From my email, on the new health care provisions

I saw your post on the new bill, and I actually think the healthcare components of it might be worse than the rest of it.The bill has a provision that allows the government to “negotiate” prices for drugs that are among the top 10-20 by spend in Medicare Part B (physician administered, usually IV infusions) and Part D. Since drugs that are selected in one year are not eligible for inclusion in subsequent years, this will capture more and more drugs over time. The negotiation of course happens with a gun to the head—the bill sets statutory minimum discounts of anywhere between 25-60%, depending how long the drug in question has been on market.The biggest issue with the bill is that it makes small molecule drugs eligible 9 years after approval, while biologic drugs are eligible after 13 years. This is based on some silly misconception that small molecule drugs are quicker and cheaper to develop and therefore have shorter payback periods. That may have been true when we were tackling relatively low-hanging fruit like high cholesterol, but small molecule drugs that tackle unmet needs today are nothing less than miracles. An oral pill that treats cystic fibrosis, like Vertex’s Trikafta, or sickle-cell disease, like Global Blood Therapeutics’ Oxbryta, is incredibly challenging to develop.This is going to hurt returns for small molecule drugs and skew R&D efforts away from them to biologics. Biologics like monoclonal antibodies are great, but many of them carry substantial administration costs or suffer from worse compliance/adherence because they are IV infusions that require patients to go into a care setting periodically to receive their next dose. But the real issue is they do not go generic the way small-molecule drugs do. Generics for small-molecule drugs are relatively cheap to develop, benefit from a streamlined approval process, and can be substituted for the branded drug at the pharmacy counter even if the doctor prescribes the brand, and as a result, drive 90% discounts to the brand price. Biologics, as the name suggests, are derived from living cells and thus cannot be easily proven to be equivalent to the brand—clinical trials are required and the overall expense of developing a biosimilar is 10x that of a small-molecule generic ($20M vs $200M). Between the higher development cost, lack of automatic substitution, and doctor and patient reluctance to believe these biosimilars are identical to the brand, biosimilars discount the brand price less and take a smaller share of the market, resulting in smaller savings to the system.It gets worse—many drugs these days are a “pipeline in a product,” targeting a biological mechanism that is implicated in many diseases. The most famous example might be Humira, which began as a rheumatoid arthritis drug and added psoriasis, psoriatic arthritis, ulcerative colitis, Crohn’s disease, ankylosing spondylitis, and hidradenitis suppurative over time, running trials to prove efficacy in each. Humira is a complex example—patent evergreening extended its lifetime and justified the investment in expanding its approved indications, and on a societal basis, it’s hard to know whether that’s good or bad, but hopefully we can agree that the solution to an IP issue is not to create an artificial time of expiry that discourages investment in science.The bill also includes an exemption through 2028 for orphan drugs that are approved in only one indication—these are drugs that target very rare diseases and generally charge extremely high prices to be financially viable. Some of these drugs are eventually tested in and expand to other smaller indications—but this exemption would discourage that and create an incentive to only try the drug in the largest indication and not expand the label to maintain the exemption and maximize its lifespan.Moreover, small companies that derive at least 80% of their revenue from one drug get a partial exemption from this, rendering them unacquirable by a larger drug company, since the drug is worth more as a standalone asset. This is again a failure of incentive design—it forces replication of corporate and commercial infrastructure that would otherwise have been a source of cost synergies for an acquirer.An example of the orphan disease issue is a drug called mavacamten, that Bristol-Myers acquired for $13.1B (it was the main asset of a company called Myokardia). The development plan was to first test the drug in an orphan indication, obstructive hypertrophic cardiomyopathy (oHCM), then expand to non-obstructive HCM, and eventually to a broader non-orphan heart failure market. This is a small-molecule drug, so negotiation eligibility is 9 years after launch in oHCM, or 2031–this would leave only 5-6 years for commercial launch in the heart failure market. While it probably makes sense for BMS to go ahead and test this molecule in heart failure at this point, the NPV of the molecule would be materially lower assuming a 25% discount to Medicare prices at year 9. The investment bank Jefferies estimates it at a 19% haircut—$10.6B from $13.1B. If the discount is deeper and/or spills over to commercial reimbursement, the haircut gets steeper and steeper—this overhang will reduce the number of drugs developed and/or force ever-higher launch prices since more of the value of the molecule has to be generated from the first indication.Lastly, this encourages even more gaming of the system. In theory, authorizing a generic competitor at a small discount at 9 or 13 years would protect the branded drug, as drugs with generic/biosimilar competition are exempt from negotiation. Handing the rights to produce a 10% cheaper version of your drug to Teva or Sandoz could therefore be less costly than the government’s proposed price  cuts.This is sadly the story of our entire HC system—poor incentive structures layered on top of each other in an increasingly wobbly manner rendering the whole system unfit for purpose and on the verge of collapse. I should note here that this also targets one of the few industries where the US is still the undisputed global leader—can we really afford to do that? Especially when pharmaceuticals are less than a fifth of US HC spend, and the real drivers of out-of-control healthcare spending are guilds like the AMA and local monopolies (hospital systems that have consolidated heavily and are the largest employers in many congressional districts and even states, giving them both outsize negotiating power against insurers and lobbying clout in Congress).

That is from Anonymous!


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