There’s a post by Peter Bach, of the Center for Health Policy and Outcomes, that’s been getting a lot of attention the last few days. It’s called “Unpronounceable Drugs, Incomprehensible Prices”, and you know what it says.
No, really, you do, even if you haven’t seen it. Too high, unconscionable, market can’t support, what they can get away with, every year, too high. Before I get to the uncomfortable parts of my own take on this, let me stipulate a couple of things up front: (1) I do think that the industry is inviting trouble for itself by the way it it raising prices. It is in drug companies’ short term interest to do so, but long term I worry that it’s going to bring on some sort of price-control regimen. (2) Some drug prices probably are too high (but see below for what that means). Big breakthroughs can, at least in theory, command high prices, but not everything deserves to be priced at the level it is.
I was about to say “see below” again, but this paragraph is below, so here goes. Let me quote a bit from Bach’s article:
Cancer drug prices keep rising. The industry says this reflects the rising costs of drug development and the business risks they must take when testing new drugs. I think they charge what they think they can get away with, which goes up every year. . .Regardless of the estimate, the pricing of new drugs for cancer and now other common diseases has come unglued from the rationale the industry has long espoused. Instead, pricing is explained by a phenomenon of increasing boldness by the industry against a backdrop of regulators and insurers who have no legal authority to dictate or even propose alternative pricing models.
Bach’s first assertion is correct: drug companies are charging what they think they can get away with. In that, they are joined by pretty much every other business in the entire country. I did a post once where I imagined car sales transplanted into the world of drug sales- you couldn’t just walk in and buy a car, for example. No, you had to go to a car consultant first, licensed by the state, who would examine your situation and determine the sort of car you needed. Once they’d given you a car prescription, you could then go to a dealer.
Well, we don’t have that, but what car companies do charge is, well, what they can get away with. The same as steel companies, soft drink companies, cardboard box companies, grocery stores, and people who are selling their houses. You charge what you think the market will bear. Even people selling basic necessities of life like food and shelter charge what they think the market will bear. It’s true that health care does feel different from any of those (a point that I went into in that post linked in the last paragraph), and there’s the root of many a problem.
And, some will say, a big difference is that none of these other sellers have patents on their side, the legal right to put the screws on. But remember the flip side of the patent system: the legal certainty that you will lose that pricing power on a set date. The pricing of new drugs is completely driven by their expected patent lifetimes, because almost all the money that the developing company is ever going to make off the drug is going to have to be made during that period.
And sometimes that period isn’t very long. The patent clock starts ticking a long time before a drug ever gets on the market; there are often only five to ten years left when it’s finally approved for sale. There are other factors, too. Everyone is talking about the price of Sovaldi for hepatitis C, but no as many people have thought about the fact that the drug is, in fact, so effective that it has blown two other recently approved Hep C treatments right out of the market, well before their patent lifetimes had even expired. There really is competition in the drug business, and that sector shows it in action.
Now, what there isn’t so much of is competition on price, true. And that’s what you do see in the other businesses I named above. There are grocery stores that occupy the “Wonderful Prestigious High Quality” part of the market, and others that occupy the “Low Low Prices Every Day” part. (And interestingly, if you Venn-diagram out what’s on the shelves of those two, there’s still some overlap, allowing you to watch people paying wildly different prices for blueberries that came off the same truck, not to mention even less perishable stuff like aluminum foil). You don’t see this in the drug industry, partly because for patented drugs we’re never selling the same blueberries. the same gasoline, or the same khaki trousers. Even the biggest “me-too” drugs still differ from each other to some degree.
And that brings up another point. Bach uses (as his example of pricing in the cancer field) two Alk compounds, Xalkori (crizotinib) from Pfizer and Zykadia (ceritinib) from Novartis. Xalkori was first, and Bach makes a lot of the fact that Zykadia is priced higher, even though he says that Pfizer ran bigger clinical trials, had to work out the associated diagnostic test with the FDA, and launch the new mechanism into the oncology market. Novartis, he says, got to piggy-back on all that, and yet their drug is priced higher. There can be no other reason for that pricing decision, Bach says, other than that they can.
Let’s go into some details that Bach’s article leaves out. Zykadia is indeed second to market. But the time gap between the two drugs means that Novartis was working on it before they knew that Xalkori worked in the clinic. Bach makes an error here made by many others who have not actually done drug discovery work: the time course of these things is longer than it looks. A screen had to be run against Alk, compounds had to be confirmed, a medicinal chemistry team had to optimize them and make lots of new structures, all of which except one fell by the side of the road. The compound had to go through animal tests for efficacy and safety, and it had to be scaled up and formulated. And so on, and so on. Novartis did not sit back, watch Xalkori succeed, and then decide “Hey, we should get us some of that action, too”.
Now Zykadia is, as Bach says, a second-line therapy. But it’s approved for patients who do not respond to, or have become intolerant to Xalkori. So this “me-too” drug is, in fact, different enough to work on patients for whom Xalkori has failed. In fact, most patients will start to show relapse inside of a year on Xalkori, so it would appear that most non-small-cell lung cancer patients with multiyear survival are probably going to end up taking both compounds. Cancers mutate quickly, and we need all the options we can get – and guess what, some of those options are going to be second to market, because they can’t all be first.
Another point to note is that while Zykadia was indeed approved on the basis of a smaller clinical trial set, that’s because it received “breakthrough” designation from the FDA for accelerated review and approval. Startlingly, it actually got approved after Phase I trials alone. (Not bad for what Bach characterizes as a simple copycat drug, by the way). Novartis has run the compound in more clinical trials than that, and they continue to do so. It’s not like they slipped in with a mere 163 patients and then trotted off to the FDA while brushing the dust off their hands. To find this out, by the way, you’ll want to use “LDK378”, the internal Novartis designation for the drug, and I’m passing this information on to Bach for free. Clinicaltrials.gov shows 13 trials in the US when you do that, and there are others outside the country as well.
Bach’s article, as mentioned, plays down any differences between these two drugs, saying that “they have not been directly compared”. But that’s not accurate. Let me quote from that link in the paragraph just above:
As described by Shaw and colleagues in the New England Journal of Medicine, ceritinib has striking activity in ALK-rearranged NSCLC, both in treatment-naïve patients and in those who experienced tumor progression on crizotinib. . .The drug has clear pharmacological advantages over crizotinib. Its surprising level of activity in crizotinib-resistant tumors may be explained by its greater potency and its particular ability to inhibit ALK with gatekeeper mutations that confer resistance to crizotinib.
The two drugs have had a very important comparison: people who are going to die on Xalkori are going to survive longer if they switch to Zykadia. “Me-too” drug, my ass.
But rather than end on that note, tempting as that is, let me circle back to pricing once again. The price for these cancer drugs is not borne by individual patients emptying their piggy banks. It is borne by insurance, both private and government. And drug companies do indeed price their drugs at what the think the insurance plans will pay for them. This is not a secret, and should not be a surprise, and I continue to be baffled by people who react to this with horror and disbelief. Prices appear when you find out what the payers will pay. If Pfizer, Novartis, or Gilead priced their drugs at fifty million dollars a dose, no insurance company would reimburse. But the insurance companies are paying the current prices, and if they believe that they will be put out of business by doing so, they need to stop doing that. And they could.
They will, too, if we in the industry keep pushing them towards doing it. That’s our big problem in drug development: our productivity has been too low, and we’re making up for it by charging more money. But that can’t go on forever. There are walls closing in on us from both sides, and we’re going to have to scramble out from between them at some point. Pricing power can only take you so far.