From Obscurity To Innovation Engine – The Evolution Of Specialty Pharma
By Rob Wright
Twenty years ago when I first started in the life sciences industry, specialty products for rare diseases had the feel of being a company’s charitable contribution to society. I recall sitting in a new-hire training orientation listening to the instructor inform us how the profits from our cashcow products supported the R&D and distribution of the specialty products designed to help the unfortunate few suffering from rare diseases. How times have changed! Today, specialty drugs represent the fastest-growing sector of pharmacy spending. A recent Express Scripts Drug Trend Report has specialty drugs at an annual cost of more than $290 per member per year (PMPY) in 2012, up from $170 PMPY the year prior. By 2018, it is estimated specialty drug spend will surpass traditional drug spend and PMPY will reach $845. In just three years, market research intelligence firm EvaluatePharma projects 7 of the top 10 bestselling drugs (by revenue) will be specialty drugs and the category accounting for nearly half of all pharmaceutical manufacturer sales. Some have described the category’s growth as staggering and question how insurance companies will be able to afford paying for what often proves to be lifesaving treatments for patients suffering from rare diseases.
Ron Cohen, M.D., would like to remind people who are concerned about insurance companies being able to afford paying for medicines of one simple fact: Prescription drugs account for about 10 to 12 percent of the total U.S. healthcare spend. “We are one of the great innovative engines providing society with desperately needed goods which are more valued than the latest iPad or video camera,” he attests. Cohen founded Acorda Therapeutics (NASDAQ: ACOR), a specialty pharmaceutical company, back in 1995. The physician-turned-CEO shares insights on the evolution of the U.S. specialty pharmaceutical industry from obscurity to significance. In addition, he explains the current insurance conundrum and his concern around its having the potential to stifle pharmaceutical industry innovation. Finally, Cohen places a call to action for industry leaders to educate U.S. stakeholders (i.e. consumers, patients, families, media, and elected officials) on the value proposition specialty drugs offer as drivers of innovation.
From Obscurity To Significance — The Evolution Of Specialty Pharma
For the 10 years prior to the passage of the Orphan Drug Act (ODA) of 1983, the pharmaceutical industry averaged less than one specialty pharmaceutical product per year. In the 30 years since, the FDA Office of Orphan Products Development (OOPD) notes industry having developed and marketed more than 400 rare disease drugs (a little over 13 per year). Under the ODA, drugs, vaccines, and diagnostics agents would qualify for orphan status if they were intended to treat a disease affecting fewer than 200,000 American citizens. “Unlike the usual chemistry-based pills,” Cohen notes, “Orphan-type drugs are often biologics which tend to be very complicated to produce.” In addition, these drugs are for relatively small populations and manufactured in fairly low volumes. The result is products that are very risky to develop, costly to produce, and thus, very expensive when they make it to market. For example, in January, Sanofi’s Kynamro (mipomersen sodium) injection received approval for treatment in patients with homozygous familial hypercholesterolemia (HoFH) — a disease occurring in approximately 1 in 1 million people. The annual cost for Kynamro is about $176,000 a year. It will be competing with Aegerion Pharmaceuticals’ Juxtapid (lomitapide) capsules which cost $235,000 to $295,000 a year. In the U.S. these two drugs have a viable market of about 300 patients annually. To encourage companies to develop specialty pharma drugs for such small markets, the ODA included a number of incentives including tax credits, drug development grants, fast-track FDA approval, and a seven-year market exclusivity period. This was different from traditional patent protection, as the period of exclusivity did not begin until the drug was granted FDA approval.
The Insurance Conundrum
Though there is some debate as to whether the ODA really stimulated the production of rare disease drugs, the increased output of the past 30 years cannot be denied, having resulted in $80 billion in sales a year in the U.S. alone. As specialty pharmaceuticals gained in popularity, so too did issues surrounding the process of managing their costs. The passage of the Medicare Modernization Act in 2003 and the subsequent implementation of the Medicare Part D program included a specialty tier in order to help define what qualified as a specialty drug. “Those specialty tiers are entirely cost-based, so it’s irrespective of whether it’s a biologic or chemistry-based or oral or injectable,” Cohen states. “Basically, if it costs more than $600 a month, it gets specialty status.” Other characteristics include:
- complex treatment regimens requiring ongoing clinical monitoring and patient education
- special shipping, storage, or delivery requirements. generally biologically derived, available in injectable, infusible, and oral forms
- dispensed to treat individuals with chronic or rare diseases often having limited or exclusive product availability and distribution
- treat therapeutic categories such as oncology, autoimmune/immune, and inflammatory that are marked by long-term or severe symptoms, side effects, or increased fatality.
