Monday, December 10, 2007

Venturing to Washington II: Fleecing the Drug Industry

The primary concern of Day 1 of the FDA/CMS Summit was just how bad for the industry are the unofficial tollgates of a more safety-conscious FDA and the official post-approval burdens imposed by the FDA Amendments Act.

Day 2 focused on a perhaps more inchoate fear – the chance that payors of all stripes will take the savings they need out of the hide of the drug industry.

And they will need them. Amgen VP of Global Coverage and Reimbursement Josh Ofman noted the variety of ways drugs cut overall health costs – but ultimately acknowledged, as did a variety of other speakers, that cost-containment was going to hit drugs hard – either, says Ofman, through controlling market access, restricting coverage (e.g., through formulary controls), or by imposing conditional coverage.

Most speakers did not expect the industry nightmare of a single-payor to soon take flesh. And the popularity of unfettered drug choice makes dispensing restrictions political and economic non-starters. But without them, the easiest (and most politically popular) target for cutting costs, separately noted Eli Lilly’s top politico Alex Azar and Rob Seidman, the influential former pharmacy chief at Wellpoint, is the biopharma industry—through price reductions and rebates (which fatten PBM profits as much as they cut drug expenses). Drugs covered by Part D—where consumer choice is most obvious (“what do you mean I can’t have Lipitor?” the consumer bellows at the pharmacist)—will likely face the brunt of the pricing assault.

Unfair? Absolutely. As much BS as drug companies hand out about their R&D spend, the fact is they can’t invest in new medicines if they can’t charge enough for the ones they get to market. Investors, for one, won’t allow it. Rob Seidman somewhat cynically commented that if the drug companies can’t create new products for less than $1 billion, they “need to build a better mousetrap.”

So—some mousetrap suggestions. First, there are ways of cutting that cost. Lilly’s Chorus division has shown it can get products to proof-of-concept much quicker than traditional development programs, giving their late-stage clinical colleagues a much broader choice of likely programs to push forward (and their business development colleagues a slew of out-licensing candidates that would otherwise have been dust-collectors on lab shelves).

Second, former Pfizer exec Stephen Williams, now with a new firm he founded called Decisionability, offered an interesting solution to the rising reimbursement risks – securitizing them in much the same way private equity firms and royalty buyers have learned to securitize drug-development programs. Instead of packaging development-stage products into tradeable securities (e.g., Morgan Stanley’s Pharmaceutical Royalty Monetization Assets—click here for more on just how clever the financial community can be), theoretically one could bundle approved products into packages that could cut a sponsor’s risk of reimbursement problems and permit investors to share in the upside of a positive outcome.

But drug companies also need to figure out ways of cutting reimbursement risk without turning to Wall Street. And one very practical solution is to start exploring how to create at least two formulations, one Part D and one Part B, for a molecule entering development (it’s a point we’ve mentioned before—here for example). That means exploring how a small-molecule headed for Part D might be useful in an IV infusion…and doing so at the earliest stages of planning for proof-of-concept. Take those biotechs, for example, developing small-molecule therapies for cancer or as replacements for niche drugs in orphan diseases, like lysosomal storage disorders: oral is convenient, sure. But IV can have both therapeutic and reimbursement advantages, too.

It’s reimbursement-oriented portfolio management – and it’s why R&D executives need to be au courant on the challenges their commercial colleagues face with payors (and why the marketing guys should focus on more than just market size when they kibbitz on drug development issues).

Final suggestion: there were roughly 200 attendees at the FDA/CMS Summit. More than half were the drug companies’ policy mavens. It’s clear, at least to this blogger, that what was once inside-the-beltway wonk material is now central to financial and drug-development strategy. If senior marketing, finance and R&D execs are leaving this stuff to their Washington groups, they’re leaving themselves wide open to the competitors who aren’t.

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