been brought to market has also broken records, once again fulfilling the optimist’s paradigm. Even NICE, often viewed as one of the most stringent HTA bodies in the developed world and a key actor in keeping UK pharma prices amongst the lowest in the G7, has recommended the use of CAR-T in both pediatric and adult patients. Yet at the same time, a paper by researchers at the Department of Health Policy, Vanderbilt University School of Medicine, has called CAR-T the subject of a “cost-effective but unaffordable” conundrum. This may indicate that pharma prices are approaching an absolute ceiling which society/payers will not traverse. Creative minds are afoot designing payment mechanisms that can cope with the sky-high prices of one-time cures as current pricing and reimbursement mechanisms were simply not built to cater for this possibility. Indeed, given the high mobility of US patients between health plans and insurers, it is hard to see a way through this issue. Paradoxically, single-payer systems like the UK have the advantage here as they can afford to take the very long term, holistic view of costs versus effectiveness which is clearly needed in this context.
Economic Anomalies
Pharma benefits from economic anomalies like no other industry. In other markets, pricing of commodities is set by supply and demand (and this applies to generic pharmaceuticals too). Proprietary products based on IP can sustain premium pricing (witness the iPhone X or Samsung Galaxy G9) but there is a whole ecosystem of cheaper alternatives that are functionally similar through to near-equivalent. And once the price of a new product is set, it generally stays the same (at best) or declines over time – you couldn’t imagine a smartphone whose price increased every few months with no increase in specification or functionality.
Pharma has enjoyed a “best available treatment regardless of cost” mindset and this was not surprising in an age where treatment options were relatively few and the budgetary impact in GDP terms was relatively minor. In 1960, healthcare accounted for 5% of the overall economy, today it has reached 18% and shows signs of having maxed out. Countries where healthcare budgets are not open-ended have faced this for a lot longer: when the absolute amount of money available for healthcare is a defined sum that cannot be exceeded it is essential to focus resources on situations that provide the maximum medical value. In Benthamite terms, it’s the “greatest good for the greatest number”. In turn this has shifted the mindset to a “good-enough treatment at the most economical price”. Perhaps it’s a case of buying the Moto G6 rather than the iPhone…
Final Words
Some of the pharma due diligence projects we have undertaken in the past 12 months have paid testament that innovation continues to be applied creatively and directed more toward breakthroughs than ever before. Although tightening of credit and other macroeconomic forces may buffet the industry, as stated upfront the fundamentals remain intact. The industry will continue to fight rearguard actions against pricing pressure and all the rest (as it did over the decades starting with the original debate over generic substitution, etc) but will ultimately succumb to the inevitable. This will not mean the end of the world as we know it, it will simply signify that it’s time for the industry to reinvent itself. After all, that’s one thing it has successfully managed time and again for over the past 100 years.