With the recent news of pharma’s frustration with more price controls around the world, John Avellanet, frequent Biotech Blog poster and author of Get to Market Now!, is grinning right now for having predicting a strengthening of such price controls back in 2009 and in 2010. Here is a brief interview with John, covering price controls, comparative effectiveness, personalized medicine, and other industry trends.
BiotechBlog: In your book, on p. 32, you noted an expectation for the role of NICE and other cost-efficiency-driven healthcare agencies to expand. What’s changed since then?
John Avellanet: Last year the new government in the UK announced it was planning significant changes to the role of NICE and a shift to “value-based pricing.” Pharma firms were very excited about this change, but as I told my regulatory intelligence newsletter subscribers in October last year, “Value-based pricing will price drugs according to their clinical value to patients.” In other words, as I pointed out in Get to Market Now!, cost of a drug is being directly equated with efficacy and safety. Medicine approval and reimbursement simply has to be based on efficacy and safety. The greater the efficacy and safety of the drug, the greater the price.
BB: So you see this trend increasing?
JA: Without question. The US’s recent initiation of comparative effectiveness studies under the aegis of the Institutes of Medicine, and the pilot parallel review programs of FDA and CMS – these are just baby steps toward more value-based pricing. Let’s face it, you can’t have a situation where the latest product is only 5% better but comes at a 75% premium – not in this economy. Private insurers and prescription management firms in the US started a number of these comparative studies last year because if they don’t get healthcare costs under control, they’ll go out of business.
BB: What driving this cost-containment push? The economy?
JA: Well, a lot of factors are actually converging – the weak global economy is only speeding the problem to be right now rather than 2 or 3 years from now. This was always going to happen because you have many powerful trends coming together: costly knowledge specialization, aging demographics, growing globalization, diversion of regulation and technology, and so on. I spend significant time looking at a lot of these trends in the book – the entire first half of Get to Market Now!
If you look at all these trends together, it becomes pretty clear that no matter how you slice it, healthcare costs simply have to be capped. Now, there’s lots of ways to do this, but that’s not the point of the book.
Instead, with Get to Market Now!, I tried to answer a more pressing question for pharma and biotech firms: “How can we still bring new innovative medicines to market for less cost?”
BB: A lot of companies out there are offering specific solutions they claim will speed time to market and reduce development costs. How does the book handle this?
JA: I avoid all those specific one-offs claiming to be silver bullet solutions. If it were that easy, we wouldn’t have this challenge, would we?
I walk readers through what’s worked for other industries faced with similar challenges, why it’s worked, and how to apply these lessons in pharma today. And I offer a lot of examples of drug and biologics firms successfully applying these techniques. There’s over 113 different tactics in the book that work, so readers can pick and choose what will work best for their organization. I’ve also got discussions with FDA officials, case studies and so on.
BB: So the book isn’t just about the dialogue, it’s about what has worked for other and what is working in pharma and biotech today?
JA: Correct. And thankfully, a growing number of industry executives, venture capitalists, and industry publications have deemed Get to Market Now! a success. It’s certainly generated a lot of interest because of both the analysis of the trends we face today and all the various tactics the book lays out, from using voice of the customer in preclinical, to quality by design throughout development and the post-market, to taking advantage of Foucault’s panopticon in regulatory compliance. The key is to use the regulatory constraints to your advantage.
I always say, “Think of regulations and reimbursement rules as the boundaries of the field. Now within the boundaries of the field, you can play any game you want or any combination of games. But the regs are the lines you can’t cross. So within the boundaries of the field, play to your strengths and everyone will cheer.”
BB: Do you see these tactics also applicable to personalized medicine?
JA: Yes, and perhaps even more so. Remember, with a one-size-fits-all drug, you’ve got a huge percentage of the world’s population as potential customers. With personalized medicine, your potential customer base shrinks dramatically. If you can’t streamline development and put into play as many of the tactics in the book today when you’ve at least got the revenue base from a one-size-fits-all drug portfolio, how are you going to put them into play when you’re revenue has shrunk by 80%?
That’s the worry of a lot of the executives that bring me in to talk them through how to better apply these tactics to their companies. We know the tactics work – all the historical data from other industries proves it. So how can we start tailoring and applying them today, right now, before it’s too late?
For more on Get to Market Now! Turn FDA Compliance into a Competitive Edge in the Era of Personalized Medicine, visit the book’s dedicated resource site for readers, www.Get2MarketNow.com. Mr. Avellanet has made the first chapter free for download, plus a number of free mini-tutorials on some of the tactics from the book. The book is available through Amazon.com, Barnes & Noble, and the publisher, Logos Press.
