This piece originally appeared in the Timmerman Report.

When Allergan CEO Brent Saunders announced his manifesto on drug pricing at Allergan just after Labor Day, he was met with acclaim and approval (some examples here and here). He called for a return to the social contract between biopharma companies and patients. In his view, patients understood in the past that developing drugs was risky and cost a lot of time and money, and therefore patented drugs would be expensive. Drug companies, holding up their end of the social contract, felt an obligation above simple profit-making—that drugs are supposed to keep patients healthy or to get them back to that state. That meant pricing had to take into account the public good, not just profit maximizing, and be reasonable. Moving forward, Saunders announced that, among other things, Allergan would commit to value-based pricing and to limit price increases to no more than single-digit percentage hikes per year.

These are worthy and admirable goals. But I look at other recent events and can’t help feeling his effort is doomed.

A few things make me worry. First, Valeant announced price increases on several of their franchise drugs last month. Around the same time, Anthem announced that they would not cover Sarepta’s new Duchenne Muscular Dystrophy drug, Exondys 51. Looking back over time, historical trends and current behavior suggest that the biopharma industry’s self-restraint doesn’t stop the industry from raising prices, and even well-intended efforts don’t last.

This past year, of course, Valeant imploded. I think that’s the technical term. Their questionable acquisitions and continual price increases made them the next public enemy (after everyone’s favorite No. 1, Martin Shkreli). The offense: gaming the system to increase profits without providing real innovative value. Biopharma repeatedly points to innovation to justify why medicines cost so much; Valeant and other examples like it undermine that argument. Valeant’s CEO lost his job, and its executives got grilled by Congress.

So you’d think, if there’s any company that would try to avoid price increases for the next year or two, it would be Valeant. If you’re camping and hiding from bears, you don’t smear yourself with honey and mint toothpaste (true: bears love mint toothpaste). But just this past October Valeant announced price increases on drugs in their neurology, gastrointestinal and urology franchises. They hastened to add that prices for other franchises won’t increase, and that they will cap increases at single digit percentages year to year. Skepticism reigned. As David Maris of Wells Fargo^* noted, in September Valeant had raised prices on three ophthalmology drugs by 9.9% (sure, it’s less than 10%, but come on, like we wouldn’t notice. This isn’t the sale aisle at Walmart). And Valeant’s guidance, Maris pointed out, is forward looking. It ignores years of large price increases in the past.

What that says to me is this: Valeant has no choice. If they could keep functioning in a reasonable, or even somewhat risky way without price increases so as to keep a low profile, they would. But they can’t. That’s the pressure all biopharma companies, including Allergan, face today: to make a profit, however you can, and with blockbusters harder to come by, price increases are a primary tool in the biopharma industry garden shed. That’s one thing Saunders is up against. Unless Allergan finds a way to be dramatically more efficient than other pharma, he’ll have trouble keeping his promises.

Next, let’s take a look at the payers. How does Anthem’s action feed my pessimism? At first glance, Anthem’s action seems specifically tied to the controversy over the approval of eteplirsen. Despite an FDA advisory committee that voted not to approve this drug based on minimal and qualitatively weak data, eteplirsen (Exondys 51) was given a provisional approval. Anthem is pointing to the data package and the provisional approval as reasons to not pay. From that standpoint, it doesn’t seem like a precedent-setting action.

But I do see this as a harbinger of problems to come, like when your teenage son, who’s just learned to drive, comes home and casually mentions how, you know, intact doors and an attached bumper are overrated. Over the last several years, orphan indications and rare diseases have enjoyed a growing status—biopharma companies aren’t shy about setting huge prices for orphan drugs, and payers have generally been fine with covering these drugs given the small number of patients. Drugs for rare diseases aren’t considered budget-busters. Yet here we have a drug priced at $300,000 per year, a likely treatable population of only about 1,000 boys in the US…and Anthem said no. You can bet the other big payers like United Healthcare and Cigna are watching like hawks for the public reaction. I doubt there was any kind of communication among the big three around coverage for Exondys 51, but I still have fun imagining an Owen Ellickson (@onlxn on twitter)^** style conversation among the three big payers:

Cigna: So. This new drug. Exondys 51.

UHC: I know. ANOTHER Orphan drug.

Anthem: But what can we do?

Cigna: Well. I’ve been thinking…

UHC: Yeah? About jumping out of markets ‘cause profits’re not high enough? Done that. Bad, bad press…

Cigna: No, not that…

Anthem: So what?

