Pharmaceutical Reference Pricing in the U.S.

1. Pharmaceutical Reference Pricing in the U.S. April 2016 Delusion or a soon-to-be Reality? Ilkka Anhava Ling Chen Huiyan Jin Emil Nedev David Spellberg Innovative Business Models in Global Healthcare – EMBA Course Spring 2016

2. Executive Summary • CMS will likely tweak Part B drug payment in near term to incentivize use of cheaper drugs • CMS will test other new Medicare drug payment systems over the next 5 years • However, near-term likelihood of reference pricing for Part B and/or D drugs is <25% • Headwinds for Reference Pricing in Near Term • Mixed performance in EU • Political gridlock and pharma lobby • Competing ideas (e.g., Medicarepricenegotiations) • Significant biosimilar competition very soon • But, first US biosimilar priced only at 15% discount • Affordability may need to be addressed via other methods • Regardless, RA and Crohn’s on Chopping Block • Macular Degeneration also in Focus • Most ophthalmologists prefer cheaper Avastin • But Avastin off-label issue remains a hurdle • 18Bpotential Medicare savings over 10 years remain on table

3. Increasingly frequent public linking of drug prices to access issues… Note: Georgetown / Kaiser Family Foundation analysis of CMS data Prices of top-10 drugs increased 100%+ between 2011 and 2014 Amgen: Enbrelup 118% AbbVie: Humiraup 126% Physician Prescription: Imbruvica for Leukemia “There’s no way I could do that…It was just prohibitive.” Outcome: Did not fill her prescription Jacqueline Racener Leukemia Patient “…as many as 25% of Americans cannot afford … do not fill prescriptions… in 2014… highest rate of drug spending growthsince 2001 … due to new specialty drugs …” Andy Slavitt Acting Admin., CMS

4. …coupled with cases of very “opportunistic” pricing spark backlash 5,455% Daraprim price increase from $13.50 to $750 per pill Martin Shkreli Isuprel and Nitropress price increases of 525% and 212%, respectively Howard Schiller "I write to encourage you to reconsider Gilead's pricing … for Sovaldi and Harvoni ...[my office will] continue to examine this potential claim for unfair commercial conduct.“ – Maura Healey, Jan. 2016 Maura Healey Mass. AG “When Americans pay for research … cost should not limit their access … the NIH has a powerful tool to hold drug companies accountable for barriers … including price.” – Bernie Sanders, Mar. 28, 2016 THE BERN “[Medicare could] save $300 billion a year [if it negotiates prescription drug discounts]. We don’t do it. Why? Because of the drug companies.” – Donald Trump, Jan. 2016 THE DONALD

5. The government quickly proposed Medicare drug pay reforms… March 8, 2016 CMS PROPOSED RULE Will test ways to cut Medicare Part B costs and drive use of most cost-effective drugs Test launches planned late 2016 / early 2017 • 2015 US prescription drug spend $457B • $128B (28%) was for injectables • Medicare Part B spent $21B on drugs • Mechanism to promote lower-cost drug use: • Reduce add-on payment to 2.5% from 6% of ASP • Add new flat fee of $16.80 per drug per day • “Value-based” Pricing Models to be tested: • Discounting/eliminating patient cost-sharing • Indications-based pricing • Reference pricing • Outcomes-based risk-sharing agreements • Avalere Analysis: Medicare reimbursement would drop for drugs costing over $480 per day and rise for drugs costing under $480per day Financial Incentive Change Note: ASP = average sales price of Part B drugs

6. …including reference pricing which is dreaded by the pharma industry • Reference Pricing – General Methodology Overview • “Clusters” usually based on cheapestdrug in group • For drugs priced above the reference price, patientmustpaythe difference • Some countries (e.g., Belgium) require drugs to be priced below the reference price Reference Group Drug #4 Drug #2 Drug #3 Drug #1 $ $400 $300 $100 $200 Reference Price Applicable to all drugs in group • External Reference Pricing (ERP)– Use of prices of a medicine in one or several countries as a benchmark for setting or negotiating the price of the product in another country Referencing Country Referenced Country Methodology Price #1 Drug Group X $300 Lowest Price Drug X Price $100 Price #2 $200 Price #3 $100 Note: Some countries use average instead of lowest prices and reference-price based on multiple countries

