Biopharma Innovation — Value At Any Price?

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

In March I attended The Conference Forum’s R&D Leadership Summit. One of the panels that provided a great deal of insight involved executives discussing how to assess and create value for patients, payors, regulators, and society. This event employs the Chatham House Rule, which means “Neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” Despite not being able to reveal that info, I still think the ideas that were shared will prove valuable.

In particular, the following is a summary of a moderated Q&A on how, despite the valuable and innovative medicines biopharmaceutical companies create, society has railed against rising drug prices. Panelists discuss the current state of affairs and possible solutions for how the drug pricing-versus-value-delivered debate can be solved.

Moderator: We are here to talk about the value of biopharmaceutical innovation. Value subsumes a lot of issues —including cost — but also benefit, risk, and everything that goes along with it. Let me start by asking panelists to comment on how we got into this mess (i.e., the controversy surrounding drug pricing). Because in an ideal world, one would think an industry producing ever-better medicines to treat the afflictions of humanity would be elevated above all others by the benefiting population. But the opposite is currently the case.

Panelist #1: Part of the reason we are in this mess is that biopharmaceutical R&D has not traditionally focused on generating value in ways that are understood by the appropriate audience. When I joined this industry many years ago, we mostly looked at value through the eyes of the FDA, the prescribers, the payor, and then the patient (in that order). If you understand what matters to these stakeholders early on, you can shape your development program and set a product target profile that will truly differentiate, while meeting an unmet medical need. But not only do we need to have a better grasp of our differentiation from competitors, we need to do a better job of identifying the subsets of patients that can be targeted with a therapy, in such a way that payors know it will be limited to the appropriate people, used to produce value, and result in long-term benefits. For example, industry has developed a lot of products for rheumatoid arthritis (RA), and we have all sorts of endpoints. But where’s the value to society? I was recently at a talk where they were discussing how 20 years ago the RA medical community was focused on trying to correct RA caused deformities. Today these deformities virtually don’t exist. As we move forward in understanding how to develop our trials, we need to do so with an ability to demonstrate the value (similar to the RA example) to society, payors, and especially patients.

Panelist #2: While we should be proud of what we are doing, we need to recognize that we are in a shift. On one hand, we have unbelievable science, technology, and innovation taking place that address diseases of high unmet medical need. At the same time, we are all patients, and patients are struggling with the costs of healthcare. Though biopharma is but one element in the healthcare value chain, if we expect to change the narrative, we have an opportunity and a responsibility to do a better job in communicating what we bring. For example, biopharma R&D used to be mostly primary care. But as we continue moving toward personalized healthcare, biopharma R&D shifted toward developing more specialty-care products. Unfortunately, along the way we forgot to explain to society how very targeted solutions result in lower volumes and higher prices. We must do a better job of explaining the value to payors and regulators, being sure to show how these new therapies are more cost-effective, as well as explaining their long-term impact on the overall healthcare budget.

Panelist #3: One of the problems is that, despite the majority of biopharma people doing great and meaningful work, a few people doing really dumb things can be very attention grabbing. When this happens the industry is painted with a very broad brush of being out of touch with patients. Unfortunately, this is almost impossible to prevent. But the more you can work together in developing standards while making sure that people in the industry understand and communicate how even small missteps by one company can be devastating for all, that’s important in working to address the current state of affairs. For example, Gilead’s drug for Hepatitis C (Hep C), Sovaldi, has gotten a lot of negative ink for its initial price point. Lost in the conversation is how one of the largest medical institutions in the world, the VA, believes it can use this, as well as some of the other new Hep C medications, to eradicate Hepatitis C from its patient population.

