Anyone either celebrating or fearing the start of a Hepatitis C drug price war should take a break from the excitement to consider that a far more nuanced and profound game is at hand, one where the rules of tacit collusion (the legal kind) constrain price erosion—and each new entrant with a “good enough” drug regimen can take a reasonable share with modest further discounts.
In this game, in which patients can be cured even if they are not taking the most convenient or best tolerated regimen, being the best is not particularly relevant. It takes many qualifying entrants in the market before “gentlemanly” conduct turns chaotic and prices fall rapidly, a process that can be slowed by consolidation.
AbbVie’s (NYSE: ABBV) Viekira Pak, a combination regimen that was just approved by the FDA to treat chronic hepatitis C virus (HCV) infection, emerged with a list price only 10 percent lower than the $94,500 list price for 12 weeks of Gilead Sciences’ (NASDAQ: GILD) sofosbuvir-ledipasvir combo pill (Harvoni), though some patients only need to take Harvoni for 8 weeks. Although AbbVie and Gilead offer regimens with comparable cure rates, AbbVie’s is less convenient and less tolerable for the patient than Gilead’s: Viekira Pak requires more frequent dosing, involves more pills, has more complex drug-drug interactions, and has more side effects than Harvoni.
Despite the disadvantages of its regimen, AbbVie just secured exclusive formulary status from the pharmacy benefit manager Express Scripts (NASDAQ: ESRX) that covers tens of millions of patients in the U.S. In the deal, Express Scripts negotiated an undisclosed discounted price for Viekira Pak. By effectively removing Harvoni from the formulary, Express Scripts is forcing physicians to choose an inferior, yet “good enough” regimen. Thus, one important lesson from the AbbVie-Express Scripts deal is that the bar for qualifying as a new entrant in HCV is not as high as people think. Regimens that match or exceed the profile of AbbVie’s Viekira Pak are also “good enough,” and should be able to compete on price.
The rules of civilized price competition dictate that AbbVie can only offer a winning price discount to some payers, but not all, giving it only some of Gilead’s market share. In turn, Gilead has to let it happen. If Gilead cuts its price to take back the share it will lose to AbbVie, that would only trigger another round of discounting, cascading into a much anticipated price war.
In a kind of “ultimatum game,” Gilead must yield some market share to AbbVie to keep AbbVie from dropping its price further. Likewise, AbbVie cannot try to grab Gilead’s entire market share, or Gilead will respond with price cuts of its own. Predicting the fraction of the market each company will end up with is difficult, but a 50/50 split is unlikely. AbbVie may be content with less, especially since it likely wants to preserve pricing until it brings its more competitive next-generation regimen—which would likely still be a bit worse than Harvoni—to market. Were the U.S. a single-payer system, like the U.K., dividing the market would be impossible. But the U.S. is a fragmented market with a few large formularies (Express Scripts and CVS Caremark) and several medium and small ones; therefore, Gilead and AbbVie can split the market in a “gentlemanly” fashion. This phenomenon of neither player wanting to spark repeated rounds of discounting is called “tacit collusion,” and it is legal. The practice would only potentially violate anti-trust laws if the players communicated and coordinated their pricing plans.
The emergence of additional players in the HCV market, like Bristol-Myers Squibb and Merck possibly in 2016 or 2017, will force Gilead and AbbVie to make room for more new entrants. To compete, Bristol and Merck do not need to have the best drugs; they just need to be “good enough” (i.e., well-tolerated, oral dosing for 12 weeks or less, with greater than 90 percent cure rates). Each company’s debut may trigger a single round of discounting to establish the new market share equilibrium, but each party will do its best not to accidentally over-elbow the others into a frenzy of price discounts. Based on what is known about their compounds, Merck’s regimen could be comparable to Gilead’s, requiring only 8 weeks of dosing for most patients, while Bristol’s regimen may be more like AbbVie’s, requiring 12 weeks of dosing. All, though, should fall within the “good enough” spectrum.
Others are coming. Achillion Pharmaceuticals (NASDAQ: ACHN) is a small company with four HCV drugs in clinical development; it is working on a combination regimen that could come to market by 2018, maybe a year behind Merck. Even if all known HCV patients sought treatment today, due to capacity constraints and the large pool of undiagnosed patients, there will still be millions of people who need treatment in 2018. That makes HCV a substantial and long lasting market worth fighting for. And that’s even if treatments are priced at a half, or a third of the cost they are today—especially if, given the deflation expected to occur over the next few years, payers continue to drag their feet on enabling widespread access to treatments.
Therefore, by 2018, barring consolidation among these companies, there will likely be … Next Page »
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