As the US government ponders changes to how the Medicare program reimburses physicians for drugs administered in their offices, no company has more at stake than Regeneron Pharmaceuticals (NASDAQ:REGN). The program for the elderly and disabled spends more on Regeneron's macular degeneration treatment Eylea than it does on any other single agent that must be injected by a healthcare professional.
Eylea is one of six drugs on which the federal government spent more than $1bn in 2015, which together account for more than a third of drug spending by part B of Medicare. These trends highlight where the program's stress points are, and how a combination of government action and biosimilar competition could change the revenue picture for companies like Regeneron, Roche (OTCQX:RHHBY) and Amgen (AGMN) that specialize in complex biological products (see table).
The eyes have it
Wet age-related macular degeneration (AMD) is, as the name suggests, a disease of the elderly and thus it is not surprising that the $1.8bn that Medicare spent on Eylea in 2015 represented 41% of global sales for the drug - and indeed, 44% of Regeneron's revenue. When combined with the $1.2bn Medicare spent on Roche's Lucentis, nearly an eighth of all drug spending in part B can be ascribed to this condition.
With so much of its revenue coming from Medicare, Regeneron would be uniquely exposed to changes in how the program reimburses physician practices for the drugs that patients cannot self-administer - these drugs are covered by part B, which reimburses physician practices and other non-hospital institutions.
Growing at 9% a year, drug spending in part B has increasingly become a focus of health policymakers who hope to restrain costs by ending the buy-and-bill method of reimbursing physicians (Pricing debate puts Medicare drug reimbursement in play again, April 18, 2017).
With four of the top 10 drugs, Roche, too, has some exposure to changes to part B payment policies. Rituxan, Lucentis, Avastin and Herceptin consumed $4.5bn in spending. As a share of Roche revenue, however, Medicare accounted for much less - just 9% of total worldwide revenue. In addition, biosimilar competition is likely to emerge for Rituxan, Avastin and Herceptin in the next couple of years, meaning sales for those three agents will be in decline anyway.
On the other hand, Roche's new drugs Perjeta and Kadcyla could come under pressure in future. These are ranked at number 43 and 51 respectively, and represented $272m in part B spending, a number that is likely to grow as they are recent launches.
A similar situation confronts Amgen, whose Neulasta represented $1.3bn in Medicare part B spending in 2015, and is likely to confront copycat versions within a few years. However, this company is also seeing growing Medicare spending for its denosumab franchise of Xgeva and Prolia, which was in the seventh position and nearing $1bn Medicare spending in 2015, and thus could have greater concerns about reimbursement than Roche does. The $2.2bn Medicare spent on Amgen's top two drugs constituted 10% of its total revenues in 2015.
Try and try again
The Centers for Medicare and Medicaid Services last year targeted such high-cost items when it sought to change the buy-and-bill reimbursement system - in which physicians are paid the average sales price (ASP) plus 6%. The agency wanted to trim the markup to 2.5% plus a flat fee of $16.80 per injection; the idea was that it would give physicians an incentive to use cheaper drugs, but the proposal was withdrawn after widespread sector opposition.
At a manufacturer price of $980.50, Eylea would have been similarly reimbursed regardless of the markup calculation. Nevertheless, Regeneron joined the opposition on the grounds that this would "unduly incentivize use of off-label repackaged/compounded products over other FDA-approved products that are subject to comprehensive safety, efficacy, sterility and other handling standards".
The subtext of this objection is the use of cheaper compounded Avastin, which has been used successfully by many ophthalmologists to control wet AMD.
The latest spending restraint recommendation, coming from the Medicare Payment Advisory Commission (Medpac), does not alter the ASP-based payment calculation, but does call for rebates when the ASP rises faster than inflation - that should not be a threat to Regeneron, which has not taken a price increase on Eylea since at least 2013. Regeneron did not respond to an enquiry seeking its position on the Medpac recommendation.
However, the Medpac recommendation also calls for a competitive bidding framework to be instituted by 2022 - a suggestion that would allow Medicare to play Roche off Regeneron at a time when both companies would be looking to maximize revenue as their agents near the end of their market exclusivity.
With drug pricing still a hot topic among political leaders, government spending on Eylea and other biological agents used heavily by Medicare beneficiaries will be under pressure. With a significant chunk of revenue at stake, Regeneron, Roche and Amgen will need to pay close attention to how the debate matures.
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