Panelist #4: The problem we see today is a result of branded biopharmaceutical success. For example, generics right now account for 90 percent of every prescription in the U.S. If you look at doses, it is probably close to 93 percent. Yet generics account for 30 percent of cost. While many might argue that generics are taking over the market, their penetration really represent the success achieved by the branded side of the biopharmaceuticals industry. For the reason generics have such a dominate market position is because of all of the very good drugs that have been developed. But for the branded side of the business to survive, we’ve had to focus on ever-smaller market segments. Over time, this has put a lot of pressure on industry, which has elicited some bad behavior by a few stakeholders. I once worked at company where we produced a drug that was priced at about $9,000 a year. Some 11 years later it is about $57,000 a year. Such price increases for older drugs is not uncommon, and is partially being driven by less-productive biopharma R&D. While such approaches seem to have reached a breaking point, what really broke the camel’s back was the Accountable Care Act (ACA). As a result of the passage of the ACA, the consumer was brought into play, as ACA launched a lot of very high-deductible plans. While this provided many people with access to insurance, from a consumer’s perspective, having $8,000 to $10,000 deductibles before insurance kicked in was not perceived very positively. And it was at the pharmacy where most of these consumers experienced the dramatic increases in their out-of-pocket expenses. For those who had not been exposed to biopharma pricing before, , m Many patients faced paying the full list price — even though that is not the price the insurers were paying. Then, due to a lack of drug pricing transparency and a misunderstanding of how drugs are actually priced, avery activist consumer evolved. A consumer paying $1,000 to $2,000 per prescription who is trying to live on $25,000 to $30,000 a year, frankly doesn’t care that much about our R&D investments  or that it takes $2 billion to bring a drug successfully to market. We need to address the systemic issues, which are not just biopharmaceuticals and how we pay for them, but insurance and everything else surrounding healthcare.

Panelist #5: The foundational principle in this whole debate is who is going to discover and develop the next breakthrough medicines? In my view, the biopharmaceutical companies are the best suited to invest in a wide variety of high-risk areas (e.g., Alzheimer’s prevention, cognitive decline). But will these companies continue to take on such high risk if there is not a significant enough reward for them when successful? It seems the type of financial R&D commitments being made by biopharma companies is not registering with our society. Some companies have had terrible track records in trying to develop therapeutics for certain diseases, had zero return on their investment, and yet, continue to research diseases like Alzheimer’s, some for more than 25 years.

Moderator: It seems like we have a bipartite problem here. On one hand, R&D leaders are expressing the challenges faced with productivity issues and the huge investments made over long periods of time without a return. As only one out of every 10 drugs that go into human clinical testing ever gets approved, Americans are paying for the failure of the other nine. But these failures need to be paid for because all have had capital invested in them. If we want investors to invest in an industry that has a 90 percent failure rate, they expect a high return on the few successes achieved; otherwise, they are not going to invest in anything.

On the other hand, we have an issue with how society pays for medical care and drugs. If the patient is burdened with paying for a lot of their healthcare bill, there is a problem. Because regardless of what is charged, no matter how rational the pricing may seem, most Americans can’t afford to pay the full price for many services. For example, the average price of a coronary bypass surgery in the U.S. is $75,345. Such prices are the reason for why insurance exists. Part of the cause for America’s current drug-pricing frustration is a result of insurance no longer covering enough of the liability. We don’t hear people screaming about the high price of their hospitalizations or surgeries, because, by and large, insurance is still paying for these. If insurance reaches a point of not paying for a large percentage of a patient’s surgery or hospital stay, most likely we’d see the same level of outrage expressed toward hospitals.

It feels like a mess, so what do we do about it?

Panelist #1: Part of that problem is that we have a splintered reimbursement system, where the money that you spend on drugs may be more than compensated in terms of decreased hospitalizations and absenteeism, and with drugs for schizophrenia, decreased incarcerations. These are tremendous savings to society. We need to have a broader societal consensus about what value is, because new innovative drugs will never pay for themselves in the first year, if the only measure being used is reduced drug costs. But that is the way many payors currently look at the system. We need to be able to look at longer-term savings in an integrated value way, such that when value is clearly demonstrated, society is willing to pay for it.

Panelist #4: What we are seeing is a healthcare ecosystem going into failure. As such, we will soon see radical reform. Healthcare industry stakeholders have a decision to make — either lead the reform, or be led by it. In every healthcare industry sector we have seen mergers among stakeholders. Hospital systems, insurance companies, PBMs, and drug companies have gotten larger and more powerful, with every one of them fighting for every dollar. As a result, the finger pointing and placement of blame between these stakeholders for the current crisis has become excessive. Meanwhile on Capitol Hill, nearly every conversation is focused on healthcare reform. More importantly, not one of these industry stakeholders is free from being labelled as a significant contributor to the problem. This squeeze has applied a lot of pressure, which has resulted in a lot of bad behavior, as everyone tries to protect themselves. But we need to get beyond this and create a forum where dialogue can take place among healthcare ecosystem stakeholders.

