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Pharma’s pricing problem – Investors’ Chronicle

A simple peptic ulcer could have proved life-threatening for sufferers less than five decades ago. That was before scientists at a then-minor pharmaceutical business called Smith, Kline & French discovered the compound cimetidine in the mid-1970s. Marketed under the brand name Tagamet, the drug prevents the excess release of ulcer-causing stomach acids. It became the first pharmaceutical product to surpass $1bn in annual sales in 1986. 

The next drugs to reach – and exceed – this milestone were also treatments for very common conditions. The antidepressant Prozac, developed by Eli Lilly (US:LLY), made it big shortly after Tagamet. Pfizer’s (US:PFE) cholesterol medication Lipitor would later become the first mega-blockbuster drug of the 21st century. This first crop of billion-dollar-earning medicines had an important feature in common: they could all be prescribed at a GP’s office, often without referral to a specialist. 

The economics underpinning these so-called ‘primary care blockbusters’ is easy to grasp. At the time they arrived on the market, they addressed a widespread unmet medical need. The sheer size of the patient population meant that these drugs didn’t need hefty price tags to make a profit for their developers. 

In the past decade or so, however, higher-priced drugs for less common conditions have started to bring in a greater share of revenue for the biggest pharmaceutical companies. As treatments become focused on ever-smaller groups of patients, questions of pricing and profit margins are coming to the fore like never before. Investors will inevitably want to see that share prices can advance alongside scientific understanding. But the cost of new advances, coupled with straining healthcare systems around the world, mean pharmaceuticals are now facing a new type of price pressure.

AbbVie’s (US:ABBV) Humira – which is approved to treat a number of autoimmune disorders – is perhaps the defining drug of the era of speciality medicine. Unlike most of the primary care blockbusters, its initial use must be supervised by a doctor who has expertise in the patient’s particular condition. The hugely popular oncology drugs that rose to prominence over the past decade, such as Merck’s (US:MRK) Keytruda, also fall under this speciality umbrella. 

Advances in medical science mean that treatments can increasingly be tailored to suit a patient’s genetic make-up or specific disease subtype. This targeted approach – which also takes environmental and lifestyle factors into account – has come to be known as precision, or personalised, medicine. Though still in its infancy from a scientific perspective, there are now a number of examples of precision treatments at work, particularly in oncology. 

Most recently, AstraZeneca’s (AZN) Enhertu was approved in China and the EU to treat breast cancers that test positive for a specific protein called HER2. Precision medicine is ultimately grounded in the idea that greater availability of data can help physicians better diagnose and treat disease. AstraZeneca has already set out its ambition to become a leader in the field – stating that it aims to have a diagnostic component linked to each asset in its pipeline. 

Commercial logic suggests that payers – be they individuals, insurance companies or public healthcare systems – would be willing to stump up for medicines that are known to be highly effective. This is certainly part of the appeal that underpins the market for the so-called ‘orphan’ treatments for rare diseases, whose rapid growth is tipped to continue over the next decade. According to commercial intelligence provider Evaluate Pharma, the top 10 biggest orphan drugs will be worth $64bn (£53bn) globally by 2028, by which time they will make up a fifth of all non-generic prescription drug sales, up from 18 per cent in 2018. These statistics are particularly impressive given that a disease is only granted orphan status if it affects fewer than 200,000 people in the US, or fewer than five in 10,000 in Europe.

On a company-specific basis, orphan drugs’ share of revenues is tipped to grow most substantially at Johnson & Johnson and AstraZeneca. Evaluate forecasts that orphan drugs will make up 39 per cent of AstraZeneca’s sales by 2028, up from 28 per cent now, and 46 per cent (up from 27 per cent) at Johnson & Johnson.


Splitting the bill?

For investors, the attractions are clear: specialised drugs are more expensive and command higher profit margins. For companies, an array of tax breaks and carve-outs are dedicated to orphan drug development in both the US and Europe. That applies not just to established players but also more speculative players. “A huge proportion of early-stage drug developers that floated on stock markets in the past five years mentioned the word ‘rare’ [in their prospectus],” says Amy Brown of Evaluate Vantage, part of Evaluate Pharma. “Investors love rare disease companies for the reasons of premium pricing, help getting to market and faster approval times from regulators.”

But change could be afoot as politicians fix their gazes on ballooning post-pandemic healthcare budgets. Under the US Inflation Reduction Act (IRA), signed into law last August, some of the drugs that are costliest to federal insurance programme Medicare could eventually be subject to mandatory price cuts. The Act does make an exception for orphan drugs, but pointedly this is only for cases where such drugs are approved for a single treatment. Many orphans have achieved significant sales by focusing on multiple different diseases, and could find themselves subject to the Act’s price review policies in the years ahead.

