For the past 20 years Express Scripts ($ESRX) has been crunching the numbers on the ever rising amount of money Americans spend on drugs. But last year, the analysts say, the country hit a critical watershed as the amount spent on traditional drugs--the pills used for a host of common maladies--slid a bit while specialty drug spending surged 18.4% on the arrival of complex new therapeutics which have captured the attention of drug developers around the globe.
That's the first time that's happened, and the fallout is of central importance to the drug development industry.
As a pharma benefit management company contracted to help control spending, Express Scripts analysis is shaped by the payer perspective. Traditional medicines, those pills, have been rapidly losing ground to generic drugs as long-time blockbusters went over the patent cliff. Express Scripts and all the other PBMs in the U.S. have perfected the rapid conversion of patient populations to generics, which cost a fraction of the amount spent on branded therapies. But last year's tilt down on spending for pills was mirrored by a rapid rise in new specialty drugs, which come with prices that are far less easy to control. And the lessons that the PBMs are learning now will shape payers' response to a new generation of specialty meds now in the global pipeline of Big Pharma and biotech alike.
Specialty medicines are simply defined as treatments which require special handling, such as careful monitoring, complex methods of administration and careful patient education. Almost a quarter of the country's drug spend in the pharma benefit--and this wouldn't account for the specialty drugs billed under the medical benefit--accounted for a quarter of all pharma spending last year. They are also needed for only 2% of the country's population.
The rise in drug spending is being driven by new biotech therapies, which have become a central focus in the pipeline. So with two new drugs for hepatitis C on the market, Incivek from Vertex ($VRTX) and the new Merck ($MRK) therapy, spending on hep C drugs shot up 33% in one year. New drugs in development will likely drive that number even higher in the next few years. And the key number for payers: The class of 39 approved drugs last year included 22 specialty drugs, several of which cost $10,000 or more per month.
The "same principles of effective management solutions and increased drug competition (used to control traditional drug spending) are necessary to the country's effort to rein in specialty drug costs," says Glen Stettin, senior vice president of clinical, research and new solutions at Express Scripts. "The plan sponsors who implement our specialty management programs are already seeing much lower growth in specialty drug costs than the national average. And increased drug competition, in the form of biosimilars, is necessary to offer more affordable medication for patients afflicted with these complex specialty conditions."
Those special programs include the PBMs use of formulary design to favor the use of less expensive drugs as well as a host of restrictions--like prior authorization on expensive drugs or step therapy programs to require the initial use of less-pricey treatments. As payers flinch under the assault of specialty meds, those restrictive measures are likely to become standard, a key concern for drug developers developing new markets. But as we've seen in recent months, the arrival of biosimilars may be significantly delayed in the U.S., offering the industry an even longer run on market franchises that are worth billions in annual revenue.
The tension between drug developers and payers has been growing for years, of course. But with generics holding down the cost of traditional medicines, the healthcare industry was able to absorb the arrival of specialty medicines without suffering a big spike in the overall pharma cost. As that changes with the arrival of many more specialty drugs, and payers find themselves without many effective tools to rein in costs, it's likely that there will be more pressure on finding other ways to control costs. And that could present one of the biggest challenges the biopharma industry has ever faced.
- here's the release from Express Scripts