In the United States we have the most expensive healthcare costs. This has created a negative cultural bias toward healthcare. We know that U.S. healthcare costs could be reduced by half with improved diet, increased exercise, and compliance with therapeutic prescriptions. When people with major cardiac problems don’t take their medicines, the cost comes back to haunt us in the form of increased emergency room visits and hospitalizations. It feels like U.S. citizens have zero accountability for taking care of their own health. Is this because society has created an environment where people expect to be taken care of? We are reaching a tipping point where we will soon see tremendous scientific breakthrough therapeutics. My concern is if people are only interested in complaining about the price, when these breakthroughs arrive in the market, the system we have in place won’t be willing to pay for them.

Moderator:  The U.S. spends about $3 trillion a year on healthcare, which is about 18 percent of GDP. Healthcare will soon be one fifth of GDP. U.S. per capita healthcare spending is more than twice the average of other developed countries. So it isn’t just drugs, but the entire healthcare delivery system. Are we going to be able to change the cultural healthcare issue in a country where people overeat, resulting in a population where one-third are considered obese, and half are considered overweight? Many of the afflictions killing U.S. citizens are tied to this one problem. As we can’t wave a magic wand to fix diet and exercise, we need to go to the next level, which is a systemic issue with high healthcare costs. A study of the historical trends in the National Health Expenditure Accounts (NHEA) showed that from 1960 to 2013, the health spending share of GDP increased from 5 percent to 17.4 percent. Over the same period, average annual growth in nominal national health expenditures was 9.2 percent compared to nominal GDP growth of 6.7 percent. Even after adjusting for economywide inflation, the average annual health spending growth exceeded that of GDP growth by 2.4 percent. The fundamental issue is —we are spending too much on healthcare and not getting enough benefit from our spend. If we say we have the best healthcare system in the world just because it is the most expensive, then aren’t we looking at the wrong metric? According to the WHO’s ranking of the world’s healthcare systems, the U.S. ranks 37. How can drug companies be part of the solution?

Panelist #5: Clearly, it is up to biopharma to address the R&D failure rates as a contributing factor to rising drug prices.

Panelist #1: But that 90 percent failure rate is probably too low. Because of the 10 percent that succeed, many fail in the marketplace because they don’t address an unmet need. The key part to being successful in bringing new drugs to market is demonstrating value and having an aggressive target product profile. We need to get away from the belief that an FDA approval, along with enough good TV commercials, can make any product profitable. R&D leaders need to take a tougher look at their programs before they go into Phase 3 trials and cost a few hundred million dollars.

Panelist #2: While some think public shaming of biopharma is driving down drug prices right now, I actually believe it is market-driven pressure, which is how our system is supposed to work. Shaming may be a part, but it is a small part. If you look at the consolidation in the market, the exclusionary formularies, and the added competition of Hepatitis C drugs, for example, that is what drives prices down. With regard to R&D, yes, the bar has to be higher, as another “me-too” drug is not good enough. I am supportive of generics, because in my opinion, the more generics we have, the more money people have in their budgets to pay for innovative drugs. While there is a lot of excitement surrounding bringing new technologies into drug development R&D — which could be quite game changing — it is still taking us far too long to go from discovery to approval. How can we bring in new technologies when we want and need to show value in other areas?

Panelist #4: Biopharma hasn’t done a good job of understanding the value of our products. I am not an expert in putting together pharmacoeconomic trials. And even if I were, it isn’t about doing a trial and saying, “Look at how much value there is.” It is having an understanding of the true value of what is being developed. You’re starting to see it in places where biopharmas are taking on risks and actually delivering on results. For some drugs, that will work. If we don’t truly understand the value, how are we going to price it appropriately or take risks to allow us to capture the upside value? The other thing I think would be very helpful for our industry is to adjust our behaviors. For example, biopharma talks a lot about innovation. Yet we put tremendous amounts of money into protecting franchises, as opposed to putting it back in R&D. For example, Humira, a tumor necrosis factor (TNF) blocker with multiple indications is a drug currently making about $14 billion a year. The compound’s patent expires this year. From a company perspective, AbbVie is doing the exact right thing and has put in about 110 patents that will probably keep competition out of the market for anywhere from three to eight years. So while that product avoids generic competition, by fighting to remain branded it is preventing about $50 billion that could be coming back into the system and paying for new drugs. I’d like to see us call a truce and allow branded companies the opportunity of perhaps 12 years’ of patent exclusivity. During this time period nobody can challenge the patent, but more importantly, branded companies cannot do anything to extend the patent either. I think we’d put a lot of lawyers out of business, while also allowing a lot of dollars to come back into funding innovation. But to do this would require biopharma to fundamentally change its business practices.

