Vantage point – Rocketing US drug prices will force payers' hands

Analysis

The patent cliff is dead. Long live pharma’s pricing power. The sector’s dramatic shift to speciality drugs has revived a debate about its ability to command a premium for its discoveries.

These trends have payers openly talking about how to combat big pharma’s market strength. The big question is how pharmacy benefit managers can hope to do so when old tools such as tiered cost-sharing and prior authorisation have more limited value against the increasing use of biologicals and a swing towards orphan indications.

“We’ve never had mass market products at these kinds of price points,” says Kevin Schulman, a professor of medicine and business administration at Duke University in North Carolina. “The industry has clearly changed their trajectory and their portfolio, and the rest of the market has to figure out how they want to respond or whether they can respond.”

Weak negotiating position

The situation is most acute in the US, where the government’s inability to negotiate prices with pharmaceutical manufacturers, along with multiple players in the private insurance market, has historically resulted in the highest prices of any country in the world. Prescription drug spending is expected to near an annual growth rate of 7% by 2020, and will be exceeded in percentage terms by only three other healthcare categories: non-physician professional services, home health care, and residential care.

Forecasters at the Centers for Medicare and Medicaid Services (CMS), who prepare the national health spending outlook, write that increases in prescription drug use by newly insured patients under the Affordable Care Act have the biggest effect on near-term spending increases – the growth in drug spending will only be 5% this year. Later in the decade price increases, a slowdown in generic switching and the aging population will combine to result in greater spending growth.

This is a sharp change from three years ago, when the sector struggled to replace the sales lost to generic competition as the patent storm reached its fury. In 2011 the net increase of $738m in sales from new drugs represented just a 4% gain from the value of sales lost to patent expiries, according to EvaluatePharma data. By 2020 the increase is forecast to be $52bn, five times the value lost. In the US, the difference is even starker, since in 2011 the sector actually lost ground because of patent expiry.

Swings and roundabouts: patent losses, new products gained ($bn)
2011 2012 2013 2014 2016 2018 2020
Worldwide
Sales lost from patent expired products (18.8) (37.8) (23.7) (25.5) (15.9) (16.7) (12.2)
Sales replaced 19.5 46.8 41.2 58.0 61.0 66.6 63.9
Change in sales 0.7 9.0 17.5 32.5 45.1 49.9 51.7
% of lost sales replaced 104% 124% 174% 228% 384% 398% 524%
US
Sales lost from patent expired products (15.5) (24.6) (15.0) (14.4) (9.9) (9.8) (6.4)
Sales replaced 3.2 24.9 22.9 29.6 27.0 30.7 28.0
Change in sales (12.4) 0.3 7.8 15.1 17.1 20.9 21.6
% of lost sales replaced 20% 101% 152% 205% 274% 313% 437%
Source: EvaluatePharma

What has happened to turn this around? Pharma and biotech’s R&D engines chugged to life as companies confronted the patent cliff, and the 33 new drugs and biologicals approved in 2013 and 43 in 2012 were a sign that the sector’s scientists were able to deliver new agents addressing unmet medical needs or better products in diseases with unsatisfactory treatments.

This era has seen the rapid advancement of new drugs in hepatitis C with few or no side effects and incredibly high cure rates, and oral treatments for multiple sclerosis with efficacies that rival injectable biologicals. Many of these new drugs are considered speciality products – defined as those costing more than $3,000 a month. These are often found on the highest “tiers” of US health plans, requiring the greatest amount of out-of-pocket spending by beneficiaries.

In 2014 the hep C drug Sovaldi, manufactured by Gilead Sciences, will cost $27,000 per month for each of the three months patients take it, while the oral MS drug Tecfidera, from Biogen Idec, is more than $4,000, according to data from EvaluatePharma’s Sales, Volume & Pricing module. Another aspect that helps put a drug in the speciality category is a need to infuse or inject it in a health facility, as is the case with many biologicals used to treat cancer.

Alarm bells

The growth of speciality medications is setting off alarm bells at payers’ offices. The pharmacy benefit manager Express Scripts, for one, forecasts that speciality spending will grow from about 35% of the total drug bill in 2013 to roughly half in 2018, says spokesman David Whitrap.

This period will see the introduction of expensive new hep C drugs – fuelling an incredible 1,800% rise in spending on the virus by 2016, Mr Whitrap says – along with new cholesterol-fighting biologicals in alirocumab and evolocumab that will probably cost thousands of dollars a month compared with perhaps $20 for Lipitor generics.

This is reflected in the skyrocketing pricetag of top-selling drugs, by revenues. This average rose from a median of $1,258 to $9,396 between 2010 and 2014, according to EvaluatePharma. In 2014, 30 of the top 100 drugs cost more than $25,000 a year, compared with 16 in 2010 (Biologicals and orphan diseases spark huge increases in US drug prices, September 25, 2014).

This rarefied air would have been considered the territory of the orphan drug just a few years ago, but now many products with huge populations are being launched at high prices. “The problem you get is when orphan prices go beyond orphan drugs,” says Bernstein analyst Ronny Gal, who recently published a note analysing the shift in pharma costs.

This is leading to an inflection point in 2016, Mr Gal says, something confirmed by the CMS projections, which indicate that every year after 2014 will see an annual spending rise of 5% for prescription drugs in the US.

How to respond

Mr Gal believes that payers will be forced into a much more robust confrontation of drug costs by 2016, and drug companies will increasingly have to justify their prices. Pharma has engaged in economic modelling for some time, but Mr Gal believes what it shows is illusory; manufacturers will need to up their game as PBMs become more assertive buyers. “Most of the drug companies right now are paying lip service,” he says. “There’s actually no real savings.”

Duke University’s Mr Schulman, who co-wrote an article on the topic of speciality drug spending in the influential policy journal Health Affairs, is not optimistic that pharma companies will be able to prove the cost benefit of these price rises. “We’ve had that argument for a long time. I think [it] has run its course,” he says. “This is back to 1980s pricing. It does raise the question about the fundamentals of the industry, the return of capital and the productivity. And how do we want to pay for innovation?”

Tighter management of the pharmacy benefit will be the answer. Old tools like generic substitution might not always work with very new categories of drugs – although in the case of high cholesterol, for example, payers will want to make sure that patients test the maximum tolerated dose of statins like Lipitor before moving to the newer biologicals.

However, a mix of old techniques like prior authorisation and newer ones like specialty pharmacies, and use of infusion centres in the case of biologicals will increasingly be applied.

Express Scripts’ Mr Whitrap cites research done by his company that indicates tight management of drug benefits – use of speciality pharmacies along with disease and utilisation management techniques – can reduce annual per member per year speciality drug spending increases from 27.8% in the case of unmanaged programmes to 13.6% in the strongest schemes.

Of course, another technique is plain old increases in patient out-of-pocket spending, enabled by the rapid expansion of insurance plans with four or more levels of pharmaceutical cost-sharing (Vantage Point – Four-tier drug plans thrust affordability into spotlight, February 19, 2014).

“I think that pharma and PBMs have gotten out of the business of making choices for you and are going to give you the opportunity to share,” Mr Schulman says. “It’s the patient-pharma relationship that’s going to be really toxic. The payer is just going to pass it through.”

With a challenging economic outlook emerging, the sector should probably refrain from enjoying its post-patent cliff salad days too much and instead get to work preparing for the price squeeze to come.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @JonEPVantage on Twitter

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