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Sustainable Investing

Finding the Right Balance: The High Cost of Gene Therapy

Can drug companies offer these treatments and deliver fair investment returns without insurers increasing premiums?

By Yusuf Anwar, M.D., CFA,Sharvari Johari
Professional analyzing samples in a lab.

Key Takeaways

Gene therapy must be affordable for patients and insurers but profitable enough so that drug companies take on the costly research and development efforts required to produce them.

In the U.S., health care and medical insurance aren’t designed to cover high-cost, one-time therapies. Even countries with government-provided health care struggle with gene therapy prices.

Despite their high price tags, gene therapies can reduce the cost of care overall, and some drug companies and insurers are trying new approaches to pricing and reimbursement.

When pharmaceutical giant Novartis announced that Zolgensma®, its gene therapy treatment for spinal muscular atrophy (SMA), would have a $2.1 million price tag, jaws dropped as headlines pronounced it the “most expensive drug ever.” But Novartis lost that distinction when bluebird bio’s Zynteglo®, a gene therapy that treats a debilitating type of anemia known as TDT, was priced at $2.8 million per patient. Not long after, uniQure’s hemophilia gene therapy drug was approved and priced at $3.5 million per dose.

What are gene therapies? Are drug companies overcharging for these potentially game-changing treatments? How can insurance companies and patients afford them?

Gene therapy pricing is a conundrum: It must be affordable for patients and insurers but profitable enough to incentivize drug companies to undertake the costly research and development efforts required to produce them. We’ll examine these issues and reveal some challenging financial aspects of health care innovation to help investors understand this tricky landscape.

What Is Gene Therapy?

Gene therapy replaces a defective or missing gene in a patient’s cells with a healthy version of that gene or introduces gene-editing tools (such as CRISPR-Cas9) that can change the existing DNA in the cell.1 It holds promise for treating a wide range of diseases that are currently difficult to treat, including cancer, cystic fibrosis, heart disease, diabetes, hemophilia and AIDS.2

It could also be truly revolutionary in scale. There are over 10,000 different single-gene diseases and the World Health Organization estimates that 1 in every 100 people is affected by at least one of them. That means an estimated 70 to 80 million people globally are living with at least one of these potentially curable diseases.3

The U.S. Food and Drug Administration (FDA) has approved fewer than 20 gene therapy treatments to date. Most involve one-time treatments, which is great for patients but creates challenges for pricing models and insurance plans that assume patients with chronic diseases will use a drug for a long time.

American Century invests in some of the companies that develop these therapies. How the treatments are priced provides insights into the way drug companies and insurers might work together to offer gene therapies and deliver solid returns to their investors.4

Why Is Gene Therapy So Expensive?

According to the Harvard Business Review, the actual use of gene therapies has been slower than expected for reasons that include the following:5

  • Gene therapy prices may reflect a lack of competition, as most of these therapies currently treat rare diseases for which few other options exist.

  • The U.S. health care system is built on a fee-for-service model that incentivizes physicians to prescribe ongoing treatments. It isn’t set up to handle extremely expensive, one-time therapies.

  • Manufacturing can present an additional challenge, depending on the disease. According to the CEO of Berkeley Lights, a technology company working on cell-based products, “You have to buy very expensive materials to make the drugs for gene therapy, so there is no scaling up. ...”6

If these therapies become available for common diseases, high prices and high patient uptake could push any health care system to a breaking point. Conversely, when only a small number of patients could benefit from a given treatment, relatively few doses must cover the research, development and manufacturing costs.7

Netherlands-based uniQure had to pull its $1 million gene therapy for potentially fatal fat-processing deficiencies from the EU market. Its price, combined with limited data on efficacy and just 700 potential patients in Europe, made health systems in these countries unwilling to pay for the treatment.8

Are Gene Therapy Costs Justified?

As noted above, gene therapy can be eye-poppingly expensive. Still, the cost may be justifiable given the impact of the diseases they treat on a patient’s ability to work and quality of life.

Consider Zyntelgo, which treats TDT. Without this treatment, TDT patients require blood transfusions every three to four weeks.9 The transfusions alleviate their symptoms but cause an iron overload in the blood, which requires ongoing treatment.10 A study in the medical journal Blood found that the average cost of managing chronic TDT in the U.S. is roughly $75,000 annually.11

Since TDT patients require transfusions their entire lives, the total lifetime cost of managing the disease could easily exceed $2 million. This doesn’t include other expenses, such as monitoring iron overload in the heart and other organs, the costs associated with comorbidities related to TDT and the significant time burden on patients. It also doesn’t account for quality-of-life impacts, including the pain and fatigue of chronic illness.

