Think Obamacare Will Suffocate New Drug Development With Price Controls? Think Again

3/21/11Follow @xconomy

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any of the recent regulatory decisions are creating downward pressure on drug prices. Here’s what we know has happened since healthcare reform passed:

—Dendreon (NASDAQ: DNDN), after analysts expected it to set a price of $62,000 for a course of treatment for its prostate cancer drug last April, set the price at $93,000. And while Medicare did haul Dendreon in front of a public hearing to explain the drug’s safety and effectiveness last November, every regional Medicare branch has agreed to reimburse at that price. The national Medicare agency is expected to issue a decision this spring that says this drug can be covered as long as it is used in accordance with the FDA-approved prescribing label.

—Vertex Pharmaceuticals (NASDAQ: VRTX) released some groundbreaking clinical results of new treatments for hepatitis C and cystic fibrosis. The cystic fibrosis drug will probably be priced at about $150,000 a year, according to Thomas Russo, an analyst with Robert W. Baird.

—Seattle Genetics has released some stellar results of a new “empowered antibody” drug for rare lymphomas. This drug is estimated to cost about $108,000 a year, according to JP Morgan analyst Cory Kasimov. That would make the Seattle Genetics treatment more expensive than Genentech’s bevacizumab (Avastin), or Eli Lilly’s cetuximab (Erbitux), a couple of the poster children for high-priced cancer drugs.

How long can the drugmakers carry on like this, setting sky-high prices? The current state of affairs will probably last until about 2020, says David Miller, president of Biotech Stock Research, an independent equity research firm in Seattle.

The reason things will the stay the same has everything to do with politics. Healthcare reform became law without any real provision to clamp down on drug prices a year ago. Now with Republicans in control of the House, the pressure is on to gut the new reform law—not give it new teeth to clamp down on costs.

If Obama wins re-election to a second term that keeps him in the White House until January 2017, it’s possible he could do a second round of healthcare reform that does more to corral healthcare costs. But it’s more likely, Miller says, that Obama will use his political capital in a second term to do other things besides Health Reform 2.0.

The bet here is that nothing substantial will happen to blunt prices of new brand-name drugs until 2017, when a new President from either party takes office. By then, with many aging Boomers retired, there will be huge new pressure to curb healthcare costs of all kinds—including the costs of new drugs. Curbing healthcare costs will be a hugely controversial, so it’s reasonable to project nothing serious will get enacted until about 2018, 2019, or even 2020.

What does that mean for drugmakers? Serious risks stand in the way of budget-hawk politicians, who will be accused of denying dying patients a potentially lifesaving drug just to save money. So it’s safe to bet on the status quo for a long time.

Even so, the party can’t last forever. Drugmakers know it, and will feel a sense of urgency to get while the getting’s still good. But there’s no question that the pricing environment is very favorable for them now, and for the foreseeable future, no matter how much scary rhetoric about price controls may come out of D.C.

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  • Dr. R. K.

    Pundits are constantly getting this drug pricing thing wrong. When companies sell products for ~$100,000 dollars it’s not because they just want to rake in huge profits because even at these prices it’s still questionable whether companies like Seattle Genetics will even be profitable.

    These are really complex drugs. They are engineered antibodies chemically conjugated with really complex toxins. Each of these alone would be hard to do and now you combine them you wind up with a lot of complexity.

    If you don’t want the high prices. You won’t be getting the life saving meds.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    R.K.—I know these are complex drugs, and they cost quite a bit to manufacture. I wasn’t trying to make a point here about whether the high prices are excessive or not. My point here was that Obamacare didn’t take away the pricing power of drugmakers, and this situation will probably remain in place for many more years to come.

  • http://www.wacleantech.org Tom Ranken

    Luke–

    I will bet you lunch that you have misanalyzed this. Increases in payments for brand name drugs is not equivalant to drug price inflation. The majority of the increases in payments for these products are introductions of new products that weren’t available in the past plus changes in utilization. Drug price inflation is a different, but related, issue.

