For senior citizens in the United States there are two constants to look forward to: a Social Security benefit payment and Medicare coverage. These two entitlements are arguably indispensable when it comes to ensuring financial and physical health.
Unfortunately, neither entitlement program is exactly "healthy." Social Security is projected to burn through its remaining cash reserves by 2033, while the Trustees suggest that the Medicare Hospital Insurance Fund will be depleted by 2030 (also known as Medicare Part A). Medicare Part B, which covers the cost of physician and outpatient visits, and Part D (prescription coverage) are expected to be adequately financed for the next 75 years.
But what if the Trustees are wrong?
The real problem with Medicare
At present, the Trustees project that healthcare costs for Parts B and D will account for 3.8% of U.S. GDP by 2089. That's up from the 2% they accounted for in 2014. But what if the rising costs of prescription drugs isn't being properly accounted for? We've seen a number of variables change in the drug development space in recent years that could wind up altering the trajectory of drug cost inflation in the coming decades.
For example, we're beginning to see a major push toward personalized medicine and away from one-size-fits-all treatments. By honing in on specific genes or mutations, drug developers aim to tackle tough-to-treat diseases on a person-to-person basis. However, personalizing therapies to target a specific gene or protein can really narrow down the pool of eligible patients, and in turn raise the wholesale cost of that therapy substantially.
We're also witnessing unprecedented merger and acquisition activity in the drug development industry. DealLogic points out that through mid-August we've seen $270.9 billion worth of biotech deals announced. This compares to $277 billion in biotech M&A announced all of last year -- a year in which a record was set for M&A deals in biotech. As companies combine their strengths, they also reduce competition, thus further adding support to prescription drug prices.
Let's also not forget that the U.S. healthcare system is designed in such a way that it does little to curb prescription drug price inflation. First, Congress doesn't set price caps on prescription drugs for fear of sending businesses and jobs to overseas markets. Secondly, insurers and pharmacy-benefit managers exclude very few drugs from their approved formulary lists because they're obligated to give their patients the best therapies available -- otherwise consumers will find other providers that will. And finally, it's just a common perception that high prices are needed in the U.S. to support drugmakers' efforts in overseas emerging markets where they simply can't turn a profit.
With few checks on prescription pricing, Medicare Part D could wind up being the undoing of Medicare.
Could these drugs wind up bankrupting Medicare?
The way I see it, there are a handful of drugs, or drug classes, that are on the verge of being an outright danger to Part D expenses in the coming decade. While this is entirely up for debate, and the therapies/drug classes being presented below are entirely arbitrary, I suspect these could put Medicare in a bigger bind than the Trustees realize.
Hepatitis C drugs
Arguably the most "in your face" cost concern facing Medicare Part D is the prescription costs associated with next-generation hepatitis C drugs, such as Gilead Sciences' Harvoni and Sovaldi.
As recently as 2011, the standard of care for treating the hepatitis C virus, or HCV, was intravenous interferon and ribavirin. The cure rate hovered around 50%, and it left many patients with flu-like symptoms, anemia, and rashes. These therapies are a big step up in efficacy and patient quality of life -- especially Harvoni, which treats the most common form of HCV, genotype 1. Harvoni is a pill that's taken once daily without interferon or ribavirin, and it effectively eliminated all detectable levels of HCV in better than 90% of clinical trial patients.
The downside to this effectiveness is that Harvoni and Sovaldi come with a wholesale price tag of $1,125 and $1,000 per pill, respectively. For a standard 12-week treatment a patient could end up facing $94,500 or $84,000 in total costs. Last year alone Medicare forked over $4.5 billion on new HCV drugs, including $3 billion for Sovaldi. This was more than 16 times what it spent on HCV medicines in 2013.
If there is bright side to this, it's that once the treatment is complete, the patient is expected to be cured, so the treatment costs tend to be well defined ahead of time. Also, we have seen exclusive deal-making occurring within the HCV industry between pharmacy-benefit managers, insurers, and drug developers to ensure the American public gets this life-saving drug at below wholesale cost.
Numerous types of cancer drugs
Another primary concern for Medicare Part D is the rising cost of cancer drugs. Although cancer's triggers are still largely unknown, and its risk factors can vary from cancer type to cancer type, one commonly accepted risk factor among all cancer types is age. Considering that the U.S. National Cancer Institutes' Surveillance Epidemiology and End Results database suggests 43% of males and 38% of females have a risk of developing cancer in their lifetimes, it's a safe bet to suggest that cancer drug prominence (and costs) will only grow over time.
I see two standout "concerns" as particularly significant for Medicare in the oncology space.
First, the highly touted cancer immunotherapy drugs could wreak havoc on costs. The leading immuno-oncology products -- Bristol-Myers Squibb's Opdivo and Merck's Keytruda -- work by enhancing your body's immune system so it can better locate and fight cancer cells. Although these therapies have provided response benefits in advanced melanoma and non-small cell lung cancer patients (in clinical studies), they come with an astronomical annual wholesale cost of $143,000 for Opdivo and $150,000 for Keytruda. It's possible that as the label indications for these immunotherapies are expanded the wholesale cost of these therapies could fall, since the revenue stream would be more diversified and these companies would be more assured of recouping their development costs -- but that's no guarantee.
The other concern would be for cancer products that have long-tail usage in the elderly, such as Johnson & Johnson and AbbVie's Imbruvica, a treatment for chronic lymphocytic leukemia, the most common blood cancer in adults. CLL is a disease that leads to around 4,600 deaths in the U.S. per year, but a patient can live with the disease for a decade or longer (the 10-year survival rate is 35%). Though Imbruvica is designed to be used in situations where other lines of therapy have failed, it exhibited a duration of response ranging from 5.6 months to slightly over two years in the clinical study that led to its approval. With a price tag of around $8,200 a month, Imbruvica is costing CLL patients nearly $100,000 per year!
Next-generation cholesterol drugs
Last, but certainly not least, next-generation PCSK9 inhibitors, such as Amgen's Repatha and Regeneron Pharmaceuticals and Sanofi's Praluent, could wind up being the most concerning of all for Medicare.
Both drugs, which were just recently approved by the Food and Drug Administration, use a new pathway to lower LDL-cholesterol levels in the body. This is the bad type of cholesterol that can wreak havoc on your cardiovascular system. Repatha and Praluent target the PCSK9 protein and inhibit its ability to bind with receptors on a patient's liver. These receptors are responsible for filtering LDL-cholesterol out of a person's bloodstream.
The concern is that Repatha and Praluent are being targeted at a much broader audience than just rare genetic disorders such as heterozygous familial hypercholesterolemia, for which both drugs were approved. PCSK9 inhibitors could be targeted at patients with higher than normal LDL-C levels who have no history of prior heart disease, which would open up an enormous market for both drugs. Unfortunately for Medicare, the annual wholesale costs of Praluent and Repatha are $14,600 and $14,100, respectively. This is a chronic condition, so these medications would be used throughout a person's lifetime -- meaning PCSK9 inhibitors could be ground zero for the undoing of Medicare.
It's obviously very difficult to predict what could happen five or 50 years from now with Medicare. But I believe a line in the sand has been drawn, and prescription drug prices are about to cross that line with little to no consequence for the drug industry. This is going to be a trend worth watching in the coming years and decades.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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