Epoch 43: Future Target Product Profiles for Delivering Mega-Blockbuster Products

Future Biotech Business Models

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Hello Avatar! Welcome back for another week of biotech analysis. Sundays are for talking strategy and today we are going to be speculating on what the ideal future product profile to deliver mega-blockbuster products may look like.  We are going to use a framework introduced by Stifel as the basis for discussion and then branch out into a few subsegments we see the field eventually moving toward.  The initial discussion will be around the two specific high level product profiles - “Payer Centric” and “Patient Centric” products.  As with any business it is always best to know your customer and in the case of biotech to know your customer's customer.  Obviously the main customer for biotech is pharma as that is the likely exit plan for the medicines and vaccines that are developed.  However, what is pharma going to buy?  Obviously what their customer wants!  Today we will dive deeper into two emerging themes from pharmas two biggest customers: payers (insurance and governments) and patients.

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PAYER VS PATIENT CENTRIC MEDICINES

This week we are going to revisit a concept introduced months back by Tim Opler and the Stifel team.  The discussion is around future markets and how to think about the evolution of the biopharma business model.  This is incredibly important for biotech operators to pay attention to as biotech needs to be building companies designed for exit to pharma in the future.  Failing to recognize the trajectory of the marketplace is a recipe for building companies which are likely to find themselves dead in the water rather than with a line of potential buyers.

Opler and colleagues hypothesize that tomorrow's market can be thought of as payer centric or customer centric.   We break this down as follows:

Payer centric: large drugs which remove significant cost from the healthcare system. 

Patient centric: lifestyle drugs that patients may even be willing to pay out of pocket for or disease which is both serious to quality to life (due to presentation of symptoms)

FDA APPROVAL VS PAYER COVERAGE

Let’s begin with a light discussion around the difference between FDA approval and payer willingness to pay.  Often, we focus on the TPP to get a drug approved.  For public investors there is often intense focus on the advisory committee and approval decisions.  But after that, it is about commercial execution.  And a big part of commercial execution is getting drugs covered by payers (i.e., insurance).  As we will get into below, payers have different goals vs regulators.

The FDA approval process is a rigorous one that evaluates the safety and efficacy of a new drug. In order to receive FDA approval, a drug must go through three phases of clinical trials, each of which is designed to test the drug on a larger and more diverse group of people. If a drug is found to be safe and effective in all three phases of trials, it is then eligible for FDA approval.

However, FDA approval does not guarantee that a drug will be covered by payers. Payers, such as Medicare and private insurance companies, have their own criteria for determining which drugs to cover. Payers typically consider the following factors when making coverage decisions:

• Clinical evidence: Payers want to see strong evidence that the drug is safe and effective for the intended indication. This evidence may come from clinical trials, observational studies, and other sources.

• Cost-effectiveness: Payers also consider the cost-effectiveness of a drug. This means weighing the cost of the drug against the benefits it provides to patients.

• Budgetary impact: Payers also need to consider the budgetary impact of adding a new drug to their formularies. This means estimating how much it will cost to cover the drug for all of their members.

It is important to remember that the FDA approval process is relatively objective. The FDA has a set of criteria that must be met in order for a drug to be approved. Payers, on the other hand, have more discretion in making coverage decisions. They may weigh different factors differently, and their coverage decisions may vary from payer to payer.

EXAMPLES OF PAYER RELUCTANCE TO COVER FDA APPROVED DRUGS

Below are two examples of drugs which were approved with great excitement from the medical and scientific communities, but that failed to initially gain wide support from payers.  The reason is both cases, cost vs risk/benefit.

CHRONIC HEART FAILURE

Entresto (sacubitril/valsartan) is a drug used to treat heart failure with reduced ejection fraction (HFrEF). It is a combination of two drugs: sacubitril, which is an angiotensin receptor neprilysin inhibitor (ARNI), and valsartan, which is an angiotensin receptor blocker (ARB). Entresto was approved by the FDA in 2015, but launched into poor payer coverage.

According to a 2022 study, only 38% of commercial insurance plans covered Entresto without prior authorization. Prior authorization is a process where patients need to get approval from their insurance company before they can start taking a drug.

Reasons for the poor payer coverage include high cost ($3,750/month) and perceived margin of long term risk/benefit improvement 

PCSK9 INHIBITORS

PCSK9 inhibitors are a class of drugs used to lower cholesterol levels. They are particularly effective at lowering LDL cholesterol, which is the "bad" cholesterol. PCSK9 inhibitors were approved by the FDA in 2015, but they also launched into poor payer coverage.

According to a 2018 study, only 33% of commercial insurance plans covered PCSK9 inhibitors without prior authorization. Prior authorization is a process where patients need to get approval from their insurance company before they can start taking a drug.

Reasons for the poor payer coverage include high cost and perceived margin risk/benefit improvement (although support from CV outcomes studies have helped this class)

EXAMPLES OF PAYER CENTRIC MEDICINES

Now that you have a good sense of what a payer centric medicines is - lets run through a few therapeutic areas and themes to exemplify areas of future opportunity.