Medicare will negotiate the prices of top-selling drugs for blood clots, diabetes, cancer and arthritis, flexing newly granted authority that for the first time allows the insurance program to use its market power to lower the cost of certain medicines.

On Aug. 29, the Biden administration released a list of 10 drugs that will be included in the first round of negotiations, which will run over the next year and produce prices that take effect in 2026. Among the drugs on the list are the widely used blood thinners Eliquis and Xarelto, which made their respective makers more than $10 billion in U.S. sales last year, as well as the diabetes treatments Januvia and Jardiance.

The list also includes AbbVie and Johnson & Johnson’s leukemia drug Imbruvica, Amgen’s anti-inflammatory therapy Enbrel and Novartis’ heart failure medicine Entresto. Rounding out the initial 10 were AstraZeneca’s Farxiga, J&J’s Stelara and Novo Nordisk’s insulin aspart, which is sold under the brand names Fiasp and Novolog.

More than 8 million people covered by Medicare used the drugs between June 2022 and May 2023, according to a fact sheet provided by the Centers for Medicare and Medicaid Services, or CMS. Gross spending over the period surpassed $50 billion, or about 20% of prescription drug costs under the so-called Part D benefit.

The list’s announcement moves forward an effort to expand the federal government’s role in determining what drugmakers can charge for their products. Democrats gave Medicare its new negotiation powers via last year’s Inflation Reduction Act, which passed Congress along party lines.

Known as the IRA for short, the law fulfilled policy goals long-sought policy goals held by Democrats. But its drug pricing provisions, which also cap out-of-pocket costs on insulin for people in Medicare, are popular among voters of both parties.

“For far too long, Americans have paid more for prescription drugs than any major economy,” President Joe Biden said in a statement. “And while the pharmaceutical industry makes record profits, millions of Americans are forced to choose between paying for medications they need to live or paying for food, rent, and other basic necessities. Those days are ending.”

For the pharmaceutical industry, the IRA was a significant — and rare — political defeat after years of fiercely contesting any legislative attempt to regulate drug pricing in the U.S.

Six large drugmakers, along with the powerful lobby PhRMA, have since sued to block the law and its implementation in lawsuits filed over the past two months. They claim the law is unconstitutional and, rather than setting up a process of negotiation, unfairly compels drugmakers to accept terms set by the government or endure ruinous fines.

“Although drug companies are attempting to block Medicare from being able to negotiate for better drug prices, we will not be deterred,” Xavier Becerra, head of the Department of Health and Human Services, said in an Aug. 29 statement.

To determine the 10 drugs included in Tuesday’s list, Medicare was directed to identify the medicines on which it spent the most under Part D, which covers products taken outside of a doctor’s office. Therapies with generic competitors were not eligible, nor were products approved within a certain number of years.

By next February, CMS will send an initial price offer to the companies, which then have one month to counteroffer. Further meetings can then take place, with CMS announcing the “maximum fair price” it ultimately determines by Sept. 1, 2024.

Those prices will take effect Jan. 1, 2026, and remain in place until a drug becomes ineligible for the program, such as when a generic competitor enters the market. For some of the initial 10 selected that may be quite soon. Januvia, for instance, is protected from competition until May 2026, per Merck’s most recent annual filing.

Medicare will select more drugs for negotiation each year, eventually including Part B medicines and expanding to 20 per year from 2029 onward.

The minimum discount required under the IRA varies based on a drug’s years on market, but must be at least 25%. However, it’s unclear exactly how the resulting savings will be used. Some people covered by Medicare could benefit from lower coinsurance based off a drug’s price, as well as reduced liability during their deductible phase. Savings might also help reduce premiums.

“There is no specific guarantee within the law that any of the savings the government derives from the so-called negotiations will be passed on to patients,” said Catherine Owen, U.S. commercial general manager for Bristol Myers Squibb, which sells Eliquis along with Pfizer.

Bristol Myers and its pharmaceutical peers have also warned the law will impact their investment in drug research and development, and push them to prioritize biologic medicines over chemical pills.

Some, such as Novartis and Eli Lilly, claim they’ve already made decisions to sideline certain programs because of how the law limits the time in which they can earn money on newly approved products.

According to Owen, Bristol Myers recently decided against running a lengthy study of an experimental small molecule drug called iberdomide in newly diagnosed multiple myeloma because of the IRA’s negotiation timeline.

The wait is over. After months of speculation, the Biden administration on Aug. 29 unveiled the first 10 drugs subject to Medicare price negotiation, beginning a year of back-and-forth between manufacturers and the agency. And now the real question is, how much impact will pharmaceutical companies see? 

There are few surprises on the initial list, which comprises mostly cardiovascular, diabetes and cancer blockbusters, including the blood thinners Eliquis and Xarelto, Type 2 diabetes medications Januvia, Jardiance and Farxiga and the blood cancer therapy Imbruvica.

Many analysts had predicted those drugs and others would appear among the selections after the Centers for Medicare and Medicaid Services announced last year that it was choosing among the top 50 single-source drugs it spent the most on under Medicare Part D.

However, John Stanford, executive director of Incubate Coalition, a venture capital advocacy group, said that, for many in the industry, the official list brought home the reality of drug pricing negotiations. 

“We're going from 0% of people caring about it to 99% [to]100% of people saying: ‘This is a totally new landscape,’” Stanford said. Incubate has criticized the price negotiation process, and counts among its advisory board members biotech executives and investors.

While speculation around the impacts of Medicare negotiation have run rampant since the CMS was granted the authority under the Inflation Reduction Act last year, the list provides a window into how the agency is approaching the process, Stanford said. 