“Complex biological drugs require more sophisticated handling,” Cohen explains. Complicated dosing regimens such as systemic application by infusion or injection or requiring physician supervision for administration are what Cohen describes as being high-touch interactions, which further add to the cost of these drugs. To address the high-touch needs of these patients, specialty pharmacies grew from a cottage industry to big business. “Specialty pharmacies realized they could provide an advantage over traditional retail for these patients,” Cohen attests. In addition to providing better service than traditional retail pharmacies to these high-touch patients, specialty pharmacies and pharmacy benefit management (PBM) organizations gained popularity as a means of reducing drug costs. It is estimated that more than 200 million Americans receive drug benefits administered by PBMs, which are able to aggregate the buying clout of millions of enrollees and thereby lower prices through discounts, manufacturer rebates, and improved distribution efficiencies. “If you look at the evolving landscape, the boundaries have been totally blurred, because commercial payers own specialty pharmacies and PBMs that manage the pharmacy benefits for the reimbursement of companies,” Cohen states. This blurring of boundaries results in a potential conflict of interest. “A specialty pharmacy owned by a large insurance company or payer wants to get contracts for manufacturers to distribute their drugs because that’s how they get paid,” he explains. “The reimbursement side may want to limit access to those specialty drugs because they cost a lot.”
According to Cohen, when it comes to reimbursing for specialty pharmaceuticals, “It benefits the payers to scrutinize and exert control.” There are a number of ways insurance companies do this, such as specialty-tier structuring with significantly higher co-pays, prior-authorizations, and step edits. “It is just a thicket of regulations and requirements,” states Cohen. “In some cases, the standards imposed by insurance companies don’t make medical sense to practitioners because they are done in a highly variable way.” This unwillingness of the system to pay for a drug is one of Cohen’s biggest concerns.
The EU’s Shortsighted Cost-Containment Policies
“The burden for paying for a pharmaceutical innovation is falling quite disproportionately on the United States’ system,” Cohen says. This is because of the pricing power available in the U.S. Cohen believes the extent to which insurance payers don’t pay for specialty drugs has the potential to stifle U.S. pharmaceutical innovation. Take the EU as an example.
“Europe, which has a government pay system, has taken the approach of squeezing pharmaceutical industry margins,” he explains. “What you’re finding is some of the bigger, multinational companies are now moving operations out of Europe. In some cases, these companies have decided not to distribute certain new drugs in Europe, because the price does not reflect the innovation or benefit of the drug nor the investment of the company to bring it to market.” On a small scale, take Acorda’s Ampyra (dalfampridine) extended release 10mg tablets, approved by the FDA for people with multiple sclerosis (MS) and marketed as Fampyra outside the U.S. through a license and collaboration agreement with Biogen Idec (NADAQ: BIIB). Acorda projects the drug will do between $285 and $315 million net sales this year. “Of that, we are going to spend $60 to $70 million in R&D,” he explains. “That’s a pretty high percentage of our net sales.” The reason Acorda can invest nearly 22% of sales into R&D is because the company gets a reasonable rate of reimbursement for the drug in the U.S. In the EU, however, reimbursement is significantly less. Cohen believes the pharmaceutical pricing and reimbursement policies (e.g. external reference pricing [ERP]) outlined in the September 2012, European Commission Economic Papers 461 – Cost-Containment Policies in Public Pharmaceutical Spending in the EU, “will prove to have been shortsighted and extreme and not constructive for supporting innovation in drug development. If this were to happen in the U.S., there would be, in effect, nothing paying for pharmaceutical research and innovation.” Cohen believes a European style of reimbursement in the U.S. could open up opportunities for countries like China to take the lead.
A state-run system, China developed a five-year plan allocating billions of dollars specifically earmarked to advance certain industries, including biopharmaceuticals. “We don’t have the luxury of a government entity pouring money into our industry,” he attests. “We have to earn it through the value of the products we produce. If we’re not getting reimbursed at the current level, then R&D and innovation are clearly going to suffer. I don’t think this is really arguable.” Cohen asks, “How are we willing to pay for our future medical wellbeing?” This is a message he feels pharmaceutical and biotech companies need to communicate better.
