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Drug Prices

BioCentury on the Coming Drug Pricing Crisis

I always enjoy BioCentury‘s “Back to School” issue this time of year, and this time they’re being more outspoken than usual. (That link is free access). The topic is pricing:

Last year, (we) argued biopharma companies can no longer assume the market will support premium pricing, even for drugs that deliver meaningful and measurable improvements over the standard of care.
This year, BioCentury’s 22nd Back to School essay goes on to argue that the last bastion of free pricing is crumbling, and biotech and pharma had better start experimenting with new pricing models based on value for money while they still have the chance.
The wake-up call was the launch of Sovaldi sofosbuvir from Gilead Sciences Inc.
Payers, reimbursement authorities and health technology assessment agencies almost universally — with the exception of Germany — acknowledge the drug is a breakthrough for patients with HCV.
At $84,000, the drug is clearly cost effective for a subset of HCV patients who would otherwise progress to expensive sequelae such as liver transplant. But its broad indication includes a majority of patients whose disease won’t progress to the point of costly interventions. And doing the math makes it obvious that treating even a fraction of eligible patients would be a staggering sum for payers to absorb.

What Gilead has done – thanks, guys – is to accelerate a number of trends that were already looking like trouble.

With Sovaldi as the stimulus, government officials, payers, reimbursement authorities and patient groups are fighting back against high drug prices with renewed vigor. For these stakeholders, biopharma’s arguments that drug developers must be compensated for the cost and risk of creating medical breakthroughs don’t hold water.
The easiest response of payers and consumers to industry’s argument is: not my problem.
Far worse, biopharma’s historical arguments about the cost and risk of drug development are giving ammunition to academics, legislators, health technology assessment bodies and payers to argue that the costs of developing and manufacturing drugs plus a “reasonable” margin should be the basis for price.
Industry needs to wrest the discussion away from a cost-plus system that would essentially turn biopharmaceutical companies into utilities, cutting off the lifeblood of innovation.

We seem to be too busy testing the limits of what insurance will pay for to worry about that right now, unfortunately. As the essay goes on to show, companies (Gilead and Alexion, for starters) are getting requests from regulators and legislators to provide an exact breakdown of just what it cost to develop their latest drugs. Demonstrate to us, in other words, that your pricing is justified. The next step beyond that is for these authorities to disagree with the numbers and their interpretation, and to suggest – and then enforce – their own. And I’m pretty sure that the industry would rather avoid that.

Cost-plus pricing places no value on the benefits provided by medicines and eliminates the incentives for biopharma industry innovation and for risk-taking in poorly understood diseases where many failures are likely.
The right question is not how much does R&D cost, but how to measure the benefit to the patient, payer and society; how to value that benefit over time; and how to distribute the risk should the expected benefit not be realized.
The answers are not obvious, and many approaches will need to be tested. Undoubtedly, in many settings the current systems for data collection, coding and reimbursement are not adequate to the task.
But that is no excuse for inaction. The current system of drug pricing and reimbursement is unsustainable and will be fixed — with or without the industry’s participation.

Biocentury suggests several things that should be looked at. First of all would be pricing per course of treatment, rather than per unit dose. That brings the spotlight more on what the drug is supposed to be accomplishing – and if that also spotlights some of them that aren’t accomplishing as much as they’re supposed to be, well, so be it. The industry should also consider risk-sharing arrangements, to take on more of the downside if a drug doesn’t work as well as anticipated, with the opportunity to pick up more gains if it exceeds. Another idea would be pricing models where the payments are spread out over the time that the drug benefits a patient, rather than all of it being up front. In general, we need to make the connection between new drugs and their benefits easier to see, which in turn makes their pricing easier to see.
And if some of those prices turn out to be too high, well, that’s our problem. We have to be ready to accept it when we have drugs that don’t work as well for some conditions as we want. Only if we can do that can we turn around and charge the higher prices for the ones that are truly effective. I’ve made the argument many times that companies, not just drug companies, should be able to charge what they want to for their goods. And in the abstract, that’s true. But in the world we live in, politics will intrude, big-time, if the drug industry tries to always extract the maximum revenue for everything, every time.