7. So far, reference pricing has achieved mixed results in Europe… The “Good” … ? • Belgian researchers found that reference groups reduce medication costs for poorer patients • However, Italy, Sweden, and Denmark are moving away from reference pricing to price negotiations because of lack of evidence of savings • The real impact of ERP on drug costs is still not well understood; more studies are needed The “Bad” • ERP programs vary by country (e.g., # of comparator countries, price benchmarks) • ERP ignores cross-country variations in care needs, income and care costs • Differences between public and actual prices are usually confidential • Drug names, doses, pack sizes vary across countries • ERP incentivizes international launch sequencing strategies by drug makers • 1:1 comparisons are difficult and can impede access, especially in smaller/poorer countries

8. …and it is unlikely to fare better in the US if it ever sees the light of day • CMS’ Part B proposal already has stiff opposition from the pharma industry and providers • Political gridlock between a Republican Congress and a Democratic President + Pharma lobby • Estimating cost savings from reference pricing is difficult and makes gathering support harder • Most experts agree that the President can NOT make this change via executive order • Competing proposals seem more popular (e.g., Medicare price negotiation authority) Potential Longer-Term Lifeline for Medicare Drug Reference Pricing: • CMS’ viability tests of new payment models (incl. reference pricing) over next 5 years

9. However, if reference pricing became a reality… Impact Estimate of recent CMS Part B Proposal • Medicare could generate large savings on cancer, RA, and OP drugs • CMS will most likely not go after cancer first • RA and OP, however, will likely land on top of CMS’ priority list right away Note: Analysis performed and published by Avalere Health on April 7, 2016 Top-5 Drugs by Medicare Part B Spending in 2014 • RA and MD drugs made up 25% of total $21B Part B drug spending on 1% of beneficiaries • High competition of largely equivalent drugs in both areas • RA and MD likely focus areas for reference pricing Note: Analysis performed by CMS based on 2014 Medicare drug spending data RA = rheumatoid arthritis OP = ophthalmology

10. …the rheumatoid arthritis space would very likely be a top priority… Lowest Cost • Medical database analyses showed equivalentefficacyandsafetyfor RA and Crohn’s disease • 4 of the 5 drugs will likely face biosimilarcompetitionvery soon • However, the first US-approved biosimilar Zarxio came to market at only a 15% discount • Big pharma biosimilar sponsors will likely preserve value while Generic firms will price more aggressively * Figures are averages and can vary depending on patient-specific treatment needs ** IV-administered drugs are physician-administered and, thus, covered under Medicare Part B; Sub Cu (subcutaneously-administered) drugs are paid for under Part B, if administered by a physician, and under Part D if obtained at a pharmacy and self-administered by a patient

11. …as would the macular degeneration space, given its high-cost drugs Lowest Price Lowest Cost • Multiple studies since 2005 showed equivalent efficacy for Wet AMD for all 3 drugs • Studies show that 64% of ophthalmologists choose Avastin as first-line drug and that Medicare could save approx. $18B over 10 years if the remaining 36% of doctors switched to Avastin • However, Avastin use is off-labelbecause Genentech did not seek FDA approval for Wet AMD * Figures are averages and can vary depending on patient-specific treatment needs ** Lucentis, Avastin, and Eylea injections are administered by a physician and are, thus, paid for under Medicare Part B

12. Our Call • CMS will likely tweak Part B drug payment in near term to incentivize use of cheaper drugs • A model involving a lower ASP+% coupled with a fixed fee is a viable way of doing so • CMS will test other new Medicare drug payment systems over the next 5 years • Depending on these test results, CMS may or may not identify reference pricing as viable • The likelihood of reference pricing for all Part B and D drugs in the near term is <25% due to: • Mixed performance in EU • Political gridlock and pharma lobby • Competing ideas (e.g., Medicare price negotiations) and methodologies (e.g., value-based pricing) • Longer term implementation depends on CMS pilot results and may be holistic or targeted

