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Compassion, Drug Prices, and Money

A number of people have sent along this article from The Guardian. It’s about Jamie Love, a campaigner for cheaper pharmaceuticals. It’s a long, well-written piece, and I’ll summarize it only by saying that Love is very much opposed to the patent system, is very much a fan of compulsory licensing, and is clearly very concerned about the welfare of the poorest patients. I will say nothing bad about him as a person.

But he (and many of the other people in the article) have, I think, some mistaken ideas about where drugs come from. In fact, you can read most of the article and not have much of an idea. It seems, apparently, that drugs are picked off some sort of tree, or perhaps mined from the earth in a few locations that the big multinational companies have staked out. Once they appear above ground, through whatever process that is – it’s not really important – they should be free, or as close to free as possible. It’s just common sense.

Only well on in the article does the topic of drug discovery actually come up, and it does so in terms that get used again and again:

Big Pharma has a simple justification for charging high prices for drugs: it costs a lot of money to invent a medicine and bring it to the market, so the prices have to be high or the companies will be unable to afford to continue their important research and development (R&D). The figures drug companies usually cite are from the Tufts Center for the Study of Drug Development in Boston, Massachusetts, which describes itself as an independent academic institution, despite the fact that it receives 40% of its funding from industry. In 2000, it put the cost of bringing a drug to market at $1bn. By 2014, that had risen to $2.6bn.

But those figures have been contested by Love and other campaigners. Many drugs begin as a gleam in the eye of a university researcher: somebody in academia has a bright idea and pursues it in the lab. Much medical research is funded by grants from public bodies, such as the US National Institutes of Health, or, in the UK, the Medical Research Council. When the basic research looks promising, the compound is sold, often to a small biotech firm.

No. No. This is not how it works. With rare exceptions, which can be easily counted on the fingers, the “compound” is not invented in academia. Update: I’m exaggerating, but for some real figures, see here. I’ve discussed here, many times, the relationship between academic research and drug discovery, but if you’re looking for the most unusual form of it, that would be where the actual drug gets found at the university.

The article mentions that Love’s wife, Manon Ress, unfortunately has breast cancer. She’s taking Kadcyla, and both she and Love have been campaigning for the UK government to break Roche’s patent and license it  – the UK could even sell it to others, Love says, and make some money back that way. Where exactly did Kadcyla come from, anyway? It’s a conjugate of the antibody Herceptin with a cytotoxic agent, DM-1, which is a linked form (mertansine) of maytansine. Both of these go back a ways.

Here’s a Herceptin timeline, which has a lot to do with the founding of Genentech back in the 1980s. Genentech was clearly a major driver in the Her2/EGFR field, although there was also a large amount of academic research in the area as well. But the first people to sequence Her2 and clone it were from Genentech, and the first people to develop a monoclonal antibody to it (first in mice, then humanized) were as well. Now, the idea that there were genes such as Her2 that were associated with increased risk of cancer came from academic research, as did the first techniques for making monoclonal antibodies. But that illustrates the way these two research types work with each other. More often than not, academic research discovers general principles and concepts, while industrial research reduces them to practice as medicines. If you believe that this reduction to practice is basically trivial, once the first discovery has been made, you are wildly incorrect, and I only wish that you could try it sometime to experience it firsthand.

Maytansine, the other part of Kadcyla, is even older. It goes back to the late 1960s/early 1970s, when it was discovered in an Ethiopian plant by Morris Kupchan and co-workers (he was a very active natural products chemist at Wisconsin and Virginia). There, indeed, is an academic discovery, funded by public money, but it did not lead to a drug. Maytansine had a lot of excitement around it later on in the 1970s as a potential anticancer agent, but it failed in the clinic, largely because it was unacceptably toxic. (The first summer undergraduate research I ever did, back in 1981, was towards a total synthesis of maytansine). A great number of modifications have been made to the structure over the years, both in academia and in industry, without producing a successful drug.

But the idea of coupling a maytansinoid to a selective antibody promised to get around this problem, and this has been pursued by a company called Immunogen, who licensed Kadcyla to Roche (they have deals with several other companies as well). We no longer have to strip Ethiopia of the source plant to make such therapies (a real concern during the 1970s work), because another drug company, Takeda, figured out that maytansine and several analogs are, in fact, produced by microorganisms, not by the plant itself, which led to fermentation techniques that produce the compound in the lab. Kadcyla, then, is not one of those compounds that people at the Guardian (and many others) imagine are produced by professors and then snatched up by industry. A great deal of industrial time, effort, and money has gone into every part of it, and – how do I put this? – the people developing it, at every stage, did so in the expectation that they could make money by doing it.

