The Great American Drug Deal

by Peter Kolchinsky

  Former FDA Commissioner Scott Gottlieb made a similar case with an emphasis on biologic drugs, saying that payers need to reward those who make biosimilars (akin to generics but of biologic drugs—more on that in Chapter 8) with market share, even if it means painfully kicking their addiction to the rebates payers extract from market leaders (who typically pay less generous rebates as they lose market share).100 The alternative is longer in-class monopolies and slower genericization of biologic drugs, throwing the Biotech Social Contract off kilter.

  Furthermore, some drug classes, such as CAR-T cell therapies and gene therapies, are not genericizable by any approaches conceivable today (I propose “contractual genericization” as a solution in Chapter 8). In these cases, me-toos represent the only foreseeable commoditization strategy.

  Combining Drugs Can Lead to Better Solutions and Lower Prices

  Another major benefit of me-too drugs becomes evident when drugs from different classes are used in combination to create more effective therapeutic regimens. For example, HIV has long been treated with a “triple cocktail” of three kinds of drugs (two polymerase inhibitors and one integrase inhibitor), and hepatitis C is now easily cured with combinations of two or three types of antivirals.

  Think of this like a plumber putting a wrench and a pair of pliers together to solve a difficult problem that would be impossible to solve with either tool alone. Imagine if there were only one wrench and only one pair of pliers. If one company owned both, it would have a monopoly and could set a high price for its combination therapy. If a “wrench” drug were owned by one company and the “pliers” drug by another, they might not be motivated to think about how to combine their drugs into a single pill or therapeutic regimen in the first place. Each certainly would want to charge a high price for its own drug since each could be considered necessary. But if there were multiple wrenches and multiple pliers on the market, with multiple companies each owning a set, this would create opportunities for multiple solutions and greater price competition among them.

  When biopharmaceutical companies compete at the level of solutions by combining or sequencing multiple drugs to offer patients better outcomes, me-too drugs turn into necessary building blocks of solution sets that will compete for market share. When Gilead first launched its hepatitis C polymerase inhibitor Sovaldi, which remains the only hepatitis C polymerase inhibitor on the market, it charged $84,000 for a 12-week course of treatment. Sovaldi couldn’t cure any patients on its own and needed to be used with at least one other type of hepatitis C drug. In 2015, Bristol-Myers Squibb released daclatasvir, a hepatitis C NS5A inhibitor meant to be taken with Sovaldi. The combination achieved a high cure rate, but with daclatasvir priced at $63,000, the total cost of the combination was $147,000 for a 12-week course of treatment. But Gilead had its own NS5A inhibitor, which might be considered redundant if you think in terms of classes of drugs and not the big picture. Gilead released Harvoni, a pill combining Sovaldi and its own NS5A inhibitor, and priced it at around the same level as Sovaldi alone. This made it impossible for BMS to compete, not to mention the fact that Harvoni was a single script with a single copay for the patient and one tablet per day instead of two. BMS, knowing that this would be Gilead’s strategy, had tried to develop a hepatitis C polymerase inhibitor of its own, but those efforts failed, dooming its long-term prospects of competing in the hepatitis C market. Therefore, BMS’ NS5A, although first-in-class, suffered from BMS not having a me-too polymerase inhibitor. Fortunately for society, AbbVie and later Merck were able to piece together their own sets from various me-toos and came to market to compete with Gilead, bringing down the price of curing hepatitis C.

  Drugs do not actually need to be co-formulated into a single pill to be used together; they can simply be co-administered at the same time or during the same course of treatment. If they are owned by the same company, their prices can be functionally linked via co-contracting with payers (e.g., Drug A and B each costs $10,000/month, but together the price is $15,000/month).

  These pricing and convenience advantages of combinations are also why every oncology company is developing an anti-PD(L)1 antibody (the FDA has approved five, and there are upwards of 20 more in development). This is the one drug class everyone knows is going to be part of a solution set for many cancers. As soon as there is a hint that a new type of drug class could work in combination with it, companies rush to get their own versions in that class, fearing that they will be stuck with nothing if their solution set ends up missing a key ingredient (why BMS lost in the hepatitis C market). That fear is logical and warranted and is driving the creation and acquisition of many drugs within a single class.