13. Appendix Detailed Presentation & Sources

14. Executive Summary • CMS will likely tweak Part B drug payment in near term to incentivize use of cheaper drugs • CMS will test other new Medicare drug payment systems over the next 5 years • Near-term likelihood of reference pricing for all Part B and/or Part D drugs is <25% • Headwinds for Reference Pricing in Near Term • Mixed performance in EU with some countries abandoning system • Political gridlock and pharma lobby killchances for action in near-term • Competing ideas (e.g., Medicarepricenegotiations) may have more legs • Regardless, RA and Crohn’s on Chopping Block • Significant biosimilar competition in RA / Crohn’s spaces very soon • First US biosimilar launched at only 15% discount to reference product • Need for additional affordability improvement likely to persist • Macular Degeneration also in Focus • 2/3 ophthalmologists prefer cheaper Avastinto Eylea and Lucentis • Avastin off-label issue remains a hurdle to physician switching • Remaining savings potential for Medicare approx. $18B over 10 years

15. Increasingly frequent public linking of drug prices to access issues… *Medicare OOP Cost: Medicare patients who receive high-cost injectable / infusible drugs under Medicare Part B are still responsible for a part of the drug’s total cost out of their own pockets (i.e., OOP = out-of-pocket cost) Note: Georgetown / Kaiser Family Foundation analysis of CMS data The press is running more and more stories on patients who struggle with high drug costs … Source: Wall Street Journal (WSJ) article from December 31, 2015 Physician Prescription: Imbruvica Patient Reaction: “There’s no way I could do that…It was just prohibitive.” – Jacqueline Racener Outcome: Ms. Racener, a 76-year-old legal secretary, decided to not fill her prescription Jacqueline Racener Leukemia Patient … and government is not far behind “Surveys suggest that as many as 25% of Americans cannot afford … do not fill prescriptions … spending on medicines increased 13% in 2014, compared to 5% for health care spending growth overall, the highest rate of drug spending growth since 2001 … due to new specialty drugs — drugs that account for nearly 33% of costs, but represent less than 1% of prescriptions.” – Nov. 2015 Andy Slavitt Acting Admin., CMS

16. …coupled with cases of very “opportunistic” pricing spark backlash While drug price hikes are no rarity, two arguably excessive examples recently caused a huge public outcry … Action: 5,455% Daraprim price increase from $13.50 to $750 per pill "So 5,000 paying bottles at the new price is $375,000,000 - almost all of it is profit and I think we will get three years of that or more…Should be a very handsome investment for all of us.'‘ – Martin Shkreli Martin Shkreli, Ex-CEO Action: Isuprel and Nitropress price increases of 525% and 212%, respectively “We are listening and changing…in a number of cases, we have been too aggressive.” – Howard Schiller (before Congress) Howard Schiller, CEO … and brought the wrath of the federal and state governments and Presidential hopefuls upon the pharma industry “[I support free market principles but am] disgusted…what was done here [Turing, Valeant] was different. Perverse business practices were employed.“ – Rep. Carter R(GA), Feb. 2016 Rep. Buddy Carter R-GA "I write to encourage you to reconsider Gilead's pricing structure for Sovaldi and Harvoni ...[my office will] continue to examine this potential claim for unfair commercial conduct.“ – Maura Healey, Jan. 2016 Maura Healey, Mass. AG “When Americans pay for research…high cost should not limit their access to it…the NIH has a powerful tool to hold drug companies accountable for barriers to access…including price.” – Bernie Sanders, Mar. 28, 2016 THE BERN “[Medicare could] save $300 billion a year [if it negotiates prescription drug discounts]. We don’t do it. Why? Because of the drug companies.” – Donald Trump, Jan. 2016 THE DONALD

