Sovaldi Aside, Declining Economic Returns On New Drugs Threaten Innovation – Study

Lifetime total costs exceeded expected revenues for novel products launched from 2005-2009, according to a paper published in Health Affairs. Focusing solely on recent successful launches like Gilead’s hepatitis C drug ignores the commercial fate of other once-promising drugs that turned out to be “dogs,” MIT researcher says.

As biopharmaceutical companies continue to defend against payer pushback and public criticism over the cost of new treatments like Gilead Sciences Inc.’s Sovaldi, the industry will find help from a new study that concludes declining economic returns on new drugs threatens the investments needed to drive innovation.

Economic returns on drug development have declined to their lowest level in two decades, and if this trend continues it could threaten industry’s ability to sustain medical innovation over the long term, according to a study published in the February issue of Health Affairs.

Public attention to recent highly successful launches “needs to be weighed against less publicized unsuccessful launches and declining economic returns,” the authors said.

The authors said that recent public attention focusing on highly successful launches, such as the blockbuster hepatitis C drug Sovaldi (sofosbuvir), “needs to be weighed against less publicized unsuccessful launches and declining economic returns. This study calls into question pharmaceutical companies’ ability to maintain their historical high levels of innovation to advance medical science.”

While Sovaldi has been a standout, the rest of the class of 2014 new drug launches were largely niche specialty commercial opportunities, or had use limited by payers (Also see "Head Of The Class: A Star Stands Out Among 2014 Drug Launches" - Pink Sheet, 5 Jan, 2015.).

The paper was authored by Massachusetts Institute of Technology economics professor Ernst Berndt in conjunction with three representatives from the IMS Institute for Healthcare Informatics. The Pharmaceutical Research and Manufacturers of America provided funding for the data analysis undertaken by the IMS group but did not fund Berndt’s research.

The analysis was part of a series of papers in Health Affairs focused on biomedical innovation. A separate study looked at venture capital investment in life science companies (see related story, (Also see "Venture Capital Growth In Orphan Drugs Aided By ‘Regulatory Certainty’" - Pink Sheet, 16 Feb, 2015.)). The issue also included a paper by a CVS Health Corp. consultant and executives at the company on use of formulary management strategies to promote uptake of biosimilars (Also see "Driving Biosimilar Use Through Formulary Management A ‘Viable Strategy,’ CVS Execs Say" - Pink Sheet, 2 Feb, 2015.).

Sales Volatility

Berndt and colleagues said that widely cited studies have focused on the average costs of bringing a new drug to market.

For example, in a November report the Tufts Center for the Study of Drug Development estimated the cost of bringing a new drug to market has reached $2.6 billion, up 145% from the center’s last projection in 2003 (Also see "Cost Of New Drug Development Pushed To $2.6 Bil. By High Failure Rate – Study" - Pink Sheet, 18 Nov, 2014.).

However, “relatively little attention has been paid to lifetime expected revenues or the implicit net economic returns on R&D costs,” the Health Affairs article states.

The authors compared average lifetime pharmaceutical revenues to average R&D and lifetime operating costs to determine net economic returns on four cohorts of novel drugs and biologics launched in the U.S. from 1991-1994, 1995-1999, 2000-2004 and 2005-2009. The analysis encompassed 466 novel active substances, 378 of which were small molecules and 88 biologics.

IMS Health data were used to calculate present value of lifetime net sales, while average operating expenses and average R&D cost assumptions were drawn from published literature. The researchers also used a variety of modeling techniques.

The average present values of lifetime global net sales were lower for novel products in the most recent launch cohort covering 2005-2009 than in any of the three previous cohorts.

The authors also found considerable volatility in novel product sales.

Most novel active substances achieved relatively small lifetime sales, with half the compounds failing to reach the $1.5 billion mark.

The vast majority of novel active substances achieved “relatively small lifetime sales,” the authors said; 75% of novel compounds had lifetime sales below $4.5 billion, and half the compounds failed to reach the $1.5 billion mark.

