It's been a little over a year since Novartis (NYSE: NVS) spent $8.7 billion on biotech company AveXis and its lead candidate at the time. Now that the revolutionary new gene therapy called Zolgensma has finally earned approval, it's time to start recouping the expense.
Zolgensma is approved to treat a tiny target audience of children under 2 years old who were born with spinal muscular atrophy (SMA). In the U.S., only around 400 babies are born with the muscle-wasting disorder each year. Given the tiny potential audience, Novartis set the list price for its new gene therapy at an eye-popping $2.125 million, making it the most expensive drug Americans have ever seen.
Despite the sticker shock, there's a chance that Novartis will be able to recoup its expenses and then some. It all depends on whether Novartis can convince end payers that a single dose of Zolgensma is a better deal than today's standard treatment for the same condition.
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A relative bargain
In late 2016, the FDA approved the first treatment for SMA, an injection delivered into the spine called Spinraza. Biogen (NASDAQ: BIIB) priced Spinraza at $125,000 per injection, and patients require six injections in their first year, followed by three more each subsequent year.
The first five years of treatment with Spinraza works out to around $2.25 million, which makes Zolgensma a bargain by comparison. Although the treatment is administered just once, Novartis will allow insurers to make payments of $425,000 per year for five years. The Swiss pharma giant also intends to let insurers off the hook if the treatment stops working before they're finished paying for it.
Novartis' new gene therapy also has numbers from the Institute for Clinical and Economic Review (ICER) on its side. ICER is an independent drug-pricing watchdog that's been getting more attention than it's used to thanks to the Spinraza-versus-Zolgensma debate. At $2.125 million, Zolgensma is 50% below ICER's threshold for ultra-rare disease cost-effectiveness, and 50% less than 10 years of Spinraza treatment.
A tough sell?
While plan sponsors would like the insurers they've hired to jump for a more cost-effective treatment option, a successful launch of Zolgensma is far from guaranteed. That's because there's a convoluted system of drug channels in between Novartis and the patients it's trying to reach.
America's bizarre drug-pricing system rolls on tracks of a standardized width, and Zolgensma's pricing model doesn't fit. Novartis doesn't mind receiving five smaller annual payments, and plan sponsors are enamored with the idea. On the other hand, specialty pharmacies, pharmacy benefit managers , and wholesale distributors receive an undisclosed percentage of a drug's list price as it flows through the supply chain, and they aren't nearly as enthusiastic about a new payment model.
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Gene therapies don't have a great track record
Spinraza sales reached an annualized $2.1 billion in the first quarter of 2019, and that's probably a lot more than a single-administration gene therapy will ever record. In 2017, Novartis launched another complex, single administration treatment for the treatment of cancer called Kymriah. First-quarter 2019 sales of the chimeric antigen receptor-modified T-cell therapy reached a paltry $45 million.
Kymriah isn't exactly a gene therapy, and it also has logistical problems that Zolgensma doesn't. Sadly, sales of a gene therapy that has a lot in common with Zolgensma have been more disappointing. The FDA approved a treatment called Luxturna from Spark Therapeutics in late 2017, and during the entire year of 2018, net sales reached just $27 million.
Luxturna and Zolgensma both employ a weakened virus that delivers functional copies of a gene directly to nervous system cells so they can produce a vital protein they couldn't produce before. Hopefully, their similarities won't carry over to sales performance.
Reasons to remain hopeful
Luxturna is injected into eyeballs to prevent a rare cause of blindness called Leber's congenital amaurosis type 10, while Zolgensma is delivered to motor neurons in the spinal cord. Unlike Leber's, infantile-onset SMA usually renders children unable to swallow or breathe on their own before they reach their second birthday.
There's a decent chance that the combination of SMA's severity and Zolgensma's efficacy will help the gene therapy buck the commercial-stage trend that its peers keep following. During an ongoing clinical trial, 19 out of 21 patients with infantile-onset SMA treated with Zolgensma were still breathing on their own at their last checkup. Moreover, 10 patients were able to sit up on their own for at least 30 seconds. It doesn't sound like much, but sitting unassisted is a motor milestone this patient group never reaches on its own.
Zolgensma is approved to treat SMA patients 2 years old or younger, and Spinraza probably can't compete on efficacy for this group of patients. During a placebo-controlled study that supported Spinraza's approval, it reduced patients risk of death or permanent ventilation by just 47%. Spinraza will still play an important role for people born with less severe forms of SMA, but denying infantile-onset patients Zolgensma in favor of Spinraza will probably be considered downright irresponsible.
Image source: Getty Images.
A small part of something very big
It's important to remember that Novartis is a giant that regularly records more than $50 billion in net revenue each year. That means success or failure for its new gene therapy isn't going to make a huge difference to the returns this stock can provide over the long run.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Biogen. The Motley Fool has a disclosure policy .