With Repeal And Replace Dead, Biopharma Still Has Plenty On Which To Focus

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

Not long ago I had the opportunity to go to an invitation-only event attended by some of the biopharmaceutical industry’s biggest thought leaders. At the time, Repeal and Replace of the Affordable Care Act (ACA) was a priority for the new administration. But now that it has failed, you might be wondering what else should folks in biopharma be paying attention to?

Plenty.

One of the speakers provided a wide variety of insights for attendees to consider. But as this event employs the Chatham House Rule, I can’t reveal the name of the speaker. However, I would like to share this highly credible person’s thoughts on what biopharma should focus on.

What Has Changed And Where Does Opportunity Reside?

the speaker first provided a macro review of what has changed over the past year. The first big change was the U.S. election results. And while this sent shockwaves throughout the world, Europe experienced an earthquake of its own — the United Kingdom’s decision to “Brexit” from the European Union. The two strongest remaining EU anchor nations are France and Germany, and both seem to be struggling with internal competition. “There are a lot of internal challenges (e.g., terrorism), rising political stars, etc., facing these two countries,” the speaker shared. And while many believe Donald Trump won the U.S. election as a result of campaigning on putting “America First,” as you can see with the outcome of the UK EU exit, the U.S. is not alone in the “go it alone” thinking. While we know that the EU has been good for industry and globalization, what happens if Germany and France also decide to put their countries first? Might the European Union’s days be numbered? According to this speaker, the biopharmaceutical industry should pay close attention to EU developments Because though biopharma tends to look toward the U.S. first when coming up with new drugs, Western Europe and Japan are a close second and third. “If Western Europe changes further, this will impact how biopharma invests R&D monies,” they concluded.

Whether you are a fan of the U.S. election outcome, the consensus seems to be that the new administration is, by and large, business-friendly. That being said, the primary challenge facing the new administration involves how to prioritize what issues to tackle first, second, and so on, as there are so many things that need to be addressed. Now that repeal and replace has failed, what should the new administration focus on? Is it tax reform, immigration, defense, or perhaps infrastructure? If tax reform, is it corporate first, individual next, and then on to the controversial border tax? Or will the administration get stuck working on comprehensive tax reform, which has the potential to be a quagmire?

From this speaker’s perspective, there are two low-hanging fruit opportunities for the new administration — deregulation and repatriation. One of the initial orders from the new administration was that for every new regulation implemented two old ones must be removed. “In some ways, this means as much as tax reform, especially for those highly regulated industries like financial services, oil and gas, automotive, and biopharma,” the speaker shared. With regard to repatriation, many believe that for the first time in a long time, the stars are becoming aligned for this to become a reality. “I was highly involved in the big repatriation that occurred in 2004 when there was about a half trillion dollars of capital stranded in Europe,” the individual commented. Letting that money come back to the U.S. allowed companies to strengthen balance sheets, financial plans, and invest in R&D. This time however, we are looking at approximately six times that amount (i.e., $2 trillion to $3 trillion). “The two biggest sectors where money is stranded overseas are technology and biopharma. Pharma would benefit immensely should repatriation happen.”

A Perspective On Drug Pricing And PBM Power

There are some interesting changes regarding healthcare and pharma, the first being the fast-growing debate on price versus value. Another is the emergence of pharmacy benefit manager (PBM) power. Currently, about 70 percent of prescription drug volume is controlled by three PBMs — ExpressScripts, CVS Caremark, and OptumRx. And while there was much outrage over Sovaldi’s initial cost, it was the competitive marketplace and the subsequent follow-on Hep C drugs that created price competition and rebates of up to 50 percent. “This type of situation is a positive and something industry has to be aware of in terms of what can happen if you have very high pricing on certain products,” they shared. Not long ago there was a trend of companies moving away from developing “me-too” drugs. One wonders if this lack of branded competition is one of the reasons why industry has so struggled with its drug-pricing image.