Kadcyla, Manon Ress reports, has been much easier to deal with than the chemotherapy drugs she was receiving before. That is no doubt true, and in fact, I also have no doubt that Roche was planning on that being the case. In fact, they probably counted on people (and their insurance companies) being willing to pay for that benefit. Here is a dirty little secret that’s not actually a secret, and (truth be told) not all that dirty, either: drug companies try to make money. (And off people being sick!) But it’s true. Even inside the large companies, there are all these slogans about how we do it all for the patients, etc. But we do it to make money, too, because without the money it’s very hard to do much for any patients, anywhere.

And as fate would have it, often (although not always) some of the biggest and most important medical needs turn out also to be the places where one could make the most money. It’s as if some sort of “invisible hand” is bringing these things together. That way, we don’t have to depend on everyone running a drug company to have the highest ideals in their heart – if they’re good at their jobs, they’ll end up doing the world good even if they’re not very nice people themselves. It’s not just drug companies that work this way, either. We can harness the behavior of people as they are, rather than the way they should behave if they were as good as they could possibly be. To quote the fellow who came up with that line about the invisible hand, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest“.

Every time the topic of drug pricing comes up, I’m going to refer people to Jack Scannell’s article on it. Are drugs priced based on their ingredients? Hardly, although the Guardian article acts as if this were some damning revelation. Anyone who finds it so should compare the cost of the next salad they have in a restaurant with the cost of lettuce and tomatoes down at the store. It’s like buying a piece of software by downloading it from the manufacturer’s site: let’s say that you pay $39.95 for it – but look at the cost of the electricity over those few minutes it took to arrive on your computer! That was nowhere near $39.95! Another factor Scannell brings up is that drugs may well be priced based on what they can do for you, what value you place on their effects. Like that salad – did you enjoy it? Or like that software – was it useful? Did taking that medicine improve your life? Is Kadcyla keeping you alive?

It may be, actually, but it may not be doing so for as long as we would wish. One reason the UK health authorities refused, at first, to play for the drug was that they felt that its cost/benefit ratio was not justified. And that’s fine – Roche and the government did, in the end, come to terms on a discount, although the government will not pay for Kadcyla in all cases. I have no problem with this sort of pushback – in fact, I think that’s exactly what should happen. The problem with value-based pricing, Scannell argues, is that it’s often not clear (especially at first) what value to place on a new drug. How long will Kadcyla keep you alive, anyway? There’s no way to say when you start taking it. Different people will react differently – all anyone can give you are averages, and even those take a while to come in under real-world conditions. (And, as he notes, the health services of different European countries can end up assigning different values to the same drug).

Now, it’s true that I’m quoting Adam Smith and so on, when the drug business is far from an ideal free market. For one thing, drug patents are government-granted monopolies – competition on a new drug is deferred until that patent expires, as a reward for the difficulty of invention. (The Guardian article makes sure to mention that this can be “up to twenty years” without mentioned that a good part of that time is eaten up before the compound ever makes it to market). And pricing is hardly transparent, which is a big problem, because that information is crucial to making decisions in any kind of marketplace. There are also, most certainly, market failures, where the societal value of a new drug is not well-coupled to its potential for profit.

But overall, the system does some good things. Drugs do go generic, and if we take care to make sure that people don’t turn generic drugs into monopolies as well, we end up with a large collection of effective therapies that are quite cheap, while preserving the prizes that keep companies chasing after newer ones (which go generic in turn). The great majority of prescriptions, remember, are for generic drugs.

The problem I have with the worldview of Jamie Love et al. is not their compassion for their fellow man. It’s that I still fear that they have an inaccurate view of where all these drugs come from, which leads them to imagine that prices can be slashed across the board without really affecting that process much. Drugs, they seem to believe, are really a lot easier and cheaper to find and develop than anyone is willing to say, so all we need to do is dig into the bulging, obscene profits of the drug companies, and everything will work out fine. But if those profits are so hefty, how come drug company stocks don’t perform better? Whey don’t they come up with more drugs? Why, when you divide out their revenues by the number of drugs discovered over the years, do the figures come out so annoyingly high? How come people aren’t lining up to discover more drugs, if it’s that inexpensive to do? Where are the not-that-hard Alzheimer’s drugs, the easy cancer cures? A lot of what goes on out here in the real world would seem to argue against Jamie Love’s idea of how things work.

78 comments on “Compassion, Drug Prices, and Money”

  1. Anon says:

    Completely agree that charging a lot because drugs cost a lot to produce is wrong. Price is based on value, not cost, and if Pharma can’t produce enough value at low enough cost to make a profit, well, then the business model is basically broken and will not last very long.

    Either fix the model so that it creates value at fair price, or pack up and get out.

    1. Tim Bergel says:

      “Either fix the model so that it creates value at fair price, or pack up and get out”

      Are you serious? Packing up and getting out means no improved cancer therapies, no new antibiotics, nothing to help Alzheimer’s sufferers. I don’t know about you, but that’s not an option as far as I’m concerned.

