Explaining The Cost Of Biotech Therapies

Nobody said biopharmaceuticals would be inexpensive. This is attributable to multiple factors and the riskiness of the drug-development process.

Abstract

Health plans and employers are strategizing about how to finance biotech therapies, which can run five and six figures per patient per year. The challenge to manufacturers is to communicate the value of their products now – before someone defines it for them.

Emerging, exciting, essential, and expensive are the adjectives most consistently used in discussions of biotechnological therapies. Of these four descriptors, expense represents the most pressing issue. Why are biotech drugs so expensive?

The pharmaceutical industry has been pilloried over the cost of drugs, with the fallout settling on the statehouse, the White House, and the court house. If public tempers are high over standard pharmaceutical therapies that cost hundreds of dollars a year, how can biotech companies expect to defend the five- and six-figure price tags of some of their wares? How do they persuade price-sensitive insurers, budget-conscious employers, entitlement-minded patients, and poll-watching congresspersons of the value proposition of their products?

Biotechnology companies are at a crossroads: Biotech therapies hold great promise for patients — many of whom suffer from conditions that would otherwise be inadequately treated — but the industry has its work cut out for it to gain private and public payers’ formulary acceptance. In the end, it’s going to require more than just taking a page out of the pharmaceutical industry playbook, which brought us television and magazine advertisements depicting smiling, healthy people. It’s going to require a frank discussion of fact, science, and proof of superior outcomes — not to mention an audience willing to listen with open ears.

Biotech drug-development costs will decrease as the manufacturing process matures, says Jeff Kimmell, RPh, vice president and general manager of pharmacy for drugstore.com “These are the new kids on the block.”

PHOTOGRAPH BY DON WILSON

Cost of recently approved biotech therapies

Drug	Used to treat	Annual cost
Omalizumab (Xolair)	Allergic asthma	$15,0001
Enfuvirtide (Fuzeon)	Advanced HIV	$20,0001
Cetuximab (Erbitux)	Colon cancer	$120,0002
Laronidase (Aldurazyme)	MPS-1, genetic enzyme deficiency	$170,0001

MPS=MUCOPOLYSACCHARIDOSIS

¹CAREMARK RX TRENDS REPORT 2003

²MEDCO HEALTH SOLUTIONS VIA BALTIMORE SUN

COST INGREDIENTS

According to the Tufts Center for Drug Development, it costs, on average, $897 million to develop a new drug and bring it to market. While specific figures for biotech therapies are unavailable, it is a reasonable bet that most biologics would be of higher than average cost.

Part of the high cost of biologic therapies reflects the riskiness of the biotech drug development process. “It is a very tricky business,” says Greg S. Weishar, president and CEO of PharmaCare Management Services, a pharmacy benefit manager and parent company of Pharma-Care Specialty Pharmacy. “Vast amounts of money are invested in the discovery, growth, and production processes, and many dollars are thrown away trying to discover or create a particular protein that will be effective against a specific disease. There is a huge amount of failure, and failure costs money.”

Weishar’s point is underscored by statistics. The biotech industry spends about 25 percent of revenues on research and development, compared to about 20 percent for the mainstream pharmaceutical industry. Meanwhile, there has been a drop-off in both industries’ combined productivity over the past several years. In 1996, the U.S. Food and Drug Administration approved 53 new molecular entities; in 2003, 21. Yet, in the same period, R&D costs increased about 10 percent annually.

The advent of genomics-based biotech therapies only has worsened the problem, argues Michael Pellini, MD, president and CEO of Great Valley, Pa.-based Malvern Pharmaceuticals. “Genomics has increased the production of new potential targets,” he says. “So, while more targets are being researched, we’re not yet seeing an equivalent amount of new products emerge.”

Biotech therapies require highly specialized manufacturing techniques and have distribution processes that are not amenable to mass handling. “It is difficult to get efficiencies comparable to those you would get from chemical drugs,” says Jeff Kimmell, RPh, vice president and general manager of pharmacy for drugstore.com.

