Updated from 6:14 AM EST with additional comments and stock prices.
BOSTON (TheStreet) -- The exclusive hepatitis C pharmacy deal struck between Express Scripts (ESRX) and AbbVie (ABBV) is a serious, perhaps permanent, blow to the multi-year biotech stock bull market.
The power to control drug prices in the U.S. now has shifted firmly to cost-cutting insurance carriers and pharmacy benefit managers. This means biotech companies, especially those facing competition, can't guarantee the outsized profits investors have come to expect and crave.
After today, investors are no longer going to ask biotech executives, "What will you charge for your new drug?" Instead, the new question becomes: "What will Express Scripts -- or any other pharmacy benefit manager --- allow you to charge for your new drug?"
That's a huge, fundamental change which is likely to put downward pressure on lofty biotech stock valuations.
The deal between AbbVie and Express Scripts focuses only on the price of hepatitis C drugs, but expect future cost concessions to be wrung from other high-priced diseases, including cancer.
Under terms of the deal announced Sunday night, AbbVie agreed to significantly discount the price of its Viekira Pak hepatitis C therapy in exchange for exclusive access to Express Script's 25 million customers. Starting Jan. 1, Gilead Sciences' (GILD) competing hepatitis C drugs, Sovaldi and Harvoni, will be excluded from Express Scripts' formulary. The deal covers patients with genotype 1 hepatitis C, the most common form of the liver disease in the U.S.
Gillead shares fell 11% to $96.65 in Monday trading. Despite its favored deal with Express Scripts. Abbvie shares also fell half of a percent to $67.39.
Insurance companies and PBMs like Express Scripts have long been vocal critics of high drug pricing. In the past year, they have complained loudly about the budget-busting impact of huge numbers of patients seeking cures with the new hepatitis C drugs.
Gilead set the price of Sovaldi at $1,000 per day, or $84,000 for a 12-week course of treatment. Harvoni, which combines Sovaldi with another Gilead medicine, was priced at $94,500 for a 12-week treatment.
Health plans and PBMs were largely forced to cover the costs of Gilead's hepatitis C drugs because they were the most effective and only treatments available. That changed Friday when the Food and Drug Administration approved Abbvie's Viekira Pak. The company set the sticker price of Viekira Pak at $83,300 for 12 weeks of treatment, a small discount to Harvoni which suggested a reluctance to compete solely on price.
But then AbbVie negotiated for exclusive formulary access to with Express Scripts. The negotiated price for Viekira Pak was not disclosed, but Express Scripts said it was a "significant discount" to the drug's sticker price.
What's next? Express Scripts Chief Medical Officer Steve Miller is fairly blunt, telling Bloomberg, "We look at this as being the first of what will happen in the field of cancer, rheumatoid arthritis and many other of the expensive specialty fields."
That's a statement which should send shivers of fear running down the spine of every biotech CEO and investor.
Last week, Juno Therapeutics (JUNO) and Bellicum Pharmaceuticals (BLCM) completed successful initial public offerings. Both companies are racing ahead to develop so-called CAR-T therapies -- immune cells taken from a patient and genetically re-engineered to recognize and kill blood cancer cells. Novartis (NVS) and Kite Pharmaceuticals (KITE) are also developing CAR-T therapies.
The field of cancer immunotherapy is red hot right now and investors seem to have an insatiable appetite for these companies. But CAR-T therapies, once approved, are expected to cost $350,000 or more. Will Express Scripts offer exclusive access to its cancer patients to Novartis in exchange for a discounted price? Or Juno? If that happens, does Kite get frozen out like Gilead?
It's a scary but real scenario which could repeat itself in any disease area where drug prices are high and competition is abundant: cancer, rheumatoid arthritis, diabetes.
The only biotech and drug companies potentially protected from reined-in drug prices might be those developing unique and highly effective treatments. Bluebird Bio's (BLUE) gene therapy comes to mind. Or Vertex Pharma's (VRTX) cystic fibrosis therapies. But how long can those companies keep competition and drug pricing pressure at bay in a new era where health plans and PBMS call the shots?
It may take some time to sink in, but the Express Scripts-AbbVie deal is a tectonic shift in the control of drug prices which is going to have far-reaching ramifications on the profitability and valuations of biotech stocks.
Update: Since publishing this story, I've heard from some institutional investors who believe drug pricing overall is not at significant risk because hepatitis C is different from other diseases.
"Hepatitis C is a short-term cure market, so Express Scripts can force patients to take a regimen that is more inconvenient with more side effects because treatment is over in 12 or 24 weeks," commented one institutional investor via email. He adds: "Hepatitis C is also a prevalence market, meaning there are relatively no new cases diagnosed. Companies are looking to just drain the prevalence pool with no future market to protect, which creates incentives to use price to win share before the market disappears. Cancer is different. Even Express Scripts says cancer is the 'third rail' for PBMS because patients who are dying will not tolerate having their doctors' choices interfered with."