The Trump Effect on Pharmaceutical Company Stock Prices and their effect on drug prices

Drug Pricing – Feeling the Squeeze

Whatever happens next in the US and elsewhere, life science companies must take charge and own the value story behind their innovative products. It starts by understanding and mastering value assessment frameworks. An Inbeeo thought experiment.

Bold Predictions for the Pharmaceutical Industry in the New Year

A new year, a new administration in the US, a hard Brexit, general elections approaching in France and Germany. We are entering an era of deep uncertainty in major pharmaceutical markets. It is hard to make any prediction for pharma and biotech companies in these circumstances. But I’ll take a chance: there will be more pressure on drug prices on both sides of the ocean.

OK, I admit it, I took no risk at all. In times of uninhibited populism, with the extra bit of legitimacy granted by a handful of shameless, unethical players, drug companies remain the perfect scapegoat for politicians of all kinds in their rhetoric on public money sparing. I am still puzzled by the reaction of the stock market right after the US presidential election (see the left half of the picture). The old equation of (R) = pharma revenue up and (D) = pharma revenue down has been invalid for many years. Today, the lines are blurred, and the recent ‘drug companies are getting away with murder’ comment by President Trump is just another confirmation of this fact. Anyway, stock prices are back to where they were pre-election (see the right half of the picture), and that leaves us with the same question – ‘what’s next?’

The Trump Effect on Pharmaceutical Company Stock Prices and their effect on drug prices

The Value of Penicillin – A Value Assessment Framework Based Thought Experiment

Let’s stop here my little foray into political comments as it is not my forte. My job is to help life science companies demonstrate the value of their innovative products. That increase in pressure makes biopharma companies think more thoroughly about the value their new products can create for patients and stakeholders, and that’s a good thing. As I was doing some work on those mushrooming ‘value assessment frameworks’, I was asking myself ‘what if my job was super easy?’ I mean, easy to a point that I would get a call from someone at Merck saying ‘we are about to launch something we believe is quite revolutionary and we need you to help us price it. It is called penicillin.’ I know it is silly, but for the sake of the conceptual exercise, let’s just imagine that Lord Fleming had never left his staphylococci cultures in the open air while on holiday and that, in 2017, patients would most surely die from pneumonia and endocarditis. How much would Merck be allowed to charge for its wonder drug according to the criteria of, let’s say, the Institute for Clinical and Economic Review (ICER)?

In 2013, it was estimated that 56,382 patients died from pneumonia in the US (data from the American Lung Association) out of 1.2 million hospitalized. It is consistent with the often mentioned figure according to which penicillin has reduced mortality from pneumonia by a factor of 20x. For simplification, let us assume that 1 million patients would have died in that year without the help of penicillin or one of its follow-on compounds. That gives us an estimate of a per-patient clinical benefit of the product as follows:

Estimated benefit of Penicillin based on assessment of QALYs Saved per Patient

I made the conservative assumption that the life expectancy of the saved patients is roughly 9 years, out of the 18 years of life expectancy of men aged 65, which I further reduced by another 40% disutility rate compared to full health (just tell me if is there is too much jargon). That leaves us with a back-of-the-envelope estimate of 5.1 QALYs gained per patient.

Back to ICER’s value assessment framework. With that kind of benefit, in what price range ICER would issue a positive recommendation to use penicillin (we’ll make another overly simplistic assumption here that all other costs than treatment costs are equal)?

  • up to US$250,000 per treatment course, the cost-effectiveness ratio of penicillin stays under US$50,000 per QALY gained. This is the range that ICER describes as ‘opportunity’  and drug usage should be encouraged including in middle-income countries
  • up to US$500,000, the ratio stays under US$100,000 per QALY gained. This threshold represents what is believed to be the individual willingness-to-pay for the therapy. Why? Because it is twice the average annual income per capita. Why is that a good measure of an individual willingness-to-pay? Well, because.
  • Between half a million and three-quarter of a million, this is the gray area where the product might be deemed as cost-effective, but other variables have to be taken into account.
  • Anything above US$750,000, Merck would face a major pushback from payers. Still, it is quite the jump from the US$20 they would charge some 70 years ago, even in constant dollars.

Once the per-patient benefit assessed, ICER and other HTA agencies might worry about the potential annual budget impact of the new technology, that could culminate at a daunting US$750 billion per annum, an increase of 25% of the US healthcare expenditure.

The Value of Keytruda – Value Assessment Framework Reality

Back to reality. Merck is not launching the first penicillin. They are rolling out their promising immunotherapy pembrolizumab in several indications including PDL-1 positive non-small-cell lung cancer. It will not offer an additional 9 years of life to treated patients, but 5 months at the most effective dose. Three months if I adjust for disutility. Still, a doubling from conventional chemo and a new hope for affected patients. How should it be priced to pass the ICER test? Probably around US$25,000 for a full course of treatment. In reality, it costs around US$40,000. At least in the US. Meanwhile, in the UK it will most likely cost the NHS under US$30,000*. Surprising? Not at all. Because the NHS has mandated the National Institute for Health and Care Excellence to run an assessment of most new products reaching the market. And it turns out that NICE’s Value Assessment Framework is quite similar to that of ICER because they’ve invented it back in 1999 (sorry, in that matter it was not America first).

There is More to Value than Cost-Effectiveness

Does it mean that the job of the new administration is super easy as they need to look at what is happening on this side of the pond and apply it to all products reimbursed through government-sponsored health programs? Not so fast. There is more to the value of an innovation like pembrolizumab than a cost-effectiveness ratio. Even NICE, who have made cost-effectiveness their raison d’etre, seem to admit it, by saying that “pembrolizumab was innovative in its potential to make a significant and substantial effect on health-related benefits” in their final appraisal. ICER are expanding their value framework to include a “care value” component. Even more rudimentary frameworks like the one from ASCO includes some – oddly named – ‘bonus points’ for palliative care. In my overly simplistic example of the cost-effectiveness of penicillin, I misrepresented the value of the drug by omitting the rapidly growing resistances to the molecule. But the overall impact of the ‘wonder drug’ went beyond a simple snapshot of its cost divided by some QALYs gained, as it chartered the way for a new treatment paradigm. Hopefully, immunotherapies will do the same for cancer patients.

Whatever happens next in the US and elsewhere, life science companies must take charge and own the value story behind their innovative products. It starts by understanding and mastering these value assessment frameworks. Those existing, and those to come. Yes, there will be more, my second and last prediction of the day.

* GBP29,114 listed price on the NHS formulary, minus an undisclosed discount that could amount to 30% of the value, exchange rate 1GBP = 1.25USD

Related Content From Inbeeo

Learn more about Inbeeo’s Value Based Pricing Tool i-vbp

Why I Prefer a Value-Based Healthcare Mayhem over the Status Quo – A look at why Value Based Healthcare is the fay forwards 

Three Reasons Why Value Definition Is The Ultimate Challenge for Pharma – Inbeeo’s perspective on what is the true value of pharmaceutical innovations

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