By Allan L. Shaw, a five-time public company CFO (e.g., Serono & Syndax) and has served on five public boards, which included the chairing of two audit and two compensation committees.
Today we bear witness to a “golden age” for biopharmaceuticals. With all of the exciting/ innovative science, growing scripts, increase in drug approvals, and record revenue, it’s difficult to call it anything else. This is all occurring as the healthcare (HC) ecosystem is embarking on unprecedented change to fundamentally reform the HC system to squeeze out excessive inefficiencies/waste before it bankrupts the system. Maintaining the industry’s momentum while navigating a changing environment will be extremely difficult, particularly in the face of pressures to curtail increasing healthcare costs and the growth in spending on medicines. What does biopharma need to do to operate within the resource confines of its ecosystem to enable optimal patient access to innovative medicines while fostering alignment among stakeholders?
Healthcare’s economics historically have been substantially volume-based, with very little correlation to outcomes, which contrasts with almost any other industry. Could you imagine purchasing a car if manufacturers did not stand behind its performance? Given global cost-containment initiatives, the ecosystem is evolving into a value-based system whereby accountability and outcome-based reimbursement will supersede the volume-based model currently in place (e.g., risk-sharing by NICE [National Institute for Health and Care Excellence]). For example, price controls in the rest of the world have put pressure on capturing profitability in the U.S., while the share of total branded drugs purchased by the U.S. continues to decline annually and is now approaching 30 percent. This will completely change how the game has been played; commercial success will depend on demonstrating a product’s “value proposition” based on clinical and economic evidence. Clinical evidence will need to encompass head-to-head comparisons with the “standard of care” to demonstrate value-differentiation and provide better labels. This new reality will reward truly innovative medicines in noncompetitive categories while facilitating the extinction of “me-too” branded products. Of course, in many disease states, both of these issues are being addressed simultaneously, as novel drugs are being tested in second-line combination therapy with an inexpensive generic agent as first-line therapy. A secondary benefit of this paradigm is that all patients are given active treatment. For example, in the lucrative type 2 diabetes market, an experimental drug versus placebo is often being tested in combination with metformin, which is provided to all patients in the clinical trial.
“To continue its prolific pace, the biopharma industry needs to embrace the changing healthcare system.”
Ideally, a value-based system will provide a framework to rationalize pricing and optimize resource allocation. With that said, the devil is in the details. What is value, and how do you prove it? There are many factors to be considered, including disease and patient management. In my opinion, a drug’s value is determined by its comparative effectiveness to the standard of care. Underscoring this point, Europe has been practicing referencing pricing and requiring “standard of care” comparator arms in clinical studies for many years. Determining “cost-effectiveness” (e.g., evaluating both pricing and efficacy versus standard of care at appropriate doses with sufficient sample size, double-blind trials, etc.) will be critical in allocating limited healthcare resources. While it may be “more art than science,” I offer the following thoughts concerning establishing the value proposition:
- Need to evaluate the cost-effectiveness of an innovative therapy versus the standard of care.
- Generate and capture data to render a more cogent decision regarding pricing.
- Do the clinical results provide empiric estimates of relative efficacy and safety as compared to the standard of care?
- Create a strategy for developing the value proposition for new drugs, including price-sensitivity estimates, and for identifying the appropriate health economic endpoints that should be included in Phase 3 and even Phase 2 trials to allow pharmacoeconomic modeling to optimize commercial outcomes.
- Outcome data is critical for demonstrating and maximizing a product’s commercial value while facilitating patient access. For example, in the absence of overall survival benefit, the combination of progression-free survival and health-related quality-of-life outcomes versus the standard of care in a well-designed trial is likely to lead to positive evaluations from regulators and payers.
While the pace of change at times is akin to watching Muhammad Ali use his “rope-a-dope” strategy to wear down his opponents, changing the way business is conducted is inevitable and well under way. The recent Sovaldi debate over the treatment of hepatitis C underscores this. It revealed the significant lack of alignment with our managed care reimbursement criteria and their correlation to outcomes (Pharmacy Benefit Managers’ [PBMs’] emphasis on minimizing current-period costs over HC system costs). The Sovaldi debate highlighted the need for further systemic evolution to produce alignment (and common risk pool), particularly in the case of outcomes that have 20-year horizons. This situation also highlighted the PBMs’ emerging purchasing power given recent consolidation in the space. The payer market is no longer fragmented, as three PBMs will soon control approximately more than 70 percent of the commercial market given recent consolidation, along with Medicare part D dominating its market segment. While we are still far from a single payer system, the PBMs are currently defining the debate. This was illustrated by Solvadi decreasing in price by nearly 50 percent since losing its monopoly in this market, giving rise to many strategic/commercial questions on how to maximize contracted prices. Examples of the PBMs’ enhanced negotiating power are evidenced by the increasing prevalence in restricted formularies and coupons, representing a fundamental shift in market access to contain costs. As launch preparations are being made for PCSK9, a monoclonal antibody that will be prescribed in combination with generic statin drugs to lower cholesterol and to potentially lower coronary risk, it will be interesting to see if any lessons were learned.
CHANGE IS INEVITABLE
As pricing headwinds continue to swirl, the disparity in gross-to-net pricing has never been greater, and the increasing prevalence of combination therapies of branded drugs does not help the situation, particularly in a capitated pricing/ bundled environment. Given that fundamental change is inevitable, isn’t it better for biopharma to have a seat at the table than be on the menu? If we don’t instigate change, the shifting regulatory, public, and political environments will, and those terms will be far less favorable to the biopharma industry.
To continue its prolific pace, the biopharma industry needs to embrace the changing healthcare system. We need to do a better job of defining value and determining pricing that does not bankrupt the system. Particularly given the macro dynamics, we are approaching a breaking point that will require ”commercial innovation” that generates new engagement strategies to maintain/ increase patient access, along with emphasis on cost-effectiveness. There needs to be a better understanding of the market dynamics that reflect the competitive landscape and patients’ needs that correlate to the industry’s resource allocation and will better inform and optimize drug development activities.
The focus needs to be patient-centric: putting overall health and outcomes at the core of every decision, shifting the emphasis to value as opposed to costs and profits. Branded manufacturers need to proactively take a lead in such discussions to better define the debate to positively influence the outcome. Good, truly innovative science that addresses unmet medical needs or provides outcomes that are better than the standard of care will continue to be reimbursed reflective of their value to patients/ outcomes. But branded drugs that are not adequately differentiated will be denied access. The strategy of creating the successful health ecosystem of the future starts with the right intent. Successful commercial innovation requires doing what is best for the patient and putting the patient at the center by improving health and outcomes and decreasing costs. Medicare is leading the charge from fee-for-service to innovative models based on improved HC outcomes at lower prices. These changes may prompt us to consider the following:
- We may determine that our business isn’t only about drugs.
- We may need to re-evaluate our pricing models.
- We may need to restructure our business.
- We may consider extending branded exclusivity to enhance patient access and ensure adequate returns.
- We may have to reevaluate how we do our research and what should be considered as clinical evidence.
- We may consider reassessing the molecules we study and the science that we pursue.