The Institute for Clinical and Economic Review (ICER), a nonprofit organization that analyzes the clinical and cost-effectiveness of medical treatments, reports that more than half of the gene and cell therapy products it has reviewed are cost-effective, but not across all categories. For example, cancer cell therapies known as CAR-T were found to be more cost-effective than gene therapies for rare diseases.12

Nonetheless, ICER noted that certain gene therapies justify a hefty price tag. For example, ICER initially said that Novartis’s Zolgensma, made for children younger than age 2 with SMA, would not be cost-effective at a price above $1.5 million. After considering more data and value-based payment plans (discussed below), this “maximum” price was raised to $2.1 million.13

Who Determines Gene Therapy Costs?

While $2.1 million is a lot of money, Novartis had considered a price as high as $5 million. Using a value-based pricing model, the company priced the drug at approximately 50% of various established benchmarks, including the cost of treating chronic SMA over 10 years ($750,000 in the first year and $375,000 thereafter).14 15

Value-based pricing refers to paying for a drug in proportion to the benefits it provides to patients compared to existing treatments. Rather than allowing drug companies to charge whatever price they believe will maximize their profits, the value-based approach links the price to whether the drug helps patients more than current treatment options and, if so, the extent of the improvement.

“It is a positive outcome for patients and the entire health system that Novartis instead chose to price Zolgensma at a level that more fairly aligns with the benefits for these children and their families," ICER’s president said.¹⁶ Given the cost of other options, $2.1 million could be considered a price that reduces health care costs.

Determining how to charge for gene therapy is tricky. What is the value of eliminating chronic pain and ongoing, time-consuming treatments that allow people to rejoin the workforce or take care of family members? Gene therapy pricing may be justified considering the impact on quality of life and cost savings over time. But a price that makes these therapies viable for drug companies to develop may force the insurance industry to raise premiums to unaffordable levels.

Many insurers initially balked at covering Zolgensma’s $2.1 million price tag. However, when Business Insider reported on the impact of the lack of coverage on patients and their families, Aetna, Anthem and UnitedHealth reversed their decisions.¹⁷

Gene Therapy Challenges: Insurance Reimbursement and Innovative Payment Models

Alternative payment methods, such as installment plans and outcomes-based reimbursement models, could make gene therapy treatments more accessible. Novartis’s partnership with Accredo allows patients to take up to five years to pay for Zolgensma.18

Bluebird offers an annuity model in the EU for its lentiviral therapy that includes rebates if a patient relapses. Spark Therapeutics combines an outcome-based approach with an installment model for its therapy Luxterna®, which treats individuals with a rare form of inherited vision loss.19 The treatment must demonstrate short-term efficacy (over 30-90 days) and long-term durability (over 30 months) as measured by eyesight tests for Spark to be fully paid by the insurer.20

Drug manufacturers could suggest alternative payment models, but for most Americans, access to these treatments would come down to whether their insurance company would pay for them. Insurers have a disincentive to cover large, one-time costs. Under the current health care delivery system in the U.S., a patient’s insurer must pay the entire cost of the therapy at the time of the treatment.

Over the long term, this could be a good deal for an insurer because the therapy would eliminate the need for future care. However, if a patient switched to another insurance plan (highly likely given that most Americans are insured through their employers), these future savings would go elsewhere. Thus, health plans are reluctant to cover therapies, making it difficult for patients to access them.

Even public, single-payer systems (where patients do not transfer between plans) are reluctant to cover these therapies. In 2019, bluebird sought to offer Zynteglo as a $1.8 million treatment in Germany, but the country’s health care system said it would only pay $950,000 if it worked or $790,000 if it didn’t.²¹ The two parties couldn’t negotiate a price, so the company withdrew the drug from the country.

Outcome- and Subscription-Based Approaches to Gene Therapy Pricing

Outcomes-based models require that the payer (the insurance company and/or the patient) and the drug manufacturer clearly define 1) what “success” means, 2) the payments and 3) the timeline. Outcomes may not be measurable in the short term, which means installment plans may be unworkable as patients could switch insurance providers before the installments are paid.

