MANAGEMENT INSIGHT - The Specific Peck Response & How Express Scripts Has Changed the Future Course of Drug Pricing

In the book, The Bird, author Colin Tudge describes how his favorite pub once ran out of peanuts and lamely proffered a medley of Japanese biscuits in their place. The tiny, pretty crackers, he reports, were brightly colored in hues of yellow, red, and blue, and thoroughly revolting. He tossed them across a lawn in disgust, to where a nearby flock peacocks waited for just such a possibility.

Tudge watched with interest as the peacocks wandered through the field of crackers, eating first all the yellow ones and only the yellow ones. Then they returned over the same area only for the red, and finally lapped the area a third time for the blue. Why?

Birds, it turns out, are pattern followers. Their eating rituals follow what scientists call the specific peck response, which is an optimal foraging strategy. Animals that feed on small foods face two logistical challenges: that no single seed (or biscuit) is worth lingering over, and that in any one scattering of items, only some will be edible. Most often there will be gravel, rocks, and other debris mixed among them. Rather than wasting time making choices, the birds will test the most prevalent item and go after those, before switching to the next most populous item.

You can conduct this experiment at home, if you’re so inclined. Toss a cup of sunflower seeds mixed with a half cup of peas onto your lawn or driveway. I promise you that whichever species of bird arrives first, it will ignore the peas and eat only black sunflower seeds before switching to the peas. Then, reverse the experiment and throw a cup of peas and a half cup of sunflower seeds out. The birds will first eat the peas, then the sunflower seeds. Every time!

The specific peck response system was forged by evolution, and it works. We may reasonably expect that birds will continue this pattern unless and until it no longer works for them.

We humans aren’t so very different. We develop certain ways of doing things, and we generally stick to those patterns unless and until they no longer work for us. Then we are forced to adapt or die. In nature, change is slow. In business, it can happen overnight.

​THE END OF SKYMALL

Just ask SkyMall, which filed for bankruptcy in January. Remember this magazine? For 25 years, it’s been tucked into the back of every airline seat. It’s full of whacky, oddball innovations — paper towel holders with USB ports, wine glasses with built in aerators and the like. SkyMall died because of a single regulatory change that destroyed them overnight.

You may not have realized it, but the reason you perused SkyMall was because you were forced to turn off your electronic devices during takeoff and landing. There wasn’t much else to do, so you flipped open the magazine. Just like everyone else.

But last year, the regulations changed, and airlines were able to allow passengers to power up during takeoff and landing. SkyMall’s sales numbers fell out of the clouds. From $33.7 million in revenue in 2013, the company saw only $15.8 million in the 9 months ending Sept. 28, 2104, according to The Wall Street Journal.

The fortunes of a magazine, or indeed an industry, can change significantly based on a single event. In drug development, we are ever on the lookout for this type of change induced through changes in FDA policy. Or healthcare laws. Or economic downturn.

But this time, we’ve been broadsided by a new player in drug pricing policy, and many of us still haven’t recognized the impact this single deal will have on prescription drug pricing. I’m talking about AbbVie and Express Scripts.

A NEW PRICING ENVIRONMENT

Allow me back up a little first, before I get to the meat of the matter. Until 2015, price wars didn’t happen among patented prescription drugs. Insurance companies offered a selection of drugs, with varied accompanying payment plans. Some drugs weren’t covered to encourage patients to use more cost-effective options — usually generics. The insurance companies exercised some pricing pressure, but their main concern was that the treatment offered be less expensive than the alternative of no (or different) treatment. Express Scripts, CVS, and Walgreens distributed the drugs to the patients. The drug companies, as a result, could set their prices to what the market would bear; within the context of other treatment options.

In the case of Hepatitis C, any solution that mitigated the need for liver transplants and/or prolonged end-of-life care was preferable, and hence, when Gilead came out with Solvadi with a 90% success rate and priced the pills at $1,000/pill or $84,000 for a full course of treatment, the insurance companies swallowed it.

Even when AbbVie came along with a similar product, Viekira Pak, the new competitor signaled reluctance to compete solely on price by giving it a sticker of $83,300 for 12 weeks; not a hugely significant difference, particularly for a product with the downside that it requires 4 to 6 tablets a day versus Solvadi’s single-daily dose.

Then, in January, AbbVie entered an exclusive deal with Express Scripts. In exchange for exclusive access to Express Scripts 25 million customers, AbbVie agreed to significantly discount the price of its Viekira Pak.