What Is The Value Of A Medicine?
Cohen believes that the pharmaceutical industry has been a convenient target for public angst for too long. “If you read the papers and watch the news, you would likely think prescription drugs make up 75 percent of all healthcare costs,” he states. Consider this recent headline in the Wall Street Journal — “Drug Makers See Profit Potential In Rare Diseases.” Cohen attributes this misperception to the pharmaceutical industry’s profitability and rare commentary on other drivers of rising healthcare costs. A recent article published in the American Journal of Managed Care (March 2013) showed hospitals, not pharmaceuticals, as being the primary driver behind spiraling healthcare costs. Accounting for more than 30 percent of all U.S. healthcare expenditures, the average cost per hospital stay in the U.S. ($15,734) is three times the cost of the next closest country, Germany ($5,004). In addition, data showed provider consolidation through hospital mergers or the buying up of physician practices resulted in “higher prices for services, higher costs for patients, and often no improvement in the quality of care delivered.” According to Cohen, it is incumbent on specialty pharma to clearly communicate the value of a medicine, even those considered very expensive. “Yes, a company might charge $50,000 a year for a drug, but if you look at the outcomes for the patients and see that it prevents hospitalizations which cost $100,000, then you would gladly pay for this drug,” he affirms. “In other cases, drugs may improve lives without necessarily showing as direct a line toward decreased costs, for example, drugs that improve walking ability or that reduce pain, yet still are highly important to patients. It is dangerous to try to assert, as for example Europe increasingly is doing, that drugs are only valuable if they can be proved to reduce overall costs. This ignores the intrinsic value in improving the lives of people suffering with disease and disability.”
A little over a year ago, Vertex Pharmaceuticals (NASDAQ: VRTX) gained FDA approval for the first drug that treats the root cause of CF (cystic fibrosis), Kalydeco (ivacaftor). At a cost of $294,000 for a year’s supply, it is one of the most expensive drugs in the U.S. Cohen notes however, that the research conducted by Vertex is leading to other discoveries and providing opportunities to treat even more patients with differing strains of CF — a point often overlooked when one focuses only on cost. “In my view, the leaders of our industry have not spent enough time educating the public as to the value innovative medicines bring to society,” Cohen states. “There needs to be a much greater effort on the part of industry to educate patient groups, since those patient groups have the power to advocate for open access to medicines.” Cohen believes the pharma industry is part of a solution, not part of the problem. He advocates for the industry to stop taking such a defensive stance and begin offering some positive offense. To support educating and gaining industry advocates, Cohen supports the industry utilizing existing coalitions such as PhRMA and BIO to develop public service announcements designed to reach a wide audience. “If everyone would contribute to ongoing public service ads about what we do, the number of drugs produced, and the number of lives improved or saved for the various conditions, instead of just advertising the latest erectile dysfunction drug, we could change the perception of our industry from convenient whipping post to innovation engine and creator of life-enhancing medicines.”
Chipping Away At Pharma’s Ability To Innovate
One of Ron Cohen’s biggest fears is that people in power and government who use the biopharmaceutical industry as a whipping post will continue to layer on more regulations to extract more discounts and payments from the pharma industry. “For example, the industry agreed to cover initially 50 percent of the ‘donut hole’ of Medicare and then increasing percentages over the ensuing years,” explains Cohen, CEO of Acorda Therapeutics. “This is tens of billions of dollars of payments and discounts.” According to Cohen, the industry did this with the understanding that the Affordable Care Act (ACA) would enable more people to have access to insurance coverage. “In effect, we’re giving a substantial discount on the medicines, but we’re getting more customers,” he explains.
This all changed with the June 28, 2012, Supreme Court decision ruling that the federal government could not force the states to accept the Medicaid expansion. “Now, it’s unclear how many Medicaid patients are really going to come in under the expansion, because already 25 states or so have said they are not going to participate,” Cohen says. “And they are pushing to extract still more discounts from the industry for Medicare dual-eligibles, subjecting them to the same 23 percent plus discounts Medicaid gets.” Cohen describes these decisions as a continual chipping away at the financial health of the industry, and thereby, at its ability to innovate and provide society with the new medicines it needs.