The downside for biopharma companies would be lower prices for drugs that provide incremental or modest benefits. But that reality is coming one way or another. The upside is a better shot at continued premium prices for real breakthroughs — although probably not as high as historical premiums — plus the potential for preferred formulary placement and earlier market access for many drugs.

But it’s a tragedy-of-the-commons situation, because even though some of these ideas for different pricing, and even the calls for restraint, may well be in the industry’s best interests, individual companies look at each other and say “You first”. But as the old political saying has it, if you’re not at the table, then you’re on the menu.

15 comments on “BioCentury on the Coming Drug Pricing Crisis”

  1. PPedroso says:

    The irony in all this, is that Gilead tried some of these points with sovaldi:
    – Treatment price instead of unit price;
    – Argument that the savings for healthcare will be bigger if sovaldi is used;
    And it really is a real breakthrough.
    At the same time it shows a desire for a quick return on investment that is difficult to diferentiate from greed.

  2. NoDrugsNoJobs says:

    Ironically it is often the short patent life more than the monopoly itself that drives high prices. Were it the case that drugs could recoup their costs over a much longer period, the urgency of high prices would be substantially moderated. If drugs could be annuitized over longer periods of time, their prices could be dropped and ultimately the innovators could funnel the money back to R&D more predictably. Instead we have the situation where companies sit on uncertain patent estates with relatively short assertion times after lengthy development periods.
    In just 4 years, they can expect multiple paragraph IV challenges by generic companies such that much resources are diverted to legal strategies and risk uncertainties and considerable investment by ANDAs simply to copy a drug that is already being made. Imagine if instead of short patent lives we had something more akin to copyrights which last a very long time. We would have many more seeking to be original “authors” instead of copiers. The world would be a much more productive and predictable place. Oh well….

  3. Twelve says:

    People seem to assume that it’s the industry who are the sole arbiters of pricing. Not so – it is driven by the expectations of the investor community for a suitable rate of return to compensate them for the outsized risk associated with drug discovery.
    If a company bringing an exciting new product to market decides to dramatically undercut what the market assumed they would charge, their stock price would implode. Stockholders would then sue both management and the board of directors for malfeasance, and corporate raiders would swoop in to buy the now cheap stock and demand a change of leadership (the new team, of course, would promise to ‘reassess’ their pricing strategy). Unless the company is mostly privately held, these pressures would likely result, either directly or indirectly, in the drug price heading back to where Wall Street assumed it would be.
    If you think this scenario stinks, well, join the club. That’s capitalism, at least how it’s practiced in the US today. But understand this: if you want publically owned companies to come up with valuable new drugs, they’re competing for capital with Uber, Facebook, and all those sexy social network start ups. If pharma doesn’t promise a payoff commensurate with the perceived risks, it won’t see the money. And if the US government enacts significant price controls, well, research-based Big Pharma (and all the money-hungry little biotechs) didn’t exist 75 years ago, and there’s no law of nature saying they have to be around in the future.

  4. Anonymous says:

    I don’t think we’re too far away from true value based payments on an individual level. There are already crude systems in place (See NICE and velcade). This would be based on detailed individual patient information on outcomes, be it through biomarkers, continuous remote monitoring or self-reported by the patient. Of course, we will discover many behavioural interventions that may be more beneficial than pharmaceutical, which may force prices down.
    Regrading NoDrugsNoJobs idea to extend patent life, I’m not sure this would work when considering the discount rates applied to pharma.

  5. UK Chemist says:

    #2 Absolutely right. NPV has a time as well as a financial component. Evidence based medicine only works if someone can fund the gathering of the evidence.

  6. anon says:

    True value based payments! yep I can’t wait to hear all the complaints about people who had to pay X amount more for a drug that only costs X dollars to manufacture and treat for this method!

