More on Pharma Pricing

A reader in the industry writes with excellent comments on yesterday’s post on the Chris Rock hypothesis.

Long-time reader, first-time emailer–love the show ;).  I’ve been in and around the pharma industry for nearly 30 years, and I’ve spent time in gene therapy/gene editing where the one-time cure model dominates.  Some thoughts on chronic vs. curative dosing and why a curative therapy is likely worth less:

1. There’s a potential mismatch between payment for a drug and the accrual of value that justifies its price point.  If I take a curative therapy for a disease like hemophilia (e.g., the new $2.9 M drug, Roctavian), the insurance company immediately incurs the cost of the drug, but the prime financial benefits (no more expensive chronic therapy, reduced expensive visits to the hospital) accrue over time.  Patients switch insurance companies as they switch jobs, so the “payout” that justifies the treatment price accrues to the subsequent insurers.  On chronic therapy, if a patient switches to another insurer, the new insurer picks up the payments so there’s no such disconnect.  Rationally, insurers should pay more for chronic therapy, even in present value terms.
2. Durability of effect is unknown until it isn’t.  It’s difficult to charge for a drug as a cure until such time you know it’s a cure and have proven it as such.  How long do you have to follow treated patients to prove that?  Gene therapies are starting to show waning efficacy in some cases.  The FDA mandates that you cannot include something in the drug label that has not been proven.  Payors will point to a label and ask why they should pay for something that’s not on there.  This can be mitigated by programs where the drug company pays back a portion of the cost if it doesn’t work, but collecting on that seems like a huge hassle–how do you prove that it stopped working (I can hear Mike Munger–“the answer to your question is transaction costs…”)?
3. Sticker shock and headline numbers.  A drug that costs $3 M or more is something the White House can use at a podium and get a reaction.  Never mind that it gets paid back pretty quickly by discontinuing a therapy that costs hundreds of thousands per year–life-saving drugs should not cost millions of dollars!  This puts downward pressure on one-time cures.

So, my perspective is that it is more difficult for a one-time treatment/cure to capture the value it creates vs. a chronic therapy.  So, why did Lilly shares tumble on the news?  More important than duration of therapy is market share vs. competitors.  A more permanent solution (with no rebound after discontinuation) would more than make up for lost revenue on the back end by taking share from the competition on the front end.  And THAT is why pharma is incentivized to pursue cures.  Making a better drug will beat the competition, and a cure is a better drug.  Big Pharma doesn’t necessarily pursue curative treatments directly because they don’t know how.  Technologies like CRISPR and mRNA have to come up via biotechs that are purpose-built to maximize the platforms’ value and to understand/navigate the underlying technology.  That said, Big Pharma has inked HUGE deals to gain access to these technologies (e.g., Pfizer/BioNTech), so they do seem to come around eventually.

These are all excellent points. On point 1, note that Medicaid creates similar incentives in that insurance firms want to farm long term costs onto Medicaid.

Point 3 suggests that we should be especially wary of price controls on cures. Sticker shock may drive us to price controls leaving us with treatments that look cheaper but are even more expensive in the long-run (and by present discounted value). Sovaldi is a case in point. Its initial $84,000 price generated huge opposition even though it typically cured hepatitis C infections and avoided many later liver cancers and saved money overall. Indeed, as I pointed out earlier, Sovaldi so reduced the number of liver transplants that more people with other diseases ended up with life-saving transplants.

This is also what I meant by starting in the right place. If you start in the right place you have some hope of getting to real causes and possible solutions.