      1. Anon says:

        Yes, I’m serious. Drug R&D is now destroying more value than it creates, and is only still going on at all because US patients have no choice or control over the price they pay for their meds. The fact is that global drug sales and profits would be rapidly shrinking (in volume) were it not for the 15% average annual price rise.

        Time to pull the plug.

        1. Pennpenn says:

          Which would leave us with… what alternatives? No matter how we approach it, someone is going to have to pick up the bill. And there is ALWAYS going to be a bill, either in terms of cost of development, cost to consumers, or cost to health care systems (in terms of caring for patients who possibly have no hope of ever having a treatment for their conditions).

          It is misguided and foolish to just say “pack it all up”.

          1. Anon says:

            It’s even more foolish to say “let’s keep destroying more value than we create”, as we are doing currently.

            That’s why I suggest to develop a new R&D model that actually creates more value (incremental benefits) than it costs to develop that value/benefits.

            But if you can’t develop a better new model that actually creates value, then it makes sense to pack it up and do something else rather than destroy more value.

            That is not foolish, it’s pure common sense.

          2. Anon says:

            PS. If you can’t develop a more efficient R&D model, and won’t pack up the current one, then somebody will pack it up for you – with US price controls, healthcare reform, or simply by investors pulling out their cash (e.g., by M&A/consolidation and R&D cost-cutting/asset-stripping) as they are gradually doing…

        2. Vader says:

          “Drug R&D is now destroying more value than it creates”

          Assertion of fact not in evidence.

          1. Anon says:

            Annual increase in sales from new products (rather than price increases on old products) is now consistently less than annual R&D spend. What does that tell you?

          2. Pennpenn says:

            That it’s an expensive development process for what is essentially a niche market?

            It’s absurd to suggest wholesale dumping of “something that kind of works” for “nothing that doesn’t work”.

          3. Anon says:

            No, it means that Pharma is consistently getting less money out of R&D each year than it puts in each year, i.e., it’s destroying value.

            And no, I’m suggesting to either: a) fix something that is currently destroying value so that it creates value; or b) dump it and do something else that does create value.

            It’s not rocket science.

          4. GT says:

            Anon….you’re right…it’s not rocket science…it’s chemistry/biology. Rocket science is trivial by comparison. You obviously don’t understand how much time, effort and $$ it takes to develop a single item. Just because we have made it easy for you to click on a link and have it delivered in 2 h doesn’t mean it didn’t take YEARS (sometimes decades) to develop it! Judging by your comments you don’t have much experience in R&D and that’s fine but you may want to stop asserting random nonsense.

            Also, with regard to $$ in R&D v.s. out you sound like a typical business guy. Simply put, the low hanging fruit is gone and the problems that we are tackling now are an order of magnitude more complex. That costs $$.

          5. Anon says:

            @GT. I meant that the logic of fixing or dumping a value-destroying activity is not rocket science, not that the process itself is not rocket science. In fact I’m a PhD, not an MBA, and I’ve spent my entire career working on pharma R&D, from every possible angle (big pharma, VC, biotech, etc.), so I know what I’m talking about…

            And actually your comments just confirm exactly what I have been saying, which is that R&D costs too much compared to the value it delivers:

            “You obviously don’t understand how much time, effort and $$ it takes to develop a single item… Simply put, the low hanging fruit is gone and the problems that we are tackling now are an order of magnitude more complex. That costs $$.”


  2. AB says:

    I wish more of my friends outside chemistry understood this. I know a great deal of (intelligent, well-meaning) people who think as the author of the Guardian piece does, and come to natural byt erroneous conclusions given their perspective.

    Are there any good books or memoirs or the like tracing the real development of a real drug? The kind of thing you could give to a non-scientist to give them an idea of the real, blow-by-blow, messy process that leads from bright idea to drug?

    1. NA says:

      AB, you could refer your friend’s to Derek’s article here – it’s the best I’ve seen in a long time to explain drug prices and refute commonly held beliefs (such as in the Guardian article), in layman’s language too…

      1. AB says:

        Indeed. I’ve bookmarked it for exactly that purpose. But I do like the extra space books have for these topics. Will have to have a look at the book fluorogrol recommended.

    2. fluorogrol says:

      The Billion Dollar Molecule would be a good start—it covers both scientific and financial struggles.

      1. Design Monkey says:

        Billion dollar molecule is cute reading. It ends on such an optimistic note. Except, one would be well advised to read also the sequel – The Antidote, and to knowthe real state of matters with events described. (for example, Japanese investors got for their zillions of monies no any drug to sell)

  3. Frank Adrian says:

    I don’t think the question any more is whether drugs cost a lot to develop (they do) – it’s whether the capitalist system in place now is the best way to fund the development of new drugs (not to mention the health care system). When the stakes are highest (life/death) is when the problems of “for profit” healthcare are cast into highest relief. Expect more of these kinds of articles until one can rationally justify lengthening the regime of “market failures” or until the system is changed enough to lessen the impact of the same.