This is a student paper from the 2010 final projects in the NIH Foundation for Advanced Education in the Sciences’ TECH 366 — Biotechnology Management. The students were asked to tell a story based on the course lectures, and to expand with general lessons on biotechnology company management.
Profitability and Orphans: The Role of Price and Incentives in Four Different Markets
Drug development is long, expensive, difficult, and complex. Due to the high cost of drug development, many companies will not consider developing a drug unless there is the potential to have a “blockbuster” with $1 billion per year in sales. There are two main factors that influence a drug’s ability to get to this $1 billion threshold: market size and price. As the size of the market increases, the relative cost per drug can decrease and vice versa. Traditionally, pharmaceutical companies have tried to maximize the market size for a product while keeping prices relatively modest (1).
Many factors influence the decision to enter the market with a novel compound. Some of these factors include development costs, the competitive landscape, the present unmet medical need, the intellectual property position of the compound, and the potential market size. Over the course of the semester I became particularly interested in learning more about drug pricing and how a drug’s final price can influence the decision to enter a new market. In this paper I will review some of the basic considerations that influence the price for pharmaceuticals. Subsequently, I will consider the use of the Orphan Drug Act as a tool to incentivize drug development for rare and neglected diseases that would not be profitable under the traditional model. In particular, I will focus on four categories of drug indications and consider how novel drug pricing models and the Orphan Drug Act provide incentives to drug development. In some cases these forces work together to create profitable products with the benefits of an orphan drug designation, while in other cases drugs truly can’t reach blockbuster status but can none the less take advantage of orphan incentives.
To begin, we need to consider how price is traditionally determined for drugs and biologics. Not surprisingly, the price of a new pharmaceutical is often set by the same factors that influence the price of any consumer good. First, it is important to understand the present value of products in the market. Then, the added value of the new product over existing products is determined (2). This straightforward approach is complicated by several additional considerations. First, the health care system is unique from many other markets in that the person who receives a good or service (in this case a pharmaceutical) is usually not the payer. Instead, a third party (often an insurance company or government program such as Medicare, Medicaid, and the Department of Veterans Affairs-VA) pays the cost. In many cases the interests and willingness of the third party to accept and pay a particular price may be different than the interests of the person receiving the drug. Another consideration when pricing a drug is whether to set price based on all costs plus a margin for profit or charge as much as the market will bear. Again, the price that is reasonable to a patient may not be the same as the price a third party will consider.
Over the past few decades an alternative approach to reach $1 billion in sales has emerged. Specialized treatments, mainly for specific types of cancer and rare diseases, have come to market that offer great benefits to a small patient population. The $1 billion threshold market reality made it very difficult for many years to develop drugs for rare and neglected diseases. The Federal Government addressed this in 1983 with the passage of the Orphan Drug Act, which was designed to provide a number of incentives to encourage drug development for these indications (3). A drug is eligible for orphan status if it affects less than 200,000 people in the United States. For the most part this program has been highly successful, as the number of drugs approved for rare conditions has accelerated greatly in the years since the act was passed (4). Some of the incentives to develop orphan drugs include a 50% tax credit for clinical development costs, a seven-year market exclusivity for approved products, the waiver of licensing fees, protocol design support, and grant support. Intriguingly, some companies have been able to take advantage of these orphan incentives and have also been able to develop very profitable drugs. How is this? Companies have been able to use market pricing strategies to charge high prices for drugs that offer significant benefits. In this case the company is getting the double benefit of orphan designation and substantial revenue.
The remainder of this paper reviews four different broad drug indications that are eligible for orphan designation: therapeutics for rare diseases, targeted medicine, neglected diseases, and medical countermeasures. This review is not exhaustive, but highlights what I see as general trends for these different drug classes. I examine the market size and price potential for these products and attempt to explain why they were (or were not) able to achieve blockbuster status.
The first example is therapeutics for rare diseases. In large part, drugs for these indications have been able to enjoy the benefits of orphan drug designation and large revenues. This approach was pioneered by Genzyme, and has since been successfully followed by other companies. Since these drugs typically only affect a few thousand people in the U.S., they are eligible for orphan status. In addition, drug manufacturers have successfully charged very large amounts and have convinced insurance companies and other third party payers to cover the cost of these drugs. The reason is that in many cases these are life saving products that significantly improve patient quality of life. From a cost standpoint, it is less expensive for the third party payer to reimburse the very large price for the treatment than to pay for alternatives that would otherwise represent the standard of care. Since there are no alternatives, the company can charge $100,000-$300,000 per year for treatment and receive payment (5). By charging hundreds of thousands of dollars per treatment course for only a few thousand patients, the company is able to reach the $1billion threshold and take advantage of the additional incentives offered under the Orphan Drug Act.