Moderator: What if we set the principle that a drug should be allowed to be priced based on the value it provides without a particular reference to what it costs to get it there? Right now there are questions as to what a company should charge for a new drug (e.g., what the market will bear, the cost of development). Let’s say there was an independent academic group that could look at the drug pricing/value problem more objectively. Take Hepatitis C drugs for example. On average, drugs like Sovaldi provide about $250,000 per person benefit to society by curing the disease within more than 90 percent of people in 12 weeks with no side effects. Would it be fair to say that the innovator company ought to get a percentage of that value, say 20 to 25 percent, and society gets the rest? But the problem you’d probably run into is who is society, because the insurance company is the one paying for the drug, and they are not necessarily getting the $250,000. Is there a way of advertising such an approach to drug pricing in a way that the burden doesn’t fall disproportionately on any one party (i.e., the insurance industry)? Because the benefits of such an innovation will accrue to society, and the company that brought the innovation is incentivized by getting a financial piece of the benefit.

A second principle was alluded to by panelist #4, which is a branded biopharma being enabled to get a high return for a defined period of time that can’t be extended. This principle enables innovation, and those innovations eventually turn into very cheap drugs — forever. That is another part of creating societal value. Finally, if you are given that defined patent period that allows for a high return, there should also be an agreed-upon percentage (i.e., 20 percent) that gets plowed back into R&D.

Panelist #1: One thing we must not lose sight of is the incentive for innovation. The science having advanced the way it has and the opportunities to improve human health are critically important. But to get there we need some principles that reward true innovation and those who invested in that innovation.

Panelist #3: We haven’t talked about the rapid adoption of biosimilars, which has the potential to hugely impact healthcare costs across the U.S. The U.S. is one of the countries in the world where innovation is perhaps adopted the most rapidly. We have 90 percent genericization of small molecule drugs. Yet in the biosimilars space, which is hugely expensive and becoming one of the biggest healthcare cost burdens, the adoption of competing products is very low, as is the price pressures. Adoption of biosimilars represents a huge opportunity to recoup some money back to society. Biopharma is deluding itself if it doesn’t think the prices of biological drugs are not high. In a world of curing cancer where we are combining products with three or four different mechanisms of action, all pushing price points of $120,000 to $150,000 a pop, that’s not sustainable. We have to figure out how to price these biologics and biosimilars in a way that’s sensible, delivering value, but at prices that are affordable.

Panelist #2: There are two challenges to having a robust biosimilar industry. One is development costs. We have to work with our regulators to find a way to do this more cost-effectively. The average cost to bring a biosimilar to the market is $200 million to $300 million. That’s too high, especially if one of the goals of having a biosimilar on the market is to create competitive pricing. The second challenge is the fact that the biggest barrier to biosimilar adoption is the legal system that was put in place with the act. Companies with a biologic are spending tons of money to put patents in place. Half of the biosimilars that have been approved in the U.S. have not launched simply because of patent litigation. We have to find a more rational way for biosimilars to be a low-cost alternative.

Panelist #5: There is one point that breaks the circle, which we have to just accept, and that is sometimes it is not about value but affordability. There are plenty of really expensive cars that I would love to drive, but I simply can’t afford them. There are other cars I can drive, but these cars won’t save my life. When it comes down to saving one’s life, affordability takes on an entirely different language.

Also, biopharma needs to take a closer look at the cost structures of their companies. A large biopharmaceutical company is perhaps investing 20 percent in R&D, but what about all of the other money being spent on things like  DTC advertising, commercialization, etc.? If a biopharma can’t grow without taking price increases on all of its products, should it be allowed to continue? Taking a harder internal approach to managing costs would most likely drive increased R&D productivity.