Can payers get to 'rational' hep C drug prices without a price war?

Payers worried about hepatitis C drug prices have been counting on impending price competition to save them money. The idea is that, once Merck, AbbVie and Bristol-Myers Squibb ($BMY) have treatments on the market, Gilead Sciences will have to back off its $84,000-per-treatment-course sticker price.

Actually, the theory is even broader than that: These companies will all be eager to get a jump on their rivals. So, they'll all be willing to negotiate on price, in return for preferred access to the patients PBMs cover.

The reality could be a little better--and a little worse--than that.

Announcing its consumer health sale to Bayer, Merck ($MRK) suggested that the purveyors of this new generation of hep C drugs all know how valuable they are. The market is a "long-term opportunity," Merck execs said. It will be a big cost burden to government-funded programs. In fact, annual costs could rise to $85 billion in the next five years, the company said.

RBC Capital Markets analyst Michael Yee interpreted the comments this way: Given that AbbVie ($ABBV) and Gilead ($GILD) have made similar noises, payers can't expect much of a price war. But they get some cost control anyway.

Merck CEO Kenneth Frazier

"[T]hus the players will be rational and have reasonable pricing without a price war," Yee wrote in a note to investors (as quoted by Barron's). And that will lead to "a sustainable, healthy large market of revenues," he said.

Meanwhile, Merck CEO Kenneth Frazier signed onto the argument that even expensive hepatitis C treatments could prevent higher costs from disease complications down the road. "People don't realize that the real impact to society of hepatitis C is yet to be felt, because the wave of cirrhotic patients is about eight years from now," Frazier said. "There's a lot that we need to do as a society to prevent all the costs of liver transplants and the like."

- get the CNBC story
- see the Barron's blog post

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