R&D incentives

Kirsten Axelson, a consultant for the Partnership to Fight Chronic disease and visiting fellow at the American Enterprise Institute, said CMS makes clear that Medicare price controls will apply to all FDA-approved indications of a drug, rather than just the initial indication.

For instance, Jardiance is noted for both heart failure and diabetes on the list and Farxiga is recorded as a diabetes, heart failure and chronic kidney disease treatment. Based on those observations, Axleson said the industry can expect the agency to “group together as many drugs of the same moiety as possible,” on future drug pricing lists.

Pharma executives and industry groups had urged the agency against this approach, arguing that lumping multiple indications for a drug into negotiations would disincentivize companies from researching a molecule for more than one disease..

David Ricks, CEO of Eli Lilly, has suggested he may alter the company’s development strategy to pursue multiple molecules with staggered timelines to “spread their bets” and keep the business attractive for investors.

“It's doing exactly what many of us are concerned about, which is creating a disincentive to add second or third indications for the same drug,” Axelson said of the list, noting that she expects more companies to begin rethinking their strategies. “The message to manufacturers is not to develop for a second or third indication.”

Because the list targets drugs for widespread chronic conditions like diabetes and heart disease, it could change how drugmaker view those indications, Axelson said.

For instance, drug manufacturers may think more carefully about developing medications for diseases affecting large portions of Medicare patients, because the new therapies would have to compete with negotiated prices and, potentially, be later targeted for negotiation, she said.

Areas of drug development that may be less impacted include treatments for diseases that impact people younger than 65, and therapeutic areas where the barriers to launch are lower, and where companies can reap profits more quickly.

Rethinking rebates

Analysts have also questioned whether the government-negotiated prices for drugs on this first list will be lower than the rebate prices currently offered to Medicare Part D plans.

Many of the drugs the CMS chose are already “deeply discounted,” Axelson said. She suggested those prices will soon become the ceiling for how much companies can charge.

“If you're already discounting 60% or 70%, that's where CMS is going to start,” she said.

As the agency prepares to add 10 more drugs to its negotiation list each year, and then 20 per year after 2029, manufacturers with likely candidates for negotiation should rethink their rebate strategy, Axelson said.

“If I were a manufacturer with a blockbuster drug, I would, especially toward the end of the life cycle, start thinking about pulling back on the discounts because they're going to become punitive,” Axelson said.

Awaiting more clues on market impact

The announcement of the first 10 drugs marks only the beginning of a long negotiation process between drugmakers and the Biden administration. Companies with products on the list, including Merck, Bristol Myers Squibb, Janssen and other pharma giants have until October to decide whether they plan to participate in the negotiations.

Most of them will certainly engage in negotiations, as they would otherwise need to withdraw their drugs from Medicare and Medicaid coverage or face an excise tax of up to 95% of their U.S. sales if they bowed out.

Analysts and investors will be watching the negotiation process closely over the next year for more signs of how it could impact market dynamics. The next big insights are likely to come in September 2024 when the CMS publishes the maximum prices negotiated for the drugs, Stanford said.

“When the prices come out, that's when we're going to know just how much of a gut punch this is to the industry,” and how much it could impact biotech investment,” he predicted.

If the agency ignores the costs of R&D and manufacturing associated with drug development while determining prices, “then that's the signal that the entire marketplace is going to cool significantly” because of negotiations, he said.

However, if the agency makes minimal price cuts and signals that “they’re being fair arbiters,” he said investments may still slow, but won’t grind to a screeching halt.

“When we see just how draconian the price controls are, we'll decide just how much of the spigot we close as investors,” Stanford said. “The more draconian the cuts, the more chilling the impact on investment.”

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By Lumanity

The Inflation Reduction Act (IRA) provides Medicare with the opportunity to negotiate drug prices. While there is preliminary direction about how maximum fair price (MFP) will be calculated, speculation exists regarding how the negotiation process will work, evolve over time, and impact other areas of drug innovation and physician reimbursement. This aspect of the IRA will likely change choices manufacturers make about bringing a new product to market, could potentially dampen investment in additional indications after introduction, and could discourage subsequent class entrants (i.e., follow-on drugs). At the same time, there is the potential for other less obvious unintended market consequences that may change patient access to care, physician reimbursement, and pricing in other payer/purchaser segments beyond Medicare.

The negotiation process for eligible small molecule drugs will start seven years after US Food and Drug Administration (FDA) approval and will go into effect in year nine. For biologics, the process will begin eleven years after licensure and will go into effect in year thirteen. Beyond total product costs in Medicare, other elements that must be considered by the Secretary of Health and Human Services in calculating an MFP include: the cost of producing the drug, research and development costs, any prior federal financial support, and alternative treatments.¹

The negotiation of drug pricing and setting of an MFP will alter the revenue curve for manufacturers. With less revenue to fund research and development, budgets could become more selective in funding clinical studies for new products. A primary consequence of this change will elevate the importance of bringing drugs to market with clear revenue pathways. While many respected thought leaders have already expressed concern that innovation for small molecules will be disproportionately impacted due to the brevity of the nine-year period before MFP can be established, there are many other equally concerning consequences associated with MFP implementation.

