Most focus on the clinical profile of their drug, but in "payor-managed" indications, understanding the incentives of PBMs & other middlemen can make or break a launch (even if the drug is best-in-class)

This is increasingly important as more biotechs will need to learn to not just develop drugs, but also launch them too, given the sheer number of companies and overall slowdown in buyouts

So what factors dictate whether an indication is payor-managed?

• High $ spend usually driven by large patient populations
• Lots of competitors, ideally pharma with broad portfolios
• Not an immediately deadly disease

It's helpful to think of this as a sliding scale. You have areas like I&I (IBD, RA, PsA, Allergies) / CV (CHF, diabetes, cholesterol, weight loss) on one side and rare diseases / oncology (especially IV) on the other.

If you're competing in the former, you'll have to work the messy US drug pricing system, which means understanding the incentives of payors and PBMs, such as:

• They receive a rebate tied (a) the drug price, (b) a % discount to that price and (c) the volume of scripts. Incumbent products will naturally have higher patient volume, which means even if you discount aggressively, the payor / PBM would make more money going with the incumbent. We see this when biosimilars fail to take share despite >80% WAC discounts
• This is compounded by the fact that physicians and patients don't like to switch from drugs that are working - so it's difficult for plans to pivot existing subscribers (the majority) to new entrants unless they are refractory
• These markets tend to be dominated by big pharma, which can use bundled contracting tactics to offer collective rebates across a portfolio of drugs in exchange for preferential treatment. This also works between pharma (i.e. AbbVie's I&I portfolio > Lilly's)

Altogether, this means that even if a biotech launches a drug and demonstrates clinical superiority vs. incumbents, it may still have a challenged launch because incentives will drive payors / PBMs towards existing drugs first via step therapy, formulary tiering, prior authorizations etc.

The first-mover advantage is huge in these indications. The early patient, physician and payor lock-in allows winners to reinvest into indication expansion, marketing and new launches that can enhance the bundled contracting offer.

Of course, there is potential federal and state reform on many of these points. But for now, this is the state of play!