  4. DJ says:

    Just remind Mr. Love that the Kadcyla that is helping his wife would not have existed if he made this same argument about Avastin or Herceptin a decade or two ago. The profits from those enabled Kadcyla just as the profits from Kadcyla will pay for some other drug in the future. Pay it forward Mr. Love.

  5. oncodoc says:

    We all want at least four things from medications:
    1. innovation and efficacy
    2. purity of the compound
    3. availability
    4. low costs
    These goals are mutually contradictory at least in part. Our laws are never perfect in trying to strike a balance between these goals. Yes, I think that goal #4, cost, has often been slighted. BTW, doing away with patents may not be a panacea; I certainly recall shortages of prochlorperazine and leucovorin when these compounds came off patent.
    I think we need to insure that medication maker have adequate margins and incentives to do their work while maintaining vigilance to avoid creating opportunities for naked exploitation by manufacturers. Overcommittment to ideological positions is also a danger since it blinds us to the inherent messiness of reality versus the abstract ideals beloved by ideologues.
    In brief, no quick answer to the problem.

  6. petros says:

    Nicely put Derek. I had similar thoughts when I read the article. And of course, in this case, patent breaking would not be simple.

    Moreover, as a biological therapeutic, the legal position for approval is more complicated in Europe. A biosimilar could only be approved by the EU, not by an individual member state! And who would pay for the clinical comparison to be done even if a company could be found who would make a good quality biosimilar at low cost?

  7. DCRogers says:

    The neat free-market “invisible hand” becomes quite visible because the entire enterprise rests on the non-free-market mechanism of government-enforced monopoly in the form of the patent system. In the end, companies depend on the goodwill of governments (and electorates), not the free market, for their success, even survival.

    A “broken” business model is not simply one that is not profitable, but one that undermines public support for this government intervention. The temptation to perform short-term financial chicanery for profit (Shkreli; tax inversions; blocking generic competition) seems to outweigh the damage it does longer-term support, as well as the trust needed to accept the pain of higher prices as justified.

  8. Anon says:

    As the saying goes, you can pick any two from good, fast, and cheap…

    If you want fast and cheap, go for generics.
    If you want good and fast, be prepared to pay the price for a branded drug.
    And if you want good and cheap, you’ll have to wait for branded drugs to go generic.

  9. MTK says:

    I’ll ask these question in all seriousness.

    Without some form of exclusivity, i.e. a patent, what is the actual incentive for any entity to take on endeavor such drug discovery and development?

    How in the world are you going to pay for things without at least a prospect of return if successful?

    I guess we could get rid of the whole regulatory process which would lower costs, but that doesn’t seem to palatable either.

    1. Anon says:

      The answer is pretty simple and self-evident: If the private sector (Pharma) can’t make a good return on investment, then it must fall to the public/non-profit sector… i.e., government, charities, etc.

      It’s certainly doable, but nowhere near on the same scale.

      1. John Galt says:

        I hope your ‘etc’ category has some competence included. Because government and charities don’t inspire me to think it’s doable at any scale.

      2. dp says:

        You’re clearly an ideologue, so let me help you find ways to test your assumptions yourself:
        – Did you consider under what conditions it would be possible to better industry in the development of drugs against various conditions?
        – Did you then assess whether the public sector would be able to meet these conditions, and by when?
        – Did you then examine whether the public sector was ever able to meet some of these conditions at any point in the last hundred years?

        1. Anon says:

          Two things:

          1. You think Pharma is doing much better with its R&D performance right now?
          2. Presumably if Pharma closes down its R&D, then any talent will migrate to whatever entities will support R&D, because they won’t have a choice.

          1. ab says:

            2. You may presume whatever you want, but in this case your presumption is wrong. If Pharma R&D shuts down, many of us will go do something completely different. Law, medicine, VC, financial analyst, whatever. News flash: we’re all capable of doing a lot of different things. We CHOOSE drug research because it’s the right mix of a lot of different things (money, intellectual challenge, the chance to do good in the world). Adjust those filters much and we’ll all go do something else.

          2. Anon says:

            Fair point, though presumably government, charity, etc., would not make their terms so unattractive that they lose all the best talent. Yes, some talent would be lost, but in practice, there is always a natural balance (equilibrium) between market forces (supply and demand) – even in the non-profit sector.

          3. ab says:

            Again, presume all you want, but your comments suggest you have neither worked in pharma R&D nor witnessed a substantial lay-off, because when terms of employment become less attractive, the real talent leaves. You seem to have this notion that there’s this giant pool of extremely talented scientists who live and breathe for nothing other than the chance to get into lab and crank out some molecules, and that it doesn’t matter whether it’s an academic lab or a government lab. No. Most of us, as I’ve already said, want an intellectually challenging work environment without too much bs, a chance to do good in the world, and reasonable compensation. That combination does not and will never exist outside of private industry.

