May 16, 2017


Contracting 2.0: The Why, When, How — And Why Not — Of Value-Based Deals


Pricing doesn’t always cause business discontinuities — but it’s always the double-edged sword at the center of the action, helping innovators and hobbling laggards. Discount brokers revolutionized consumer investing; discounted long-distance ultimately destroyed AT&T. Price wars bankrupted dozens of airlines — and pricing discipline coupled with consolidation seems to have saved the survivors. While new technology enabled file sharing, Apple and Spotify wouldn’t be dominating the music industry without their pricing innovations.

The biopharmaceutical business is now being shaken by its own discontinuity, and pricing stands center stage. The key change: the transformation of the biopharmaceutical customer base from the economically unaware physician to the economically driven industrial buyer.

Like industrial purchasers everywhere, managed care organizations and at-risk health systems have different standards of evidence than do less economically sensitive stakeholders — i.e., physicians and regulators. And like other industrial purchasers, they try to exercise their buying power to drive prices down.

This whole situation, certainly in regard to specialty drugs, is relatively new. Until Gilead Sciences Inc. launched its HCV drug Sovaldi sofosbuvir, payers had never seen a single drug that could actually turn their P&Ls red. And they had likewise rarely exercised their purchasing power in specialty until they did so in the battle over the Sovaldi follow-ons: pitting the less convenient, lower cost Viekira Pak ombitasvir/paritaprevir/ritonavir from AbbVie Inc. against Gilead’s Harvoni ledipasvir/sofosbuvir, ultimately driving the cost of these drugs below 50% of their list prices.

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