Numlock Sunday: March 3, 2019

By Walt Hickey

Welcome to the Numlock Sunday edition. Each week, I'll sit down with a writer behind one of the stories covered in a previous weekday edition for a casual conversation about the story they wrote.

This week, I spoke to Max Nisen of Bloomberg Opinion. Max covers pharmaceutical pricing and the health care business, and I wanted to chat with him about gene therapies, those new and wildly expensive ways that companies are treating challenging diseases.

We spoke about what’s wrong with American health care, what the potential of gene therapy really is, and why the current system isn’t engineered to cure diseases, it’s engineered to treat diseases.

Max can be found at Bloomberg, on Twitter and at his food newsletter Fresser.

This interview has been condensed and edited.

Walt Hickey: Drugs are expensive. Why?

Max Nisen: Oh boy. In general or in the United States? Cause there's two different questions.

Let's start with in general.

All right. In a general economic sense, people are willing to pay a lot of money to stay alive, and beyond that, in most countries in the world and especially in the U.S., there are really strong patent protections for novel medicines, which are basically designed to create an incentive to spend the significant amount of money to research and create new ones. So there's a certain amount of monopoly pricing power relative to most other industries. Pharmaceutical companies have strong pricing power. Part of it's due to the fact that, you know, there are great medicines out there. But it's also because, especially in United States, you could describe the market for pharmaceuticals as a failed or broken market.

Why in the United States has it so kind of failed in particular?

In order to have effective negotiation in a market, you need a strong counterparty and you need competing products there. There are certain areas of the pharmaceutical market where you do actually have that, but there are plenty where you don't. And the reason that you don't have a properly functioning market — even in the areas where you do have a lot of competing products — is that the system is pretty badly fragmented. So even though you have many large insurers, programs like Medicare and Medicaid, they're all kind of sub-divided in various different ways. Most private insurance is employer based, so it could be divided by your employer. Or, Medicare administered by a private plan, you know, a Medicare prescription drug benefit plan or Medicare advantage.

So you don't have that big aggregated negotiating power that you have in other countries where they just kind of negotiated as what's often called the "single payer."

The other side of that is you can only negotiate effectively if you're willing to say no. That's to say you're willing to basically tell people you can't have this very expensive drug, either in general or until you try a cheaper drug. That exists to a certain extent in our system. But it's truncated, it's limited, especially relative to other developed nations. We just kind of have a history: in the 90s more aggressive managed care ran into a lot of political difficulties and also regulatory barriers especially in Medicare. So it all combines basically to give pharmaceutical companies a lot of power and the other side, consumers, a lot less.

So one of the cool things that you've written a lot about now is drugs with extremely eye-popping costs, specifically gene therapies. Could you talk a little bit about what those are and why you're seeing like million dollar pills?

Sure. The gene therapies, these are medicines that have a few distinguishing factors. It's things they share with a lot of cancer drugs and rare disease medicines. Those tend to be the highest prices and targeted at a very small population. In order for them to make money and to recoup research costs. More the former than the latter, because, you know, if you add the money up for successful medicines, it never quite adds up that they're only recouping research costs.

But to be economically viable, they have to charge a really high price because these are diseases where there a couple thousand or tens of thousands, sometimes even fewer, incidents per year. So you have to charge hundreds of thousands of dollars a year to make any money at all. So gene therapies: This is kind of a new category of medicine theorized for a long time, but only just approved for the first time in the United States last year. Basically, they brew up millions of viruses that are able to insert new genetic code into cells and produce a healthy protein in patients that aren't able to produce that.

First it was approved for a rare eye disease. A couple thousand people have it, it can hold up blindness, improve sight, it's incredible stuff, and it has the potential to last for a lifetime.

So that's where you get the second source of incredible expensiveness relative to a drug that you have to take for a lifetime. An example for which people are trying to develop gene therapies is something like hemophilia. Right now they have to rely on expensive injections of clotting factors. By expensive, I mean to the tune of hundreds of thousands of dollars a year on top of all other medical treatments, or if they have crises or anything. Instead, you potentially replace it with a one-time gene therapy. There's still a lot of proving to do in terms of individual medicines, and also whether they can last over a long time. But you know, the theory is you do this one investment upfront. It should theoretically be compensated as if it's preventing those aggregate millions and millions of dollars of future spending.

So the notion is would you rather pay $1 million for a cure or $100,000 a year for a treatment? Like that?

That's the value proposition, that's exactly it. And you know, it'd be great if it were as simple as that because you would think that the obvious example is you would take the lifetime cure.

Unfortunately, you've got a couple of barriers in the way of that, particularly in the United States where the first thing is that we're not certain that these are cures and it's going to be a pretty long time before we know that. We're still in the very early days, we have that first approval, but those key hemophilia gene therapies are still in their late stage trials and we only have so many years of follow up. So it's going to be a while before we would trust it.

The other side of it is that on the government side, it's just not set up so you can pay more or less based on the value of the medicine. On the private side, there's very little incentive to make that investment.

It's not a $1 million investment by the way. We don't have pricing on the hemophilia gene therapy yet, but we've heard at least theoretical pricing in the range of $2 million to $3 million. From a drug maker who is working on gene therapy for a rare disease called spinal muscular atrophy, we've heard numbers going $3 million, $4 million, $5 million.

There's not much incentive to pay for that if you're an employer private insurer because people move jobs all the time, they move insurance. So there's a chance that you're going to pay that enormous lump sum and someone else is going to reap the benefits in terms of reduced drug and medical spending over time. So there's a little bit of a hesitation, as absolutely bizarre as it sounds. There's an incentive to take that really high spend on an annual basis, instead of the equivalent of a big upfront investment because of the fact that someone else might benefit.

Oh, cool. So it sounds like American health care has a couple of problems.

It's pretty broken and you know, there's a solution at least theoretically, which is you pay for the value that the medicine delivers. If the hemophilia gene therapy prevents factor infusion, blood transfusion bleeds over a certain time period by some metric, then you get compensated and you get a certain amount of compensation for whatever metric you design. And that compensation occurs over years.

That solves both problems. But, of course, this is healthcare and drug pricing. There's always a "but.” The drug makers have advocated vaguely for these kinds of policies and the institution of them on a limited basis, but have not, to this point at least, really embraced it in a way that not only do you get paid a little bit less, you get paid a lot less if the drug doesn't work. There has to be real risk in order for the economic proposition to be more viable and a really longer kind of drawn out payment period.

So some of this is regulatory, not all of it though. And even if the regulatory parts get resolved, I'm not sure that drug makers are going to address the other side of the piece, which is the fact that these medicines are priced incredibly high in the first place. The price that they're trying to set based on the future savings of these drugs are based on an already incredibly inflated system. That kind of puts a bit of a barrier in the way of a real value-based pricing for medicine as well. So we have a long way to go, I'd say.

All right, cool. What are some of the other things that you cover as part of your beat? Do you have anything to plug, any sort of newsletters?

I write about drug pricing, policy, healthcare policy, managed care, everything at Bloomberg Opinion. You can find me there. You can find me @MaxNisen. And also, just as a side interest of mine, I write about food, eating and cooking at a newsletter called Fresser. That's a Yiddish term. That means someone who overeats. This is particular to, you know, the ethnic and cultural background of the word, it means someone who overeats, but means it with some admiration. Anyway, thanks for having me!

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