Another significant change is the increase in enrollees in high-deductible plans (i.e., from 25 to 50 percent in just the last five years). This has primarily been driven by employers offering commercial plans that push employees to take on a greater percentage of healthcare costs. Employees used to pay about 30 percent of their healthcare, but today it is more like 50 percent. When you add in the fact that list price of many brand drugs has doubled in the last five years, is the societal blowback we have seen over drug pricing really a surprise? Some believe health savings accounts (HSAs) to be an important way for people to become more capable of paying for innovative medicines. But the reality is that when it comes to healthcare budgets, these funds tend to get used up pretty quickly. “In the end, employees and individuals have to fend for themselves,” the speaker noted. “How can this be expected when in the richest country in the world, 57 percent of Americans cannot even write a check for $500! They don’t have the money.” Faced with this reality, and the fact that we have a disproportionate aging population, shouldn’t lawmakers be doing everything possible, such as creating more incentives, to encourage personal savings.

Last year involved a lot of drug-price finger pointing. On the one side you had PBMs claiming to create a competitive marketplace by using bargaining power and their ability to extract massive rebates. On the other side you had branded drug companies claiming PBMs benefitted from high pricing schemes since PBM rebates and fees went up along with the price of drugs. “It is counterproductive for private sector entities to be attacking each other,” the speaker stated. “These two industries must work together to address intertwined problems, otherwise a government-managed pricing system could be spurred to fill the void.”

One of the positives from last year was a few pharmaceutical companies voluntarily taking a proactive approach to address drug-price increases. But despite all of the focus on this topic, it is important not to forget that drugs still account for about 14 percent of total healthcare costs, with 90 percent of drug volume being in the form of generics. “Under ordinary circumstances, the U.S. is a very competitive generic market, usually priced at cost to manufacture plus 20 percent,” they shared. “However, they should be available at even lower prices.”

Internal Rate Of Return (IRR) For Biopharma R&D

The IRR on pharma R&D is still causing anxiety among those who invest money in the biopharmaceutical industry. “IRR on invested pharma R&D has been unsatisfactory for the past decade,” the speaker noted. “In fact, in many years of the last decade, IRR has been below the cost of capital, which is not a sustainable situation.” Massive pressure has been applied on CEOs to start sending money back to shareholders, as opposed to investing further in R&D, because activist investors were not confident the IRR on R&D was worth it. “This is a very important phenomenon to pay attention to, because we are at a stage where innovative tools have the potential to make a dramatic impact on biopharma R&D,” this individual attests. “That is if the money is available.” One way to improve IRR is to encourage elected leaders to mandate a pro-innovation FDA. But beyond just policy, the FDA needs resources to fill its large number of vacancies.

What Can We Do Collectively As An Industry?

One of the first areas where the industry can improve is developing more effective arguments and educating the public on the societal value of biopharmaceutical R&D. “When our new president is talking about taking bids from drug companies on Medicare, you can see that we have a lot of education to do,” the speaker shared. “Because once we start negotiating on Medicare, we have created a buying monopoly, which is the forerunner of price controls.” This individual believes that price control in the biopharmaceutical industry would deter investors from staying the course, as they would not have a strong sense of what type of return a risky molecule might generate at the end of a 10- to 15-year journey. Competitive Medicare bidding could lead to narrower formularies of commercial plans that decide to follow the government’s approach to being a PBM.  