17. The government quickly proposed Medicare drug pay reforms… A recent HHS report decried yet another drug spending increase and CMS started looking for a solution … March 8, 2016 CMS PROPOSED RULE Test new ways to pay for Medicare Part B prescription drugs Goal: Slow the growth of Medicare spending on Part B drugs while encouraging doctors to choose the most (cost-) effective treatments for their patients CMS is accepting comments through May 9, 2016 • Prescription drug spending in the US totaled $457B in 2015 • $128B (28%) was for drugs provided in hospitals and doctors’ offices (injectables) • Medicare Part B drug spending was $21 billion • Problem: Part B ASP+6% payment formula may create incentives for use of high-priced drugs … via proposing a change to current Part B drug payment … … as well as several “value-based” pricing strategies • Promote use of lower-cost, clinically equivalent drugs by: • Reducing the add-on payment to 2.5% from 6% of ASP • Adding a new flat fee payment of $16.80 per drug per day • Discounting or eliminating patient cost-sharing • Indications-based pricing • Reference pricing • Risk-sharing agreements based on outcomes • Test launches planned in late 2016 / early 2017 • Avalere Analysis: Medicare reimbursement would drop for drugs costing over $480 per day and rise for drugs costing under $480 per day Note: ASP = average sales price of Part B drugs

18. …including reference pricing which is dreaded by the pharma industry Reference pricing is a reimbursement system that sets drug prices for “clusters” of clinically equivalent medicines … Reference Group • Reference prices for drug “clusters” are usuallybased on the cheapest drug in the group or on an average of existing prices • For drugs priced above the reference price, a patient must pay the difference between the price of the medicine and the reference price, in addition to any other co-payments • Some countries (e.g., Belgium) requiredrugs to be pricedbelowthe reference price in order to be reimbursed. Drug #4 Drug #2 Drug #3 Drug #1 $ $400 $300 $100 $200 Reference Price Applicable to all drugs group … and it is currently being used all across Europe in an effort to contain drug cost growth while maximizing access • External Reference Pricing (ERP) – Practice of using the prices of a medicine in one or several countries in order to derive a benchmark or reference price for setting or negotiating the price of the product in another country • Most common drug cost-containmenttool used in Europe • 23 European countries use ERP as main pricing criterion Referencing Country Referenced Country Methodology Price #1 Drug Group X $300 Lowest Price Drug X Price $100 Price #2 $200 Price #3 $100 Note: Some countries use average instead of lowest prices and reference-price based on multiple countries

19. So far, reference pricing has achieved mixed results in Europe… Cost-savings to-date are questionable across Europe … … while pharma decries ERP’s impact on innovation Barrier to Innovation The “Good” … ? • Belgian research found that reference groups lead to lowermedication costsfor poorerpatients • However, Italy, Sweden, and Denmark are moving awayfrom reference pricing to negotiations because of lack of evidence of savings • The real impact of ERP on cost reduction is still not well understood and more studies are needed • Drug makers say ERP discourages incremental innovation by reducing revenues for R&D • Additionally, since reference pricing can severely cut into profitability, in some cases, drug makers may even cancel new drug launches altogether • While drug makers’ criticism may be politically charged, a decline in innovation is never positive The “Bad” Barrier to Access • “Path dependence” – ERP programs vary by country (e.g., # of comparator countries, price benchmarks) • ERP ignores key market aspects such as health needs and cross-country variations in income and care costs • Differences between public and actual prices under confidential managed entry agreements are unknown • Drug names, doses, pack sizes vary across countries • These factors make 1:1 price comparisons difficult • ERP has incentivized pharmaceutical companies to adopt international launch sequence strategies • They often delay or avoid launching new drugs in countries with lower prices, especially if they are markets referenced by countries with larger markets • Additionally, in countries referencing the lowest prices, drug makers may even discontinue supply • These profit-driven strategies can lead to access issues, especially in smaller/poorer countries

20. …and it is unlikely to fare better in the US if it ever sees the light of day Implementing reference pricing for Medicare would require Congressional approval which is unlikely … • CMS’ Part B proposal already has stiff opposition from the pharma industry and providers: • “It is inappropriate for CMS to manipulate choice of treatment for cancer patients using heavy-handed reimbursement techniques.” – Dr. Allen Lichter, CEO of the American Society of Clinical Oncology • Political gridlock between a Republican Congress and a Democratic President coupled with a well-entrenched pharma lobby drop the chances for action in the near-term to close to zero: • "There's not much they [CMS/Obama administration] can do, that's the sad truth … so they're not gonna do much—but they're going to talk about it a lot.“ – Ira Loss, Founder of Washington Analysis • Estimatingthe cost savingsfrom reference pricing has been very difficult(because they depend on exact pricing system specifications) which has made gathering support even harder • Most experts agree that the President can NOT make this change via executive order • Competing proposals have been more popular among proponents (incl. Presidential candidates), such as plans to allow Medicare to negotiate drug prices, which could save $15B-$54B/year* … making CMS’ recent Part B proposal the only realistic way to such a pricing system in the long run • CMS will be testing new payment models over the next 5 years which will determine with which approaches the agency will ultimately decide to move forward • Afterwards, the likelihood of adoption of reference pricing across all Part B drugs is <25% * Figures are estimates and based on early CBO/OMB scores