For example, drugs that are disproportionately used in the 65+ years population may have fewer products in the development pipeline in the long run. These products often require significant research and development investment and address an elderly patient population that is often in the most need of innovation. If the exclusivity time period shrinks due to the MFP, it is conceivable that development efforts could shift to those conditions with larger commercial patient populations and longer exclusivity periods. Another potential consequence is that post approval clinical studies may be deprioritized or eliminated due to the dampened patent protection when an MFP is established. There also may be a similar disincentive for the investment in follow-on drugs which today are important clinical options for patients who either are not able to tolerate or experience side effects with the first entrant. These follow-on drugs often provide greater price competition during the early stages of patent exclusivity.

The value of each indication will be an important business consideration for multiple indication products. Some manufacturers may choose to wait until the clinical studies for the largest indication are completed before submitting a regulatory filing and starting the clock for the MFP process. This is contrary to current launch strategies that begin with smaller indications which can be supported by evidence from a proportionally sized clinical trial, and then gradually grow into larger indications as more clinical evidence and real-world experience is gathered. The market may experience fewer products with multiple indications if it is determined that additional indications are unable to be funded.

There is the potential for broader unintended consequences to occur as a result of the implementation of MFP within the Part B benefit, as well as availability of MFP to state Medicaid programs and 340b Covered Entities as specified in the IRA. For example, MFP may gradually change the reimbursement paradigm in physician offices if it results in a decrease of a drug’s Average Sale Price (ASP) which would alter provider reimbursement. Currently there is no clarity on how manufacturer discounting practices would be modified to account for this reimbursement decline.

As has been observed in oncology, community-based physician practices are dependent upon payer reimbursement of physician-administered drugs. If ASP is diminished, practices with high Medicare patient populations which acquire and administer drugs to their patients may not be able to afford to stay in practice. As a consequence, more physicians might choose to join health systems which as proposed in IRA will gain access to the MFP via the 340b program. This could stimulate even greater volumes of drug purchases through 340b than has been observed to date. This may exacerbate a trend noted by Adam Fein whereby 340b pricing coupled with greater reimbursement rates negotiated by local market dominant health systems have increased - not decreased - healthcare costs.²

A final consequence of note may be acceleration of enrollment in Medicare Advantage programs. In contrast to Prescription Drug Plans (PDPs) that may implement more restrictions as their cost share increases, the Medicare Advantage (MA) programs are incented to offer better access to expensive new drugs due to their value in offsetting costs in other areas of the health benefit spend. As a result, more individuals may opt to participate in Medicare Advantage programs to have access to new drug innovations. The ultimate effect could be a larger portion of Medicare patients being subject to restrictive provider networks implemented by MA programs.

As we move toward the first set of ten Medicare Part D drugs entering the negotiation process, it will be important for manufacturers to start evaluating their product portfolios now to ensure their business models support critical choices about indications and timing to market. In addition, physicians will need to monitor any erosion of ASP to determine ways to streamline their practices. For those that are heavily dependent on Medicare reimbursement, they may choose to join health systems with greater ability to take advantage of drug discounts. At the same time, Medicare-eligible individuals will need to evaluate and select plan options that support access to the drug innovations they need. Perhaps the most important consideration throughout IRA implementation is for CMS and industry stakeholders to develop implementation approaches with an eye on minimizing the unintended consequences that could either harm patient access to, or potentially dampen investment in, the research and innovation that has historically brought significant advancements to public health in the US.

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References

1. Kirchhoff S. Selected Health Provisions of the Inflation Reduction Act. Congressional Research Service. https://crsreports.congress.gov/product/pdf/IF/IF12203 Published Sept 1, 2022. Accessed Jan 12, 2023.
2. Brown A. Hospitals and Pharmacies Profit as 340b Drives Up Patients’ Drug Costs. https://michbio.org/hospitals-and-pharmacies-profit-as-340b-drives-up-patients-drug-costs/ Published Nov 9, 2022. Accessed Jan 24, 2023.

Taking on one of the world’s most lucrative drugs isn’t easy. The problem is so thorny that, among the companies challenging AbbVie’s arthritis treatment Humira with low-cost copies in the U.S., several strategies have emerged in the first months of direct competition.

The manufacturers of these generic biologics, or biosimilars, are battling to gain a place on insurers’ coverage lists. Success could mean a bigger slice of the $19 billion in U.S. sales that Humira earned AbbVie in 2022.

So far, most have chosen to price their biosimilar Humiras at only a small public discount, banking instead on offering insurers rebates in private negotiations. A few are trying something more radical with steep upfront price cuts.

The contrasting tactics highlight the intricacy of U.S. drug pricing, as well as reasons for why biosimilars have so far disappointed in making expensive biologic medicines more affordable and accessible to patients. That promise has, with a few exceptions, not materialized as quickly or as broadly as had been hoped.

Price split

While generic copies of pharmaceutical pills typically enter the market at prices well below their branded competitor, the same hasn’t been true of biosimilars.

Four of AbbVie’s new challengers have set a discount of just 5%, betting that behind-closed-door negotiations with insurer middlemen known as pharmacy benefit managers will result in rebate deals sufficient to gain coverage.

Two launched their copies at deep discounts to Humira, as low as 15% of the drug’s nearly $7,000 list price for a four-week supply.

Others, though, are hedging their bets. Amgen, Biocon and Sandoz have all gone with high- and low-price products to suit different types of healthcare buyers. (Amgen, which was the first to launch a biosimilar Humira in January, chose a narrower split than Biocon and Sandoz did.)

“There are definitely some dynamics here that are creating an obvious divide,” Fran Gregory, vice president of emerging therapies at pharmaceutical distributor Cardinal Health. “It’s highly influenced by the payers and PBMs.”

