Push the red button

Pharma toys with mutually assured destruction

Pharma is toying with mutually assured destruction. Gilead Sciences lost some $20 billion in value on Monday morning after Express Scripts ditched its hepatitis C treatments for AbbVie's discounted drug. This may kick off widespread price wars throughout the sector. Such tactics, though, could be a strategic disaster for all concerned.

Hepatitis C cures have been a Gilead gold mine. It launched Sovaldi a year ago and sold $8.6 billion of the drug in the first nine months of the year. Gilead charges $84,000 per patient for the drug. Insurers grumbled, but paid up. Other treatments weren't nearly as effective and chronic disease causes liver damage. Now AbbVie has muscled in on this turf. Its newly approved drug, Viekira Pak, appears just as effective in patients with the most common strain of the virus.
 
AbbVie's price cut in exchange for Express Scripts business helps it over the short run. The pharmacy benefits manager is the middleman on drug pricing and selection for 25 million Americans. From now on it will in most cases only pay for AbbVie's drug.

It's unusual to see a drug company disrupting the start of what could have been a cozy duopoly. Normally, pharma companies only offer incentives to insurers and pharmacy benefits managers when a therapy has been on the market for many years and there are numerous substitutable alternative treatments.

This discount may simply be a one-off. Most blockbusters merely help keep chronic conditions like heart disease under control. Patients can theoretically be switched back and forth between drugs. AbbVie's and Gilead's drugs, on the other hand, actually cure hepatitis C. That creates a bonanza-like atmosphere, in which one company's gain today is the other's permanent loss.

Express Scripts, though, wants discounts to spread and is targeting high-priced specialty drugs in oncology and autoimmune disease. This spending is growing fast because of high price tags. Spending on specialty drugs at CVS Caremark increased by more than 15 per cent over the past two years. By contrast, outlays on traditional medicines increased by just one per cent.

Spreading price wars could affect many providers. But AbbVie could be one of the first to be hit hard. About two-thirds of the company's sales come from a drug for autoimmune disease. The great irony of AbbVie pushing the red button is that it may be hoist by its own petard.