A Feb. 25, 2004 press release, “Amgen Opens State-of-the-Art Biotechnology Research Campus,” gives some insight into the expense involved in manufacturing. Amgen is building a $625 million, 750,000 square foot facility called Helix on 40 acres in Seattle. Its six buildings will incorporate the latest computerization and robotics and host a staff of more than 750 researchers, scientists, and support personnel seeking and developing biotech therapies.

There are yet more price considerations once a biotech drug is on the market. Some of this relates to the nature of these drugs. As they are derived from natural sources, they are less stable than synthetic drugs, often necessitating special handling. Most biotech drugs must be administered by injection or infusion, adding to their cost.

Finally, many biotech therapies are targeted to patients with relatively uncommon diseases or those who constitute a small subset of patients with a highly prevalent condition such as asthma. Joel Ower-bach, PharmD, vice president and chief pharmacy officer for Excellus BlueCross/BlueShield, observes that a television ad he has seen for treatment for Gaucher disease may be germane to one Gaucher sufferer among the 2 million members his company serves.

“Yet, there’s a TV ad for it, because it takes very little effective response to recoup those expenses,” he notes, explaining that while the Gaucher treatment being advertised costs more than $100,000 a year, “It doesn’t take more than a patient or two to get the investment back.”

Indeed, while the mass-market pharmaceutical industry to a large extent focuses on the “blockbuster model” — blockbuster being a $1 billion drug — the biotech industry tends to espouse what Columbia University business professor Francoise L. Simon, PhD, calls the “targeted model.” Do the math, and the result is the same: if 50,000 patients take a $20,000-a-year drug, there you have your $1 billion.

ESTABLISHING VALUE

The cost of biotech therapies being what it is, manufacturers must make a strong case to payers (see “Defining the Value Proposition of Biotech Therapies” on page 42). Miraculous though biotech drugs may be, payers will be skeptical in the absence of credible information that would support the expenditure.¹

Pharmacoeconomics can be used to define the value proposition. It appears, however, that this science is used only sparingly to assess biotech drugs — the prices of which appear to be based on little more than what a largely uninformed market will bear.

In contrast to many European nations, which routinely perform pharmacoeconomic analyses as part of the drug-approval process, the FDA applies a two-dimensional approval standard, requiring demonstration only of the product’s safety and efficacy. This standard does not include pharmacoeconomic evaluation.

Paying for higher-cost biotech drugs does not necessarily result in cost offsets from reduced physician visits, hospital days, or other utilization. Societal and economic outcomes are much harder to quantify, and Owerbach knows of no specific, credible studies demonstrating substantial downstream savings to offset initial biotech drug costs. “That hasn’t factored into the equation yet,” he says. “We need to get those data. We may find that a lot of investment to get biotech products to market is for naught.”

Still, many healthcare insiders cling — to some extent, anyway —to the notion that drug therapy can reduce other health costs, even though this has yet to be proven beyond a doubt. Ten years ago, pharmaceuticals represented about 8 percent of healthcare expenditures. Today, that share has doubled, but costs have not changed materially.

Experience, innovation, economies of scale, competition, and enlightened self-interest are all potential routes to cost reduction.

“Are there drugs that provide value against other healthcare costs? How do you answer that question when no one requires pharmacoeconomic analysis?” asks William Fleming, PharmD, vice president of pharmacy and emerging technologies at Humana. “So what if this blood-pressure drug does reduce blood pressure by X amount or that glaucoma medication reduces intraocular pressure by Y amount? What does it say about healthcare costs? Does it increase workplace productivity? Does it improve activities of daily living? Does it improve the quality of life? If so, what are these improvements, and how do we measure them?”

Using enoxaparin (Lovenox) as an example, Fleming says Humana has no problem paying for any drug that can demonstrate cost offsets — if not savings. “We know that Lovenox will decrease length of stay and may obviate hospitalization altogether. In that situation, paying for medication regardless of its cost becomes important, because it improves quality of life, daily living, and helps to reduce the likelihood of a hospital admission.”

But if a biotech company cannot demonstrate a value offset, then Fleming says it “really needs to think about how to price the drug. We can’t explain to employers why, all of a sudden, pharmacy costs are going up.”