  • P.R.

    I believe that Obamacare is being implemented in phases over the next several years, with those phases most likely to have the strongest impact on drug coverage/reimbursements (and by extension, pricing) yet to be implemented. I will be very interested to see an update of this article 4 years from now, once we start seeing the full provisiions of the law having been implemented.

  • Siraa

    As they say in the investment business: past performance is not an indicator of future returns.

    LT, just because these policy changes haven’t yet effected prices, doesn’t mean that they won’t. As P.R. noted, most of the changes are implemented after 2012.

    Sorry, but this is a fatal flaw in your argument LT, and therefore I don’t think that the article merits much consideration.

  • http://na John

    http://www.xconomy.com/seattle/2010/04/14/dendreons-big-question-how-much-will-people-pay-for-provenge/
    Luke,
    As usual, analysts got it wrong again w/ pricing! What’s new?

    Pre FDA approval, DNDN never announced a price for Provenge. They always responded that “it would be priced in accordance w/ similar drugs” and they always provided a range of $50-$100K.
    Dr. Gold has performed flawlessly, but I do fault him for not managing market & public expectations by providing a higher price range (ie: $80K – $120K) during all the healthcare cc in 2009 and 2010 and other presentations he has performed leading up to FDA approval day.

    It seems the street (http://www.thestreet.com/story/11039104/2/biotech-stock-mailbag-cadence-pharma.html) has consensus analysts forecasting $363M total for 2011. Dr. Gold has projected $350M-$400M.

    We don’t know who or what analysts make up this consensus average and we don’t know if this consensus will change during the year as more analysts provide their guidance on Provenge sales.
    Here is a list of analysts/boutiques/banks that follow DNDN: http://investor.dendreon.com/analysts.cfm
    What we also don’t know is which of these analysts that follow DNDN make up The Streets average of $363M.
    Any analyst that projects higher than $400M tells me they’re against the success of DNDN and think Dr. Gold is underpromising on Provenge sales…

    Fortunately, so far, the street consensus average or total is $363M giving Dr. Gold and his team the opportunity to blow through and EXCEED market expectations rewarding shareholders and dying pc patients!
    I hope DNDN does $380M+ total for 2011 ;o)
    Thanks Luke!
    Long DNDN

  • http://RamsellCorp.com Thomas Loker

    I think there are a few takeawyas from this analysis, correct or not depending on your point of view, that bear mentioning.

    1.) One of the problems with pricing in healthcare today, including pharmaceuticals is that all the pricing is based on false and specious numbers.
    2.) Invoice price has nothing to do with reimbursement rates and actual cost.
    3.) Due to the large amount of government action in this marketplace none of the pricing reflects true market influence.

    If we want to gain control over cost and pricing in healthcare including pharmaceuticales first we need to focus on having a market driven system. When the government attempts to try to gain some arbitrary control the inflective variables that industries can use to offset their controls come into play. If the government wants to limit margin then the industry will redirect the funds flows so they maintain their ideas of profit and there is not real control because the consumer doesn’t directly feel the effect of the price in a quantifiable way. The Rebate based and leveraged deepening discounted reimbursement rate system we use across healthcare has disconnected the providers of service and the consumers in such a fundamental way there is no recovery without a true market based redesign.

  • http://vcb5 J. Keeney

    Daa! It is because of fears of govt. control of health care and encouragement of generics that R&D-oriented companies, both big Pharma and biotech, are choosing to raise prices aggressively now on patent-protected, marketed drugs. The answer is to for govt. to lengthen patent exclusivity on forthcoming new drugs so that companies will be encouraged to invest more heavily in R&D, and have a longer period of time to realize a return on their R&D investments. The result would be a slowing in the rate of price increases on existing drugs, as well as companies choosing to introduce new medications at more reasonable prices.

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