This may be particularly challenging to small health plans with questionable solvency. Medicaid’s Best Price policy creates an additional wrinkle, as drugmakers must offer Medicaid patients a minimum 23% discount or the lowest price negotiated with other private or public payers.²²

Another approach is a subscription model. Here, a government entity pays the drug manufacturer a fixed annual subscription fee for unlimited access to a given therapy. Louisiana adopted this model for hepatitis C treatments.²³ However, the efficacy of hepatitis C treatments and the number of patients affected is clear, whereas gene therapies are still relatively new and target rare diseases.

Another approach is risk pooling, whereby public and private insurers contribute a portion of their budgets to a pooled fund. This addresses the concern that patients could change insurers, as all payers would reimburse patients from the pooled fund. This model has not been implemented in the U.S.

In short, health insurers are reluctant to cover expensive gene therapies, making it difficult for patients to access them.²⁴

Gene Therapies From an Investor’s Perspective

Investing in companies that develop gene therapies requires understanding how drug pricing strategies may affect a company’s cash flow and ability to earn a return on its investment. We must also recognize that while gene therapies may reduce medical costs overall, the drug companies that produce them may not benefit financially.

Gilead’s cure for hepatitis C illustrates this point. When the treatment was approved in 2017, headlines decried the notion of a “$1,000 per day pill” without considering the overall benefit to society. Curing hepatitis C would provide enormous cost savings to a country’s health care system over time, far exceeding the price of Gilead’s cure. But pharmacy benefit managers that act as intermediaries between insurers and drug companies require discounts from drug companies. Therefore, the money Gilead receives is often far less than the drug’s list price.

Furthermore, by curing the disease, Gilead actually “cannibalized” its own future sales by limiting the potential patient pool for the condition. In contrast, companies that develop treatments for ongoing (chronic) conditions and generate recurring sales can do better financially, even though society overall is “stuck” with higher ongoing medical costs.

Most analyses that base the price of a gene therapy (or any drug) on the cost of developing that specific treatment only consider the cost of successful trials. This excludes the cost of failed attempts that are a necessary part of any drug company’s research efforts. These costs must be covered by the prices charged for successful drugs if the company is to stay in business.

It’s also worth noting that other countries often don’t allow U.S. drug manufacturers to charge the same prices they charge in the U.S. This reduces drug manufacturers’ ability to recoup their investments based on non-U.S. sales, leading them to push more of the burden onto U.S. insurers.

Looking at this issue in terms of minimizing the total dollars a society spends on a therapy is probably not the right approach either. The total cost of paying for rare disease therapies with six- to seven-figure price tags may well be below the total amount spent to cover less expensive primary care drugs. However, the former may help only a few thousand patients, while the latter may bring relief to millions.

Making Sense of Gene Therapy’s Tricky, Three-Sided Dilemma

Putting all this together, we see a thorny problem for drug companies, insurers and patients. The cost of developing gene therapies is rising, many hidden costs of delivering these drugs aren’t accounted for, and the duration of drug patent protection in the U.S. is under pressure.

Companies whose gene therapies have cured challenging diseases often fail to benefit financially. That means drug manufacturers may see little incentive to pursue this type of drug development in the future. Insurance companies are faced with either raising premiums to cover the costs of these therapies, thereby making health insurance even less affordable, denying coverage or losing money. Patients can’t afford to pay for the drugs without insurance, presenting them with the horrible trade-off of “your money or your life.”

Despite these challenges, we don’t believe that high prices and difficult cost-sharing debates should discourage investment in the biotech or health insurance industries. There are likely to be breakthroughs that allow experienced companies to leverage their early efforts in ways that lead to future efficiencies. Of course, thoughtful investing in this space requires a solid understanding of the risks. As active investors, we can engage with companies to understand their pricing strategy for gene therapies.

We also believe there is a way for patients, biotech companies and insurers to all “win.” Despite the high cost of developing gene therapies, these innovative treatments reduce costs compared with treating chronic disease over a lifetime, including hospitalizations. The cost savings are meaningful and benefit insurance companies by lowering total payouts over time. As noted earlier, the improved quality of life for patients has real economic benefits.

