Citizens are
increasingly taking responsibility for their health, and convergence of IT and
life sciences is accelerating this pace. Value for money from healthcare
spending is increasingly the call of the day, which has managed to noticeably
stem healthcare inflation in the US. Improving standards in the emerging
markets, on the other hand, are accelerating healthcare spending, but largely
on generic drugs. For the biopharma industry, biologics helped it come out of
the small molecule generic carnage of the last couple of decades, but now even
these biologics face their own life cycle challenges.

Over the past decade,
the Mehta Partners team has challenged the biopharma industry to recognize that
many of their products would not fetch even a fraction of the price if they had
to be sold in a free-market environment, such as mobile phones or bottled
water. And that is exactly what is underway with ‘electronization’ of the
biopharma industry. Transparency is increasing, giving payors and patients, as
well as doctors, a seat at the table when resources are scarce and cost-benefit
analysis must shape choices, and this phenomenon is underway around the world.
The industry can no longer hide behind the regulatory veil, and play market
forces to the hilt—no matter that often only a minority of eligible patients
benefit from many of their newest products.

With global drug
spending set to top $1 trillion (with US accounting for over one-third of the
total) it’s a fair question to ask how much should drugs cost? The issue has
been highlighted by the ever increasing cost of new cancer drugs and the recent
availability of highly effective hepatitis C therapies. Spending on drugs
launched within the past 24 months has climbed from $6 billion to almost $20
billion. Payors are starting to deny or delay reimbursement, and even
questioning clinical data. Biopharma companies are having to offer deeper
discounts and patient assistance programs. A price war has broken out from day
one in the hepatitis C market, never mind that these are not just truly
innovative, but in fact curative breakthroughs!

This underscores that
‘electronization’ of the industry is gathering momentum, and only truly
cost-effective innovations will fetch premium pricing, and only for patients
with precise diagnosis expected to benefit. The ‘big data’ to help improve our
understanding of the total treatment costs and outcomes, increasingly with
companion diagnostics, is paramount. IMS Institute for Healthcare Informatics
has recently proposed three main ways big data can help determine how much
drugs should cost and in setting the price for innovative therapies:

Payment per use:
pricing based on indication Outcomes based payment: based on total savings
resulting from use of a particular drug Conditional approval / conditional
pricing: price adjustments based on new data Of these, pricing based on
indication, especially for expensive cancer drugs, has recently gained momentum
and support of leading oncologists recently (see Indication-Specific Pricing
for Cancer Drugs; JAMA Oct. 2014).

Indication-specific
pricing becomes critical when the treatment costs are similar for different
approved indications of a given drug, but benefits vary greatly (see table).

The situation with
cancer drugs can be directly contrasted with the saga of the new hepatitis C
drugs. Why is Gilead’s Sovaldi the “best ever launch” in history and projected
to have sales of over $11 billion during its 1st year on market? It has just as
much to do with duration of therapy as it does with pricing. Cancer drugs for
example are priced at $8-12k per month and duration of therapy in certain
indications can be 1 year or more, yielding annual prices of $90-140k. In case
of the HCV drugs from Gilead and Abbvie, complete eradication of the virus can
be achieved within 12 weeks. A $10k per month cost (similar to expensive cancer
drugs) would only yield $30k per patient (who likely will not require further
treatments). Thus it can be argued by the industry that a highly efficacious
drug that can cure patients within a few weeks should be valued higher. Sovaldi
price at launch was thus set at $84k for 12 weeks of treatment. So the initial
sticker shock seems more reasonable when considering overall benefits and total
savings from curing patients. Sadly, this logic is practical on a first-come,
first-served basis until the scarce resources are exhausted, as the math stops
working if one were to extrapolate an $80k price tag to the 130-150 million
people worldwide living with hepatitis C. In the end, biopharma industry’s
inability to enable access to its products for every patient who may benefit
remains its Achilles’ heel, and the key reason why it continues to be compared
with the used car industry in society’s trust.