The second example involves therapeutics that are selected based on specific patient criteria or clinical biomarkers. This approach has been called personalized, stratified, or targeted medicine (for clarity I will use the term targeted medicine throughout). The concept in this case is to identify a biomarker that targets therapy to a particular population that has a high likelihood of response to the therapeutic. In theory, this is an attractive option since the patient population that is most likely to respond to the drug has been pre-selected, and therefore clinical trials should be shorter, cheaper, and faster. The benefit to industry comes as the targeted therapy identifies a patient population that is significantly small enough to qualify for Orphan Drug status. Using these principles, a product can require less time to gain approval, which essentially extends patent protection while also enjoying the benefits of orphan incentives. Critics question why a company would chase down a market that is deliberately being made small as this approach runs contrary to the traditional blockbuster drug model. However, this model can be useful if it allows the drug to reach market quickly, where it can generate revenue and open the door for additional approvals for other indications.
This targeted medicine approach has been highly successful for several products. In these cases drugs reach blockbuster-type levels of sales and can enjoy the benefits of orphan drug status. Two well known examples are Novartis’s Gleevec and Amgen’s Epogen. Gleevec originally received orphan status for patients with chronic myelogenous leukemia. Over the past decade the drug has gone on to gain additional approvals and now is licensed for seven orphan indications and 10 indications overall (6). Even with these multiple indications the total patient population remains relatively small (between 50-100,000 patients), and since this drug is so effective the company is able to charge a premium (estimated $40,000/year) and third party payers are willing to pay (1, 7). Epogen follows a similar story. Originally granted orphan status and approved for anemia due to end stage renal failure and anemia associated with HIV, Epogen was later approved for anemia caused by chemotherapy, a large and lucrative market. Sales of Epogen were more than $2.5 billion for 2009 (8).
Neglected diseases represent a third group of indications that have taken advantage of orphan designation. While these diseases have a high prevalence worldwide, they are rare in the U.S. and are therefore eligible for orphan status. Unlike the previous two examples, however, the price and revenue achievements of neglected diseases have been much more modest (9). Several considerations help explain why these products can enjoy orphan incentives but generally do not charge a premium or generate large sales. Since many of the people affected by these diseases live in developing countries, the sales potential of these products is small. This is because private citizens can’t afford the products and insurance or other third party payers do not exist. Once licensed, special pricing strategies and partnerships are established in these countries to supply these drugs at no or an extremely reduced cost. From this we can see that even though the affected population is large, payers can only afford a very small price.
Recognizing this drug development challenge, the U.S. Government appears ready to take a different approach to accelerate efforts to license products for neglected diseases. Recently the National Institutes of Health (NIH) launched the Therapeutics for Rare and Neglected Diseases (TRND) program in the Office of Rare Diseases Research (10). In March 2010, this office released a Request For Information (RFI) to identify compounds that show promise for rare and neglected indications (11). NIH is particularly interested in compounds that have been halted for strategic or financial reasons. The RFI states that the Government plans to license and develop some of the most promising drug programs. This decision by the Government is essentially an admission that these indications do not present a potentially profitable market. Without sufficient market forces to drive development in these areas, the Government plans to sponsor and perform the work internally to improve the greater good. This approach is not unprecedented, since a similar governmental effort was made to develop drugs and vaccines for allied troops against tropical diseases and biological warfare agents during World War II (12). As the above examples illustrate, the potential patient population for neglected diseases, while large, generally lives in developing countries where the capacity to pay a premium for life saving drugs is very limited. As such, the price companies can charge is very low and offers little motivation for product development. Non-profit groups and governmental agencies are generally the only entities that will develop drugs for neglected diseases. In this case, orphan designation alone does not provide sufficient incentive for industry to develop these drugs.
The final category of products to consider is medical countermeasures (MCMs). These are products to be used against emerging health threats, pandemics, or chemical, biological, radiological, or nuclear terrorism threats. For the most part these indications represent very limited markets where the U.S. Government is the only buyer, and as such it is reasonable to consider these drugs for orphan designation. In fact, companies have used this approach for the approved products cyanokit (for cyanide poisoning), pyridostigmine (for Soman nerve gas), DTPA (to accelerate the removal of americium, plutonium, and curium from the body) and Prussian Blue (to accelerate the removal of cesium and thallium from the body). Sponsors have also applied for and received orphan designation for anthrax and smallpox treatments, though these products are not yet FDA approved (13).
