Public Relations Battle Between Drugmakers And Payers Intensifies

BMI View : We believe the intensifying debate over hepatitis C treatment costs and rationing of coverage will ultimately push the federal government to intervene in drug pricing. Drugmakers will see their leverage over payers weaken in the coming years as payers band together to extract discounts. In turn this will call into question the sustainability of the traditional pharmaceutical business model and potentially accelerate further consolidation in the industry.

The US pharmaceutical industry will be concerned to see resistance from payers in a market where companies have traditionally held the bargaining power, and from which they derive a great deal of revenue for their innovative drugs. If the price of a curative drug like Sovaldi (sofosbuvir) can garner such a backlash from both payers and government officials, we suspect that any significantly innovative drug for a relatively common, chronic disease such as diabetes or cancer will face similar hurdles. The industry is expected to deliver breakthroughs in cancer therapies that promise to extend survival but at a premium. Combined with an influx of new signups to health insurance, these two factors will apply pressure to payers over the coming years and we expect them to pushback when faced with rising drug costs.

With pharmaceutical companies facing massive outlays for R&D and the prospect of a squeeze in revenues, the delta between the cost of capital and subsequent returns on capital could narrow if drug pricing sees a paradigm shift within the US. The traditional industry model of screening, developing and commercialising internal drug candidates may come into crisis, while the ongoing consolidation we have witnessed over the last three years accelerates.

Public Relations Battle Between Drugmakers And Payers Intensifies

BMI View : We believe the intensifying debate over hepatitis C treatment costs and rationing of coverage will ultimately push the federal government to intervene in drug pricing. Drugmakers will see their leverage over payers weaken in the coming years as payers band together to extract discounts. In turn this will call into question the sustainability of the traditional pharmaceutical business model and potentially accelerate further consolidation in the industry.

The US pharmaceutical industry will be concerned to see resistance from payers in a market where companies have traditionally held the bargaining power, and from which they derive a great deal of revenue for their innovative drugs. If the price of a curative drug like Sovaldi (sofosbuvir) can garner such a backlash from both payers and government officials, we suspect that any significantly innovative drug for a relatively common, chronic disease such as diabetes or cancer will face similar hurdles. The industry is expected to deliver breakthroughs in cancer therapies that promise to extend survival but at a premium. Combined with an influx of new signups to health insurance, these two factors will apply pressure to payers over the coming years and we expect them to pushback when faced with rising drug costs.

With pharmaceutical companies facing massive outlays for R&D and the prospect of a squeeze in revenues, the delta between the cost of capital and subsequent returns on capital could narrow if drug pricing sees a paradigm shift within the US. The traditional industry model of screening, developing and commercialising internal drug candidates may come into crisis, while the ongoing consolidation we have witnessed over the last three years accelerates.

AHIP And Gilead Argue Over Sovaldi Pricing

The debate over drug pricing and the cost of innovation continues, as insurer lobby organisation America's Health Insurance Plans (AHIP) specifically targeted blockbuster Sovaldi in a complaint over 'runaway drug prices.' The AHIP commented that '( Gilead) had priced ( Sovaldi) at an astronomical level that is not sustainable for consumers, innovation or society.' Similarly, pharmacy benefit manager ExpressScripts is encouraging other pharmacy benefit managers and health insurers to refuse to use Sovaldi once a competing product from either AbbVie or Merck enters the marketplace. However, Merck and AbbVie have effectively ruled out a pricing war, as that would set a precedent within the industry that would have consequences for other therapy areas and give payers additional leverage over the sector in determining drug prices. Merck's recent acquisition of Idenix Pharmaceuticals for a 230% premium above market price for its hepatitis C drug candidates highlights this even further. Merck is clearly set on producing a drug combination that is better than Sovaldi and Gilead's follow-ons. The argument for a pricing war is therefore greatly weakened because Merck will aim to charge a premium over Gilead's hepatitis C drugs in order to recoup its costs.

While AHIP and pharmacy benefit managers recognise the benefits of Sovaldi, they have argued that the benefit is not proportionate with the cost, and that reimbursing all hepatitis C patients for Sovaldi '…would break the country'. This argument is rather self-serving, as it would be their own bottom lines that would face the pressure, and many would be forced to deny coverage to patients in order to retain profits. Both Gilead and other drugmakers have argued that their innovative products are indeed worth the high prices charged. In the case of Sovaldi, Gilead believes that the high upfront cost (USD84,000) represents a long-term saving relative to the cost of further complications (transplants, illness) in hepatitis C patients, which can spiral into million dollar figures if left untreated. By making the argument in public on pricing, insurers and payers have effectively blocked any room for negotiation that would have lead to behind-the-scenes discounting or rebates.

State Health Plans To Block Coverage Or Demand Discounts

The impetus for drug price changes will now have to come from the federal government and Congress, and we expect that to be an extremely drawn out process. However at the state level, we see the first signs of a shift in policy towards innovative drug prices. We believe this may be the first of many moves that eventually lead towards some form of tiered pricing or a commitment to cut healthcare costs.

Following the announcement that Medicare will reimburse the cost of hepatitis C screening, private companies that manage care plans for state Medicaid and Medicare programmes have written to the White House, requesting that the federal government cover the costs of reimbursing hepatitis C drugs. Reimbursement by Medicare would open up state and government health programmes towards prescribing Sovaldi. Oregon's healthcare programme is expected to deny coverage to hepatitis C patients; the state is allowed to do this based on a special waiver that enables it to place a cap on healthcare costs in return for federal aid for its healthcare programme. While a final decision has yet to be announced, treating Oregon's hepatitis C patients would cost USD168mn. Given its total prescription spending amounted to USD377mn in 2013, the cost of treating Oregon's hepatitis burden would amount to a doubling in healthcare spending. Medicaid programmes in Florida and elsewhere are looking to ration spending on hepatitis C patients, and with the screening programme expected to bring thousands of new hepatitis C patients into the system, pressure to act is expected to pile on the US government. We anticipate that Medicare, which currently is prevented from negotiating with drugmakers on prices, will be granted the ability to do so like other federal agencies such as Medicaid and Veterans Affairs. The argument between payers and the pharmaceutical industry over innovation and costs will continue to intensify over the coming year.

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