Achieving this win-win-win scenario would require greater transparency and a commitment to maintaining financial incentives that would allow innovative drug developments to continue along the current trajectory. Acknowledging the financial realities of all stakeholders, drug companies are starting to tie the prices of gene therapies to outcomes.

Positive developments indicate that things are moving in the right direction. We believe well-informed investors can identify opportunities to generate attractive returns while benefiting multiple stakeholders and contributing to health care innovations.

Finding a Viable Solution for Gene Therapy Pricing

At this point, the best way to price gene therapies is unclear. Companies must be able to charge prices that allow them to earn a return on their investment so that they are willing to pursue R&D. Prices and payment plans must allow insurance companies to cover these therapies so that patients can benefit from them.

Through our sustainability research and engagement efforts, we are evaluating how companies that develop gene therapies could approach pricing. We have identified some initiatives that we consider to be constructive:

  • Outcomes-based pricing that allows patients to recoup costs for failed treatments.

  • Pricing based on the costs of treating a chronic disease over decades.

  • Partnerships with insurance companies on reimbursement models.

  • Company-sponsored programs that help patients to navigate diagnosis, treatment access and reimbursement processes.

Drug pricing mechanisms necessitate a complex and nuanced discussion with many relevant stakeholders. Gene therapy treatments are aligned with one key theme of our Health Care Impact strategy, innovative treatments for diseases.

However, when we consider companies that develop gene therapies for our impact strategy, we also consider the other themes, namely access to medicines and services and new solutions for lowering health care costs. And, when we include drug companies in any of our strategies, we assess how gene therapy pricing may affect profitability.

Achieving widespread uptake of gene therapies will require an innovative pricing approach that works for drug companies and insurers. We believe gene therapy could be priced equitably to properly incentivize drug companies, protect insurers’ solvency and serve patients with unmet needs.

Yusuf Anwar, M.D., CFA

Yusuf Anwar, M.D., CFA

Senior Analyst

Sharvari Johari

Sharvari Johari

Senior Sustainable Research Analyst

Learn More About Health Care Innovation and Drug Pricing Issues

References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.

Sustainable Investing Definitions:

  • Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.

  • Sustainability Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, best-in-progress, thematic, and impact approaches.

For purposes of compliance with the Global Investment Performance Standards (GIPS®), the Firm is defined as American Century Investment Management, Inc. (“ACIM”). ACIM claims compliance with the Global Investment Performance Standards (GIPS®). The Health Care Impact Equity strategy seeks to provide a total return that exceeds the benchmark over a market cycle using a fundamental growth equity investment strategy targeting U.S. companies engaged in the health care sector and a portfolio constructed to align with the United Nations Sustainable Development Goal (SDG) of ensuring healthy lives and promoting well-being for all. Index futures (and currency forwards and futures, where applicable or appropriate) are occasionally used to equitize cash and manage portfolio risk. As allowed, other derivative instruments may be used as part of the investment strategy. Returns are calculated and stated in U.S. dollars. The return may increase or decrease as a result of currency fluctuations. Returns for periods less than one year are not annualized. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

MedlinePlus, “How does gene therapy work?” NIH National Library of Medicine, February 28, 2022.

Mayo Clinic, “Gene therapy,” December 29, 2017.

bluebird bio, “Understanding genetic diseases,” accessed November 3, 2022.

Zachary Brennan, “With two new expensive gene therapy approvals, outcomes-based pricing deals grab the spotlight again,” Endpoints News, August 26, 2022.

Josh Suskewicz and Moni Miyashita, “3 Business Models That Could Bring Million-Dollar Cures to Everyone,” Harvard Business Review, November 12, 2018.

John Cumbers, “Why Some Drugs Cost $2.1 Million Per Dose And How One Company Plans to Change This,” Forbes, December 16, 2021.

Nature Medicine, “Gene therapies should be for all,” Vol. 27 (August 2021): 1311.

Suskewicz and Miyashita, Harvard Business Review.

bluebird bio, “Transfusion Dependence: Symptoms and Impact of Beta-Thalassemia,” accessed November 3, 2022.

Clark Paramore, Anna Vlahiotis, and Meghan Moynihan, et al., “Treatment Patterns and Costs of Transfusion and Chelation in Commercially-Insured and Medicaid Patients with Transfusion-Dependent β-Thalassemia,” Blood 130, Supplement 1 (2017): 5635.

Para, Vlahiotis and Moynihan, et al., Blood.

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