Cigna: Look, long term, all the pharma are going the orphan/rare direction right? I mean that’s kind of the point of the whole Precision Medicine thing. Smaller and smaller patient groups, larger and larger per prescription prices. Cancer’s the main indication now, but it won’t stop there.

UHC: I know. Death of a thousand cuts. Get ulcers just thinking about it.

Cigna: So…what if we pushed back now, when we can make a good case for why we won’t cover a drug?

Anthem: Are you kidding? Did you see the parents and kids at those FDA hearings? We’d get murdered in the press.

Cigna: Well, maybe not. We’ll never know until we try. Only…I was thinking maybe it would be best if just one of us declined coverage.

UHC: Sacrificial lamb kind of thing. Why, that could put that organization out of business!

(Everyone laughs)

Anthem: Good one. Well, but how do we decide?

Cigna: So, I brought these three straws…

 

The thing is, Anthem isn’t alone. Just recently Humana put tight restrictions on when and how it would reimburse for Exondys 51.

The payers are trying to make their business work, too. As we move into a future with more niche indications and sub-populations, we will, I expect, see better, more targeted treatments for patients–but also stingier coverage plans, and tight restrictions on when they’ll pay for these precision medicines. As the system stands today, this is another pressure on biopharma to keep prices high and maybe even jack them up whenever they can. What you can’t make up in volume, you make up in price, right? I will say, the recent round of earnings calls suggest the biopharma industry players are trying to hold a line on pricing and saying they’ll make it up on volume—but will that last?

The last point I’ll make has already been nicely summed up by Stewart Lyman on his blog. He asks the simple question: When has this happened before and what happened next? The answer in a nutshell is, respectively, “often” and “not much.” The response from other biopharma CEOs to Saunders’ manifesto has been so quiet I think I’m not just hearing the chirping of crickets, but the buzzing of gnats. As mentioned in that STAT news article about earnings, prices and volume, some biopharma are saying they’ll try to keep price increases down—but it’s not out of a sense of duty or social contract, but rather fear of the current political climate. If public and media attention should shift (and after this election, however it goes, I expect there will be a lot of other things for all of us to pay attention to), I expect biopharma to quietly resume using pricing to prop up earnings. That’s a third whack at the piñata of a renewed patient-pharma pact. A company that goes it alone will rapidly find itself outcompeted by its less scrupulous peers. A race to the bottom, this could well be.

It’s an open question, a kind of parallel world “what if” within the biopharma community to ask what would have happened had Pfizer’s acquisition of Allergan happened. Rumors had it Brent Saunders would have been in line to be the next CEO, and John LaMattina wondered in Forbes what impact the Saunders manifesto would have had, if it had come from the head of one of the largest biopharma companies in the world. Unfortunately, I think he has it backward—if Saunders had become head of Pfizer, the manifesto would probably never have been made. Very little about Pfizer’s most visible actions over the past few years suggest the commitment to value-based pricing, minimal price increases and innovative R&D that Saunders advocates for now. Instead, Pfizer’s merger and acquisition history, as well as the efforts to acquire a foreign company to do a tax inversion, all suggest a board that’s most interested in continual, low-risk short-term plays to boost the stock price.

I’m reading Christopher Hayes’ book Twilight of the Elites as a way to understand the current Trump phenomenon, but there are a lot of nuggets in there that apply equally well to the problems biopharma is facing today with reputation. Hayes describes an acronym in broad use in the sub-prime lending community before the crash:  IBGYBG. That stands for “I’ll be gone, you’ll be gone.” It resonates because it speaks to the short term, profit-seeking mentality that pervaded the subprime lending community…and sometimes, it seems, biopharma. Another observation Hayes points out is Gresham’s Law, which originally was coined (pun intended, hah!) to describe how bad money (counterfeit) would chase out good in the days of Queen Elizabeth. Today, the interpretation would be that when incentives are strong and a lot is at stake, bad behavior commonly pushes out the good.

Does that have to happen? That depends. Absent regulation, the main factor restraining Gresham’s law is, basically, societal norms. What’s good and decent? Without those societal norms, that self-restraint, what holds us back when it’d be easier to engage in selfish and questionable behavior? I recently came across a call for a Biopharma Code of Ethics, spearheaded by Mike Rea. If this goes somewhere, gets adopted, and gets public support from top to bottom in Biopharma, maybe that helps. If not, we’ll probably see Saunders’ well-meaning push fade away.

 

^*I know, right? Wells Fargo taking someone else to task for financial improprieties?

^**The election has been a bit more tolerable with Owen Ellickson’s “leaks” from the Trump campaign.