Boehringer Ingelheim, which launched its biosimilar at a 5% discount to Humira, claims it is “competitively priced.” Called Cyltezo, Boehringer’s drug is the only biosimilar approved so far as an “interchangeable,” or able to be substituted directly by pharmacists without a specific prescription.

“We recognize the potential benefits of a two-price strategy and are pursuing this approach for implementation in 2024,” said Stephen Pagnotta, Boehringer’s biosimilar commercial lead, in an email. “This approach will allow us to provide different pricing options to meet the diverse needs of patients and improve accessibility.”

Competitive lessons

Pharma companies will be watching the post-monopoly market for Humira closely, in part because no biologic drug has faced so much competition in such short order.

How pricing for Humira biosimilars shifts over time may carry wider lessons as more biologic copycats pour onto the market in the coming years. For AbbVie, the competitive balance could determine whether the sales decline it expects results from lower prices it can match, or whether it loses volume it can’t replace.

Christopher Raymond, an analyst at Piper Sandler, recently surveyed around 400 physicians, and concluded Humira is currently retaining market share in rheumatoid arthritis, its main indication. According to the findings, declining use of the drug in digestive and skin conditions has been offset by a new product, Skyrizi, that AbbVie introduced as a Humira successor.

“Based on this feedback, while price is clearly a drag on this franchise, we think Humira as a brand is likely to be stickier than investors may anticipate,” Raymond wrote in a July 20 note to clients.

Such scenarios have been commonplace with biosimilar launches. Inflectra, an alternative to Johnson & Johnson’s Remicade and one of the first biosimilars launched in the U.S., struggled to make headway when it first arrived. Its maker, Pfizer, eventually sued J&J alleging anticompetitive practices. They settled the case in 2021.

Over time, competition has had more of an impact. Nearly seven years after the launch of Inflectra, the average sales price of Remicade and its biosimilars has dropped by 68%, according to a report from biosimilar manufacturer Samsung Bioepis. Biosimilars now account for nearly half of the market.

Other factors may play a role, too. According to Samsung, biosimilars of cancer treatments have made greater inroads more quickly than those for immune-related disorders, like Humira and Remicade. Lookalikes to Roche cancer drugs Avastin and Herceptin have taken, respectively, 85% and 83% market share, for instance.

That’s due in part to “value-based” payment models, which reward doctors for reducing overall costs. Autoimmune drugs like Humira and Remicade are also taken for many years, making it harder to switch patients stable on branded drugs to a biosimilar.

“Providers are ready, able and willing to prescribe biosimilars to patients who are naive to treatment,” said Gregory. But branded products may be harder to replace among patients already taking them. Many of those drugs remain on PBM formularies, she said.

PBM choices

Two of the three largest PBMs in the U.S., Cigna Healthcare’s Express Scripts and United Healthcare’s Optum, have already updated their coverage lists in the wake of Humira biosimilars launching.

Both Express Scripts and Optum chose Cyltezo and Novartis’ Hyrimoz, along with an unbranded Novartis product, to add to their earlier selection of Amgen’s biosimilar.

In a statement, Aetna’s CVS Caremark said it is “reviewing the availability of additional entrants and plan[s] to recommend coverage of one or more of these products.”

The choices PBMs make can significantly impact consumers’ out-of-pocket costs. For example, they can end up paying more for deeply rebated products because cost-sharing is sometimes based on drugs’ list price. In response, policymakers have called for greater transparency into PBM practices and how they pass on rebates.

“The PBMs have a financial model that they’ve been living with for years,” Gregory said. “That financial model will not change overnight. But I think it will change over time.”

At the start of the last decade, big pharma was getting smaller. Blockbuster medicines that had fueled years of growth were losing patent protection, exposing the industry’s largest companies to generic competitors. The resulting impact was so substantial it temporarily stalled the relentless upward march of U.S. drug spending.

Today, big drugmakers are facing an even larger “patent cliff,” with more than $200 billion in annual revenue at risk through 2030. But this time around, many of the brand name drugs losing market exclusivity are biologic products, manufactured from living cells, rather than the chemical pills that previously dominated the ranks of pharma top-sellers.

These biologic drugs, like AbbVie’s anti-inflammatory treatment Humira and Merck & Co.’s top-selling cancer medicine Keytruda, will face competition from so-called biosimilar drugs that, unlike generics, may not be as easily substitutable. Still, it will be a treacherous period for drugmakers to navigate, as they will need to replenish their research pipelines and carefully manage new product launches to replace lost revenue.

“This is of tectonic magnitude,” Arda Ural, health sciences markets leader at the consultancy EY. The looming patent expirations "capture most blockbusters," he added.

Besides Humira and Keytruda, drugs like Bristol Myers Squibb’s immunotherapy Opdivo, Johnson & Johnson’s immune disease medicine Stelara and Regeneron’s eye treatment Eylea will reach the end of their patent protection this decade.

The launch of Amgen’s copycat version of Humira in January represented a start of sorts for this looming industry-wide patent cliff. Nine other Humira biosimilars are set to arrive by mid-2023. As a result, U.S. sales of the drug, which totaled $18.6 billion in 2022, are predicted to steadily shrink.

A different sort of cliff

The pattern of sales decline for Humira and other blockbuster biologics like it is expected to be different for several reasons, though.

Many biosimilars won’t be interchangeable, or directly substitutable, by pharmacists, for example. Physicians, meanwhile, may be reluctant to switch patients who are stable on the branded drug, meaning that initially it will be newly diagnosed patients with chronic diseases who are most likely to receive biosimilars. And because biosimilars are more expensive to develop and make, their manufacturers won’t be able to afford cutting prices by nearly as much as with generic pills.

