by Tom Norton
I did something today that I haven’t done in years: I checked out the US pharmaceutical R&D spend versus the rest of the world. Having known since the 80’s that the US owned this space, a quick look at the latest R&D figures confirmed my decades old understanding of the industry’s worldwide position.
Today, based on PhRMA’s 2012 survey of global member companies, about 75% of the world’s pharmaceutical R&D spending is taking place in the US (see Appendix on page 66). The closet individual country competing with the US in this space is the UK — with 3.6%.
Why check out America’s Rx R&D spend? As I have stated in several previous PharmExec blogs, I see 2014 as a pivotal year for the American pharmaceutical industry. Frankly, given many ongoing market developments here in the US, I am wondering how much longer this American dominance in R & D spending can continue.
Factors Mitigating Against Future U.S. R&D Spending
Generally speaking, with the eventual onset of some form of Obamacare in the public sector, and the rapidly expanding application of all manner of managed health insurance in the private sector, the pricing of drugs is clearly under constant pressure.
Additionally, if you combine domestic coverage realities with international NGO demands for global access to cheap Rx drugs, as well as the occasional country that just decides to usurp a new American Rx patent, we are definitely not talking about a warm and cozy market reception for newly approved Rx drugs in 2014.
A 2014 Rx Example
Thinking about these new Rx “down drafts,” I checked the final number of FDA approved drugs for 2013. The final count was 27. And among them was one, clear “world-beater:” Sovaldi, brought to market by Gilead Pharmaceuticals.
The “wow” healthcare headline? “Sovaldi could end the hepatitis C epidemic in the US…and possibly the world.”
Sovaldi’s big selling points?
- This breakthrough product is being credited with ‘curing’ the hepatitis C virus (HCV) in as little as 12 weeks of therapy. That’s huge!
- But the equally big news is that Sovaldi is not an injectable interferon product like most of the other products previously used to treat HCV, many that were associated with tough side effects. Now, patients take one 400mg Sovaldi tablet daily in combination with other oral HCV therapies — without major side effects.
Overall, is this big news for the estimated 4 million Americans managing this disease? Absolutely. A therapy with twelve-week cure rates and an oral formulation – no more needles – would typically end up a winning product for patients, and a win for the company selling it. For Gilead, some Rx market experts are predicting that Sovaldi has the potential to pass Lipitor’s blockbuster record of $13 billion in annual sales.
But this is 2014. Consider the following market difficulties Sovaldi is encountering:
First, the product is selling for $1000 per pill…That’s $1000 a day for a recommended 12 week regimen…or about $84,000 per therapy. If I have my math right, that means if every one of America’s four million HCV cases were to go on the Gilead product, the total cost would be $336 billion.
Just to keep us grounded here, a $336 billion spend for national coverage of Sovaldi would be as much as the estimated annual cost of all primary & secondary education in the United States.
Second, given the development of Obamacare, and its goal to reduce the top level of healthcare in the US so that more people who don’t have access to healthcare will, at least, be able to have basic care — where does Sovaldi fit in?
Some might argue that within the purview of the Obamacare-inspired Patient Centered Outcomes Research Institute (PCORI), Sovaldi would get an approving nod as it treats a key “chronic disease” (See page 7).
Maybe, but I doubt that is how any Obamacare exchange around the country will evaluate this new product. Instead, the exchanges will think about Sovaldi’s price tag: how many millions of flu shots; how many millions of STD vaccines; how many millions of pre-pregnancy wellness sessions; etc., can be purchased for $336 billion? In short, how many millions and millions of Americans could benefit from using these funds for general healthcare needs, versus expenditures on Sovaldi to control HCV?
It appears that Sovaldi as it is currently priced will not have much of a chance in Obamacare. I would guess the product goes to Tier 4 on Obamacare exchange formularies, with prior authorization. End of story.
The Private Health Insurance Market
Third, let’s think about the broader private health insurance market that currently is made up of about 66% of all Americans. It’s important to note that even as Obamacare and many other public programs are driving major healthcare upheaval, the private market is also going through massive changes that are nothing short of revolutionary.
Private employers of every size are looking for ways to reduce healthcare costs and it appears that 2014 may be the year that this trend really takes hold across the board. As an example, check out this suggested “short cut” for employers to reduce healthcare costs. It should give companies like Gilead pause. See specifically, “The Walmart $4 Solution”.
In the middle of all this is a large, developing movement known as “private healthcare exchanges.” These brokered insurance offerings are designed so that employers can “reduce the trend of health care costs, reduce administrative burdens in a complex regulatory environment, and expand the number of benefit choices available to employees.”
One 2013 survey sponsored by the Private Exchange Evaluation Collaborative found that “nearly 50% of US employers plan on moving to a private health exchange” by 2018, while Accenture is suggesting that if the private healthcare exchange movement continues, it could far surpass expected Obamacare sign ups (30 million) by 2018.
So, what is the likelihood that private health insurance will cover Sovaldi? Well, it will obviously depend on the richness of each employers’ final insurance offering, but think about this: The previous basic treatment for HCV was a combination of ribavirin and peginterferon. Results were not always great and frequently accompanied by nasty side effects. Nor was the cost of those two drugs cheap. Somewhere around $30,000 per year.
Now, put this up against Sovaldi’s $84,000 per therapy– with much better results — and what are the private health exchanges going to offer? I leave that to you to figure out. Think “step care” followed by prior authorization referrals to get to Sovaldi. Already ExpressScripts is suiting up for war with Gilead over the price of Sovaldi. Others will no doubt follow.
On the other hand, if a health management company can avoid a liver transplant by using Sovaldi, as Gilead management is energetically pointing out, well, it makes for a provocative ethical and economic argument.
Lastly, let’s think about how an important new drug like Sovaldi is being received globally in 2014. For starters, consider that the worldwide HCV patient population that could benefit from Sovaldi is estimated to be 300 million individuals. Almost as many people as the entire population of the US.
A hue and cry has gone up already from global NGO’s and HIV activist groups denouncing Gilead’s pricing of the product. The demand is that generic Sovaldi should be made available immediately, worldwide, or in the worst case, that nations simply be allowed to declare a public health emergency and undertake compulsory licensing of the Sovaldi patent. The US Rx industry has had recent experiences with this type of activity in countries like Thailand, Brazil, and India. What are the chances of this occurring? Keep an eye on countries like Russia, China, and India that are battling huge HCV epidemics.
2014 and the Future of Rx R&D
So, taking us back to where we began this discussion, you do have to wonder – if the combination of public programs like Obamacare, private concepts like employer healthcare exchanges, and global demands for low cost access continue – what will happen to future US pharmaceutical R&D investment? If continual cost reductions in pharmaceutical reimbursement become the norm in the US, what then is the commercial incentive for US Rx manufacturers to continue spending vast amounts of private capital in search of new, more effective drugs?
If the answer is that US manufacturers are just going to have to reduce their prices, I guess that’s fine. But if that’s the case, how then will the Rx companies finance their future research? Think about it this way: What VC will buy into a business that is betting on results that may occur 10 to 15 years down the line, and at the same time, is faced with a persistent, downward pricing spiral — worldwide?
As I asked a California high tech friend a few weeks ago, “If you had a billion dollars to invest, would you put it into emerging digital technology, or into US pharmaceutical R&D?” He laughed; given all that we know about the launch market for new Rx drugs in 2014, that really isn’t much of a question, is it?
Tom Norton is principal at NHD Smart Communications. He can be reached at firstname.lastname@example.org