Pharmaceutical giants face a conundrum, as illustrated by two recent events. Eli Lilly (LLY) agreed to pay $6.5 billion in cash for ImClone Systems (IMCL) to get its hands on a roster of experimental cancer drugs. And Roche, bowing to pressure from Britain's National Institute for Health & Clinical Excellence (NI≠≠CE), slashed the price of lung cancer drug Tarceva by $1,200 to $10,830 per four-month course of treatment. Roche says it wants patients in Britain to benefit from Tarceva and that it is working with NICE, an independent body that advises the British National Health Service.
How are these two developments related? Pharmaceutical companies are charging into the cancer arena, convinced that these costly treatments will open a new path to revenue growth. But national health authorities are balking at the drugs' high prices, given that most of them extend life by only a few months. If insurers in the U.S. follow suit, Lilly and its pharma peers could run into severe pricing constraints.
"At some point—and that point will come sooner rather than later—payers are not going to approve spending $100,000 for someone to live an extra six months," says Erik Gordon, director of biomedicine at Stevens Institute of Technology. David Balekdjian, a partner at strategy consulting firm the Bruckner Group, confirms that "for many diseases, U.S. insurers are rigorously examining the outcomes new drugs produce, relative to their cost." As insurers increasingly scrutinize cancer drugs, "many will never reach their markets," Balekdjian warns.
In the world of giant pharma companies, cancer medicine has long taken a backseat to heart treatments, depression drugs, sleep aids, and other billion-dollar sellers. Because cancer treatments often consist of complex protein molecules that take years to develop, the drug multinationals left these risky products to small biotech ventures such as ImClone. But lately drugmakers have been embracing cancer treatments, in part because older blockbusters such as Pfizer's (PFE) Lipitor and Lilly's anti-psychotic Zyprexa are approaching the end of their patent life. Moreover, because of safety concerns, the U.S. Food & Drug Administration is reluctant to approve pills taken by millions of people for minor ailments. But the FDA demands less of cancer drugs that could save patients who face near-certain death.
Cancer drugs also require little marketing support—no TV ads or lavish magazine spreads. Oncologists tend to be hyper-aware of any new treatment that might help mortally ill patients. "You don't need thousands of sales reps, you just need good data," says Lazard Capital Markets analyst Gene Mack.
Best of all for makers of cancer drugs, these products have long enjoyed considerable pricing power because they are so difficult to develop. Genentech's (DNA) Avastin costs up to $100,000 a year. Erbitux, ImClone's only marketed drug, costs around $10,000 a month and pulled in revenues of $1.3 billion in 2007. That's why Lilly is willing to make its largest acquisition ever, and why Pfizer is exiting heart drugs in order to focus on treatments for cancer, as well as Alzheimer's and diabetes.
WHAT WILL INSURERS COVER?
The cost controversy could end up limiting the cancer market's promise, however. Last April, Bristol-Myers Squibb (BMY), which holds 60% of the North American marketing rights to Erbitux, bowed to Canada's health authority and dropped the drug's price there. Britain's NICE already restricts the use of Erbitux due to cost. And in August it rejected four kidney cancer treatments, among them Pfizer's Sutent and Genentech's Avastin, for that reason.
The pricing environment is "becoming more challenging," acknowledges Dr. Richard Gaynor, Lilly's head of cancer research. The company has been discussing drug development with insurers to get a handle on what they are willing to pay for, he says.
With Kerry Capell in London