“If you track the sales of a typical small molecule that goes generic it really goes off the cliff — 80% of the market can be gone in 30 to 90 days and the price goes down even more,” said Richard Kelly, a senior partner with the law firm Oblon, McClelland, Maier & Neustadt who specializes in life sciences intellectual property.

“[Biosimilars] have to be sold,” he added. “[Salespeople] have to go around to the doctors to sell a drug. It’s just another product in the detail-man’s bag.”

Take the statin Lipitor, once the world’s most lucrative drug. Sales fell from nearly $11 billion in 2010, the year before it faced generics in the U.S., to $4 billion in 2012. Pfizer’s overall revenue fell from $68 billion to $59 billion over the same period.

In the case of Humira, the fall is expected to be more gradual, with the company forecast to retain more than one-third of its 2022 U.S. revenues in 2024 and hold onto more than $2 billion through 2030, according to Evaluate Pharma.

The impact will be felt, nonetheless: AbbVie and analysts alike expect company-wide revenue to fall for at least a year because of Humira competition. And AbbVie executives recently indicated sales are likely to be sluggish in 2024, too, walking back earlier predictions that the company would see a return to growth then.

Humira’s sales erosion will be closely watched throughout the industry as executives and investors try to understand the long-term effects of biosimilar entry. Early biosimilars didn’t impact prices the way that payers and lawmakers had hoped, in part because there weren’t many of the copycat drugs. (While 40 biosimilars are now approved in the U.S., only 26 are available on the market.) Branded drugmakers also successfully used contracts and rebates to stave off competition.

However, analysts and industry experts believe the sheer number of Humira copycats and the entry of interchangeable products will allow them to take share from AbbVie.

The chief question facing AbbVie is how quickly it can recover through two replacement products: Skyrizi for psoriasis and Crohn’s disease, and Rinvoq for rheumatoid arthritis and several other inflammatory disorders. The company has upgraded its forecasts for both drugs, which it now says will earn $21 billion combined in 2027, approximately equalling Humira’s peak sales.

One major reason Humira achieved its massive sales was the many different autoimmune disorders for which it gained approval. With follow-on biologic drugs, however, the incentives to do so may be limited by the Inflation Reduction Act, which gives the federal government the power to negotiate lower prices within Medicare, said Mara Goldstein, Mizuho Securites’ senior biopharma analyst.

“We’re living through this real time and it’s a little challenging,” she said. “Does it truly create a disincentive to develop indications? Will companies continue to invest in new clinical trials right up to patent cliffs? How does [the law] change the value of dollars invested over time?”

New lessons to learn

AbbVie followed the lessons of the previous patent cliff by merging with Allergan in a 2019 deal that gave it enough new revenue to withstand the expected erosion of Humira's sales. Its approach was similar to large pharmaceutical companies’ strategy ahead of the 2010s patent cliff, which spurred the megamergers of Pfizer with Wyeth and Merck with Schering-Plough.

Megamergers might not be the answer this time, however. For one, current pharma executives have expressed reluctance to do big deals because of the complexity of combining two companies. There is debate, too, over the effects such deals have on market valuation and R&D productivity afterwards.

Another reason is that, after years of industry consolidation, there are not many major large drugmakers left as attractive merger targets. Those that remain have patent cliffs of their own, Goldstein said.

Instead, the hunt for new products will either be in big drugmakers’ own laboratories or in those of smaller biotechnology companies. By having two successor blockbusters already in waiting, AbbVie has shown it can execute on the former approach.

Yet, across the industry, big drugmakers’ “R&D productivity is not necessarily corresponding to the R&D investment,” Ural said. R&D productivity and returns have, with a few exceptions, steadily declined each year over the past decade, according to data from both IQVIA and Deloitte.

Meanwhile, in biotech, “there may not be enough assets out there,” Ural added. “It’s going to be a fight for established assets, of which there aren’t that many.”

That fight will be fueled by large cash holdings. Jefferies analyst Michael Yee estimates big drugmakers have $500 billion in cash to spend on acquisitions and other pipeline-building transactions. Small and mid-sized biotechs have simultaneously seen their valuations drop, limiting their financial options, Yee wrote in a Feb. 5 note to clients.

The experimental drugs large pharma companies chase, through acquisition, licensing or inside research, might need to be different, too. They could find advantages in development platforms that can generate multiple new medicines like messenger RNA, gene editing or next-generation antibody technology, or in drugs that have promise across multiple indications.

Humira-sized blockbusters may become harder to achieve, though, which will change how drugmakers develop and commercialize new products, said Bill Coyle, global head of biopharma at consulting firm ZS. AbbVie, for example, needs two drugs — Sykrizi and Rinvoq — to replace sales of Humira.

“I think we’re potentially entering an era of fewer blockbusters and a lot more smaller products,” he said. “The other shift for many of the big pharmas is that their cadence of launch needs to be more efficient and frequent. They need to become more effective launchers of new assets.”

Patent thicket-ing

For drugs further from patent expiration, extending the date of generic or biosimilar entry through the construction of a “patent thicket” is another tactic drugmakers are pursuing. By surrounding Humira with dozens of patents in the U.S., for example, AbbVie pushed off biosimilar entry by seven years after the drug’s principal patent expired.

Others in the industry are seeking to do the same. Merck is testing a subcutaneous version of the intravenous Keytruda, which could potentially merit a separate patent and extend its market exclusivity by years.

