The Canary in the Coal Mine
Or 'How Civica Rx signals rapid value erosion for incremental innovation in life sciences'
tl;dr-
Civica Rx is a non-profit generic drug manufacturer originally started by a consortium of different health systems & hospital networks - including, notably, Intermountain Healthcare
The company operates with several unique competitive advantages - coined ‘the healthcare utility model’ by non-profit health system SSM Health;
Member health systems serve directly as Civica Rx customers in purchasing generic drugs, ensuring consistent customer centricity
The broad use of ‘take or pay’ contract variants - common in the energy industry - as a way to secure mid-to-long term demand among health system & hospital customers
Non-profit structure - with no stock & no shareholders - ensures Civica remains a ‘Switzerland’ marketplace - no individual member is able to capture additional value created by the nonprofit
Strong relationships with current contract manufacturing organizations (CMOs) to fulfill demand & expand portfolio of products - augmented by Civica-owned manufacturing capabilities
On March 4th 2022, Civica announced it would begin manufacturing generic insulin - most notably, insulin glargine, the backbone of Sanofi’s flagship Lantus brand
Despite competitive pressure from Lilly’s Basaglar - a glargine biosimilar - Lantus sales in 2021 still reached nearly $2.5B EUR
Notably, Civica is not planning to manufacturing insulin degludec (likely due to patent protection), the backbone of Novo Nordisk’s basal insulin brand Tresiba
Alongside a medley of industry partners, Civica is also partnering with India-based GeneSys Biologics on the initiative
Civica Rx - along with fellow generic drug disruptor Mark Cuban Cost Plus Drug Company - serve as bellweathers for how the relationship between innovation & value capture in the life sciences is changing
Formerly solid barriers to entering the life sciences industry are melting away as technology reduces the cost of drug manufacturing & distribution
Greater emphasis will be placed on innovative & transformative therapeutics vs. incremental innovation given their defensibility; it’s much more difficult to copy a personalized oncology therapy, much less the human capital & expertise powering that innovation
Civica Rx & MCCPDC showcase additionally a desire to sacrifice margin for scale, which further erodes opportunity for incremental innovation that has traditionally relied on high pricing and / or YOY price growth to maintain financial sustainability
Life science companies face a core decision-point - tailoring your operating model to a) focus on transformative vs. incremental innovation; and b) in what disease areas is one or the other the optimal approach
There will always be significant value in transformative life science innovation - new gene / cell therapy, new curative therapy, rare indications, etc.
Building a business for incrementally innovative products will center far more on value drivers outside the innate product and more on the overall experience - wrap-around services, distribution, portfolio approaches, etc.
Failure to adapt means risk exposure not only to other pharmaceutical companies, but to entities such as Civica & MCCPDC whose business models perform better as value erosion accelerates
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When you think about healthcare products & services - and I’m really talking about all products & all services, from your basic PCP visit (service) to your super expensive & complex curative gene therapy for a rare disease (product), that patients are using - you begin to realize that the industry doesn’t have a good price discovery process. There are many contributing factors - the inherent lack of price sensitivity for life-saving therapy, the ‘shielding’ of patients with a third party payer stakeholders, price memory & how cutting edge information on treatment makes it way to continuing medical education & medical school curricula, but it’s safe to say that price determination is often far more opaque in healthcare than it is in nearly any other industry. Even in my experiences as a market access consultant - where our literal job is to do price discovery for our clients for life science products - much of that work is more ‘how does Competitor A price’ and ‘will we get a $20 copay or an $80 copay for a similar price with a maybe +20% increase.’
(I’m sure many of my colleagues in market access will balk at the simplification but, let’s be honest - market access is tactically complex with many details to consider but has very clear strategic concepts.)
In any case, pharma & medical device products has a poor process for price discovery - which has, for many years, resulted in what some might call a ‘bubble’; where the real-world clinical & economic value of an asset is increasingly decoupled from its actual pricing. This ‘bubble’ traditionally has been maintained economically by inefficiencies within the system - for example, how rebates to PBMs for access ‘prop up’ list prices for products while continuing to create greater risk for cost exposure among patients. One aspect that has also contributed to this bubble is just the high cost of drug manufacturing itself & ability for new entrants to even begin to approach the somewhat insular industry with a high cost of entry.
This ‘bubble effect’ varies from indication to indication. For indications where value is extremely clear - curing HepC, for example - our current system works rather well. However, for indications where value is incremental, our system oftentimes just relies on historic price memory - at least, until someone (usually a payer) decides that they’ll ‘pop’ the bubble by no longer providing access. Products & services that do not have access are then forced to compete like a consumer product good - in which case standard price discovery mechanisms suddenly ‘kick in’ again. This creates a really interesting conundrum for many companies who have an asset that perhaps, is only incrementally effective - and has resulted in many life science innovator companies ‘riding the bubble’ as far as they can until, well, it pops either due to patent expiry or payer action.
What Civica and MCCPDC serve as are signals that this bubble may pop far sooner than anticipated. Remember that this bubble is essentially sustained by a combination lack of high financial barrier to entry, data opacity, and value capture mechanisms among traditional incumbents. Both Civica and MCCPDC hit upon all three aspects by virtue of their operating models. Because Civica is a non-profit, there is no ‘value’ to abscond or capture; this creates a more direct economic relationship that supports greater transparency & ultimately, price discovery. Similarly, MCCPDC’s focus on direct-to-patient does much of the same thing by removing ‘value’ that normally would have been captured by intermediaries or other entities (though going B2C takes it a few steps beyond Civica’s non-profit status).
If I were a life science company, I’d be watching these recent events with some amount of trepidation depending on my portfolio - especially if I have assets that may only be incremental improvements vs. standard of care. So much of my analysis now has to shift beyond traditional ‘will the bubble pop because of access’ to ‘has there been enough reduction in manufacturing cost that a generic comparator - by sole virtue of economics - will prevent my brand from taking root?’ Patent protection doesn’t stop the market - patients, HCPs, etc. - from picking a generic product and if that cost is low enough, well … let’s just ask the question. Did I just spend billions of dollars bringing an asset to market that just isn’t worth it?
To be clear - the risk of asset value plummeting has always been something that life science companies have had to deal with for decades now. What’s changed, however, is the timing of that impact. With companies like Civica and MCCPDC gaining traction, one can only imagine that what seemed like a reasonable lifecycle management process & strategy before may now simply be outdated & too slow to keep up.
Let’s just hope we don’t reach WSB-levels of required speed. That would be tough.
-WY