May 1, 2006 (Vol. 26, No. 9)

Patents Changing the Pricing Landscape in the Pharma Industry by Ramping up Competition

Not long ago, even a me-too drug could expect pricing freedom through its patent life. Today, we complain about poor R&D productivity, but this dearth of opportunities invites overnight imitators for the handful of successes that the new science has managed to produce.

Hence, patents are necessary but no longer a basis for success. For example, the DPP-4 (dipeptidyl peptidase IV) class of compounds, which holds blockbuster potential for the treatment of diabetes, will have only a few months of exclusivity, as the second one is expected to follow within six to 12 months.

In the hepatitis C category, for years the standard of therapy was interferon (pegylated and nonpegylated) along with ribavirin, which offers modest efficacy at the expense of a high incidence of side effects.

At first, NM283, a polymerase inhibitor from Idenix ( that showed promising data in combination with the standard of care, seemed likely to steal the show. As of last year, however, the spotlight turned to VX-950, a protease inhibitor from Vertex ( that produced some outstanding early data. And now, of course, several other competitors are only another year or two behind Vertex.

The ultimate illustration of this paradigm shift came from Lucentis, which seemed to take the air out of the Macugen launch that had taken place just six months earlier. Early data on Lucentis seemed so superior as to lead clinicians and investors to conclude that Macugens life cycle would be less than two years on the market&#8212a premature end for a compound with patent life until 2016. While this bullish sentiment may have moderated following recent publication of clinical data, it is clear that Macugens potential is smaller than most investors thought at its launch.

The ultimate wrinkle is the unexpected role that off-label use of Avastin is playing in this mix with 20&#37 market share, even though no sound clinical data exist of its efficacy or safety. Simply the potential of a dramatically lower cost of treating AMD has achieved this unprecedented success without any marketing.

Patents Cause Pricing Competition

Patents are no longer a license to print money. The pie will need to be cut into more pieces, and price competition is likely to become a real threat as market forces become a norm in this industry. While it is true that the 55&#37 of the market (by unit sales) that is generic already faces intense price competition, the rest of the market (45&#37 by unit sales and 80&#37+ of dollar sales) has remained insulated from competitive market forces so far. But for how long?

With the first batch of baby boomers about to retire and face declining health, insular pricing strategies that have underpinned superior profitability of the industry are likely to change. We will need to work smarter to bring more innovations to the market faster and adopt a price driven by market forces in return for a higher volume.

Healthcare Spending

The percent of GDP spent on healthcare is expected to rise from 15.6&#37 in 2005 to 18.7&#37 in 2014, according to CMS. The annual cost of the Medicare Drug Benefit (Part D) could approach $200 billion by 2015. Spending on prescription drugs as a percent of healthcare spending has already risen from around 5&#37 in the 1980s to 12&#37 today, and new drugs account for about one third of the growth in healthcare expenditures.

Managed care organizations are already deploying market forces with multiple tiers of coverage and copay. Standard tiers currently have $5-10 co-pay for generics, which are usually in tier one, rising to a $25-40 co-pay for one or two branded drugs in the same class, and the rest of the me-too drugs are relegated to tier three, where co-pays now are approaching three digits in many plans. Some plans demand a fixed 20&#37 co-pay for the very expensive biologic therapies.

Need for New Pricing Strategies

With a major opportunity for therapeutic substitutions at hand, as Zocor and Pravachol go generic in mid-2006, even the rebates that have kept drugs like Nexium and Lexapro immune from aggressive substitution efforts by the managed care organizations will likely not be enough. Many of the branded statins may well be forced to compete on price or face rapidly declining sales.

To date, the U.S. consumer has been kept in the dark about the true costs of his healthcare, as is the case in most other industrialized countries. But no longer, though our litigious culture will drag out the process a bit more. Even today, no payor feels comfortable denying payment of a cancer treatment even if the benefit, though statistically significant in certain clinical trials, may be questionable in terms of real quality of life.

Pricing strategies must focus on the value offered and not the cost, yet true evidence-based pricing is just evolving as an integral part of the debate. CMS and other payors are in the process of defining how best to encourage appropriate me-too drug development, as every drug category needs more than one agent to serve the diverse population but also to prevent imprudent off-label use. The ultimate goal is a fair price. Should the pricing strategy aim to maximize the shareholder value or the total value for the society?

Breaking the Monopolies

All of this adds up to a maturing pharmaceutical and biotechnology market in the industrialized nations, which account for approximately 15&#37 of the world population but 85&#37 of the industry revenue. These markets may become cash cows within a decade. Soon, industry managers will need to seek growth from the emerging markets that are rapidly creating a large middle-class that demands and now can afford to pay for Western-style healthcare.

A caution is warranted: many more billions who can not afford better healthcare will also need to be included in pricing strategies if the same misjudgements that gave the industry a red face around the gaffe to treat HIV patients in Africa is not to be repeated.

The virtual monopolies that have existed in many areas of the pharmaceutical landscape have clearly been broken as novel therapies could see competition from me-too drugs in a matter of months instead of a decade or more. This could lead to much needed price competition.

This competition should be embraced by the industry to create lean and efficient R&D engines that can discover and develop true innovations that would not require 30&#37 of revenues to be spent on sales and marketing. This fundamental rethinking will enable the industry to retain its superior profit margins, while also regaining societys trust.

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