Peter Kolchinsky, PhD, a public equity analyst at RA Capital Associates, in Cambridge, Mass., advises biotech manufacturers to mold their drug-development programs to validate maximum pricing, to the extent of terminating the development of biotech drugs when clinical trials suggest they may not perform as well as expected. Kolchinsky, who authored the Entrepreneur’s Guide to a Biotech Startup, suggests investigating the costs of similar drugs already on the market, if any, to establish the price of a new drug, and to present potential payers with multiple hypothetical disease treatment options to assess what they may be willing to pay for a new treatment option.

REDUCING COSTS

Although biotech drugs are expensive, forces are already at work to reduce expense. Experience, innovation, economies of scale, competition, and enlightened self-interest are all potential routes to cost reduction.

Size matters. Some biotech companies already benefit from economies of scale, while others may seek to gain clout by entering partnering arrangements or mergers.

“Traditional drug companies are starting to see their pipelines running a little dry and are partnering with smaller companies that they can support and help to bring drugs to market,” observes Kimmel, at drugstore.com.

New Kids. Kimmell suggests that biotech drug-development costs will decrease in the future, as the process matures. “Obviously, these are the new kids on the block,” he says. “It certainly was not as easy to produce chemical pharmaceutical products years ago. As they got better at it, they improved the manufacturing process and the costs fell.”

Consumer-driven models. Humana’s “RxImpact” prescription drug benefits program may reduce payer costs by giving members allowances for prescriptions and letting them buy the medications they feel they need. “It’s all about activating the consumer to choose and use — getting people engaged in the decision-making process and teaching them how to ask questions, rather than having medications just given to them,” explains Fleming. Humana members are asked to use the same philosophical and practical assessment mechanisms they would use to buy a house, computer, or car. One plan member may opt for an expensive medication that offers more quality-of-life advantages, while another member with the same medical situation may choose a drug that offers adequate outcomes, but at one tenth the cost. Similarly, a car buyer may choose between a fully loaded luxury car or a compact model.

Generic biotechs. Competition affects basic supply-and-demand dynamics; in the pharmaceutical industry, generic drugs² probably will reduce costs, assuming that generic biotechs are feasible.

Established biotech firms already have the production process nailed; efficiency is high by the time the product reaches the market. Newcomers will find themselves reinventing the wheel. “It costs a lot of money to produce a vial of proteins, and generic biotechs are going to have a hard time capturing the market because there’s a substantial barrier to entry for them. They have to go out and build the protein production capacity. It is a huge bet,” Weishar says.

“It has to shake out. There’s too much interest in the value proposition.”

— Randy Vogenberg, RPh, PhD Aon Consulting

ATTITUDE ADJUSTMENT?

As biotech therapies enter mainstream medical practice, payers increasingly will ask questions about their cost. Health plans are just now starting to grapple with the idea of managing biologics; the dialogue has reached the point where the issues can be articulated but no consensus exists on how to address those issues. Until then, health plans will superimpose existing benefit restrictions on specialty drugs or try to channel them specifically to patients who will benefit from them most.

This uncertainty creates an opportunity for biotech companies to communicate the value proposition behind biotech therapies to payers. As Biogen Idec CEO James C. Mullen is fond of saying, “Science sells. Not sound bytes.” The question is, will payers — who are notorious for looking at healthcare costs in silos — be receptive?

“Probably not soon, and when it comes, change will probably be slow,” says F. Randy Vogenberg, RPh, PhD, vice president and national practice council leader at Wellesley, Mass.-based Aon Consulting. “There is no incentive for health plans or insurance companies to do much, as long as they all do the same thing. Once one starts to shift, they’re all going to have to follow.”

Vogenberg, whose insights on defining the value proposition can be found following this article, works with employers to look beyond acquisition costs and help them understand where the greatest benefits of biotech therapies lie.

“It has to shake out. There’s too much interest in the value proposition and too much pressure to change. Employers are feeling the pressure because of worldwide competition and are looking at all aspects of their business, trying to maintain ultimate value in the marketplace.”

Orphans and Options: Negotiating the Managed Care Approval Process.