  Society’s Leverage: Lowering Costs Ethically

  The proliferation of similar drugs within the same class and having several classes of drugs that treat the same problem shifts the balance of power to society. Of course biopharmaceutical companies have at their disposal several perfectly legal tactics for competing for market share and preserving their prices, and they should be expected to use all of them. But society has at its disposal a number of tactics for containing drug costs that its agents (insurance plans) do not always employ. Unstated and yet still integral to the Biotech Social Contract is the tenet that the payer should play similar drugs off one another to get the best deal on behalf of society—without simply resorting to copays or other forms of cost-sharing to dissuade patients from seeking treatment.

  On the whole, payers would seem to be effective negotiators.101 Between government mandated rebates for Medicare and Medicaid and those private insurers negotiate for themselves and on behalf of government plans, payors got $135 billion in rebates and price concessions (28%) off the $479 billion of total drug costs on a list price basis in 2018,102 reducing spending to $344 billion in 2018.103 But we also know that insurance companies don’t always negotiate as hard as they could. Based on their net prices, branded prescription drugs represent only 7.4% of total healthcare spend, so some payers can’t be bothered to devote the time and resources to digging into price negotiations for me-toos except for the most expensive classes of treatment (e.g., hepatitis C, diabetes). Sometimes insurers are stuck between the rock of paying more for a drug and the hard place of being vilified in the media for denying access to treatments. Most disconcertingly, society’s agents have found a way to align their own profit motives with higher drug prices. Pharmacy benefit managers (PBMs) can increase their profits by favoring high-cost drugs, from which they extract money-back rebates instead of recommending lower-cost drugs, even generics, without a rebate. (More on this in Chapter 7.)

  Society (via government policies and contracts with PBMs and private insurance companies) should encourage the development of me-too products, especially for non-genericizable complex biologics classes, by rewarding some market share to each new entrant. If they do not, companies will have nothing to show for putting the third or fourth new, yet weakly differentiated drug in a class on the market, and they won’t bother doing so in the future.

  Directing market share to a me-too requires nudging physicians who prefer to use one drug in a class to use others after the first has hit its quota. As it would be unethical to force a physician to prescribe a drug that’s substantively worse than an alternative, this is only possible in cases where a patient could be prescribed either one. Payers already do this to some extent by lifting reimbursement restrictions such as step edits and prior authorizations in exchange for greater rebates, so mechanisms exists to do so thoughtfully with the goal of keeping the most number of drugs in each class in play. By rotating which drug in a class is preferred at any one time, payers can influence the market share of new patients that each gets, allowing those who start taking a drug to keep taking it for as long as it works.

  Payers could use copays for non-preferred drugs in a class to nudge patients to a preferred drug without violating the Biotech Social Contract as long as (a) the preferred drug in the c
lass is good enough (i.e., not substantively worse than the others), (b) the preferred drug has no copay, and, importantly, (c) if the patient doesn’t benefit from the preferred drug or suffers from its side effects, payers should waive the copay for whatever drug in the class the patient needs to switch to. As long as the recommended “copay-free” sequence is a medically sound option, then differences in patients’ ability to pay would not disadvantage anyone. If a me-too drug is not good enough, then it would be unethical to force patients to take it just because they can’t afford the copay for other drugs. But what exactly does “good enough” mean?

  Before we assume that one can instigate price competition among several similar drugs, the key questions are (a) How meaningful are the differences among all the drugs in the same therapeutic class? and (b) How medically ethical is it to overlook those differences to exploit the similarities? If one drug is cheaper than others in its class but has a higher rate of a non-serious side effect, such as a mild rash, it doesn’t seem unconscionable to ask a patient to try that drug first. If they do experience a rash, then the physician can switch them to one of the more expensive alternatives that doesn’t cause rash. The company with the rash-causing drug will have to offer a price discount to an insurance company to require that patients try it before authorizing payment of one of the other rash-less drugs in that class. Or the inferior drug might merely be a bit less convenient than the best one, as we saw in the case of hepatitis C drugs when AbbVie, marketing a twice-daily pill, offered discounts to win market share from Gilead’s once-daily pill.

