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Irrational Exubera-nce for Pfizer?

Investors cheered when, on Jan. 27, the U.S. Food & Drug Administration approved Pfizer's Exubera, the first inhaled insulin therapy to reach the market. The general consensus among analysts is that Exubera is likely to be a blockbuster.

Andrew Forman of WR Hambrecht predicts inhaled insulin products could achieve worldwide sales of $4.8 billion by 2010. With over 5 million Americans using insulin to treat their diabetes, if Exubera captures even a small percentage of the diabetes market, it could generate substantial revenue.

But in practical terms, we believe Exubera is more likely to become a disappointment for Pfizer (PFE) -- one that finally helps pharmaceutical and biotechnology companies, and especially investors, recognize that there's a major shift afoot in how managed-care payers make their drug-coverage decisions. The result: a fundamental transformation in managed care reimbursement policies, and hence which drugs payers are willing to pay for.

The motivation is clear. Managed-care payers (insurance companies, pharmacy-benefit managers, and disease-management companies), faced with both rising expenses as well as demands for more affordable premiums, are being squeezed on both sides. More than ever, payers need to be sure they're maximizing the use of every health-care dollar.

AN EYE TO SAVINGS. To help do this, virtually all managed-care payers have adopted an outcomes-based access (OBA) approach to drug coverage. As the mainstay in much of Europe and Australia, this concept was adopted by a small group of U.S. payer organizations in 1998, and actively promoted by the Academy of Managed Care Pharmacy. The OBA framework has quietly become the industry standard.

The OBA framework compares therapy options head-to-head, based on their relative clinical benefits (often boiled down to a dollar value) and their price. OBA requires that therapeutics deliver improved patient health outcomes and be priced at a level that produces overall treatment cost savings relative to the standard of care -- for example, by resulting in fewer surgeries or interventions, emergency-room visits, and doctor appointments than the "next best" option.

Payers independently assess each drug's clinical and economic worth -- termed its pharmacoeconomic value -- to determine whether and how that drug will be covered under different medical circumstances. To simplify all of the rules that have emerged, health insurers have developed a series of tiers called a formulary into which a drug is placed, with different policies and programs for each tier.

APPLES AND ORANGES. Therapeutics that offer compelling pharmacoeconomic value are given preferential formulary status, perhaps with a lower co-pay or a mandatory try-this-one-first policy, leading to increased utilization. Therapeutics that don't offer payers a clear value proposition are either covered nonpreferentially, with strict requirements for use, or are available only with higher co-pays up to as much as full retail price.

So why are we so bearish on Exubera? Because under a rigorous OBA analysis, Exubera doesn't offer an acceptable value proposition. The data simply isn't there to support Exubera's anticipated price, up to four times more than injected insulin.

As for a health-care value argument, analysts indicate that Pfizer may try to compare the cost of Exubera not with other insulins but with oral diabetes medications that carry similar price tags but are vastly different therapies, often used in combination with insulin.

This illogical apples-to-oranges comparison is likely to fail, and may even indicate a lack confidence or preparation. Based on our analyses and interviews with major managed-care decision-makers, we expect that payers will either dramatically limit Exubera's availability to patients, impose very high co-payments, or reject coverage of it outright.

OLD WINE, NEW BOTTLES. Pfizer appears to have chosen to ignore the OBA approach to defining Exubera's health-care value, and instead is likely to rely on a legacy direct-to-consumer (DTC) and physician marketing strategy. Since OBA effectively transfers a great deal of the decision-making power to payers, it renders a good deal of traditional DTC and physician marketing ineffective. In an OBA context and considering the currently available evidence, Exubera looks like anything but a sure bet.

Exubera is simply a new delivery technology for an old drug, insulin. Yet as the market failure of Biogen Idec's (BIIB) Amevive for OBA reasons demonstrates, managed-care payers are no longer dazzled by new technology in and of itself. New technology matters only when it produces breakthroughs in treatment outcomes, hence raising the standard of care, and comes at an overall cost that's competitive with other alternatives.

Can a therapeutic that primarily offers improved convenience to patients produce improved patient health outcomes that are valuable to payers? In this case, it's doubtful. Aside from lingering pulmonary safety questions associated with the treatment's long-term use, if Exubera fails, it will likely be a result of four OBA-based shortcomings:

THE REAL WORLD. First, Pfizer has yet to show that the switch from injected to inhaled insulin produces an improvement in compliance -- patients more rigorously following their dosing schedule. Next, there's no evidence that any potential improvement in compliance will be significant enough to actually reduce the rate of expensive complications, such as preventable emergency room visits and surgical interventions.

What's more, because it's newly launched, Exubera has yet to show any value by reducing diabetes-related complications in a real-world, as opposed to clinical-trial, setting. And finally, reports indicate that Exubera is being priced at a significant premium over injected insulin, the current standard of care.

For Exubera to achieve widespread preferential formulary status, payers will need to see a credible and compelling value proposition rather than an argument centered on patient convenience. The crux of the issue is whether an inhaled therapy will improve compliance and lead to significant improvements in patient health.

There are no studies exploring compliance with an inhaled -- vs. injected -- insulin regimen. However, because asthma has been treated with inhalers for many years and nasal flu vaccines have been recently introduced, perhaps we can gain some insight from their use.

HOW BIG A BENEFIT? The news isn't necessarily good for proponents of inhaled therapies. According to the medical literature, non-compliance with asthma inhalers is rampant -- and of great concern. Patients incorrectly dose on 25% to 80% of days, while 50% use the incorrect inhaling technique. Further, the market failure of MedImmune's (MEDI) FluMist nasal flu vaccine demonstrates that payers aren't necessarily willing to pay a premium for a more convenient delivery system compared with an inexpensive injection. FluMist additionally raises the question of whether needle-phobia is even that significant an issue for most patients, especially if they're faced with a steep co-payment difference.

Even if Exubera could prove a compliance benefit over injected insulin, the benefit must be significant enough to have a clinical effect, because very tight glucose control is necessary to avoid diabetes-related complications. Patients will have to rigorously adhere to their dosing schedules and learn how to properly use the inhaler system -- no small feat, according to asthma literature. In other words, "somewhat better" compliance is unlikely to deliver the kind of value that will permit a fourfold price increase.

At launch, Exubera will be priced at a premium to injected insulin far in excess of its proven pharmacoeconomic value, yet without data demonstrating significant compliance improvements that could justify the price. Payers most likely will not -- and cannot afford to -- pick up the tab.

PAYER DEMANDS. Pfizer's masterful use of DTC, physician detailing, and PR may still come to the rescue. But investors should be wary. There are increasing numbers of examples of new therapeutics to which payers strictly limit access due to OBA value considerations. There are also a rapidly declining number of new therapeutics that have managed to achieve market success while offering inferior pharmacoeconomic value to payers.

Under OBA, managed-care payers are now behaving like true consumers -- making demands for value and quality, and refusing to pay for over-priced and mediocre performance. Payers continue to build an infrastructure that effectively limits utilization of expensive pharmaceutical/biological technology to what they determine to be legitimate clinical need. The implications of this paradigm shift are profound, and seem not to be fully appreciated amongst many pharma and biotech manufacturers, and especially the investment community.

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