Managed care organizations need to decide which biotech drugs to cover. In the case of orphan biotech drugs, the choice is easier, just as it is with orphan chemical drugs. When biotech drugs are used to treat chronic conditions that are also controlled with conventional therapies, the choices are more difficult.

ALL OR NOTHING

“The biotech drug market is different from the traditional retail market, in that you have high-cost drugs and few people taking them. Many of these are orphan-status drugs that get propelled through the FDA approval process as a result,” says Greg S. Weishar, president and CEO of PharmaCare Management Services, a pharmacy benefit manager and parent company of PharmaCare Specialty Pharmacy. “Health plans are in the insurance business, and they’re in a dilemma. They’re trying to control costs, and these drugs have very few alternatives.”

Weishar gives this example: For multiple sclerosis, there are few, if any, viable therapeutic alternatives to interferon β-1a (Avonex or Rebif) — the gold standard for MS patients for MCOs.

When the MCO must choose between a chemical therapy and a biotech therapy, the principal variables to weigh are safety, efficacy, and cost. But when the choice is between covering a biotech therapy or providing no viable coverage, the equation is simpler, because depriving an MS patient of the only effective treatment available invites a public relations disaster.

Though only a few patients in a given plan population are diagnosed each year, Weishar observes, the MCO providing this therapy takes a big financial hit.

“At its most fundamental level, insurance is about taking care of people who have a very expensive condition to treat. That’s what it is all about; insurance is catastrophic,” Weishar says. “It’s a question of risk exposure to the insurance company. Only 1 percent of its population needs the drug. The question is, how should the insurance company or health plan manage that 1 percent of covered members who need Avonex [or Rebif]? Probably, the best way to manage those patients is to give them the drug.”

Jeff Kimmell, RPh, vice president and general manager of pharmacy for drugstore.com, agrees that the nature of orphan biotech drugs means that they have an easier path through the MCO approval process: “Uniqueness buys you something, though MCOs will still question whether the patient needs that particular drug. If you can find the item that is unique and provides 5 or 10 percent more effectiveness or 5 to 10 percent fewer side effects, that is what patients will want and physicians will demand. If physicians tell the MCOs, ‘Don’t make me jump through hoops; this is, far and away, the better product,’ the MCOs will start paying for it without question.”

VIABLE OPTIONS

In contrast to Avonex, omalizumab (Xolair) has multiple competitors and is used to treat a common condition, asthma. “Because there are some quite good treatment alternatives for asthma, step therapy is a viable strategy and health plans have the ability to winnow that one tenth of 1 percent of asthma patients who really need Xolair,” Weishar points out. At $700 per prescription, Xolair is reserved for those few patients who cannot obtain acceptable results using chemical-based options.

Indications for the use of biotech drugs are expanding, and physicians are prescribing them increasingly. Joel Owerbach, PharmD, vice president and chief pharmacy officer for Excellus BlueCross/BlueShield estimates that the expense of biotech drug therapy increases by 30 to 50 percent annually. To decrease waste and its inherent expense, ensuring appropriate use is vital. “We need to evaluate whether a person should get the drug, determine who has the best chance of responding to it, and make sure we get the best return on the investment, which means getting the best outcome,” Owerbach says. “We need adequate proof that the patient is responding to treatment, the drug is controlling the condition, and the patient is going to avoid complications later.”

Kimmell likens this paradigm to the emergence of the earliest mass-market drugs. “When we first developed traditional pharmaceuticals, we were able to develop a few strains to take care of everybody and his brother. Anybody in the world who had an infection was able to take penicillin and get better,” Kimmell observes. “Then we had to make erythromycin because of penicillin allergies. Now, we’ve progressed to biotechnological drugs.”

Pharmacogenomics likely will yield effective drugs to people with similar genetic make-ups. Despite physical differences, persons can be so genetically alike that they can be grouped; a drug custom-designed to produce positive clinical outcomes in them may not be as effective for other genetic types. Yet finding patients who will respond best to a specific therapy necessitates biologic assays costing $100 to $700 or more. Many assays are either not covered by health plans or are covered at the Medicare rate — which often amounts to a fraction of the cost of the test.