AstraZeneca’s Tagrisso oncology drug, its biggest seller last year with $5.4bn in revenue – of which $2bn was in the US, equivalent to 4.5 per cent of the company’s total revenues – is among those that analysts speculate could fall foul of the initial Medicare provisions in 2026. But AstraZeneca’s David Frederickson told analysts in February that the company did not expect the drug to be included in the first wave of price reviews, and suggested the company would argue that the single-use orphan exemption “could very well be applied”.

Whichever drugs are targeted by the IRA, the question of who will pay for niche medicines – and how much – is becoming more relevant as precision techniques evolve and pharmaceutical companies come to depend on orphans to drive revenue.

For now, insulin prices look to be the primary focal point for politicians and patient advocates, especially in the US. The cost of the lifesaving diabetes treatment has increased more than 1,200 per cent in the past 20 years, prompting accusations of profiteering by developers. 

The IRA includes a $35 monthly cap on insulin costs for Medicare beneficiaries. In early March, Eli Lilly went one step further and announced it would cap all out-of-pocket costs at $35 for its most commonly prescribed insulins. Whether this can be interpreted as a sign that big pharma is finally capitulating to political pressure depends partly on whether other insulin makers follow suit.

In any case, these costs pale in comparison to those levied on specialised drugs, particularly those in the cutting-edge world of gene therapy.

Three gene therapies approved by the US Food and Drug Administration (FDA) last year attracted attention for their price tags of $2.8mn or more. At $3.5mn per dose, the costliest of the group was Hemgenix, a treatment for the genetic blood clotting disease haemophilia B. The drug, which is made by specialist rare diseases biotech CSL Behring, now holds the title of most expensive in the world. 

In the UK, a child was recently treated with another of the world’s priciest medicines – Orchard Therapeutics’ (US:ORTX) gene therapy Libmeldy. Effectively a cure for the fatal genetic disease MLD, the drug’s list price is somewhere around £2.8mn. NHS England said it negotiated a “significant confidential discount” with Orchard to make the treatment available to patients in the UK.

Innovative medicines such as Libmeldy are exempt from the UK’s NHS pricing agreement, known as the Voluntary Scheme for Branded Medicines Pricing and Access, for three years. The soaring cost of these innovations is one reason the agreement, established in 2019 partly as a way to boost innovative drug access in the NHS, has become a source of contention in recent months. 

The scheme was designed to limit the growth of the NHS budget for branded medicines to 2 per cent each year. Past that threshold, drug manufacturers would agree to pay back a portion of the revenues to make up the difference. The scheme’s name is somewhat misleading: although it claims to be “voluntary”, pharmaceutical companies that refuse to comply are subject to a more stringent statutory scheme. 

This year, drugmakers will be paying 26.5 per cent of their sales back to the UK government. Eli Lilly and AbbVie left the scheme in protest in January. This means they will now be subject to a 27.5 per cent clawback payment under the statutory scheme.

According to Rob Kettell, director of commercial medicines negotiation at NHS England, the increase in the health service’s clawback rate reflects the faster adoption of new, higher-priced medicines by the health service. 

Kettell told the Financial Times that the NHS was accelerating access to innovative treatments through more creative commercial arrangements. “This is something that has benefited companies as well as patients. It means faster access to new patients and earlier revenues,” he told the paper.

The rebates, while unlikely to make a dent in pharmaceutical companies’ revenues, emphasise the growing tension between healthcare systems and the industry. Yet there remains high unmet medical need in many rare genetic disorders, including haemophilia and sickle-cell anaemia. Cutting-edge precision medicines offer hope to millions of patients with few other options, but they don’t come cheap. Part of the reason for this is the fact that the procedures required to create precision medicines are themselves complex. CAR-T cancer treatments are one example. These therapies are specifically developed for each individual patient – and essentially involve reprogramming the immune system to attack cancer cells. 



The process of creating a CAR-T treatment takes place over several weeks, during which time the patient’s blood is sent off to a lab and then returned once it has been properly engineered. According to Alex Telford, a life sciences consultant, these sorts of procedure-heavy treatments may have a better chance of defending their premium prices – and their patents – than some more standard orphan treatments. 

“Certain personalised medicines and gene therapies are going to be very difficult to copy because of all the logistics that go into them,” he says. “It’s going to be very hard for generic manufacturers to come in and do the same thing. It’s not clear if these medicines will ever really go generic.”