          4. Anon says:

            @ab: “Again, presume all you want, but your comments suggest you have neither worked in pharma R&D nor witnessed a substantial lay-off.”

            I’ve experienced both (twice), so who is doing the presuming here??

            And we all “want an intellectually challenging work environment without too much bs, a chance to do good in the world, and reasonable compensation, etc…”

            I’m just saying you/we’re unlikely to get and maintain such a role in a system that is shrinking and/or destroying value. Hence, fix it or look elsewhere, before somebody else makes the decision for you.

            Good luck either way.

  10. Teukka says:

    Just my $.02 worth, but when it comes to product pricing for pharmaceuticals, it happens that what keep prices from getting exorbitant is put out of play.
    The first is supply and demand. Since new compounds for the most part are patented (e.g. patent holder has the market cornered), it means that supply is low and demand usually high, meaning high prices.
    The second is the “seller charges what the markets will bear” paradigm. It works only when the product isn’t of a kind which is necessary for someone’s survival.
    Incentives, primarily in the form of carrots –hopefully not sticks– are needed to encourage pharmaceutical companies to engage in pricing strategies which don’t tar the company name and the industry as a whole in the long term, because no-one benefits from the latter.
    Now what would those incentives look like? Your guesses are as good as mine.

    1. Thomas says:

      In a world without insurance, the cost could be quite a lot lower. How many people are going to (be able to) pay 100K for a treatment with say a questionable 6 month life extension – versus the number of people who will ask their insurer to pay this.

      This could lead to certain development not happening. But it would also be a more fair market system.

      That said, the world would be happier with everyone taking a nice 1 year sabbatical instead of no sabbatical and a half year extension of their life while in the cancer ward.

  11. respisci says:

    In reply to Anon in reply to MTK at 11:49 am

    I disagree. I reject the idea of having governments or charities place funds into drug development as more than likely, that money is not going to yield a product. Much better for them to fund patient care and support programs. Drug development is risky. For Phase 1 trials, it is the first time a drug has ever gone into a human. We really don’t know what to expect. For Phase 2 and 3 trials, the assessments are safety and efficacy in patients. Again fairly big unknowns.

  12. Stu West says:

    It’s worth pointing out that when Adam Smith talked about traders serving “their own interest” he meant that rather differently to how people perceive self-interested behaviour today. From his MORAL SENTIMENTS:

    “The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.”

    When we talk about drug company execs not having the “highest ideals in their heart” and quote Smith, we might keep in mind that his arguments depended on traders being basically moral beings.

    Bit of a deep cut this, I know…!

  13. Vader says:

    “When we talk about drug company execs not having the “highest ideals in their heart” and quote Smith, we might keep in mind that his arguments depended on traders being basically moral beings.”

    You’re kidding, right? Smith expected traders to be basically moral beings? Poppycock.

    1. Stu West says:

      Feel free to actually rebut the point, if you like.

      1. Vader says:

        I thought I did: Smith was contemptuous of traders, not admiring of their morals.

  14. Helical Investor says:

    Agree with Derek’s commentary, but do still find that patent system is not ideal for this industry. I’d swap it in a heartbeat for defined term data exclusivity and suggest 10 years is a good place to start. Of course, this would have to be homogenized across nations. Intellectual property expense is a substantial one for early stage firms.


    1. Some Idiot says:

      I like the idea of 10 years data exclusivity. It rewards those companies trying to do it right in the clinic, and also those doing trials which need to be run over a long term in order to see an effect (thinking: Alzheimer’s, Parkinson’s).

      The point where I think it starts to become sticky is when you start talking about process patents. I think organizations/inventors should be rewarded for true innovation leading to improved processes/increased productivity/lower cost (both monetary and resource-wise). But what if they also lead to a de-facto extension of that 10 year period? What then? I can see arguments both ways…


      But I agree… Whilst I believe strongly that innovators and inventors should be rewarded, I agree that that the patent system does not “feel right” for medicines (less politely: the current system is a great stinking mess that essentially only serves the lawyers…). I just wish I knew the perfect solution…!

      1. Helical Investor says:

        Daniel Barkalow,

        Yes, agree on secondary method and process patent technologies. I was mostly referring to the primary patent i.e. composition of matter for a new chemical entity. Data exclusivity alone also doesn’t protect you from closely related structures, but … is that a bad thing (I can envision yes and no here).

