Mehta Analysis: Time Has Come To Present Drugs As Consumer Products

Trump’s proposal to remove safe harbor protection for PBMs and biopharma will accelerate challenges to the traditional biopharma models, argues Viren Mehta of Mehta Partners LLC. Nimble new companies represent an innovation engine that can succeed without hiding behind the regulatory veil, and will foment rapid change, including in how drugs are valued and paid for.

Executive
Summary

A rational environment for health care
businesses is nearing where consumers and payers would pay for value – just as
they do when purchasing a mobile phone or a suit or a washing machine – and in
turn the health care providers would accept this as a fair price. Call it the
electronization of health care.

The electronics industry invests just as
heavily in innovation as biopharma, but being relatively unregulated, most of
its products reach the market in a year or two, and the life cycle of these
products is nearly as short as the shrinking life span of many innovative
therapies, again because the industry is unregulated and able to roll out a
constant stream of improved electronic products. As life science innovation is
now at a tipping point, which in turn will enable regulators to streamline drug
development, a more rapid flow of effective new biopharma products is on the
horizon. Perhaps the US FDA approval of 59 novel therapeutic agents in 2018 is
a harbinger of these better times ahead, both for society and for
biopharma.

Smart and nimble young biopharma companies are
leading this charge. Established biopharma companies with meager pipelines but
merger bloat are experiencing the limits of their business model.

Their challenge became a little more real as
January was concluding, when the US government proposed to pull the safe harbor
rug from under the pharmacy benefit managers (PBMs), health insurance providers
and biopharma companies privately negotiating a range of payments. The safe
harbor rule has protected them from charges of providing illegal kickbacks when
rebates and other payments for various services change hands.

This proposal to eliminate the safe harbor protection may or may not be effective in abolishing the infamous rebates and other payments – as the deeply embedded self-interest of a range of health care providers that benefit from many overlapping opaque practices will ensure robust resistance. These parties will at least delay the proposed change with a series of legal actions. Still, the very courage of proposing the idea of revamping one of the basic tenets of drug pricing in the US is bound to accelerate the search for a fresh approach to valuing and paying for health care products and services.

“If PBMs do not manage to reinvent themselves for the value-focused and transparent health care world, how would they not go the way of the travel agents and fax machine makers?”

One fresh approach is expected from a company
named TCORP062018 LLC. Also known as Company ABC, it is the organization
founded by Amazon, Berkshire Hathaway and JPMorgan, and led by CEO Dr. Atul
Gawande and COO Jack Stoddard to achieve better health outcomes and value for
their 1 million employees.

An intriguing legal action is unfolding in
Boston that hints at what such a fresh approach may focus on. The United
Healthcare subsidiary Optum Health seeks to block Company ABC from hiring one
of the relatively junior Optum strategy staffers. Jack Stoddard, who once
worked at United Healthcare on the team that led to the formation of Optum,
outlined in his testimony that deep adoption of technology to integrate and
streamline health care for better outcomes is essential. This value focus is
something Jack Stoddard has already accomplished in his previous roles,
delivering significant savings and better patient outcomes – illustrating what
Optum, United Healthcare and most of their competitors fear from their one-time
customers. Two of the three founders of Company ABC are Optum customers.

Data flow and IT tools are converging to peel
away the mystery of valuing health care services. The more targeted and proven
a therapy is, the easier it is for payers in the regulated markets and patients
in the out-of-pocket markets to demand pay for performance, be it the first
million-dollar gene therapy from Novartis AG or a simpler innovation
from Merck & Co. Inc. or Eli Lilly & Co.Today, most
innovative therapies already include a rational value proposition. The older
therapies discovered by trial and error – that offer mixed value and still
comprise over one-half of the top 100 selling drugs – are now beginning to face
the same value challenge.

If PBMs do not manage to reinvent themselves for the value-focused and transparent health care world, how would they not go the way of the travel agents and fax machine makers? Manufacturers of generic drugs would welcome an opportunity to distribute directly to payers and patients. And nearly 90% of drug purchases by volume in the US are generic. Meanwhile, only a very limited number of high-priced products account for the other 10% of the US drug volume, making direct distribution quite practical, especially as this 10% drug volume accounts for nearly 90% of the value of US drug spending. But what would cutting the wings of middlemen mean for biopharma?

Pharma In The
Crosshairs?

Any constraints on the pricing power of the
PBMs may not be a positive for the biopharma industry, which has come out
against the abolition of safe harbor protection. This may reflect the fear of
either having to disclose their own profits before and after the payments to
the PBMs, or worse, outright reduction of prices in proportion to the rebates given
to the PBMs. This in fact may become a central point of debate, as the PBMs
have accelerated health care industry consolidation, enabling them to obfuscate
pricing even further.Cigna acquiring Express Scripts and CVS Caremark acquiring
Aetna are just two of the recent major deals in this space. As a result, the
focus may increase on extracting pricing information from biopharma companies.

The PBMs of course see the writing on the
wall. Express Scripts, one of the top three PBMs, has proposed an alternative
to its opaque rebate model, offering lower priced drugs by excluding them from
the rebate framework. For now, it is unclear how many drugs would be offered
under this PBM-Light plan, which is no more transparent, leaving the fairness
of the bargain open to question. CVS Caremark, another top-three PBM, has also
attempted a variation on this theme without much success. (Also see “CVS ‘Guaranteed Net Cost’ Program Is
Alternative To High Price/High Rebate Model ” – Pink Sheet, 9 Dec, 2018.) Intriguingly, such schemes
are being tried by the PBMs even as they maintain that they transfer 95% of all
rebates to the payers. If true, why bother with such half-hearted efforts? And
what contributes to the healthy margins that the PBMs report?

Much has been debated in a short couple of
weeks since the US government rolled out its proposal to abolish safe harbor
protection for the health care industry. Even if this proposal withstands legal
and other challenges, its limitation would be the system itself.

Change Is Inevitable

An effective solution, therefore, calls for
fresh approaches, which may include what Company ABC may develop. But much more
is afoot.

The entire value chain, from research to
development to marketing and selling, is being revamped, thanks to the maturing
pace of life science innovations. The results are already perceptible – a growing
number of precisely targeted products for a small pre-selected patient pool,
priced for their value. Unless the larger biopharma companies can tame their
legacy costs and transform their decision making processes, the young and
nimble newcomers, increasingly from non-traditional channels, are most likely
to bring about such meaningful change over the coming decade, treating patients
more as consumers, and selling their wares for value, putting the
counter-productive business practices of our industry out of their misery.

This column originally appeared on Scrip Biopharma Intelligence, February 08th, 2019.