The downside of pricing specialty pharmaceuticals too high

Most product managers in the biopharmaceutical industry lack background in health policy. That is unfortunate because it means that sometimes they lose sight of the forest for the trees. One such circumstance, unfortunately becoming more common by the month, is the pricing of newly launched specialty products. It almost seems as though there is a race to break records for the most expensive drug ever sold.

It is helpful to take a quick look back at how the industry got into this particular situation. It was only a bit more than thirty years ago that managed care began including coverage for prescription drugs as part of standard policies sold in the commercial market. At the time, insurers hoped that generous coverage of drugs would be an important tool to help them offset their major concern, the ever escalating cost of hospital care.

Instead of understanding the true nature of the situation and rising to the challenge, industry instead developed the “megabrands and mergers” model in which modestly differentiated treatments for chronic conditions like acid reflux, hypertension, and hyperlipidemia were launched with gigantic sales forces and big direct-to-consumer campaigns. This worked until the beginning of the century when payers realized they were still facing high hospital costs, but now also had unsustainable prescription drug costs as well. The result was the three-tier formulary which within a few years essentially destroyed all the previously profitable chronic disease categories and left the industry scrambling for new sources of revenue.

Biotech rode to the rescue like the cavalry in a Western movie, and many companies quickly reconfigured their portfolios to participate in the new scientific bonanza. Unfortunately, patient populations for these products were far smaller, and even with the significant cost-cutting of the century’s first decade, biopharmaceutical firms need extremely high unit prices to permit these products to match the revenue streams of the older “megabrands” they were replacing.

To the health policy community, this looks a lot like déjà vu with the industry on the brink of repeating its mistakes of the late 1990s. Perhaps the best example is oncology. Last year, FDA approved 13 new anti-cancer drugs, but only one may extend life by more than a median of six months. Two extended life for only four to six weeks. All cost at least $70,000 for a year of treatment. This represents a classic value gap, not unlike the conditions of 2000—2001, but with several more zeros to the left of the decimal point.

Managed care, the employer community, the Federal government, and even providers are becoming concerned and are preparing responses. Everything from dramatic increases in patient cost-sharing, to preferred drug lists, to mandatory comparative effectiveness research is under consideration.

How should brand teams respond to these impending challenges? First, they need to do a much better job of involving the payer community much earlier in the development process. Most companies don’t even start talking to payers until Phase III or later—which is a major source of irritation for the health plans. The markets for these products are entirely supported by third party reimbursement, so it is critical to understand what this community wants while product profiles are still malleable.

Next, products need to be priced to the actual value they deliver to the health care system, rather than what the market will bear or (worse yet) an arbitrary corporate ROI target. Finally, as the US healthcare system continues to change its payment mechanisms to reward clinical outcomes, companies need to be ready to put their own money at risk with novel contracting strategies.

Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. Let us hope that the biopharmaceutical industry will do a better job of learning from its past and paying more attention to the broader health-policy environment into which its new products are launched.

ABOUT THE AUTHOR

Kim D. Slocum is president of KDS Consulting, LLC (www.kimslocum.com). He works with life sciences companies, health plans, and healthcare information technology firms. Before founding his company in 2006, he worked for more than 33 years in a variety of pharmaceutical, biotechnology, and healthcare consulting firms. He is a frequent speaker and writer on the future of healthcare.