  15. birdbebad says:

    Nice job Derek. It’s clear the author of the Guardian article has no idea how drugs are discovered/developed. Consider these two sentences: “Many drugs begin as a gleam in the eye of a university researcher: somebody in academia has a bright idea and pursues it in the lab…. When the basic research looks promising, the compound is sold, often to a small biotech firm.” They jump from a “bright idea” to a “compound” without any description of what that takes (let alone what it takes to get from a compound to an approved drug). I’d expect this sort of vagueness in a junior high school science essay, not a newspaper written by adults supposedly knowledgeable in their field. As an industry we need to do a better job educating the public and scribes about what it is we do all day. Though you must be getting tired of writing a similar post every couple of months, I appreciate your willingness to do so.

  16. anonymous12 says:

    Questions: Is any price too high for a drug? Do pharma companies have any pricing obligation when the public has granted them exclusivity on the sale of their product which allows circumvention of the free market? How does public responsibility balance with their responsibilities to shareholders? Would the dollars spent for high priced specialty drugs be money more wisely spent for primary care?

  17. anonymous12 says:

    Finally, should pharma companies that move abroad to avoid US taxes be granted the same US exclusivity as US-based companies?

  18. SP says:

    I don’t disagree with most of what Derek says, but I just want to note the contradiction between people’s attitudes here towards pharma execs and willingness to have those same execs being the ones leading market analysis, pricing, financial moves, etc.

  19. Barry says:

    The patent system–as entrenched in the U.S. constitution–is a great Enlightenment-era invention to let the Market create the incentive for innovation. Until then, technological innovation was rare, and only occasionally (e.g. the Longitude Act of 1714) would a govt. offer a prize for an innovation. The patent barters a period of market exclusivity in exchange for the innovator enabling his competitors in the future to implement his innovation.
    This has been the foundation of the Drug Industry, which continues to be the most cost-effective pillar of healthcare. It’s still vastly cheaper to take a drug than to be admitted to a hospital for a therapy or procedure.
    But…that market exclusivity that the patent guarantees disables the functioning of the Free Market; the innovator gets to pull the price out of his hat. And that’s the problem. Within the bounds of what the law allows, there is still the need to act ethically. Criminal law can’t (and shouldn’t) prescribe every detail.

    1. Some Idiot says:

      Just be aware that it is essentially only in the US that it is a sellers market… In the developed world (sorry, couldn’t resist that…! 😉 ) governments negotiate with the drug suppliers over what a “reasonable” price is, broadly on the basis of what added value the drug brings compared to others already on the market. Although I have a pretty serious bone to pick with many of the outcomes of these negotiations (some on each side of the fence), I still think it (on average) gives a better outcome to both society and the true innovators than what happens in the USA.

      1. Vader says:

        Actually, what happens is that the drug company is told, in effect, “Sell us the drug at the price we’ll pay, or don’t sell it in our country at all.” And the price they’ll pay is the production cost plus a very narrow profit margin.

        The drug company makes the rational decision to accept this offer, since the alternative is no profit at all. So far as this transaction is concerned, the development costs are sunken costs.

        Meaning that the cost of development is entirely paid by the U.S. market. In effect, the United States is subsidizing drug development costs for the rest of the world.

        1. Some idiot says:

          Not quite… There is actually negotiation on drug prices, which means that yes, there is give and take on both sides. Yes, sometimes it is really hardball, and yes, there are cases of companies deciding to not sell in certain countries because they could not agree to a price. But the whole system is moving towards a more sensible equilibrium. Yes, it is going to be tough until pharma realises that they actually have to create value, but that is coming (and yes, I work in pharma myself and have done for half a lifetime).

          Yes, prices in (eg) the EU may be a bit too low sometimes, but in the US they are almost certainly too high. But I believe that the EU prices tend to better reflect actual value instead of actual marketing power.

          Subsidies? Maybe yes. But one thing is sure: it is up to the citizens of the US to demand something better.

  20. shanedorf says:

    I would be interested in learning how many months/years of exclusivity remain for each new approval. I am guessing the answer is around 4-6 years which is a lot different than the 17 or 20 years that are thrown around in some of these lay articles ripping the industry. Innovators aren’t granted decades of competition-free sales; its always significantly less given all the time spent in development, approval and launch.

    1. Helical Investor says:

      I would be interested in learning how many months/years of exclusivity remain for each new approval.

      Careful not to mix terms regarding patent life and data exclusivity. The latter is a period under which a generic can not be brought to market with the originators trial data. It is just 5 years for a small molecule drug. Patent life is often longer, but also subject to challenge. It has been a long time since I saw a summary of remaining patent life, but Grabowski did publish on this in ~ 2000. I think ~ 10 years is likely common, but with a lot of variability. There are some mechanisms to recover some development time.

      There is incentive (and little disincentive) to challenge patents with Hatch-Waxman. Another issue is that compounds where the IP may not be perfect, or there is some past precedent may not be brought forward. This can often be the case when considering secondary indications (after primary ones fail). As it stands now, patent viability and remaining life may kill a program that otherwise would proceed forward on just scientific merits.