A trial of subcutaneous Keytruda in lung cancer is due to deliver results in spring 2023. While subcutaneous Keytruda would likely still be delivered by physicians, it could be more convenient. “It’s not the same as having to get an IV, where you have to sit in a chair for an hour or two,” Kelly said.

Other drugmakers sought to push out the entry of biosimilars using this strategy, including Johnson & Johnson with its multiple myeloma medicine Darzalex and Bristol Myers with its Keytruda rival Opdivo.

Already, Bristol Myers has benefited from such intellectual property practices with its medicine Revlimid. The blood cancer drug’s exclusivity was protected by patents held by its original developer, Celgene, that were strong enough to keep most generic competition at bay through 2026. That will give Revlimid, a small molecule drug, a pattern of sales decline that looks more similar to biologic drugs, at least for a few years.

Tahir Amin, founder and executive director of the Initiative for Medicines, Access & Knowledge and a critic of pharma companies’ intellectual property practices, said he expects drugmakers with approaching cliffs to use late-earned patents to delay competition.

Striking limited distribution deals with copycat drugmakers, as Celgene did with Revlimid, could also be a tactic to stave off government drug price negotiation, because the Inflation Reduction Act limits that authority to only those products with no competition.

“At the end of the day the patent system is going to define how they shape the market,” he said.

Johnson & Johnson’s pharmaceutical unit in July joined the battle against a new law designed to lower prescription drug prices, claiming it amounts to confiscation of property.

Janssen Pharmaceuticals filed suit in the U.S. District Court for New Jersey, following the lead of Bristol Myers Squibb. Merck & Co. and the trade group Pharmaceutical Research and Manufacturers of America, who are also fighting the law, but have filed their lawsuits in different federal venues.

In keeping with other challenges in the pharmaceutical industry, J&J says its constitutional rights are being violated by the Inflation Reduction Act. For J&J, the issue is particularly pressing. The New Jersey-based company expects its top-selling Xarelto drug to face price negotiations as part of the program that kicks off with an initial target list by Sept. 1.

The U.S. has long been the most lucrative market for pharmaceutical makers, in part because there are no mechanisms such as price negotiations to control the cost of medicines. As a result, Americans pay more than three times as much for brand-name drugs than people in other parts of the world, according to a 2021 Rand Corporation study funded by the U.S. government.

The IRA, passed in 2022, was designed to address that gap by allowing Medicare for the first time to negotiate prices for drugs it covers for senior citizens. The Centers for Medicare and Medicaid Services plan to release a list of the first 10 drugs selected for the negotiation process by Sept. 1. New prices for that group would take effect in 2026.

J&J and other drugmakers claim that the law will actually result in dictated prices and penalties instead of an equitable agreement between the government and a particular company. The result is a violation of the Fifth Amendment, which prohibits taking private property for public use “without just compensation,” J&J argued in its lawsuit.

“Stripped of its misleading labels, the program is a straightforward confiscation of constitutionally protected property,” J&J said. “It is akin to the government taking your car on terms that you would never voluntarily accept and threatening to also take your house if you do not `agree’ that the taking was `fair.’”

J&J also said its First Amendment rights are being violated because the law would coerce the company into saying it’s agreeing with the government on a negotiated “fair” price, which it says isn’t the case. J&J additionally touted the $65.7 billion it has spent since 2016 on research and development, arguing that the law will ultimately harm patients by slowing investment in studies of new and existing drugs.

“It deprives tomorrow’s patients of innovative medicines made possible by protected patent rights and market-based pricing, and the future generics enabled solely by today’s innovator drugs,” J&J said. “And it harms today’s patients by threatening access to existing therapies and eviscerating incentives to continually improve those therapies.”

Astellas Pharma also recently challenged the law in federal court, announcing in July that it had filed a suit against legislation that “is not only bad policy, but unconstitutional.”

The pharmaceutical industry’s counterattack against Medicare’s new drug pricing powers widened Aug. 25 with AstraZeneca joining several of its drugmaker peers in suing the U.S. government.

In a 44-page lawsuit, the British company claims Medicare is unlawfully implementing provisions of last year’s Inflation Reduction Act, which for the first time gave the agency the authority to negotiate prices of certain top-selling drugs.

AstraZeneca also alleges the law’s drug pricing provisions are unconstitutional, an argument made in several different ways by Merck & Co., Bristol Myers Squibb, Johnson & Johnson, Astellas and Boehringer Ingelheim in previous lawsuits.

Known as the IRA for short, the law directs Medicare to identify drugs on which it spends the most that are so-called “single source,” or lacking generic competitors, and are either nine or 13 years removed from U.S. approval. The agency then has the power to negotiate for a lower price, initially for 10 medicines in 2026 and then expanding to cover more each year after.

AstraZeneca and the other drugmakers that have sued argue that the process laid out by the IRA is a negotiation in name only. Under the law, drugmakers that refuse the lower price offered by Medicare are subject to a heavy tax that’s avoidable only if companies withdraw their products from the government insurance program.

“The IRA forces manufacturers to engage in purported ‘negotiations’ but affords them no bargaining power, no meaningful opportunity to walk away, and no ability to protect their interests against a so-called ‘maximum fair price’ capped at an amount drastically below actual fair market value,” AstraZeneca wrote in its suit, which was filed in U.S. District Court for the District of Delaware.

The company’s lawsuit comes the week before the Biden administration is set to make public its list of the 10 medicines that will be initially subject to negotiated prices in 2026. AstraZeneca’s asthma treatment Symbicort is viewed by some as likely to be on the list.

