In March 2010, the FDA voted to approve Dendreon’s Provenge for the treatment of metastatic castrate resistant prostate cancer. The FDA’s decision was based upon the fact that the immunotherapy could extend the lives of patients by 4.1 months. While equity analysts expected the therapy to cost $50,000, many were startled to learn that Dendreon would instead be charging $93,000. At that price point, people wondered if it was ethical for a company to charge so much for prolonging life by only an additional 4.1 months. The cost was so high that the Center for Medicare & Medicaid Services (CMS), the agency that administers Medicare, which normally rubberstamps reimbursement after FDA approval, asked for additional time to review the drug. After one year of deliberation, CMS finally gave their coverage blessing for Provenge.
By delaying coverage approval for Provenge by one year, CMS set an awkward precedent for drug development companies and their investors, leaving many to wonder if the tactics used by the agency would portend to stricter approval standards for Medicare coverage.
Investors and pharmaceutical companies have traditionally taken Medicare approval for new products as a given. One of the functions of CMS is to regulate Medicare coverage for drugs and biologics to make sure they are reasonable and necessary. At $93,000 and 4.1 months, many doctors believed that Provenge was neither reasonable nor necessary. While doctors and consumer advocates might have cried afoul, Medicare had little recourse in negotiating the price and utility of the therapy due to the passage of the Medicare Cancer Coverage Improvement Act of 1993, which states that Medicare must cover “any drugs or biologicals used in an anticancer chemotherapeutic regimen for a medically accepted indication”. Therefore, by definition, Medicare must pay for Provenge. Instead of following their normal course of action, CMS decided to put up a fight.
CMS asked Dendreon for additional time to review Provenge’s application for payment. While no one knows for certain why CMS asked for extra time, there are several compelling reasons why the agency might have pressed the pause button.
First, the agency might have wanted to signal to the market that despite the 1993 Amendment, it would no longer blindly approve products. While the agency cannot technically deny payment, it is not prohibited from asking for additional data to make its decision. In Dendreon’s case, this slowed their Medicare reimbursement approval by a year, which is a significant penalty for a company whose only product primarily targets men over the age of 65. Losing one year of possible revenue is a hefty price to pay for a publicly traded company.
Second, CMS explicitly brought up future off-label use of Provenge. Medicare has a finite budget, and off-label drug use, especially for $93,000 therapies, can consume vast amounts of money. Medicare lacks the authority to regulate the off-label use of FDA-approved oncology products due to the 1993 Amendment, which also specified that Medicare must cover (depending on compendia recommendations) the use of FDA-approved chemotherapies that are used off label.
The mere fact that CMS brought up off-label use of chemotherapies is a telling sign about the future direction of the agency and possible congressional action. While the agency cannot directly discourage the use of Provenge in off-label settings, CMS did not exactly give doctors their blessing as the agency stated “we are hopeful that unlabeled uses in the near future will take place only in the context of bona fide clinical studies”.
Lastly, being the first approved immunotherapy, CMS might have wanted more time to figure out how to appropriately bucket Provenge. The 1993 law states that Medicare must cover drugs and biologics used as chemotherapies, but is Provenge a drug, biologic, or even a chemotherapy? Chemotherapy is defined as “a treatment of an ailment by chemicals”, while an immunotherapy is defined as a “treatment of disease by inducing, enhancing, or suppressing an immune response”. Hard to say whether a cell handling process is really a chemotherapy, which might have been why CMS wanted some extra time to think about their coverage decision.
As an investor, the actions by CMS are troubling. By delaying the approval of a drug, without giving a definitive reason, CMS has added yet another level of confusion and risk associated with drug development. If Medicare approval becomes a sliding scale, like FDA approval has become, drug developers will start to shy away from high-risk / innovative products. Innovation requires a price premium to offset the risk associated with developing a novel product. Without the prospect of a price premium and a defined regulatory and coverage path, drug developers will focus on me-too products and incremental improvements that do little to benefit the health of Americans.