Regulators will soon find themselves grappling with the unique patent and pricing dilemmas presented by futuristic therapies such as Crispr. Phase 3 trials for a therapy called exa-cel, developed by Vertex Pharmaceuticals (US:VRTX) and Crispr Therapeutics (US:CRSP), are ongoing. The treatment, which is under review by both the FDA and the European Medicines Agency, uses a patient’s own edited stem cells to produce high levels of foetal haemoglobin in red blood cells. 

The elevation in haemoglobin triggered by exa-cel has the potential to reduce or eliminate debilitating symptoms in both sickle cell disease and transfusion-dependent beta-thalassemia (TDT) – another genetic blood disorder. Anecdotal accounts suggest exa-cel is effective, but given that the treatment is still in development, albeit at an advanced stage, it’s too early to declare it an unequivocal success for patients.

Some analysts argue that it’s prudent to wait on the sidelines while Crispr’s gene editing procedures are refined. “Current approaches are ex-vivo, meaning that you have to take patients’ cells, do genetic manipulation in the lab and then re-infuse those cells back into the patient,” explains Luca Issi, a senior biotechnology analyst at RBC Capital Markets. “We believe that if you can make this technology work in an in-vivo setting, where you just do a simple infusion, that would lead to different commercial trajectories and much faster uptake.”

There are several in-vivo treatments, which are injected directly into patients, in the preclinical stages of development at Crispr Therapeutics. But there’s still a way to go before investors will get a glimpse of their efficacy in a trial setting. For now, it looks as though exa-cel will almost certainly become the first commercially-available treatment based on the Crispr gene editing technique.

Investor enthusiasm for Crispr treatments has waned somewhat in recent months, with both Crispr Therapeutics and rival Intellia Therapeutics (US:NTLA) underperforming the Nasdaq Biotechnology Index in line with the worsening sentiment towards high-risk, early-stage biotech companies in general. Even so, both continue to trade on very high price/revenue multiples. Vertex, by contrast – a much larger, profitable company with a track record of success in areas such as cystic fibrosis – trades on a forward price/earnings ratio of 20 times, and its shares have performed well over the past 18 months in particular.


Regulatory hurdles

Vertex and Crispr Therapeutics submitted exa-cel to regulators in the US, UK and Europe last November. The European Medicines Agency and UK authorities have already validated, or acknowledged, the filing, which is the first step towards approval. But even if the therapy ultimately clears the review process, it’s likely that it will be faced with marketing and pricing challenges – especially in Europe, where similar therapies have struggled in the recent past.

In August 2021, gene therapy developer Bluebird Bio (US:BLUE) announced it would be withdrawing from the European market after disagreements with health authorities over the cost of its drug Zynteglo. The biotech company priced the drug at $1.8mn in Europe, and offered a “value-based pricing agreement”, which allowed payers to spread the cost over several years, depending on whether the treatment was successful. 

But this was not a cost that healthcare systems and patients were ultimately willing to shoulder, according to the company. “European payers have not yet evolved their approach to gene therapy in a way that can recognise the innovation and the expected life-long benefit of these products,” it said. 

The Institute for Clinical and Economic Review (ICER), an independent US watchdog, concluded last year that CSL’s Hemgenix could justify its multimillion-dollar price tag given its effectiveness. Vertex’s forward earnings multiple also suggests markets still feel confident in payers’ ability to absorb the potential costs of exa-cel.

However, in its review of Hemgenix, the ICER said payers should work with manufacturers to “develop and implement outcomes-based agreements to address the uncertainty and the high cost of gene therapies”. In effect, this could mean that patients and healthcare systems only agree to pay full price for a gene therapy if its impact is curative – or close to it. In the case of certain rare conditions, a million-dollar price tag for a one-off drug may still be cheaper than a lifetime of less effective treatments – although in such cases it may be only the super-rich, rather than healthcare systems, who end up enjoying the benefits.

“I think that understanding the value that these products bring to patients – and then endeavouring to ensure that we can manufacture those at a scale and at a cost that can be widely distributed – has to be a goal for the industry,” says Doug Doerfler, chief executive of Aim-traded MaxCyte (MXCT), which works with Crispr-focused companies.

Ultimately, the future for some advanced therapies may not look so different from the current batch of ‘orphan’ drugs that are used to treat multiple diseases. Telford predicts that there could one day be “broad platform approvals” for gene therapies in conditions that share a similar pathophysiology, meaning they are united by a set of common functional characteristics. The underlying causal mutations may, however, differ between patients. 

“If you expand the [patient] population with platform approvals, it’s possible that payers may say the standard of [clinical] evidence isn’t good enough,” he said. This means that these kinds of therapies may command lower prices if they haven’t been proven in a highly specific patient population. “But the volume of sales could make up for that.”

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