What is the pricing situation and revenue potential for these products – are they more like targeted therapies or neglected diseases? On the surface, there is the potential that these products may be able to charge a price premium, since they fill a critical need against lethal agents. However a variety of political and economic issues make it difficult to imagine that these products will provide substantial returns due to a high price. Federal laws passed in 2004 and 2006 created a $5.6 billion fund to incentivize development of MCMs. This fund is for the procurement of MCMs that are FDA approved and demonstrates that there is a market for these products. Unfortunately the number of new MCMs has been very limited over the past 5 years and since there are few products to buy, portions of the fund have been directed for other purposes. Some experts have argued that this fund needs to be substantially increased to provide a greater incentive to industry to develop products for all of these threats (14).
I think there is little chance that this will happen for several reasons. First, the government deficit is at record levels and I believe there is little political will to substantially increase spending. In addition, the Government tends to pay the lowest price for drugs that it buys for the VA and the Center for Medicare and Medicaid Services (15, 16). Finally, there is the 2001 example of price negotiations for Ciprofloxacin (Cipro) between Bayer and the U.S. Government. Cipro is effective against anthrax, and the Government was interested in purchasing large quantities of the drug during the anthrax letter scares. Typically the Government would pay a wholesale price for Cipro. At the time, Cipro was patent protected in the U.S. but was off patent in many countries, so generic versions of the drug existed and were readily available overseas. Some members of Congress threatened to use compulsory licensing (a power the Government has to approve any drug it chooses, usually to allow it to buy a generic at a significant cost savings) to purchase generic versions of Cipro if Bayer did not agree to the lower negotiated price. In the end, the U.S. Government negotiated the price down to one-fourth the wholesale market price (17, 18). I believe the Government would use this same tactic to purchase any MCM during a public health emergency. Finally, much of the research and development costs for MCMs are being paid for by the Government as opposed to private industry. In this case, since the Government has assisted (and funded) a company to develop the MCM, an argument can be made that they should be able to purchase the final licensed product at a discounted price. For all these reasons I believe that MCMs can enjoy the incentives afforded by orphan drug designation but will not be able to generate substantial revenue by charging a premium price.
Drug pricing plays a significant role in the decision of whether or not to develop a drug. With a $1 billion per year revenue goal, companies can reach this amount based on the number of patients treated and the cost per treatment. For indications that can’t reasonably be expected to reach this $1 billion mark via a high number of patients or a high cost, other incentives such as the Orphan Drug Act have been developed to incentivize the development of rare and neglected diseases. For the most part this Act has been a great success, and in some cases companies have been able to develop products that enjoy the orphan incentives and also generate substantial revenue. These cases involve rare diseases and targeted therapies where there is a substantial benefit of the therapy and payers that can afford the high price charged. Neglected diseases and MCMs can benefit from orphan designation but are much less likely to generate significant revenues. It remains an open question if additional incentives should be considered for these indications that continue to be developed at a slow pace.
1. Trusheim, M. et al., Nature Reviews Drug Discovery, 6:287-293, 2007.
2. Gregson, G. et al., Nature Reviews Drug Discovery, 4: 121-130, 2005.
3. U.S. Food and Drug Administration, Orphan Drug Act, http://www.fda.gov/forindustry/developingproductsforrarediseasesconditions/overview/ucm119477.htm, accessed May 27, 2010.
4. Cote, T. et al., Nature Review Drug Discovery, 9: 84-85, 2010.
5. Friedman, Y. Building Biotechnology, 3rd Edition. Logos Press, p 157, 2008.
6. Gleevec package insert. http://www.pharma.us.novartis.com/product/pi/pdf/gleevec_tabs.pdf, accessed May 27, 2010.
7. Orphan Drug Market Catches Pharma’s Eye. Yahoo Finance, http://finance.yahoo.com/news/Orphan-Drug-Market-Catches-ibd-2653919238.html?x=0&.v=1 Accessed May 27, 2010.
8. Amgen Press Release, January 25, 2010, http://www.amgen.com/media/media_pr_detail.jsp?year=2010&releaseID=1378596 Accessed May 27, 2010.