  7. Joe Shmo says:

    Of course society doesnt want to accept a premium price for medications that directly effect society (and their aging loved ones)… That would mean that 19B for a texting app was a bad use of money, and we cannot have that right?

  8. annon two says:

    One thing that Galleon must recognize is that there now is a large number people needing treatment for Hep C. After they are treated and recover, they will no longer need the drug and the population with Hep C in the US will decline, only to be replaced by new cases that hopefully should decline. They also know that the drug cannot get the same premium price in third world countries where it is in such great need. So, what is wrong with this “upfront” payment to get back their investment and make a profit by tackling such a high risk endeavor? Once they have a substantive recovery, then the rest of the world can benefit by getting the drug for less. Hell, this country spends hundreds of billions on “behalf” of other countries…why can’t we do the same for health care needs…..and actually do something to help people’s lives?

  9. dave w says:

    Quoted in the original posting: “At $84,000, the drug is clearly cost effective for a subset of HCV patients who would otherwise progress to expensive sequelae such as liver transplant. But its broad indication includes a majority of patients whose disease won’t progress to the point of costly interventions. And doing the math makes it obvious that treating even a fraction of eligible patients would be a staggering sum for payers to absorb.”
    And the cost of long-term treatment, transplants, etc. for those who are eventually damaged by prolonged HCV infection isn’t a “staggering sum for payers to absorb”? (Is there a way to identify in advance those patients “whose disease won’t progress”? What fraction of the total “indicated” population do they constitute?)

  10. watcher says:

    9 Dave: The same ones that the government now imposes additional tax on income & investments for support of the ACT.

  11. Rhodium says:

    To a lot of people, the current pricing model is a variant of Your Money or Your Life. From what I have read, a good many of the first beneficiaries of sovaldi will be prisoners, making the politics even worse. I have yet to read of a solution that seems to address all the problems. All I know is that which can’t continue won’t.

  12. Scott Stewart says:

    I get the patent idea and charge what the market will bear in the abstract, but I have a harder and harder time understanding why I, as a US taxpayer and premium payer, need to pay the drug development cost for the whole world.
    I don’t know what the answer is, but the status quo is clearly untenable.
    How do the rest of the western democracies handle drug pricing?

  13. cast off says:

    Longer exclusivity period once the drug goes on sale (as suggested by #2) appears to be just the solution to lower prices overall. The system could be reformatted to provide lock-in for X number of years post approval (independent by when the patent was filed).
    Of course, the greed will just drive the companies to exploit the higher prices for longer – with no benefit to the sick. Unless some external party would get involved with price setting to counterbalance this, which gets us right back to where we are!

  14. NodrugsNoJobs says:

    #13 – We won’t be right back to where we are because currently there is a consistent push based on the near term pricing headache in order to underwrite what is really a very long term return. Pushing the exclusivity life down will only push the near term pricing up. The problem is the near term pricing is the problem as it is too much too quick. Typically, high cost investments are 8underwritten over long term periods to reflect the long term return on the investment.
    For example, a city or state sells 30-50 year bonds on capital projects presumed to have a very long term return on the investment, they are not paid upfront. The reality is that we are currently seeing great pressure on the near term prices but the investment still must be returned. The logical way to deal with this is amortize the costs over a longer period to reflect the long term benefit of the drug.
    HepC is a tough one to fit to the model though simply because it does cure the disease and there will be great pressure to cure all the disease within the shortest amount of time possible and longer term exclusivity periods may not be the answer, though HepC is the exception to the rule where most of the current expensive drugs are for intractable treatments for which there may be no cure or if there is a cure, the disease is recurring in the population (cancer for both). for these, longer term amortizations are the most sensible solution to this conundrum – it makes sense I think….

  15. Anon says:

    One option is for the govt to actually take a stand on IP protection.
    China and India pay a fraction of what the US pays per drug while treating a multiple of the people.
    Think that about that for a second.
    Now if we all paid the same, we would have lower prices and wouldn’t be seeing this insane increase we’ve seen over the past 15 years.

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