Private equity groups and strategic buyers have good reason to be excited about the promise of therapies of the next decade. Foundational scientific discoveries have changed the way we understand cancers, immunological conditions, and other diseases, and are transforming clinical practice. An MIT study of cell and gene therapies projected that approximately 350,000 patients will be treated with 30-60 new, breakthrough drugs and biologicals by 2030. Cell, gene, rare disease, and other therapies hold great promise to transform patient lives – presenting an investment opportunity with significant potential business and societal returns.
Investors and buyers often closely (and appropriately) parse clinical trial results when analyzing the market opportunity for a therapy. Yet, drug pricing-related considerations also are paramount, as they can dramatically influence the market for and profitability of a drug or biological in the clinical pipeline. Moreover, companies' decisions at the clinical trial stage can lock in downstream market access and pricing options for a therapy. The following sections outline some key drug pricing and market access considerations for pipeline therapies.
1. What is the payer mix for the therapy?
Many novel therapies of the next decade are likely to have extensive utilization in government-funded health care programs, including the Medicare, Medicaid, Department of Defense TRICARE, and 340B programs. The therapies at issue often treat conditions that are most common among elderly, disabled, and/or low-income individuals. Even if an individual does not initially qualify as disabled or low-income for purposes of establishing eligibility for a government-funded health care program, he or she may become eligible for the Medicaid or Medicare programs as the underlying disease progresses.
Under federal law, government-funded health care programs generally receive steep discounts off of a drug's “list price.” The precise discount amount varies by government program, but generally is determined based on a manufacturer's commercial market pricing. Manufacturers and investors should prepare financial models of the manner in which commercial market prices impact the therapy's reimbursement under specific government programs. Similarly, launch-related or other discounts should be structured thoughtfully. If not, they could dramatically increase a manufacturer's financial obligations under government health care programs – potentially for a product's entire lifetime.
2. How and where is the drug administered?
Market access and drug pricing may differ depending upon how and where a drug is administered. Many emerging therapies will be administered in a hospital or by another provider on an outpatient basis. If separate payment is not established for such a drug (and the drug therefore is subject to bundled payment such as through a Diagnosis-Related Group), the drug may not be subject to the broad coverage guarantee afforded under the Medicaid drug rebate statute. The consequences of bundled payments can be significant from a market access standpoint – particularly for drugs with high anticipated Medicaid utilization.
Additionally, if a bundled payment rate is inadequate to appropriately reimburse hospitals and other providers for the cost of acquiring the drug or biological, the providers may end up financially underwater when they “buy and bill” the therapy. This may disincentivize them from stocking the therapy, particularly in the case of providers less able to bear financial losses. There are proactive steps that companies can take to mitigate these risks, but they require careful planning – ideally, prior to market launch.
3. What is the supply chain, and how will intermediaries approach coverage and pricing?
The landscape of supply chain intermediaries differs for physician-administered drugs, as compared to self-administered drugs. The drug pricing and market access strategy should take into account the particular intermediaries at issue. For instance, in the case of self-administered drugs, pharmacy benefit managers (PBMs) negotiate on behalf of insurers to obtain manufacturer rebates in exchange for insurers' preferential coverage of a drug. A manufacturer of a drug in a competitive therapeutic class often must offer competitive rebates in order to secure coverage of its therapy on Medicare Part D plan formularies, since Part D plan sponsors are not required to cover all drugs in most therapeutic classes. PBMs, in turn, have business incentives to prefer drugs with certain pricing structures.
Physician-administered drugs covered under the Medicare Part B benefit may not be subject to these same pressures. Historically, Part B drugs have been subject to fairly broad coverage under the Medicare program. Group purchasing organizations and other intermediaries play a pivotal role in ensuring access to physician-administered drugs, and they have their own set of business incentives that should be carefully considered.
The Medicare market dynamics, while not binding on commercial insurers, can heavily influence commercial insurers' approaches to coverage of therapies, so these dynamics merit careful consideration as part of a broader market access strategy.
4. What is the market access strategy for drugs with more than one possible indication?
Many breakthrough therapies are undergoing clinical trials for multiple possible indications. Where that is the case, it is important to consider market access and pricing on an indication-by-indication basis. For instance, if the Food and Drug Administration approves multiple indications for a single drug product over time, there is a risk that the first-approved indication will limit the market access and pricing strategy for all later-in-time indications. This can limit the profitability of later-approved indications of the therapy. With care and close counsel, these risks may be mitigated, allowing for successful launches of drugs of the next decade.
Originally published by Ropes & Gray, October 2020
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