Big pharma pushes pricing debate around a corner

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For two years US payers have been rattling sabres over the high prices for the newest drugs that cure hepatitis C, reduce heart failure mortality and extend cancer patients’ lives. They have now started to see results.

Novartis has offered outcomes-related discounts for Entresto in the US, while Lilly teamed up with the health insurer Anthem to lay out necessary policies for increasing use of value-based pharma contracting. Combined with Merck & Co’s well-calculated price for the latest hep C offering, Zepatier, it seems that early 2016 might be a turning point in the pricing debate.

Given the hand-wringing over the industry’s image at last month’s JP Morgan healthcare meeting, it is not too surprising to see big pharma taking a more proactive role. This could be of little use, however, to biotech investors who have ridden the bull market for four years based on a wave of new drugs, only to have it falter as pricing entered the spotlight (JP Morgan – Sector searches for ways to turn pricing debate, January 13, 2016).

Better tools

In Novartis’s fourth-quarter earnings call, pharma chief David Epstein said an outcomes-based reimbursement scheme had been agreed with two undisclosed US insurers, in which the base rebate would be adjusted around whether Entresto achieved reductions in heart-failure hospitalisations and, as a result, saved those health plans money.

Mr Epstein acknowledged that payers were becoming more sophisticated in their economic evaluation, saying: “I think the new thing that we really learned with both Entresto and Cosentyx is that they have really now developed their tools extensively around introduction of new drugs. That’s why we are trying to move to more outcomes contracts, get value for additional life and for offsetting health expenses.”

In heart failure, with much of the competition already generic – including Novartis’s own Diovan, which represents one half of the Entresto combination – showing the economic as well as clinical benefit is essential. Novartis set a $4,600-a-year price for Entresto; by comparison, national average acquisition cost of Diovan generics is about $240 a year at the heart failure maintenance dose, according to data from EvaluatePharma’s Sales, Volume & Pricing module.

Entresto demonstrated an improvement in mortality and hospitalisation over a standard of care treatment, enalapril. This benefit has failed to translate into the launch trajectory envisioned by analysts, with the drug having recorded just $21m in sales in its first six months on the market; Novartis has blamed formulary blocks that have only begun to ease.

Anthem’s song

The case of Lilly and Anthem could have a little less immediate effect on pricing, but it is a sign that the former company wants to position itself as a responsible player. The partnership with Anthem – which is on the verge of becoming America’s biggest insurer by number of enrolees should its acquisition of Cigna complete – produced two white papers analysing barriers to proactive value-based contracting.

Among them are FDA regulations limiting drug developers’ ability to discuss clinical benefits with payers before approval, which leads to erroneous assumptions about costs and patient numbers; anti-kickback prohibitions, which could be applied to value-based contracting; and federal law that grants Medicaid programmes the best prices available even if that price is set as part of a value-based scheme.

A major focus of the Affordable Care Act and US health programmes has been increasingly to implement payment based on performance. In the past this has largely targeted hospitals and physicians – these consume a much larger share of health spending in America, but neither is growing at the double-digit rates that prescription drug spending is (Thanks, Gilead – double-digit spending growth driving tougher payer line, December 3, 2015). It now looks like payers are starting to understand better how to pay for drugs as a service rather than a commodity.

This might be an unfortunate state of affairs for healthcare investors who believed that the good times would never end. Innovation and pricing power were two engines that drove the biotech bull market, and it is now clear that the latter could not be sustained.

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

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