Is the market starting to reward innovator pharmaceutical companies that are promising value-based care contracts?

To an industry outsider, pharmaceutical pricing is reminiscent of the famous Churchill quote – it’s ‘a riddle, wrapped in a mystery, inside an enigma’.

The traditional pharma return profile has not changed in principle over the last few decades. It is inherently unique, but simple at its core. Sow your R&D investment seeds more than ten years before you will see the first dollar in commercial sales. Once your first-to-world product has been successfully developed and approved, you have a window of sales exclusivity in which you can recoup the cost, and generate a return on your investment.

As your product is nearing launch, you face a difficult choice – how to price your product. Historically, the model was straightforward – charge as much as possible to ensure that you recoup your investment and generate a return in the allotted time. The national exclusivity would pave the way for it, and the market would reward it with increased share price.

Over time, manufacturer’s competition has become significantly more intense, healthcare complexity has increased with consolidation, and pricing has become more of a focal point for Congress and the public. The increased attention by others is warranted, as companies continue to raise prices in response to these tremendous forces.

Few incumbent companies have the courage to do something different. Rocking the boat would challenge decade-long investments and a continuum of industry precedent. Yet, as we near 2020, many companies are starting to wake up to the fact that something has to change. The current drug pricing system in the US is unsustainable and increasingly unjustifiable.

Value-based “innovative contracts”

The concept of value-based care has been around for decades. Under the current (fee-for-service) system, payers and patients will pay for treatments regardless if they work for the patient or not. Under the emerging value-based care model, pharmaceutical companies set up what are called “innovative contracts” with the payers – essentially only being paid if the treatment actually works.

Imagine a future where the majority of treatment regiments are pegged to value-based contracts. Patients and their payers are not the only ones that would benefit from this system. Health systems can deprioritize the price element from treatment decisions and focus on the most effective treatment for their patients. Pharma companies offering innovative contracts can continue to eliminate barriers to treatment and adherence.

Needless to say, there are myriad challenges with transitioning the system – for example, how to know if someone is “better’ (i.e., quality measures), how pharma and payers negotiate price, how benefits manager reimbursements fit into the new system, and how to simultaneously run both systems, as more and more transition to innovative contracts?

The challenges may seem many, but it’s happening, and there are many reasons it is happening now. Technology is enabling companies to track quality measure in scale, on an individual level, for the first time. More and more companies develop products only to launch into a market with vastly different competitive landscapes than they anticipated, and returns on R&D continue to plummet.

The market is beginning to reward the innovators in value-based care

Historically, the market is not great at rewarding early-adopter companies that break an industry mold and try something new. For innovative contracts to fully take hold and become mainstream, it is essential that the market incentives align. Investors need to see the inherent value in these contracts and understand how they compare to the traditional model.

On Thursday, we saw an example of just that. John Maraganore, the chief executive of Alnylam Pharmaceuticals announced that his company is seeking innovative contracts with a number of payers for their first drug, set to launch in the next few months. Their first drug up to bat is called Patisiran, which treats a disorder called ATTR amyloidosis, a rare disease that impacts 50,000 people.

With this small patient population, it may seem to have a small impact relative to all of healthcare – but the move speaks volumes about the precedent that Alnylam and others are trying to put in place. Novartis announced a similar move last month with their cellular therapy for blood cancer, Kymriah. Companies are beginning to offer bolder innovative contracts, and the market is beginning to understand the ramifications of these contracts on the company’s financial performance.

The market seems to be rewarding the affirmation of Alnylam’s value-based strategy, as shares rose as much as 5% after the announcement.

The future of value-based care

As innovative contracts become more commonplace in the US, traditional innovator pharma companies will face a challenge to change themselves and their way of going to market – or face disruption. Increasingly, they will be forced to demonstrate the pharmacoeconomic value of their products and work collaboratively with payers and other healthcare value-chain members.

To achieve success, pharma must align their commercial operations with the ethos behind value-based care – to put others before yourself. It may seem counter to decades of investment, but innovation happens when you focus on solving the challenges of others. The narrow notion of pharma-first is in decline. Generating a healthy return in the new paradigm, all while satisfying and building trust with others, is not only possible – but it is at the core of what must happen for the industry to survive and thrive.