Biotech companies should work more closely with payers to demonstrate the value of new drugs, in order to reassure nervous investors and pave the way for future growth, EY said in its annual industry report released today.
Beyond Borders: Returning to earth noted that the biotech industry generated record revenue, net income, financing, and deal value last year—but that many of these measures grew more slowly than in previous years, suggesting that the industry’s fortunes have reached a peak.
Biotech growth, the report added, is increasingly being challenged by numerous pressures on the price of medicines. Key among them is growing pushback by insurers to paying what drug developers are seeking for new and existing treatments. Payers are among stakeholders in healthcare—along with governments and the public—to which biotechs must do a better job communicating the value of their drugs, EY said.
A potential solution, according to Beyond Borders, is for biotechs to negotiate more contracts with payers in which reimbursement is tied to data on outcomes data. Such contracts have until now been more common in Europe, where single-payer state-run healthcare systems have long clashed with developers over drug prices.
Drug companies will increasingly move beyond the defensive posture of settling for such agreements, toward actively seeking agreements with payers, Glen T. Giovannetti, EY’s gGlobal life sciences leader, told GEN.
“As we look at this becoming more of the norm, we think companies will end up looking at this more strategically and playing offense, and saying, ‘we need to have a strategic relationship with a payer,’” Giovannetti said. “This will be more long-term, and less transactional, because this is the reality companies face: ‘We’re going to have to justify on a real-world evidence basis the value of our products.’”
While the healthcare system has yet to catch up to outcomes-based contracts being the norm, Giovannetti predicted that reforms toward encouraging such agreements will continue: “They’ll have to, because of the unsustainability of the current economics.”
Discouraged by Laws
In a January 29 policy memo, Eli Lilly and Anthem asserted that several federal laws now discourage outcomes-based contracts: Manufacturers are barred from communicating promotional claims of a drug’s safety or efficacy for an investigational use. Also, manufacturers must avoid commercialization of a drug before its approval, and must report pricing data to the federal government to determine Medicaid rebates; the ceiling price under the 340B program, which requires drug makers to provide outpatient drugs to providers at lower prices; and the maximum price government agencies can be charged.
“It’s not to say these are easy contracts to make or sign, but more that they [drug developers] need to make more of an effort to do them,” Ellen Licking, EY life sciences senior analyst and the report’s managing editor and a contributing writer, told GEN. “We’re starting to see some examples of them. And as those examples start to bear out in the marketplace, you’ll see more willingness to do them.”
Two recent examples of outcomes-based contracts, announced last month, were signed by Cigna with the makers of two cholesterol drugs in the PCSK9 inhibitor class that won FDA approval last year—with Amgen for Repatha (evolocumab) and with Sanofi and Regeneron for Praluent (alirocumab).
“If the drugs meet or exceed expected LDL cholesterol reduction, the original negotiated price remains in place,” Cigna said May 11 in a statement. “If Cigna’s customers aren’t able to reduce their LDL-cholesterol levels at least as well as what was experienced in clinical trials, the two pharmaceutical companies will further discount the cost of the drugs.”
Driving M&A Growth
Factors putting pressure on drug prices include politics and economics. The U.S. presidential election has fueled growing opposition to drug price hikes—Hillary Clinton in September unveiled a plan she said was designed to prevent steep hikes in drug prices—while lawmakers of both parties criticized Martin Shkreli and former Valeant CEO J. Michael Pearson over sharp price hikes at Congressional hearings where they were subpoenaed to appear.
On the economic side, years of FDA reforms such as the Breakthrough designation and Fast Track approval process, have increased the number of new medicines by encouraging innovation, as has the first approvals of biosimilar medicines, while patent exclusivity expirations have slowed down in recent years as the industry surmounted the proverbial “cliff.”
The economic and political factors driving price pressures, Giovannetti said, will leave companies more selective about how they pursue R&D, pinpointing areas of therapeutic focus where they think they can be most competitive—and thus develop new treatments most likely to command the highest prices.
“I don’t think that this issue will go away any time soon,” Giovannetti said. “This is going to be with the industry forever, that need to demonstrate value to support the price that they’re looking to get.”
While the growing number of new medicines and the sky-high price of many specialty drugs worries payers, investors have retreated from biotech and pharma stocks based on concerns that profits will eventually be reduced by new curbs on prices.
As of June 2, shares of the iShares Nasdaq Biotechnology Exchange-Traded Fund had fallen 28% to $286.28 from its all-time high of $398 on July 20, 2015. The First Trust New York Stock Exchange Arca Biotech Fund had fallen 25%, to $98.46, from its high of $131.45 on July 17.
Acquisition Sweet Spot
“The stock market pullback in Q4 2015 and especially Q1 2016 puts more companies in a valuation sweet spot for acquisition, where pharma companies can say, ‘I can do the math on this. It doesn’t feel like I’m buying at an all-time high, because we’re at 30 to 40% off the high,’” Giovannetti said.
He added that while the market swoon will drive more M&A—especially deals of up to $20 billion—buyers will be selective about what companies to snap up, seeking companies they think will deliver return on investment by boosting areas of strength or filling pipeline gaps.
Would-be acquirers, Giovannetti added, retain the “firepower” to do deals—a term defined by EY as a company’s balance-sheet strength based on its market capitalization, cash equivalents, and debt capacity—since they are flush with cash following years of financings as the financial markets recovered.
The industry is on track to meet EY’s anticipation earlier this year that M&A activity in 2016 by biotechs and pharmas could reach $200 billion, Licking said—about the same as 2014. Last year EY recorded more than $300 billion in M&A activity, but that figure included Pfizer’s planned $160 billion acquisition of Allergan, which the pharma giant ended in April.
Other highlights of Beyond Borders:
Record revenue, profits: The biotech industry finished 2015 with all-time highs in revenue ($132.7 billion, up 13% from 2014) and net income ($16.6 billion, up 18%). However, revenue rose year-over-year by 18% in 2014, a year when net income more than tripled over 2013, rising 214%, reflecting the success of Gilead Sciences’ Sovaldi (sofosbuvir) and other hepatitis C drugs.
R&D spending climbs: R&D spending in 2015 rose 16% over the previous year, to $40.1 billion. Two-thirds (66%) of the increase came from biotechs with less than $500 million in annual revenue, the report said.
Strategic alliances grow: Thanks to 17 alliances valued at more than $1 billion each, the value of strategic alliances within biopharma grew to a record-high $55.4 billion last year—of which $20.9 billion was generated through biotech-biotech partnerships.
More upfront expense: Companies that in-license products from partners paid 11% of potential deal value in 2015, the fourth annual increase in the upfront percentage. Upfront payments included almost $2 billion in equity.