Will the ‘new science’
achieve critical mass to enable the industry to address this fundamental, and
in some ways untenable, challenge? Will its R&D investments bear fruits in
therapeutic areas beyond cancer MAbs, novel anti-virals and immuno-oncology?
This is mandatory if the biopharma industry is going to avoid declining sales
towards the end of this decade, let alone regain society’s trust. Biologics
have been a savior for the industry over the past 10-15 years, primarily thanks
to their extraordinarily high prices, proving the above thesis. These relatively
recent successes now face their own reckoning as key biologic patents near the
end of their life. Biosimilar adoption understandably is starting out slowly as
manufacturing and clinical experiences build confidence towards
interchangeability. But this pace will gather steam around 2018, when some of
the key biologic drug patents expire, leading up to aggressive discounting
similar to small molecule generics. Small molecule generic acceptance took
nearly a generation, whereas biosimilar adoption is likely to take only a
decade.

Recent signals from
R&D output remain mixed; and the industry defensively is gravitating
towards rare diseases, which is the last of the therapy areas where the
old-fashioned ‘pricing-as-if-there-is-no-tomorrow’ freedom still exists.

Fortunately, there is
some flickering of the light that suggests that broader, more significant
successes can be expected. As summarized below, emerging innovative
technologies have the potential to not only improve upon existing therapeutic
options, but importantly, also open up the possibility of attacking diseases at
their root causes that have remained elusive to small molecule and biologic
approaches to date. These include improved gene therapy approaches to address
genetic disorders (such as hemophilia, beta thalassemia); sophisticated
RNA-based therapies (e.g. RNAi) for rare, difficult to treat disorders; highly
innovative techniques such as exon-skipping and gene editing to correct
disease-causing defects at the DNA level; Next Generation Sequencing (NGS)
techniques such as deep genome, exome, and transcriptome sequencing to yield
highly sensitive molecular diagnostics and also identify new disease-associated
targets.

These frontiers
initially will be rolled out for niche diseases, but should expand to a wider
range of difficult-to-treat diseases as their safety is confirmed, and complex
modality is simplified with advancing scientific tools.

INNOVATION RISING
1970s Proton pump inhibitors; histamine H2 inhibitors Transformed
gastrointestinal disorders from a serious condition to easily manageable state
1980s Polymerase and protease inhibitors for HIV A deadly infection reduced to
manageable chronic condition Blockbusters for lipid control Several cholesterol
lowering agents, led by Lipitor, significantly improved cardiovascular
morbidity and mortality 1990s Rise of biologics Recombinant proteins and
monoclonal antibodies to address a host of diseases, with focus on cancer 2000s
Decade of cancer MAbs Several monoclonal antibodies targeting key pathways in
cancer for the first time (Herceptin, Rituxan, Avastin, Erbitux) – resulting in
improved prognosis 2010s Conquering HepC Achieving cure for a largely
untreatable infection Assault on MS Several new agents to significantly improve
upon a debilitating, progressive condition Birth of immuno-oncology Novel
targets and techniques to leverage the cell killing properties of T cells to
recognize and attack cancer cells Attacking genetic disorders Targeting
mutations in cystic fibrosis to modify disease (vs. treat symptoms) Molecular
diagnostics Highly sensitive (and inexpensive) techniques to detect and
identify genetic mutations associated with disease causation/progression)
Beginning of truly personalized medicine Attacking cancer cells by targeting
specific genes with mutations that drive disease progression Coming soon to a
clinic near you: Gene therapy for genetic disorders (e.g. hemophilia, beta
thalassemia) Sophisticated RNA-based therapies (e.g. RNAi) for rare, difficult
to treat disorders Highly innovative techniques such as exon-skipping, gene
editing to correct disease-causing defects at the DNA level NGS – deep genome,
exon, and transcriptome sequencing provide highly sensitive molecular
diagnostics