Is There A New Reality To The Drug Industry?

by: Leonard Yaffe

Summary

The recent agreement between Express Scripts and AbbVie has resulted is a sharp sell-off in the sector.

The deal is generalizable to other disease states, but there are also unique aspects that must be considered.

It is important to note that the removal of disease severity consideration in the Express Scripts agreement could offset the price discount.

While I was a sellside medical analyst (for decades), I always felt on top of the "medical knowledge". The two areas that confounded me were lawsuits, usually over patents, and economic concerns. Regarding the latter, whenever a loophole or excess existed, companies made a lot of money until there was a reimbursement change. This relates either to hospitals before and after DRGs, IOL pricing, physician referrals to a facility owned by the doctor, home healthcare payments and physical and occupational therapy payments to nursing homes. The cycle always lasted longer than one expected. As a sellside analyst, to sound the warning sign early meant to miss extraordinary gains in stocks, and as I just mentioned, the favorable performance lasted for years.

I say this because it has been known for some time that specialty pharmaceutical pricing, while not a loophole (except for orphan drugs) was unsustainably high. Specialty pharmaceuticals represent 1% of the prescriptions in the US, but 25% of the dollars spent, and if left unchecked, would represent over 40% of the dollars by the end of this decade. This includes categories such as MS, RA, oncology and Hepatitis C. With many drugs being approved that will qualify as specialty medications, it had become apparent that at some point, greater efforts would be made to slow down the overall growth rate of approximately 20% annually of this category. Prior efforts had included step therapy, prior authorization, contracting and cost sharing, but these had little effect. The announcement regarding an agreement between Express Scripts and AbbVie, based on cost (although the ultimate size of the market may be little changed due to the opportunity for all Hepatitis C patients, not just those with advanced fibrosis, to be treated), appears to be a more direct aim at controlling costs. Furthermore, it suggests the possibility that a similar tactic could be used to reign in spending growth in other disease states. This would resemble the therapeutic substitution that has occurred for years in drug classes such as statins, antidepressants and antiulcerants.

It is important to realize that there are several unique aspects as it relates to Hepatitis C pharmacotherapy. The first is that the duration of treatment is short, lessening the importance of dosing frequency and pill burden. Also, the relevance of side effects is reduced. Secondly, this category had become in excess of $10 billion very quickly. Third, the complications of Hepatitis C are often manifest over decades, and may not occur in a significant percent of patients. Therefore, with the establishment of a duopoly, it was ripe for a PBM to extract price concessions. It must be noted that, in exchange for a reduced price, treatment was opened up to all Hepatitis C patients, not just those with advanced fibrosis. Therefore, the total dollars spent may be similar with more patients receiving therapy. Given that our healthcare system, which represents 17% of GDP, is resource constrained, the question became "is it better to treat many more patients now with Viekira, or fewer patients for the most part with Harvoni?". This is debatable, but I know on which side I fall.

As for other therapeutic categories, many of the characteristics of Hepatitis C therapy are absent. This would especially be true in oncology. It is more likely that multiple drug approvals could result in lower pricing in RA, MS and cholesterol lowering (PCSK9s). However, I note that these are still extremely large in dollar terms. For categories that become newly established, drug companies may choose to enter with a lower price in order to mitigate the possibility of a dramatic price reduction. This would benefit the healthcare system, and would still result in significant profitability, dollars to fund R&D and a favorable return to shareholders.

Drug spending in the US represents about 12% of all healthcare dollars, but it is under great scrutiny due to the existence of many high priced medications. It may be that the new reality becomes lower entry price points but still excellent profitability for this valuable industry, and that would be a positive for all.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.