  So good-enough drugs can be leveraged against better drugs to save society money. The challenge is defining what is “good-enough” and what is so good that it’s “unconscionable to deny.” For example, let’s say fast-follower Drug B is effective in all patients at slowing a certain cancer, and the first-in-class Drug A is effective in only half of patients, but we can’t tell ahead of time which half. In this case, it would be difficult for a physician or insurance company to require that patients try the unreliable Drug A first, offering Drug B only to the half of patients whose disease got worse since, in this case, worse means that their cancer has progressed, and they are now more likely to die. Drug B would be considered “unconscionable to deny” to all patients and Drug A could not be considered “good enough.”

  There would certainly be a good argument for trying to develop a diagnostic test to predict which patients would benefit from Drug A and which won’t, since that would give insurance companies leverage in their price negotiations. They could offer cheaper Drug A to those 50% of patients who the test says would benefit from it. But absent such a test, in a just world, Drug A would lose all market share regardless of any discounts its manufacturer might offer. Drug A would simply be supplanted by the better Drug B, which would now enjoy a monopoly (until going generic). And while Drug B might be in the same class as Drug A, an improvement so large that it makes Drug B “unconscionable to deny” represents enough progress that it’s not even appropriate to call Drug B a me-too. It might be more appropriate to call it a “next-generation” drug in that class.

  Still, the public sometimes confuses drugs that seem to be in the same class as being me-toos of one another and interchangeable. For example, it’s common for people to talk about insulins as being a many decades-old class, yet insulins have progressed through multiple generations of improvements such that the advanced insulins marketed today are meaningfully better than those from the 1950s (more on that in Chapter 13). So while old insulins are cheaper and used in many countries around the world, when people talk about the insulins in America, they are unknowingly referring to more advanced, notably safer products that are unaffordable for some patients because our insurance system has made them so.

  Racing for Cures

  While not all drugs in the same class are similar enough to one another to serve as leverage for payers in pricing negotiations, many are and create competitive tension. The companies that enjoy the profits of success remain motivated to innovate not only by the fact that their leading drugs, in the long run, will go generic, but also by the threat of fast-follower companies stealing market share in the nearer term with good enough me-toos.

  We now operate in a world in which drug companies must continue to expeditiously innovate and combine products to maintain their competitive edge and pricing power. Such competition benefits society by lowering prices below what drugs would cost if they enjoyed in-class monopolies, and it also drives the entire innovation ecosystem. Larger companies often must acquire the technologies they don’t have, which cycles some of their profits down to smaller companies and universities, providing them with the fuel and incentive to come up with the next, must-have breakthroughs.

  In Lewis Carroll’s Through the Looking-Glass, and What Alice Found There, the Red Queen explains that, in her world, one has to run just as fast as one can just to stay in the same place, and to get ahead, one must run faster than that.104 Such are the rules of the biopharmaceutical industry, except that companies are racing one another to invent and acquire more and better chess pieces with which to best vanquish diseases.

  * * *

  93Now a subsidiary of the French pharmaceutical company Sanofi.

  94Lunawati L. Bennett and Chris Fellner, “Pharmacotherapy of Gaucher Disease: Current and Future Options,” P&T 43, no. 5 (2018): 274-280, 309, accessed Oct. 15, 2019. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5912244/.

  95Geeta Anand, “Why Genzyme Can Charge So Much for Cerezyme,” The Wall Street Journal, Nov. 16, 2005, https://www.wsj.com/articles/SB113210882766198549.

  96Genzyme’s 2009 manufacturing problem (contamination at their production facility) created a Cerezyme shortage that abetted Shire’s progress, driving patients into Shire’s clinical study and motivating regulators (the FDA) to approve a new product to mitigate the risk of future shortages.