21. However, if reference pricing became a reality… Early analysis of CMS’ recent proposal shows significant savings potential for Medicare Part B … Estimated Impact of CMS’ Part B Payment Reform Proposal • An early analysis of CMS’ recent Part B drug payment reform proposal shows that Medicare could generate the largest savings on cancer, RA, and OP drugs • Given the significant legal and regulatory protections and huge public emotional capital in cancer, CMS will most likely not go after this therapeutic area first • RA and OP, however, will likely land on top of CMS’ priority list right away Note: Analysis performed and published by Avalere Health on April 7,, 2016 … but a look at the highest-cost Medicare drugs confirms that there is plenty of room for more savings CMS Analysis of the highest-spending Medicare Part B Drugs in 2014 • RA and MD drugs made up 25% of total $21B Medicare Part B drug spending on merely ~1% of beneficiaries (~49.3M) • Significant competition made up of many, largely therapeutically equivalent drugs in both therapeutic areas • Given their huge Part B spending impact and available alternatives, RA and MD will likely be key focus areas for any reference pricing system Note: Analysis performed by CMS based on 2014 Medicare drug spending data RA = rheumatoid arthritis OP = ophthalmology

22. …the rheumatoid arthritis space would very likely be a top priority… While high-cost, high-volume RA products will likely face biosimilar competition in the US very soon … Lowest Cost Pricing Wildcards … the resulting price drops may not be as huge as anticipated, leaving a need for further action • Despite a lack of head-to-head studies, medical database-based comparisons of these drugs showed equivalent efficacy andsafety for RA and Crohn’s disease and Medicare currently covers all of them and leaves the choice to doctors and patients • 4 of the 5 drugs will likely face biosimilar competition very soon which, many hope, will improve affordability for patients • However, the first US-approved biosimilar Zarxio came to market at only a 15% discount to its reference product Neupogen, indicating a much lower price reduction potential than the typical 40%+ for non-biologic generics • Bigpharmabiosimilar sponsorsPfizer (Remicade), Biogen (Enbrel), and Amgen (Humira) will likely focus on preservingvaluevia moderate price discounts while Celltrion (Rituxan) and Mylan (Orencia) could make more of a dent pricing-wise * Figures are averages and can vary depending on patient-specific treatment needs

23. …as would the macular degeneration space, given its high-cost drugs MD is dominated by 3 therapeutically equivalent drugs that come with huge price differentials … Lowest Price Lowest Cost … which make them a prime target for price/cost reduction under a reference pricing system • Multiple studies since 2005 comparing Lucentis, Eylea, and Avastin (all of which have essentially the same mechanism of action) showed equivalent efficacy for Wet AMD for all 3 drugs • Medicare currently covers all 3 drugs and allows doctors and patients choose whichever medication they prefer • Recent surveys showed that 64% of ophthalmologists choose Avastin as first-line drug and a 2014 Health Affairs study showed that Medicare could save $18B over 10 years if the remaining 36% of doctors switched to Avastin • However, there is an off-label issue with Avastin which CMS would need to solve when defining the reference group for MD • Avastin use is off-label because Genentech did not seek FDA approval for Wet AMD (Avastin is indicated for cancer) • Hence, Avastin for Wet AMD is prepared by compounding pharmacies and does not come in an original package * Figures are averages and can vary depending on patient-specific treatment needs