Industry also needs to do a better job of communicating how biopharma is a force for doing good. Current polls around drug pricing have tarnished the public’s perception of biopharma, ranking it near the bottom with the likes of tobacco. This issue isn’t helped by the fact that hospital costs are reimbursed at over 90 percent, while drugs are reimbursed at about 75 percent. Further, most people aren’t aware that investment in biopharmaceuticals provides a higher societal return than nearly every other business sector. This individual suggests that industry can’t rely on trade associations to be biopharma’s primary advocates. “There are more than half a million people involved either directly or indirectly with the biopharma ecosystem,” the speaker stated. “These folks need to take a bigger advocacy role in educating the public on the value provided by the U.S. life sciences industry.” In addition, this person suggests biopharmaceutical companies learn about payer-benefit cost methodologies, being sure to include as early as possible in their R&D planning cycles. “For example let’s say a company is working on a product to improve sleep,” they state. “And let’s say the average cost is $.40 a day, and that the new molecule is maybe 20 percent better. It may be a problem getting reimbursed at a dollar a day for such a new product when it comes out on the other end. We can’t spend $200 to $800 million on developing a drug when we don’t have a sense of the return on investment. Further, with these new molecules, if to be properly priced on bringing more value, that value should be a 300 to 400 percent improvement over what presently exists.” In other words, if developing a product that only brings a 20 percent improvement, spend your R&D dollars elsewhere.

The flow of new products has improved from about 25 annual FDA approvals to right around 40. However, the commercial value per molecule is still not very good (i.e., the average cost of R&D across industry is not being covered by the average value of every new molecule approved and launched). Many new drugs coming to market have had terrible commercial uptake. While some face obstacles of National Drug Code (NDC) blocks or tier-three or tier-four formulary designations, are these commercial problems the result of insurance companies wanting to restrict access or because biopharma didn’t ask the questions before making the R&D investment? “It’s no longer just safety and efficacy, but utility, and it is utility that needs to permeate every aspect of an R&D organization’s DNA,” this speaker attested. “If payer’s methodologies are different, and you think you can make them better, then communicate this with payers early on.” For example, when it came to treating Alzheimer’s disease, payers were not initially including the cost of caregivers. But if the patient becomes institutionalized, it’s a lot more expensive. Helping payers in developing better methodologies is extremely important if one hopes to get the proper return in certain categories.

Want To Get Patients To Stand By Biopharma’s Side?

One of the speaker’s suggestions was to get patients to stand by biopharma’s side. I have been at plenty of conferences and witnessed powerful speeches by patients speaking to drug makers on the value their product brought to them. But isn’t this approach, while a very feel-good moment, just a bit of “preaching to the choir?” How can we get these patients to share their positive feelings toward biopharma more broadly, such that mass media wants to share it throughout the world? Recent events (i.e., United Airlines) demonstrate the power of social media. And while we think that only bad news can drive such a social media firestorm, remember the ice bucket challenge of 2014? With 10,000 boomers daily going over the age of 65, there is no shortage of patients benefitting from the innovations driven by biopharma. This large and highly active audience has a lot of power. “Patient power is not only a big driver of healthcare, but it helps loosen up regulatory obstacles, as well as to get better treatment from payers,” the speaker stated. “While our approach of B2B worked well in the past, biopharma needs to get better at B2C.” To do this requires aggressively going after new opportunities, such as accessing real-world data, patient experiences, and population health outcomes, while also properly-measuring cost savings. Genotypic and phenotypic correlations are being developed, and when combined with burgeoning data-science knowledge such as the ability to structure and analyze data from different sources (e.g., real-world experience, EHRs, claims, post-marketing surveillance) and the use of biomarkers to better stratify patients for early experiments, biopharma should be much more enabled to demonstrate value.

Finally, this speaker implores industry to do a better job of showing how drugs save costs throughout the healthcare system (e.g., disease prevention, reduced employee absenteeism). It is estimated that one out of every five healthcare dollars is spent on caring for people with diabetes in the United States. The diabetic care spending ratio is even worse for Medicare, as one in every three Medicare dollars is spent on treating diabetic patients. Diabetic drugs allow patients to better manage diabetes, providing significant savings throughout the system by preventing expensive amputations, many of which are paid for by Medicare. While it is important to ensure patients have access to these medications, it is also critical for biopharma to highlight the value and cost saving being generated by industry. “Let’s accelerate our learnings of what’s possible so we better collaborate with government regulators, payers, patients, and providers, while also effectively demonstrating and communicating the value the biopharmaceutical industry brings to the world,” the speaker concludes.