Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

You pay more for things that work better. That seems pretty obvious. But it's not how pharma works in the U.S., where the standard approach is just to set the highest possible prices.

Novartis is bucking that convention by agreeing to let insurers Cigna and Aetna pay different prices for its heart-failure drug, Entresto, based on how it performs. This is not the first or only such deal, but they are rare in the U.S. And this one has particularly high stakes: It involves two of America's biggest insurers and a drug central to Novartis' success.

Letting insurers pay for a drug's performance is an unproven model, with doubters. But if this deal works, it has the potential to drive more patients to a drug they may take for a lifetime. More broadly, it could help quiet the doubters and push the industry to increasingly tie drug prices to how well they work instead of just what the market can bear. 

Novartis certainly needs something to get Entresto moving. The drug managed only $5 million in sales in the fourth quarter, a bit short of consensus estimates of $54.8 million. The company forecasts $5 billion in peak annual sales. Novartis is under pressure to deliver, as its best-selling drug Glivec begins to face generic competition, and as it attempts a difficult turn-around of its struggling eye-care business. 

Under Pressure
Novartis could use a contribution from its new heart failure drug sooner rather than later.
Source: Bloomberg

Entresto lists for about $4,500 per year. Novartis will likely lose some of that to discounts, at first, with these deals.

Heart drugs are something of a special case. There are so many patients that take medication for heart disease that payers are wary of new, expensive options. They've restricted patients' ability to get Entresto for that reason. Rather than seeking a higher price, at least at first, Novartis is prioritizing getting around this hurdle to reach more patients. 

Novartis isn't the only company trying to convince payers and patients that a costly new heart drug is worth it. Regeneron on Tuesday disclosed that sales of its powerful new cholesterol drug Praluent have been slow, thanks to the same payer barriers facing Entresto. The drug managed only $7 million in sales in the fourth quarter, compared to expectations of $22 million.

Regeneron has always warned the going would be slow, as payers are waiting for data on Praluent's long-term benefits before they embrace it. But the ramp-up has been so slow that Piper Jaffrey's Edward Tenthoff dropped his price target for the company on Tuesday to $443 from $607.

Regeneron and its partner in the drug, Sanofi, may want to get more inventive with pricing, including a pay-for-performance deal; cost and competition are a big issue for this drug. Praluent costs $14,600 a year -- pricey in comparison to cheap, generic statins such as Lipitor. 

Amgen has a rival drug, Repatha, that works the same way and will likely have long-term data out before Regeneron. That may help it convince payers to pick its drug over Regeneron's. Amgen already has a relatively small-scale pay-for-performance deal that obligates an insurer to direct patients exclusively to Repatha instead of Praluent. Once Amgen and Regeneron are confident that these cholesterol drugs are able to reduce major heart events over longer time periods, they may be more comfortable seeking bigger pay-for-performance deals. 

Slow Burn
A series of drugs from Novartis, Regeneron, and Amgen that target heart disease will be blockbusters... someday.
Source: Bloomberg
Regeneron is partnered with Sanofi on Praluent.

Pay-for-performance may end up being less than optional. Novartis' Joe Jimenez is one of the most pessimistic pharma CEOs on pricing, saying that the days of unfettered increases are over and that pressure for lower prices is the new norm. In this, he stands apart from many other executives who think public furor over drug pricing is the result of misinformation and won't lead to any real policy change.

Jimenez is betting one of his most important drugs on his view. If these deals work for Entresto -- and if drug prices continue to be featured in campaign speeches, congressional hearings, and presidential budgets -- then imitators won't be far behind.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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