  21. Mike C says:

    Hi Derek,

    You had a post a few years back on a Nature paper that put the figure at 25% of new drugs originating from academia over about a 10 year period.

  22. Daniel Barkalow says:

    Of course, Kadcyla doesn’t pay all the people who worked on maytansine or Herceptin 30+ years ago. And it does sort of pay for all the contemporary drugs that don’t turn out to work as currently developed, in that hopefully the same investors who lose everything on promising failures (and thereby fund the people whose work will be salvaged in 2050) were also invested in Kadcyla.

    It’s possible that the drug development industry shouldn’t be funded through tickets to the “which drug actually works” lottery, and everyone, whether they need a new drug now or not, should be paying for drug discovery, while the resulting drugs are sold at cost. I’m not particularly convinced whether the betting market on drug company investment is more efficient than some other allocation of funds. I suspect based on economics that taking away the variation in investor outcomes would mean that researchers and patients wouldn’t effectively have to pay as much interest to investors, and the people getting paid would be more uniformly individually approved of by the public.

  23. DanielT says:

    Price is not to pay for the drugs already developed (these are all sunk costs), it is the expected price that matters as it controls if management chooses to advance a drug through the pipeline or not. I am sure there are many potential good drugs that never advance because management decided that the return from the market is too small to generate the return on capital required (getting data on this effect is really hard so if anyone as some good public data I would be very grateful if you could share it). The internal go/no go expected return is the true price of developing a new drug. Any deviation from this number is either a windfall gain or unexpected loss.

    The interesting thing about articles like this is they can cause real damage as they affect the propensity of pharma management to invest in new drugs. If management believes that there is a serious political risk of future expropriation (or price controls) then the expected returns will be less and fewer drugs will be developed. We can even end up in the worst of all worlds where drugs are killed in development because of the fear of future price controls, yet no price controls are ever implemented.

  24. Yep says:

    Do we really need to discuss this every few months. We all know there are crazy people out there who want free drugs, new medicines, at 1/10 the cost of the current cost. It’s just pandering.

    1. Narf says:

      It is often said that the price of liberty is eternal vigilance. The same can be said of reason. If the positions of people like Jamie Love are not rebutted at every opportunity, his type of argument–fact-free and completely based on an emotional appeal–will win the day. And *then* where will we be?

  25. Alzfamily says:

    Our family is currently coping with another generation of severe dementing illness. Pharma has nothing to offer us. As a suggestion perhaps patent life extensions could be granted by the FDA if pharmas could show that natural products such as vitamin D combined with Aricept – for example- provided some incremental benefit. This would be one way for pharma to have pay day while everyone could free ride on the research finding.

    We are looking forward to the day when dementia drugs show a disease modifying effect. It will be especially interesting to see what pricing strategy is used. In many illness e.g. cancer, the bleak reality is that it is their money or their life. This is not entirely true in dementia. Our family members have lived for decades with increasingly severe dementia. For us dementia drugs will be more similar to lifestyle drugs. If pharma chooses a strategy of maximizing price they will not maximize revenue.

  26. anon says:

    “No. No. This is not how it works.” That’s a very conservative, status quo way of looking at things. There was a time when chemists had lifetime jobs in Pharma, pharmacologists and physiologists rather than molecular biologists were the main industry biologists, and academicians were relatively satisfied with surviving off grant money. Things change. When one sees the values associated with Pharmacyclics’ ibrutanib and Pharmasset’s hepatitis C drugs, expectations rise as to the value of other, more fundamental early work. Science always builds on others’ work, it never produces magical drugs in a vacuum. Like Pharma, university and even government labs should patent every little scrap of their work, and sell their rights to the highest bidders just like small companies (most buoyed by small business grants and loans) and Pharma. The US supposedly has 20 times as many lawyers as any other industrialized nation and they have to eat too. Basic science now has a value that wasn’t there (or recognized or appreciated) twenty years ago.
    Pharma is a constantly evolving field and most large pharmaceutical companies resemble banks more than drug companies, and most exist more for their Managements than their patients.

    1. Anon-Repsonse says:

      “Like Pharma, university and even government labs should patent every little scrap of their work, and sell their rights to the highest bidders just like small companies (most buoyed by small business grants and loans) and Pharma.”

      Most US Universities have taken this approach since Bayh Dole. It often results in fewer drugs than might otherwise be because the effect is to stifle competition. Maximum value for the University is achieved with licensing to a single partner. Maximum chance of a drug is when multiple groups try to find one.

  27. CatCube says:

    C’mon, Derek. You know that William Shockley did all the important work, and Apple is just skimming off the profits with the iPhone.

    On another note, your book came in today. Can’t wait to get to it throughout the week!

