The Price Wars From All Sides

By Wayne Koberstein, Executive Editor, Life Science Leader
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On my first road assignment as an industry journalist in 1987, I visited Burroughs Wellcome in North Carolina’s Research Triangle Park (RTP). I had just attended the annual PMA (now PhRMA) Meeting, where many people in the industry crowd urged me to speak with the company about its pricing. BW had announced an estimated $22,000 price per year for the anti-HIV therapy Retrovir (zidovudine), setting off a dramatic reaction by AIDS activists, along with a good section of the public in general, to what was then a record expense for any drug. A short time before I arrived in RTP, the activists showed up at the company’s headquarters and chained themselves to a fence outside the front door. Health insurers and managed care groups were also in sticker shock and joined the outcry. So what was my first question to the CEO? “Please tell me, why is the price so high?”

Burroughs Wellcome had obtained acyclovir in a collaboration with the National Cancer Institute (NCI) to screen compounds for activity against retroviruses, setting up the expectation that the company would develop and make the drug affordable and thus thoroughly available to the already large HIV population. BW was owned by the U.K. company Wellcome, a commercial arm of the Wellcome Trust, reinforcing the expectation of a low-cost, publichealth- style distribution.

But the CEO, first reluctantly but then forthrightly, answered my question with a compelling account of the extraordinary development, scale-up, and infrastructure the relatively small company had to shoulder for the product — multiplied by the considerable risk factor of introducing a drug with serious side effects into a very sick population. Wellcome was also counting on the drug to help finance its continued research with antivirals. There’s a lot more to this story, but I will save it for another day.

The memory of that early experience came back to me recently when the managed care giant United Health acquired Catamaran, a large pharmacy-benefits management company (PBM), and the deal sparked a flash-fire of concern in the biopharma industry. Because PBMs negotiate prices on large drug purchases, the merger signaled a new level of bargaining power by a mega-sized health maintenance organization (HMO), which could mean lower margins for prescription drugs in a patient pool about the size of a small sovereign nation.

United Health already owned the PBM OptumRx, and the addition of Catamaran will reportedly give it pricing leverage over drugs totaling more than $1 billion in prescription sales. More and more, PBMs in the United States seem to be looking like the corporate equivalent of the U.K.’s NICE (National Institute for Health and Care Excellence) and other governmentrun agencies around the world set up to control drug expenditures. One large U.S. PBM, Express Scripts, previously announced it would not cover Gilead’s Sovaldi and Harvoni, two breakthrough Hep C treatments, at the company’s price of about $80,000 per course.

Does this trend mean innovative new drugs will now be rejected or reduced to the level of commodities in the United States because payers are gaining socialist- like powers over pricing? Or does it foretell the eventual consolidation of drug pricing authority into a single, government-administered system? In other words, is the long-held nightmare of the biopharma industry — the end of free-market pricing in the USA — coming true? And if so, does it spell the death of innovation in the country that has arguably subsidized new-drug R&D for the rest of the world?

Fair warning: at some points in the following discourse, you may wonder on which side of this debate I personally stand. Be assured that, as always, I am on the industry’s side. But there is much more to say, so please read on.

History Answers
Drug pricing is a complex issue, and Life Science Leader has readers on all sides of it. Brand-name sellers traditionally resent all forms of managed care; generics companies and their suppliers benefit immensely from managed care’s tiereddrug lists, co-pays, deductibles, and of course, generic substitution. More recently, though, the line between brand-name and generics businesses has blurred, and in an interesting twist, suppliers have their own challenges with their clients imposing commodity pricing on outsourced products and services.

Outside of the industry, the big picture is also full of opposing and overlapping views. Patients chafe at the shared costs and tiered lists but also at premium prices for brand-name drugs, and the argument that a prescription drug is worth more than a pricey consumer item like a bigscreen TV has never fazed them. Even for some generics, patients are reporting high price tags and co-pays of late. It is precisely because people need the drug for a condition they don’t want to have that they demand to pay as little as possible for it. Payers extoll medical advances in theory — and some have even recently put a bit of cash behind drug development — but they can often be short-sighted in their pinch-penny practices regarding new medicines.