9. Villa, S. et al. International Journal of Health Planning and Management, 24: 27-42, 2009.
10. National Institutes of Health, Therapeutics for Rare and Neglected Diseases, http://www.rarediseases.info.nih.gov/Resources.aspx?PageID=32 accessed May 27, 2010.
11. Program to Advance Development of Drug Candidates for Rare and Neglected Diseases, https://www.fbo.gov/index?s=opportunity&mode=form&id=e67390f54bc6935999963218ccf50553&tab=core&_cview=1 Accessed May 27, 2010.
12. Hoyt, K. Journal of Public Health Policy, 27: 38-57, 2006.
13. FDA Application, Search Orphan Drug Designations and Approvals, http://www.accessdata.fda.gov/scripts/opdlisting/oopd/index.cfm Accessed May 27, 2010.
14. Matheny, J. et al. Biosecurity and Bioterrorism: Biodefense Strategy, Practice, and Science, 5: 228-238, 2007.
15. Congressional Budget Office report, Prices for Brand-Name Drugs Under Selected Federal Programs, June 2005.
16. Government Accountability Office, Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs. Report GAO-09-819T, June 2009.
17. Bayer Halves Price for Cipro, but Rivals Offer Drugs Free, by Keith Bradsher, The New York Times, http://www.nytimes.com/2001/10/26/business/26CIPR.html, Originally Published October 26, 2001, Accessed May 27, 2010.
18. A Nation Challenged: The Drug; A Rush for Cipro, and the Global Ripples, The New York Times, http://www.nytimes.com/2001/10/17/world/a-nation-challenged-the-drug-a-rush-for-cipro-and-the-global-ripples.html, Originally Published October 17, 2001, Accessed May 27, 2010.
About the Author:
Nate Hafer is currently an AAAS Science and Technology Policy Fellow at NIH. Previously he worked at the Federation of American Scientists and was a Science and Technology Policy Graduate Fellow at The National Academies. He received his Ph.D. in molecular biology from Princeton University and his B.S. degree in biology from The Pennsylvania State University. He can be reached at firstname.lastname@example.org .
At a recent event on the comparative advantages of small molecule vs. biologic drugs, several themes emerged which led me to re-examine the question of whether the practice of medicine is capable of keeping pace with medical innovation.
As mentioned in a previous post, the majority of patients receiving the personalized medicine drug Herceptin had not been previously administered Herceptin’s diagnostic test. This is extremely important, as the diagnostic test can identify those patients most likely to benefit from the drug and exclude those who are likely to see no benefits (and will likely only get sicker as they rotate through an ineffective drug). For all the talk of the promise of personalized medicine, it appears that the gatekeepers — physicians and payers — are unaware of how to effectively prescribe personalized drugs.
This is not a new phenomenon. Antibiotic drugs have seen their effectiveness drop due to overprescription, which led to the emergence and rapid spread of antibiotic-resistant bacteria.
So, just as mis-prescription of antibiotics took the shine off many lucrative drugs, mis-prescription of personalized medicines stands to likewise diminish their value. What is particularly surprising is that this is not a new trend. For all the advances in drug development over the decades since over-prescription of antibiotics was recognized as a problem, physicians and payers are still hard pressed to prescribe drugs effectively.
When I asked the panel of potential solutions to the problem, I was given a list of emerging technologies such as bioinformatics, e-health, centralized databases, etc. that could solve the problem; adding technology to a problem isn’t necessarily going to solve it, it may just make it a more expensive problem! In reality the solution already exists. All healthcare payers need to do is require prior authorization before prescribing Herceptin, which would require physician consultation, and require a positive result in the diagnostic test prior to reimbursement for the drug.
As with most simple solutions, I’m sure that this one has already been conceived. So why is it not being used? Could it be that healthcare payers are afraid they might end up having to use a litany of diagnostic tests on all cancer patients, thereby offsetting any potential costs savings? I look forward to your thoughts in the comments section below.
In these videos Pfizer’s Vice President and Global Head of Molecular Medicine, Aidan Power, talk about a future where everyone’s genome is sequenced and drug prescriptions are based on your genetic makeup, and argues that personalized medicine will be the defining paradigm for discovering and developing drugs of the future.
To put these videos into context, consider the recent report which found that a majority of patients receiving Herceptin had not been tested for HER-2 overexpression — Herceptin is a targeted drug intended primarily for patients overexpressing HER-2. The apparently common prescription of Herceptin independent of it’s diagnostic test suggests that the practice of medicine needs to adapt to keep pace with scientific advance.