Soon after, CVS Health Corp. and Anthem Inc., the biggest provider of health insurance plans to US employers, made an exclusive deal with Gilead for the use of Harvoni (which combines Solvadi and another Gilead product), at a significant price discount.

This changes everything! Not so much for Gilead; Gilead will still make a breath-taking profit. It’s the rest of the players in the industry who are going to be most affected.

Gilead, if we do the math, will still come out extremely well, albeit less well than before. This is true even despite the astronomical costs of developing Solvadi. For most drugs, it now costs about $2.6 billion to gain market approval, according to the Tufts Center for the Study of Drug Development. If things go spectacularly well, the most any drug might reasonably (or perhaps unreasonably) expect to earn is peak year sales of $13.7 billion and lifetime sales of $131 billion (according to Forbes); that being the record set by Lipitor, Pfizer’s LDL cholesterol lowering drug (now generic).

Solvadi has been on a different playing field since the day Gilead bought the drug candidate from a company called Pharmasset in November of 2011 for a whopping $11 billion dollars. Gilead’s shareholders were, understandably, shocked and amazed. Gilead became the worst-performing big cap biotech in December 2013, down 8.38% that year compared to Celgene’s 12.59% increase. The company then proceeded to push millions of dollars more into the Hep C drug candidate to get it through clinical trials. How could a gamble like that possibly pay off?

All you really need to know is this: In July of last year, revenue guidance for the drug was between $22 and $24 billion/year, and Solvadi isn’t set to come off patent for more than a decade. Even factoring in AbbVie’s competition and the new exclusivity agreements, no one need be overly concerned that Gilead will fail to do anything less than rocket past Lipitor to become the best-selling drug in history.

Let’s be clear about one other thing also: Solvadi is not the most expensive treatment out there. There are several more expensive, most notably Shire’s Idursuflase, approved for use as enzyme replacement therapy in patients with Hunter Syndrome. This drug goes under the tradename Elaprase, and the cost for treatment of a 35 kg individual is estimated at $657,000.

It isn’t just the cost of Solvadi that has brought it into the spotlight, but the combination of cost and market size. With its broad existing customer base (estimates of the global population with chronic Hep C range from 130 to 150 million), a whole lot of people are clamoring for this drug all at once. Over time, those numbers will settle to include only those newly diagnosed, but right now the backlog of people demanding this drug simultaneously is putting a lot of pressure on insurers.

The industry’s pattern of pricing behavior has long been strained by high prices, but there’s a pretty good argument to be made that the Hep C drugs were the straw that broke the camel’s back. Even though there have been more expensive drugs, the combination of high prices and a huge patient population is new. Those record-breaking revenues are someone else’s costs, and that someone else is the insurance companies. Something had to change.

ENTER EXPRESS SCRIPTS: A NEW PLAYER ON THE DRUG-PRICING SCENE

In the drug pricing system, drug companies set the prices, and insurance companies determine how much of that price they are willing to cover. There are only two players. Or rather, there were only two players. Now Express Scripts, CVS, and Walgreens have arrived. Any drug that has a competitive form of treatment will now be subjected to a new form of competition. This new player isn’t interested in the cost effectiveness of one treatment relative to another; only in reducing the price of the drug as much as possible so customers will shop with them.

You can bet this is the tip of an iceberg. Express Scripts has already announced its next target will be the $37.2-billion cancer drug market. At the moment, Express Scripts doesn’t cover cancer drugs, which are administered by doctors and hospitals and aren’t sold by pharmacies. Express Scripts plans to expand its coverage to include these drugs, which can cost hundreds of thousands of dollars. Bristol-Myers Squibb and Merck’s PD-1 Inhibitors, a new class of treatment approved for skin cancers, which is currently being tested for other types of cancer, may be targeted. Bristol-Myers’ Opdivo and Merck’s Keytruda are also in the crosshairs; both drugs cost $150,000/year.

Already the chances of any particular idea making it through the decades-long process of drug development, gaining funding, surviving regulatory screening, and showing efficacy beyond existing treatments are slim at best. The risks are huge. We need a vast field of sparks if we are to see any flames of discovery at all.

Now we have a new risk factor: a drug that makes it all the way to market and then fails to negotiate a good enough deal with the drug distributors to generate a profit. This will affect the number of drugs that are developed, and the willingness of venture capital to get behind a good drug candidate. The drug industry’s old foraging patterns have been disrupted. We haven’t seen anywhere near the full impact of what just happened.

To view this issue and all back issues online, please visit www.drug-dev.com.  

Derek Hennecke, President & CEO, Xcelience