In some ways, none of this ado about pricing is new. There is a long history of managed healthcare and its relationship to the U.S. biopharma industry — a history full of prescribing and pricing restrictions as well as negotiations, discounts and rebates, bundled-product contracts, and corporate consolidation on both sides of the table. Managed care hit the pharma industry in the 1980s, and its power has only grown stronger ever since; almost all U.S. employers with healthcare benefits imposed managed care plans on their employees in the successive decades.

HMO consolidation has always been part of the game, but the big players in managed care are reaching a critical point of power now, not so much because of the current large-scale expansion in health-plan coverage, but because of the increased IT power that allows the HMOs to monitor and control individual physician prescribing behavior. The union of HMOs and PBMs was an early phenomenon, though their origins were separate. At times, PBMs have also allied themselves with pharma companies, encouraging individual physicians to switch products they prescribed. But after decades of growth and consolidation, the HMO/PBM combinations have become that much more powerful, and nothing much stands in the way of their expanding influence.

In most legends, the heroes cannot slay the monsters until they understand them. In business, an equivalent maxim applies: When your customers become more powerful than you, learn everything you can about them and adapt to the pressures they present. Don’t try to be the immovable object in the path of an irresistible force.

Driven By Business
Although I’ve heard managed care described by industry people as “socialized medicine” ever since my first year in this business, it is actually a unique product of the U.S. free enterprise system. It essentially represents the kind of customer consolidation and, yes, blindeyed bargain-hunting that has affected other industries. I believe the biopharma industry can fight pricing pressure on philosophical grounds, but as long as managed care remains a profitable, growing business, it will continue to exist and biopharma companies will also have to adapt to it.

One of the conundrums the industry will need to address is the acknowledged lack of R&D productivity among Big Pharma companies in general, even during the pre-Recession days of double-digit sales growth and profits in the United States. The industry had never before seen R&D operations at the huge scale created by record spends and mega-mergers beginning in the mid-1980s. Yet the expected boost in new chemical and biological entities from those operations never materialized in proportion to the greater spending. Instead, the bulk of innovation ultimately came from the alliance of academic (NIH-funded) research and private (investor-funded) enterprise.

I first learned of the unique U.S. system of government-industry collaboration in drug research from Dr. George Poste, then the chief scientist and R&D head at SmithKline Beecham, in his keynote address at a PhRMA meeting in the late 1980s. Poste credited the NIH/industry partnership as a driving force in U.S. innovation. As with the polio vaccine and other shining examples of the industry’s heroic role in public health, the country had looked beyond politics to forge an effective compromise manifested in an industry-government alliance that turned out to be marvelously synergistic for many years.

Managed healthcare seemed almost sacrilegious when it arrived on the scene, very early introducing P&T (pharmacy & therapeutics) committees, drug formularies and therapeutic substitution, and the other measures already described. When I started writing about managed care about 25 years ago, I got hate mail from industry loyalists who wanted none of it; they just wanted it to go away. The notable exceptions once more proved the rule. But in time, companies began to deal practically with the emergence of something they really had no power to stop, and their managed care marketing departments then grew quickly, typically from small, isolated units of two or three people at headquarters to many more scattered around the country, wherever HMOs and PBMs held sway.

Physician-targeting sales forces, although expanding even faster than R&D in the same period, eventually began to shrink by the hundreds of thousands to what we see today. Meanwhile, direct-toconsumer advertising all but replaced the once-booming medical-journal campaigns, largely in the hope of stimulating enough patient demand to override payers’ prescribing controls. Industry also began to lobby the public heavily, flying the flag of innovation and counting on patients to insist they always get the best possible treatment.