AstraZeneca claims the IRA’s drug pricing provisions violate the Fifth Amendment’s due process protection, similar to arguments made by Astellas, J&J and Boehringer. However, the company dedicates much of its case to alleging Medicare has violated the IRA itself in how it’s interpreted the law in regulatory guidance issued earlier this year.

Specifically, AstraZeneca alleges Medicare unlawfully defined a “single source” drug under the IRA as applying to all dosage and formulations of a specific active drug ingredient. For instance, capsule and tablet versions of the drug ingredient approved by the Food and Drug Administration via different applications would be considered the same product, making both eligible for price negotiation at the same time.

According to AstraZeneca, this could apply to newer formulations of its cancer drugs Lynparza and Calquence.

More broadly, AstraZeneca claims the IRA undermines the Orphan Drug Act, which established incentives for drugmakers to develop treatments for rare diseases. That law has proved a powerful catalyst, spurring billions of dollars of drugmaker research into new treatments for uncommon conditions.

The IRA exempts approved orphan drugs from negotiation, but only if they’re cleared for a single use. Typically, drugmakers develop orphan drugs for several different, but related diseases.

“The IRA’s stingy approach to orphan products generates real risk that future treatment breakthroughs will be jeopardized, particularly for therapies with the potential to treat multiple orphan conditions, undermining patient access to meaningful treatment options and life-saving therapies,” AstraZeneca writes in its suit.

The issue is particularly meaningful to AstraZeneca, which spent $39 billion in 2020 to buy rare disease drugmaker Alexion Pharmaceuticals.

AstraZeneca is asking the court to declare Medicare’s IRA guidance documents as unlawful and the IRA as unconstitutional. It’s seeking an expedited briefing to allow for a faster decision.

People with the blood disorder sickle cell are anticipating the arrival of two gene therapies that could dramatically reshape their disease, potentially offering something approaching a cure.

Insurers, too, are preparing for the treatments, which are expected to carry price tags in the seven figures. While five other expensive gene therapies are already available in the U.S., sickle cell is far more prevalent than the inherited diseases they treat, affecting an estimated 100,000 people in the country. Many are covered through Medicaid, the federal insurance plan for people with limited income.

An experimental model proposed by the Centers for Medicare and Medicaid Services on Feb. 14 could help state agencies better afford those medicines, as well as offer a testing ground for payment schemes that could apply to other pricey gene therapies. Yet the timeline for its implementation might mean it comes after the first sickle cell gene therapies reach market.

“Sickle cell is a call to action,” said Michael Sherman, chief medical officer of Point32 Health, the parent company of Harvard Pilgrim Health Care and Tufts Health Plan.

“Without these kinds of models, we’re going to see access issues,” he added. “The Medicaid state agencies, like other parts of the financing system, were never designed with this sort of upfront shock.”

The gene therapy model is one of three pilot programs CMS will test in the coming years in response to an executive order from President Joe Biden directing the agency to find further ways to lower prescription drug costs. Administration officials described these programs as building on 2022’s Inflation Reduction Act, which gave Medicare the authority to negotiate prices for a limited number of drugs.

Under the gene therapy model, state Medicaid agencies could delegate authority to CMS to coordinate multistate frameworks to pay for gene therapies based on how much patients benefit from treatment. In sickle cell, for example, payment could be contingent on whether patients remain free of the pain crises they regularly experience.

These types of payment schemes, typically known as outcomes-based arrangements, are already used in some cases for the currently available gene therapies. But budget limitations and federal price reporting requirements have limited their use within Medicaid, indirectly shaping how they’re designed for private insurers, too.

“There’s a lot of benefit, I think, to having both more of a centralized purchaser or negotiator across Medicaid programs … and having more centralized data collection,” said Stacie Dusetzina, a professor of health policy at Vanderbilt University Medical Center. “I think it also gives CMS a little bit of an upper hand at the negotiating table.”

Jeff Marrazzo, the former CEO of gene therapy developer Spark Therapeutics, agrees that a centralized approach in Medicaid could help.

“What I’ve observed is that state Medicaid agencies … generally have experienced more challenges with providing access to cell and gene therapies,” he wrote in an email. “This is due in part to the cost density of cell and gene therapies, but also because these organizations lack the infrastructure required to implement alternative pricing, reimbursement, and access models.”

Marrazzo cited data collection as one example, noting that some state agencies might lack the ability to appropriately track clinical outcomes for patients treated with a gene therapy.

CMS envisions testing several different types of outcomes-based arrangements, including an annuity model where continued payment is based on continued benefit. (To date, gene therapy developers have favored a rebate-based approach, where a certain percentage of their treatment’s cost is returned to the insurer if a specific outcome is not achieved.)

Five years ago, Spark proposed a similar annuity-based idea to help insurers pay for its then newly approved gene therapy Luxturna, for a type of childhood blindness. Spark priced the treatment at $425,000 per eye and sought to offer an installment payment plan, proposing the CMS run a demonstration project around Luxturna.

Its ability to do so was limited by Medicaid rules requiring drugmakers give the program the “best price” they offer on their products. In the event a patient didn’t benefit from treatment, and an insurer therefore didn’t owe the remaining installment payments, Spark would have had to report that fractional cost as its best price.

CMS recently tweaked its policy, allowing drugmakers to report multiple “best prices” in the context of outcomes-based arrangements. “This was an important first step,” Marrazzo wrote. “Along with the [recent] policy change, I do believe CMS providing a more centralized approach could lead to more annuity models being taken up, particularly by Medicaid plans.”

