SPECIALTY DRUG PRICING WORTh RISKING PAYOR WRATh

specIalty Drug prIcIng:

Worth risking payor Wrath

On December 23rd of last year, the Nasdaq Biotech Index (NBI) dropped dramatically, plummeting nearly 300 points in one day and losing 8.5 per cent of its value. Despite the fall, the NBI, which tracks the performance of the most important Nasdaq-listed biotech companies, had an exceptional 2014 gaining over 35 per cent overall. In fact, the NBI has been one of the top performing indexes for the last fi ve years, driven largely by increasing FDA approvals for new drugs, strong M&A activity and increased earnings.

So, what’s so important about one poor trading day during one of the most signifi cant bull runs in biotech history? The cause of the decline on December 23rd.

Before market open, Express Scripts, one of the largest pharmacy benefi ts managers in the United States, announced it would exclusively reimburse Abbvie’s newly approved Hepatitis C drug, Viekira Pak, in return for a signifi cant discount to the list price. Most importantly, this deal froze out Gilead and its more expensive hepatitis C virus drug Sovaldi from the 25 million people in Express Scripts National Preferred Formulary.

While the threat of a pharma pricing war was largely blown out of proportion - the losses in the NBI were recovered in a matter of days - Express Scripts’ deal was perceived by market watchers as a shot across the bow to drug companies that were used to more pricing leverage.

As the landscape shifts going forward, these are the important themes to watch.

Specialty Pharma Continues to Push Premium Pricing

The poster child for pricing in specialty pharma is a drug called Acthar from Mallincroft. It was fi rst discovered over 50 years ago to treat infantile spasms and, until recently, sold for $50 per vial.

Over the last fi ve years, Acthar has increased in price from $50 to $1,650, to the current price of $28,000 per vial, which translates into more than $100,000 per treatment course.

While that may seem high, it’s in line with many high priced specialty drugs, and particularly the ones that treat rare pediatric conditions like infantile spasms.

The vertiginous - and most often justifi ed - pricing of rare disease drugs is the extreme example of specialty drug pricing. Combine the robust pricing with the fact that more and more traditional drugs are going generic, spending on specialty drugs is in line to surpass that of their traditional counterparts by 2018, according to data from market analytics fi rm Artemetrx (see Table 2).

Payors Are Fighting Back with More Exclusionary Deals Likely to Come

Health plans and pharmacy benefi t managers, like Express Scripts, have been very vocal about their opposition to high drug pricing. The Hepatitis C market in particular has been a lightning rod for this frustration following Gilead pricing their Sovaldi treatment at $84,000. Considering there are three to four million Hepatitis C patients in the U.S., the combination of pricing and patient numbers will result in a potentially massive bill for payors.

Table 1: Examples of Specialty Drug Pricing

DRUG Humira Soliris Kalydecko Naglazyme Solvaldi Gleevec COMPANY Abbvie Alexion

Vertex Biomarin Gilead Novartis INDICATION Infl ammatory Conditions Paroxysmal nocturnal hemoglobinuria Cystic fi brosis Maroteax-Lamy syndrome VI Hepatits C Multiple forms of cancer ESTIMATED ANNUAL OR TREATMENT COURSE PRICE $50,000 $440,000 $275,000 $375,000 $84,000 $95,000

Table 2: Forecasted Net Prescription Drug Spend %, Traditional and Specialty, For Commercial Plan Sponsors

Source: Artemetrx

With the Abbvie/Express Scripts deal, the business plan from the payor side is clear: they are ready to give exclusivity, and therefore limit patient and doctor treatment options, for a discount.

And while many have scoffed at this kind of deal as disease specific - the argument is that Hepatitis C has a finite pool of patients providing an incentive to discount and grab market share - payors are making it clear that their intentions are to move into other disease areas.

The CEO of Express Scripts, George Paz, speaking at the J.P. Morgan Healthcare Conference in January, highlighted cancer and cardiovascular as two areas they could potentially use formulary exclusions to get discounted drugs.

What do Hepatitis C, cancer and cardiovascular all have in common? These diseases have new (and expensive) classes of drugs where price competition can be created. The greater the competition and the more similar the drugs, the more leverage payors have to exclude them for pricing reasons.

Some Areas Will Continue to Support High Prices

As pricing pressure continues to mount in some areas, there are other drug classes that will be minimally affected or not affected at all. These are the areas that drug development companies should be focusing on, and where investors will see strong returns.

Drugs with strong pharmacoeconomic data that quantifiably reduce healthcare costs will continue to drive high pricing.

Even in the case of Sovaldi – Gilead’s HCV drug - most payors reimbursed it because the pharmacoeconomic data was strong. For example, using the drug resulted in a significant reduction in hospitalization and the need for expensive surgeries for hepatitis C patients. And while this component is so important to pricing, it’s amazing how many companies continue to run Phase 2 and even Phase 3 studies without collecting parmacoeconomic data.

Rare Disease Drugs

The highest priced drugs on the market are currently rare disease drugs and many market pundits don’t expect any significant pushback from payors in the foreseeable future.

Rare disease drugs continue to represent a relatively small portion of payors’ budgets, and these drugs treat high unmet medical needs in often vulnerable patient populations. Most importantly, there are usually no other treatments options for these patients. Payors have the choice of reimbursing high prices, or letting patients suffer or even die.

Table 3: Payors Other Drug Utilization Management Tools

STEP EDIT Prior Authorization Co-insurance Pay for Performance PATIENT MUST FAIL OThER LESS ExPENSIVE ThERAPIES FIRST Require authorization based on proper diagnosis Require patient to pay certain percentage of drug cost Pay for drugs further to successful pre-determined patient outcomes Limited number of prescription refills

True Innovation

Too often, drug developers have tried to price high with little innovation. These aggressive pricing strategies include certain reformulations that may increase patient compliance, or drugs with incremental benefit.

The pricing of these drugs could come under serious pressure in the future. A widely mediatized example is Sanofi’s Zaltrap, a cancer drug whose price was halved after doctors refused to pay the $40,000 price because they considered lower-cost options just as effective.

The other side of this is that meaningful innovation should and will continue to get rewarded with high pricing.

True breakthroughs are those that provide significant leaps from current standard of care, or treat diseases where patients have no options. Wall Street is currently modeling pricing for the potential CAR-T immunooncology cancer therpapies in the $350,000 range and similarly for the gene therapy treatments that are being developed at companies like bluebird bio. That pricing range is likely not far off the mark.

Healthcare systems around the globe are under pressure to reduce costs. Needless to say, drug companies have a role to play - even if forced to in certain circumstances - to keep costs in check.

Payor pushback and pricing in general are key factors that feed into drug development and investor decision making. Following the correction in December, the NBI has reached new all-time highs in January. It seems that investors agree - the prospects of new therapies in areas of continued strong pricing outweighs the risk of payor pushback.

Roberto Bellini is the President and CEO of BELLUS Health Inc.

To see this story online visit www.biotechnologyfocus.ca/ specialty-drug-pricing-worthrisking-payor-wrath