But there was an uncomfortable truth that seriously undercut the industry’s position on pricing: For most of the time companies were expanding both sales and R&D, they achieved almost all of their revenue and profit growth through price increases, not by introducing innovative new products. Companies largely blamed the FDA for slowing NCE (new chemical entity)/ NBE (new biological entity) approvals, but at the same time, they were acknowledging their own internal problems by cracking down on their R&D people, imposing milestones and metrics in the vain hope of stimulating internal R&D “productivity.” Finally, nearly all big companies abandoned the internal “critical-mass” approach and turned to the academic/enterprise alliance (i.e., biotech) for more and more new products.

Battle To Win
Now you may see why I say the pricing issue is complex. At the same time, I believe managed healthcare cannot hold back the real public demand for the kind of therapeutic innovation we have all come to expect, by whatever means the industry manages to accomplish it.

Already, the principle of premium pricing for products addressing severe unmet medical needs, although currently overused for niche cancer drugs, has been established. Many patients can now challenge their healthcare providers for coverage without fear of losing their jobs, and public pressure on United Health and other healthcare giants will only grow stronger with time.

Yet the ante is also up for the biopharma industry, because routine annual price increases for less-than-innovative products will not fly, at least not without strong payer opposition. And unfettered premium pricing of niche products is probably unsustainable as the dominant biopharma business model.

At some point, I believe this industry will have to focus on broader markets that can produce another classic revenue driver: volume, multiplied by the advantages of an exclusivity period and a relatively profitable price structure. A steady stream of innovative new entities would make all other compensating maneuvers — buying off generics companies, product-driven M&As, etc. — mostly unnecessary.

Cutting costs of care matters to managed care, but it would matter more if HMOs could take out a big low-interest loan on the projected savings. A sudden spike in immediate expense in any business cannot be amortized. (Please, someone tell me if I am wrong about this; perhaps some HMOs do have accounting options for doing just that, though I’m sure they need good evidence to back it up.) I confess to feeling some compassion for the payers in confronting the sudden prospect of a huge bill for Solvaldi. They are accustomed to paying premium prices for niche products but likely not as prepared for products with such a large market as Hep C. As everyone knows who has dealt with the stock market, economics often favor short-term over long-term thinking.

Bottom line: I would just like to encourage the industry to get over its long-held us-vs.-them, everyone’s-against-us mentality. I would like to see biopharma companies apply some perspective-taking when negotiating with their business adversaries, even if they hide it behind a poker face. Cognitive scientists say one of the hallmarks of human intelligence is “theory of the mind,” or the ability to imagine what’s going on in someone else’s head. At this year’s DCAT Week, one speaker said “knowing what the other person wants” is the first essential step in any negotiation.

Still, I’m not advocating perspectivetaking merely as a negotiating tactic. I just ask the question: How will the industry ever get the love it wants and deserves from the public if it continues to isolate itself from the rest of society behind an air of resentment? It might be very effective to take the opposite approach — come to the bargaining table recognizing the effect your position might have on the other’s business. Come to patients acknowledging cost as a potential barrier to access. Try to avoid a situation where your price could look like a ransom — or at least be prepared to explain and justify it with equanimity.

Meanwhile, the industry as a whole should focus on the battle it could win — against the commoditization of pricing for innovative medicines, including specialty drugs that boost safety, efficacy, and compliance. Keep the focus on real, tangible innovation and be ready to bargain — even if (deep breath) the big bad specter of the single, central payer somehow replaces the present U.S. system. The industry and its supporters can make a strong case for protecting innovative biopharma as a public-health treasure worthy of generous rewards that also help ensure integrity, reliability, and trustworthiness of companies in the sector. The rest is negotiation.

So, you might ask, which side of the Price Wars am I on?

I am on all sides.

P.S. Whether you agree or disagree with the points I’ve made in this article, you may have your own say in the matter by emailing me or by posting a comment on the page for this article on our website.