  28. Andre says:

    Maybe we should do a historic comparison, by looking at the success of drug discovery in countries operating on a different economic model than the capitalist west. How many drugs were developed and approved in the Soviet Union between 1950 and 1990? This number should be multiplied by two to account of the difference in population size and than be compared to the number of drugs developed in the US during the same period. Does anybody have the numbers at his finger tips? Once we have the numbers, anybody can choose which model would suit him best.

    1. Design Monkey says:

      Offhand, I would say that USSR over the whole time cranked out something around 50-100 new drugs, with significant part of them being “me too” or dumb ones, and just small part being truly innovative. (I work in institution, which tends to be historically credited as a source of a quarter of all new drugs in USSR). For more accurate number one would have to pick the couple of Mashkovsky handbooks, and count by hand which ones were original soviet inventions.

      For accounting there would be funny cases like Rimantadine/Flumadine. Which was patented as anti-flu compound in USA by DuPont, NOT developed as drug there, legally shoplifted by USSR (because it was not patent protected there), developed and used, and some 30 years after patenting registered as drug in USA too, by Forest. Who’s an inventor of Rimantadine there, eh?

      Anyway you may check off that USSR, for their size, was rather wimpy in producing new drugs.

      1. Andre says:

        Many thanks, Design Monkey, for your first-hand insight into the drug development success of the Soviet Union. Your basic conclusion is worth mentioning again:

        “Anyway you may check off that USSR, for their size, was rather wimpy in producing new drugs.”

        In other words, no significant drug development occurs in absence of economic incentives. You may like it or not. In my opinion, no economic system in human history other than Western market-oriented societies have delivered the bulk of our medicinal products. As a consequence, we have increased the life expectancy from 30 years at the beginning of the 20th century to 75-80 years today in most countries with access to Western medicine.

        It’s left to us as a society to regulate the process to ensure efficacy and safety of new drugs (via FDA and EMA) and prevent pricing excesses (i.e. T****ing). It as simple as that.

  29. anon says:

    I like how people reject the idea of having the governments or government labs do drug development. I remember people were begging for government to step in when Pfizer tried to take over AstraZeneca.

    1. MTK says:

      First, I don’t recall that

      Second, were they the same people?

      Third, the two things you bring up are not inconsistent even if 1 and 2 above are true. It’s not inconsistent for one to believe the government should stay out of doing conducting business left to the private sector, but that government has a legitimate role in regulating the private sector to ensure a fair playing field.

      Regulating and participating in an industry are not the same.

  30. kj says:

    If the govt had universal health care, there would be no worries from the individual and less “tar”. Also, reasonable profit limitations would not stifle new drugs because investors are risk-adverse so are looking at the top 1% more than the top 0.01% extreme windfalls.

    1. MTK says:


      So somehow capping potential upside lowers potential downside?

      What am I missing here?

      1. Kaleberg says:

        kj is probably thinking of a model similar to that of the electrical power industry. In exchange for a limited profit, power companies were granted regional monopolies. This worked fairly well for getting the nation wired with electricity, and experiments with free market approaches to power generation have been fraught with fraud and manipulation. We haven’t gone back to the old days of ‘wheeling’, but the more tightly regulated power markets now perform as well.

        In theory, a similar structure could be used for drug development. For example, drug pricing might be negotiated to include both past and future research and development costs. The government already buys a lot of drugs through its Medicare, Medicaid, VA and medical tax deduction programs, so it is already paying for a good share of industry R&D. Now with the ACA subsidies, the government will be paying an even higher percentage. It isn’t quite a monopsony, but it has been moving in that direction. Right now, the pharmaceutical companies pay more for marketing to the consumer than on R&D, and I can understand a major buyer not wanting to pay for that.

        I own stock in a number of drug companies, so I have nothing against the industry. I also own stock in a number of regulated utilities, so I have nothing against government regulated industries. A regulated market might not be as exciting or offer as much red meat to financial operators, but it can lure investors and fund R&D.

        1. MTK says:

          So how does that model work when one needs hundreds of millions in investment with no guarantee of revenue ever?

          The utility model worked because the downside risk is minimized in exchange for limiting upside potential.

          There’s no such exchange by limiting drug company profits. You still have the R&D risks.

  31. The Red Queen says:

    And if the first article did not make you wail and gnash your teeth, consider it with this article from the same paper, the Guardian, that came out a day or so later.
    Why ‘big pharma’ stopped searching for the next Prozac. Pharma giants have cut research on psychiatric medicine by 70% in 10 years, so where will the next ‘wonder drug’ come from?

    1. the Borg Queen says:

      The next wave of psychiatric medicines will somehow come from the Googleplex:

    2. NJBiologist says:

      Wait, isn’t Cymbalta *literally* the next Prozac?

    3. Nick K says:

      Even worse than the Guardian article are many of the comments below the line. If you anything at all about drug discovery and development you will despair at the sheer arrogant ignorance of some people.

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