24. Our Call • CMS will likely tweak Part B drug payment in near term to incentivize use of cheaper drugs • A model involving a lower ASP+% coupled with a fixed fee is a viable way of doing so • CMS will test other new Medicare drug payment systems over the next 5 years • Depending on these test results, CMS may or may not identify reference pricing as viable • The likelihood of reference pricing for all Part B and D drugs in the near term is <25% due to: • Mixed performance in EU • Political gridlock and pharma lobby • Competing ideas (e.g., Medicare price negotiations) and methodologies (e.g., value-based pricing) • Longer term (3+ years), reference pricing may be deemed viable if drug costs continue to rise and CMS’ pilot shows superiority vs. other methods (e.g., outcomes- or indication-based pay); CMS could apply reference pricing across the board or to certain high-cost therapeutic areas*. * MD is a likely candidate given how much cheaper Avastin is vs. the other two available products (Lucentis and Eylea)

25. SOURCES NYT “U.S. to Test Ways to Cut Drug Prices in Medicare” – Mar. 8, 2016 CMS Blog on Drug Affordability – Nov. 5, 2015 FiercePharma “Valeant, Turing slammed for price hikes during congressional hearing” – Feb. 4, 2015 CMS Newsroom “CMS proposes to test new Medicare Part B prescription drug models to improve quality of care and deliver better value for Medicare beneficiaries” –Mar. 8, 2016 Bloomberg “Valeant, Turing Slammed as Shkreli Calls Congress ‘Imbeciles’ “ – Feb. 4, 2016 American Academy of Ophthalmology “Avastin, Eylea and Lucentis – What’s the Difference?” – Jul. 20, 2015 WSJ “U.S. Officials Propose Test Program Aimed at Lowering Medicare Drug Costs” – Mar. 8, 2016 Consumer Reports “Treating Rheumatoid Arthritis Are Biologic Drugs Right for You?” NCBI “Reimbursement of pharmaceuticals: reference pricing versus health technology assessment” – Aug. 28. 2010 CMS Medicare Drug Spending Dashboard, December 21, 2015 HealthLine “Rheumatoid Arthritis Patients Bear Heavy Cost Burden for Biologic Drugs” – Apr. 25, 2016 Merrill Lynch - Pricing and Politics 2016 Report, Dec. 17, 2015 Evaluate Pharma & Deloitte RA Space Landscape Overviews, 2015 Generics and Biosimilars Initiative Journal “Reference pricing systems in Europe: characteristics and consequences” – 2012 Avastin.com website Journal of Market Access & Health Policy “Overview of external reference pricing systems in Europe” – Aug. 2015 Eylea.us website RA Warrior on RA Treatment Comparison Study Results Rituxan.com website Reuters “Novartis launches first US biosimilar drug at 15% discount – Sept. 3, 2015 Humira.com website FierceBiotech “Amgen's Humira biosimilar nears FDA nod, but legal hurdles remain” – Jan. 26, 2016 Remicade.com website Orencia.com website FierceBiotech “Samsung and Biogen win first EU approval for an Enbrel copycat” – Jan. 19, 2016 Enbrel.com website PR Newswire “Hospira launches first biosimilar monoclonal antibody (mAb) Inflectra™ (infliximab) in major European markets” – Feb. 16, 2015 MedPAC.gov CBO.gov Generics and Biosimilars Initiative “Celltrion submits rituximab biosimilar application to EMA “ – Nov. 11, 2015 Drugchannels.net PMLive “Mylan buys into six biosimilars, including Orencia candidate” – Jan. 11, 2016 ISPOR Cost Description of RA Drugs CreativCeutical “Overview of External Reference Pricing in Europe” – May 31, 2014 MedicalXpress “No clear path to lowered drug prices” – Mar. 16, 2016 Houston Chronicle “'Handsome' profit was seen in big drug price increase” – Feb. 2, 2016 CNBC “Gilead may face legal action if it doesn’t cut drug prices” – Jan. 27, 2015 Politico “Trump backs Medicare negotiating drug prices” – Jan. 25, 2015 Chicago Tribune “Why do doctors choose a $2,000 cure when a $50 one is just as good?” – Dec. 11, 2015 US News “Medicare to Experiment With New Drug Pricing for Doctors” – Mar. 8, 2016 CostHelper Macular Degeneration Reuters “Exclusive: Makers took big price increases on widely used drugs”, April 5, 2016 Avalere Health analysis of recent CMS Part B Proposed Rule, April 7, 2016 Healthcare Payer News, December 22, 2015