3 Companies Frightened by This Medicare Study

Rand has issued a report suggesting that CMS begin considering price. If it does, it could mean trouble for high-priced drugs from Gilead, Sanofi, and Celgene.

May 18, 2014 at 7:05AM

Everyone knows that medical costs are soaring, and that those costs present one of the biggest financial challenges to the next generation. But far fewer know that one of the biggest drug buyers, the Centers for Medicare and Medicaid Services, or CMS, is barred from considering cost when deciding whether to allow new drugs onto its payment platform.

What that means is that CMS only considers if a drug works, not whether the drug works better, relative to how much it costs, than competing alternatives. To some, ignoring the cost of medicine is a third-rail topic. Doctors should be left to determine the best treatment for each patient, regardless of expense. 

To others, granting CMS the freedom to rein in drugmakers' sky-high prices arms the agency with a valuable weapon to push back against the ever-higher creeping cost of new drugs.

Soaring cost of care 
A host of companies, stretching from drug distributor Express Scripts to health insurer Humana, are up in arms over prices for Gilead's (NASDAQ:GILD) Sovaldi, a new hepatitis C therapy that carries a price tag north of $80,000 for a 12-week course of treatment.

Gilead has been in the hot seat since announcing in December that Sovaldi's price would be 70% higher than Vertex Pharmaceuticals' Invicek.

Incivek launched to fanfare in 2011 before going on to become the fastest drug ever to achieve $1 billion blockbuster status, in part because, like Sovaldi, it came with a shockingly high price (in this case roughly $50,000, or about twice the cost of the previous standard of care: peg-interferon and ribavirin).

For those keeping track, that means the cost to treat hepatitis C has quadrupled in less than five years.

However, it's not just ever-escalating costs to treat hepatitis C that has payers muttering.

Sloan-Kettering, one of the preeminent providers of cancer care in the U.S., has been questioning the cost of new cancer treatments for years.

The company captured media attention in 2012 when it opted against including Sanofi's (NYSE:SNY) colon cancer drug Zaltrap in its anti-cancer weapons chest. Sloan-Kettering made that decision after reviewing trial data and determining that Zaltrap's efficacy was in line with cheaper, existing therapies.

That prompted Sanofi to cut its price for Zaltrap in half, showing that payers -- especially influential ones -- can force drugmakers' hands.

More recently, Sloan-Kettering doctors took aim at Celgene's (NASDAQ:CELG) Abraxane, a breast cancer drug that was granted approval for use in pancreatic cancer patients last fall.

In studies, Abraxane, when used alongside Eli Lilly's Gemzar, extended overall survival by 1.8 months versus Gemzar alone. However, In a letter published in the New England Journal of Medicine, Sloan-Kettering doctors Leonard B. Saltz and Peter B. Bach questioned whether results were good enough to warrant a rosy portrayal in the highly regarded Journal, particularly in the context of Abraxane's $25,000 additional cost.

While Celgene is keeping mum on whether it's offering discounts to payers like Sloan-Kettering (most drugmakers provide concessions), it's clear that drug developers have room to negotiate.

Sales of Abraxane, for example, totaled more than $200 million in the fourth quarter, and Celgene's operating margin is about 25%.

Fool-worthy final thoughts
Although industry profit suggests that room exists for price negotiation -- foreign government payers and drug wholesalers commonly negotiate pricing with drugmakers -- CMS doesn't appear to have much to say about which drugs get used, and ultimately paid for. Depending on your perspective, that may be a good thing or a bad thing.

Regardless, it's unlikely that CMS will gain more price freedom anytime soon. According to Kaiser Health News, it would require a vote in Congress, and that isn't a vote many politicians are eager to cast.

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Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.

The Motley Fool recommends Celgene and Gilead Sciences and owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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