During a Health Affairs-sponsored briefing Feb. 5, Berndt highlighted this variability in sales for new products.

Although new drugs are still very costly to develop, the variability of that cost has sharply decreased, Berndt said, citing the Tufts study.

“Where there’s enormous variability is on the revenue side,” Berndt said. “That suggests to me that probably on the payer side there hasn’t been as much improvement in dealing with different drugs and assessing their value.”

Costs Surpass Revenues

Lifetime total costs for the most recent cohort were at their lowest level since the 1991-1994 group, although R&D costs accounted for a larger share, approximately 34% of total costs.

The authors derived the average economic profits by subtracting the average present value of lifetime total costs from the average present value of lifetime global net sales. In the 2005-2009 cohort, costs exceeded revenues for the first time.

“The average lifetime profitability of newly launched novel active substances appears to have experienced a ‘golden age’ during the late 1990s, with average lifetime economic profits at $725 million for the 1995-1999 cohort,” the authors said. “Since then, average economic profits have fallen steadily and sharply, and they became negative (-$111 million) for the 2005-09 cohort.”

For all four cohorts, the average profits for biologics were higher than for small molecule drugs, although the gap between the two groups has been narrowing.

The decline in economic returns for new drugs and biologics may be due to several factors, ranging from specific attributes of the more recent products to broader forces that impact market demand, the authors said.

“For example, on the demand side, downward pressures on price have occurred because of consolidation among payers, wholesalers and pharmacy benefit managers; increased experience with cost-containment strategies such as multi-tier formularies; and a greater focus on incremental value in coverage decisions,” Berndt, et al,. said.

While payers and consumers benefit from downstream pressure on drug prices and profits, sustainable levels of returns are needed if manufacturers are to continue to innovate, the researchers concluded.

Speaking at the briefing, Berndt was hesitant to predict that the economic tide has turned back in industry’s favor thanks to Sovaldi and some other recent high-profile launches.

“My sense is that we have to be pretty cautious about that because while we hear a lot about a Sovaldi, most of the drugs that were approved in the past three or four years have not had a very successful track record in terms of revenues,” he said.

“A few drugs are very visible, but many others are not nearly as stellar of performers. And some of the drugs that were initially very, very promising have turned out to be dogs.”

He pointed to Vertex Pharmaceuticals Inc.’s protease inhibitor Incivek (telaprevir), which was lauded as a groundbreaking treatment in hepatitis C at the time of its FDA approval in 2011.

However, in October 2013 Vertex announced it would eliminate marketing support for the drug due to a rapid decline in sales as clinicians and patients awaited the market entry of more effective HCV treatments (Also see "Uncertain About HCV, Vertex Doubles Down On CF, Looks To Sell Off Pipeline Assets" - Pink Sheet, 4 Nov, 2013.). In August 2014, the company announced plans to discontinue sales of Incivek.

“Incivek was the first of the hepatitis C drugs, it was going to be the deal breaker," Berndt said. “Incivek’s manufacturer Vertex has now withdrawn the product from the market because Sovaldi is so much better, so we are seeing a certain amount of … obsolescence as part of the cycle.”

Policy Changes

In their paper, Berndt and colleagues suggest several policy changes that could help ensure an acceptable level of economic returns on new drug launches.

The authors point to the “breakthrough therapy” designation program, created in the FDA Safety and Innovation Act of 2012, as one example of a policy change that may help to offset declining returns and spur continued investment and innovation.

“Because of the importance of sales and reimbursements outside of the U.S. to total lifetime revenues, sustainable global reimbursement policies are also critical,” the authors said, noting that health technology assessments have restricted access and reimbursement in Europe.

Furthermore, “the ability of innovative medicines to prevent costly complications of disease should not be overlooked,” they said, warning about “the potential impacts on investment if drugs become the particular focus of additional cost containment measures” throughout the health care system.