The agency plans to focus the model on a specific disease, and indicated sickle cell as a likely candidate. Behind the advancing sickle cell treatments is a growing pipeline of other gene therapies in development.

“Our concern has been that, for some of these more rare diseases, we haven't seen the access that we would like to see. Sickle cell is one of them,” said CMS Administrator Chiquita Brooks-LaSure on a call with reporters. “One of the reasons we're so excited about this model is because we think states need some assistance from us to really be effective in the space.”

But CMS doesn’t envision launching the gene therapy model until 2026 at the earliest, years after the two gene therapies now nearing market are expected to be approved. Their developers — Bluebird bio and partners Vertex Pharmaceuticals and CRISPR Therapeutics — are currently preparing approval applications that they expect to finish filing with the FDA by March 2023.

Under current timelines, CMS would begin developing the model in 2023 and announce model specifications in 2024 and 2025, with implementation following the year after. The agency would then track metrics like gene therapy spending, use and change in access over time to evaluate its success.

To some, earlier would be better. “Being in a business, I don’t understand why it takes two years to announce model specifications,” Sherman said.

The planned model is also voluntary, so CMS would need to rely on participation from both state Medicaid agencies and from drugmakers. The latter group, CMS argued in its report, would be enticed by the prospect of simpler market access.

That access could come with some tradeoffs, however. “It may be a little bit less attractive because of the inability to command the highest possible price, especially if there is a large population that's going to be treated and many Medicaid programs are interested in joining together into this kind of one model,” Dusetzina said.

Biotechnology company Sarepta Therapeutics will charge $3.2 million for the first gene therapy for Duchenne muscular dystrophy. 

The price makes the drug, named Elevidys and approved by the Food and Drug Administration in June, one of the most expensive medicines in the U.S. on a single-use basis. It’s surpassed only by Hemgenix, a hemophilia B gene therapy cleared last year that costs $3.5 million per patient.

Following the FDA’s decision, Sarepta CEO Doug Ingram said the price reflected a “conservative” approach to valuing the benefit to patients and their families of Elevidys, which Sarepta claims would be cost-effective at prices between $5 million and $13 million.

"Our approach is to ensure that the cost to the healthcare system is less than the potential benefits of Elevidys,” Ingram said.

Sarepta is expecting statutory discounts, such as through Medicaid or a program known as 340B, and other deductions will result in a net price of about 20% lower than Elevidys’ gross cost.

Despite the multimillion-dollar price tag, Sarepta does not expect insurers will set up many barriers to treatment, given the small number of eligible patients.

“This is still a very, very rare disease,” Ingram said in a 2023 interview. “Most payers are going to realize that they need to get these kids on therapies.”

As with other gene therapies, Elevidys’ value is built on the idea its benefit will last for years and offset myriad other costs associated with standard care.

Yet it’s still unclear how much help the treatment will provide over time, and whether those effects will wane — a problem other gene therapy developers have attempted to solve by tying the cost of their therapies to patient outcomes. Bluebird bio, for example, has said it will reimburse up to 80% of the cost for its blood disease treatment Zynteglo if it doesn’t free patients from needing blood transfusions.

Ingram said that such pay-for-performance deals aren't "something that's likely or possible" for Elevidys, given the heterogeneous nature of the disease. "We have some innovative concepts that we're working on with payers that would be different than an outcomes-based approach," he told analysts on a June conference call. "But none of that will in any way delay or slow down a child's ability to get [treatment]."

So far, most of the gene therapies on the market haven’t become big sellers, as they’re generally for very rare conditions. Wall Street analysts have predicted Sarepta’s treatment could be different. RBC Capital Markets’ Brian Abrahams has forecast sales could reach more than $4 billion annually at their peak.

Yet the lofty projections are based on the assumption that Sarepta’s treatment will eventually be available to most people with the disease. Because of limitations in the data Sarepta brought to regulators, the FDA has only approved treatment for use in children 4 to 5 years of age who can still walk and don’t have genetic mutations that might counteract the treatment’s effects.

The current label restrictions will make “the initial launch more measured than we had planned for,” Ingram said on the call. Sarepta estimates there are about 400 children in the U.S. with Duchenne who are in that age range in any given year.

The approval is also “accelerated,” based on data showing Elevidys produces a form of the muscle-protecting protein people with Duchenne lack. Its continued presence on the market is conditioned on Sarepta proving, in an ongoing late-stage trial, that treatment provides a clear clinical benefit.

Success in that Phase 3 trial is also likely to be necessary for Sarepta to secure a broader approval in older children, too.

If the study meets its objectives, the FDA has indicated it "intends to entertain a non-age restricted expansion of this label," Ingram said on the June conference call. “We’ve also been assured this will be done with maximal speed by the FDA.”

In the meantime, analysts are expecting a slow ramp up in sales. In a June research note, Abrahams projected only nine patients might be treated this year, as payer negotiations and stringent monitoring protocols might hamper initial uptake. SVB Securities analyst Joseph Schwartz is anticipating faster adoption, forecasting 59 patients and about $117 million in sales for the company’s 2023 fiscal year.

Their assessments mirror that of some experts interviewed by BioPharma Dive earlier in 2023. After speaking with the heads of various neuromuscular clinics, Tim Lotze, director of a muscular dystrophy care center at Texas Children’s Hospital, said many large centers will only treat one to two patients for month. Lotze noted how patients need to be closely watched not only when they receive treatment, but for follow-up stretching years afterwards.

“Beyond everything else, we have to make sure that we keep everybody safe,” Lotze said.

Ned Pagliarulo contributed reporting.