Compounding Pressures: Multiple influencers push for U.S. drug prices to be tied to value, outcomes

A version of this article first appeared in Private Healthcare Investor in July 2016.
 
Despite criticism, drug prices are still rising. Besides the complex issues of development, regulation and competition, and the bevy of price variables such as insurance contracts and pharmacy benefit manager formularies, pricing has also become inextricably linked to the industry’s growth model. U.S. pharmaceutical, medical and biotechnology merger and acquisition deals hit a record $296.9 billion in 2015, a 28.7 percent increase from 2014, according to a Mergermarket report. Meanwhile, a 2015 Bloomberg analysis reported a 63 percent annual jump in the median Ebitda multiple paid to acquire pharma and biotech companies—the biggest annual increase since 1998.
 
Rising drug costs stir debate, but it’s pricing rationale that lies at the heart of the issue. How do some justify a high price tag, while others receive criticism? What kind of value do they offer patients and clinicians? Are high valuations of pharma and biotech companies justified? Pricing pressure is cited as a risk by 89 percent of life sciences companies, according to the 2016 BDO Life Sciences RiskFactor Report.
 
As the pharma industry and investors try to work out answers, external forces are already pushing value-based pricing up the health care supply chain. The pharmaceutical industry will soon find itself needing to do more to inform its stakeholders of individual products’ measurable outcomes and differentiating benefits to ensure these factors are considered in influencers’ value efforts.
 
Providers and PBMs Are Building Value Frameworks
Providers are doing deeper analyses on costs and questioning whether potential outcomes are really worth a drug’s price tag. Cancer treatments have been a particularly active area, with Memorial Sloan Kettering Cancer Center introducing its interactive DrugAbacus tool and the American Society of Clinical Oncology (ASCO) releasing a framework to help physicians assess the value of new cancer therapies based on the benefits, toxicities and costs. CVS and Express Scripts, two of the biggest U.S. pharmacy benefit managers, both announced moves this year to push more value-based pricing tied to indications for cancer drugs.
 
Payers Are Exploring Alternative Pricing Models
The Centers for Medicare & Medicaid Services (CMS) announced in early March that it will start testing new models to improve how Medicare Part B pays for prescription drugs, which totaled $20 billion last year, to give physicians greater incentive to select high performing drugs.
 
Commercial insurers are also testing alternative pricing and emphasizing tiered drug formulary lists as guides for patients. Such patient decisions will become increasingly influential as consumers bear more care costs: from 2009 to 2013, total cost sharing per inpatient hospitalization rose by 37%, according to a June 2016 article in JAMA Internal Medicine, driven primarily by deductibles and coinsurance.
 
Deriving Dollar Value from Outcome Value
Pharmaceutical companies that can measure and explain their differentiated value propositions should be able to create opportunities to price according to the higher value they deliver.
 
Consider the drug Ampyra, which helps about 40 percent of multiple sclerosis recipients improve their walking. Manufacturer Acorda Therapeutics offers Ampyra for free for the first two months. If it works, the patient is charged the $21,000 per year price; otherwise, there is no charge.
 
Performance-based pricing models surfaced earlier this year in an agreement between Novartis and two major health insurers around its heart drug, Entresto. Novartis offered Cigna and Aetna a base price for Entresto; if they don’t see readmissions and mortality rates drop among heart failure patients, they receive a rebate. If the drug does reduce hospitalizations and death, Novartis receives a bonus. Novartis’ CEO has indicated more outcome-based pricing deals may be coming.
 
What happens when a truly innovative drug cures a disease, or offers a similarly significant improvement? Patients and providers may value it in the tens of thousands of dollars, but can they pay for it? It’s the issue Gilead Sciences confronted with Solvadi. A three-month course of treatment for the drug proven to cure patients with chronic hepatitis C costs $84,000. Amortizing expensive drugs’ costs is one proposed solution.
 
Investors Must Weigh In
M&A activity is expected to remain very active this year. As investors consider whether to buy, sell or grow businesses, they must also ask the tough questions that have traditionally been dismissed in the pharma industry:
  • How does a current, or new, drug stack up to competition? What benefits can justify a higher price?
  • What is the cost of research and development? Is the potential outcome worth the time and resources?
  • What cost effectiveness calculations have been done?
  • Have alternative pricing models been considered? What are the challenges? Where can they be tested?
  • What measures can improve price transparency?
  • What value does the drug offer to patients? Can it be better explained? Could performance-based pricing be considered?
Shedding Pounds
The pharma industry can no longer afford to operate status quo. Improved transparency around the various components that determine drug pricing is needed to better reflect value. Pharma companies would be well advised to consider shedding some of the price “padding” they have traditionally added to their drug prices. Investors and management must start asking the hard questions about how and where they can start to initiate changes without discouraging innovation—and before change is dictated for them.