  97Samuel D. Waksal, “Pay Only for Drugs That Help You,” The New York Times, March 6, 2012, http://www.nytimes.com/2012/03/07/opinion/pay-only-for-drugs-that-help-you.html;

  Charles Ornstein and Ryann Grochowski Jones, “The Drugs That Companies Promote to Doctors Are Rarely Breakthroughs,” The New York Times, Jan. 7, 2015, https://www.nytimes.com/2015/01/08/upshot/the-drugs-that-companies-promote-to-doctors-are-rarely-breakthroughs.html;

  Austin Frakt, “How Patent Law Can Block Even Lifesaving Drugs,” The New York Times, Sept. 28, 2015,

  https://www.nytimes.com/2015/09/29/upshot/how-patent-law-can-block-even-lifesaving-drugs.html.

  98Pharmacopeia is a medical term for all the drugs physicians can choose from when considering how best to treat a patient. Throughout this book, I instead refer to it as a “mountain” or “armamentarium.”

  99Donna Young, “’Orphans’ Hit Historic High At US FDA; More ‘Me-Too’ Drugs Urged,” SRA, Dec. 16, 2015, https://pink.pharmaintelligence.informa.com/PS118484/Orphans-Hit-Historic-High-At-US-FDA-More-MeToo-Drugs-Urged.

  100Scott Gottlieb, “Capturing the Benefits of Competition for Patients.”

  101And while one often hears that Medicare is forbidden by law from negotiating drug prices, the reality is that Medicare simply outsources those negotiations to insurance companies, which do a pretty effective job on the government’s behalf, just without any government people literally at the negotiating table.

  102While this figure mostly represents rebates to PBMs and government mandated rebates, about 10% of this total is from copayment assistance the companies offer directly to patients. To the extent that private insurance companies know that companies will help some patients pay their copayments, it seems to be a kind of tacitly negotiated price concession.

  103IQVIA Institute for Human Data Science, Medicine Use and Spending in the U.S.: A Review of 2018 and Outlook to 2023 (Parsippany, NJ: IQVIA, 2019), https://www.iqvi
a.com/-/media/iqvia/pdfs/institute-reports/medicine-use-and-spending-in-the-us---a-review-of-2018-outlook-to-2023.pdf?&_=1557542013851.

  104Wikipedia Contributors, “Red Queen’s Race,” Wikipedia, The Free Encyclopedia, accessed Oct. 15, 2019, https://en.wikipedia.org/wiki/Red_Queen%27s_race.

  7

  False Heroes: Pharmacy Benefit Managers and the Patients They Prey On

  It’s hard to know when actual prices for a particular drug really do go up, because there is so little transparency in pricing. A lot of the public discourse on pricing is based on “list prices,” which no one—neither patients nor payers—actually pays. As is the case with cars and anything on Amazon, everything is always on some kind of sale or subject to discounts of one type or another. In the world of pharmaceuticals, these discounts are called “rebates” and often take the form of payments from the drug company back to the insurer. The particulars of a rebate that a drug company offers to an insurer—its magnitude and how it varies according to market share—are kept confidential, essentially based on the age-old sales tactic of “Because you’re special, I’ll give you a special price, but don’t tell the other guy.”

  Pharmacy Benefit Managers, or PBMs, are the companies who negotiate with drug companies on behalf of payers (and some PBMs are actually owned by insurance companies, so one can think of them as just agents of payers), and—importantly—retain a portion of the rebates that pass through them. In effect, PBMs profit from the very high list prices they purport to heroically negotiate down. A biopharmaceutical company offering a lower list price without a rebate would threaten the PBM business model, so PBMs discourage this tactic by not rewarding it. Instead, they encourage drug companies to keep their publicly known list prices high and give an ever bigger confidential rebate to the PBM, from which the PBMs siphon off their own rent before passing on the lower net price to the payer while boasting, “Behold what I have negotiated for you!”