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Drug Prices

Arguments on Drug Pricing

I find myself slammed with a busy work schedule this week, but I have to take a moment to recommend this post by venture capitalist Bruce Booth on drug pricing. It is long, detailed, and comprehensive, and I’m very glad that he took the time to do it, because it (and Jack Scannell’s piece from a few years ago) are where I will send people when arguments about drug pricing come up. I would love to do 5,000 words on the subject this morning, but I simply don’t have the time. I can, though, refer you to several years of my posts on the topic; frankly, it’s hard for me to imagine saying something today that I haven’t said before.

I am not asking everyone to immediately agree with Booth’s points or Scannell’s: but I am asking anyone who wants to seriously talk about these issues to take those arguments seriously. There are (to put it mildly) a lot of people who speak very loudly and confidently about drug research and drug prices who have no idea what they are talking about. The having-no-idea part is understandable – drug development is a specialized business that takes a reasonable amount of expertise to really understand, and analogies to other industries can only take you so far. But what does grate are people who spout obviously clueless things as if they were obvious truths. Short of that, there are still plenty of misconceptions that trip up people who are otherwise well-meaning and willing to learn.

So read Bruce’s post to get the perspective from someone who funds new small companies. Read Jack Scannell’s piece to get insights into drug pricing in general. You may well not agree with many of the points in them, as mentioned, but you need to be able to articulate why you don’t. To find what you believe are the flaws in their arguments, and to refer to hard data that back up your own claims. If you’re going to refer to past attempts to prove that drug companies do no innovation, provide no value, spend far less than they say on their R&D, all those other things, then you need to go back and read the arguments against those as well and be prepared to deal with them. The signal/noise in this dispute is not so good; you’re going to have to get past a lot of fist-waving and shouting (from both sides, frankly) to get to the real stuff (especially in an election season). Get to it, otherwise you’re just adding to the problem.

33 comments on “Arguments on Drug Pricing”

  1. Kris says:

    I agree with almost everyone of Booth’s arguments and suggestions to tackle the disgustingly expensive medical costs. But, I wish the drug industry people would push back just as vociferously, the drug industry lobby that actively prevents so many of Booth’s solutions to even be considered. Does anyone in the industry really believes in more transparency, or push to expanding generic competition?

    Yes, some politicians are shouting out extreme ideas and placing false blame based on largely false narratives. But, I would wager that a lot of extreme ideas and common misinformation against drug discovery cos. could be avoided or largely sidelined if the industry self-policing was actually up to task.

    1. Charles H. says:

      Industry self-policing is almost never up to the task, because the incentives are in the opposite direction. The only time I’ve ever seen it work was when there was continual strong external pressure. The comics code might be a good example.

      That said, the real problem seems to me to be generics being withdrawn from market and replaced by patented items that have no advantage. Colchicine is the example that touched me personally. Other examples are insulin prices. There are innumerable others.

      I can understand that there are costs in bringing an actual new drug to market, but when you remove a working drug and replace it by a new formulation that doesn’t work as well (e.g. a drug compounded with aspirin replaced by one compounded with acetaminophen … which is not an effective analgesic for me) and raise the price, then it looks to me like gaming the system to profiteer. Transparency isn’t required for me to make that decision.

      1. Vader says:

        I don’t know how it is at the moment, but the nuclear power industry is quite dedicated to self-policing. The incentive is pretty clear: One of them screws up, it reflects very badly on all the rest.

        The incentives with drugs will be a bit different, because the public perception is different in this important respect: The public regards nuclear power as inherently problematic (it isn’t, IMO) so a screw-up by one confirms a bias against the whole industry. The public does not (in general) regard drugs as inherently problematic, so a screw-up by one company is perceived as “you’re going it wrong” rather than “it can’t be done right” which is less likely to be generalized.

        But that may be changing, and a perception by the drug companies that they may end up sinking or swimming together could make for some serious self-regulation.

      2. ME says:

        No. Almost all of Booth’s arguments are flawed. The problem is that there is tremendous waste in the pharmaceutical industry. Look at how many IO therapies are in development. Among senior pharma executives, there is a consensus that there is over-investment in R&D and that it is driven by high prices and excess profit. Excess captial doesn’ drive innovation, it drives waste. What does drive innovation is necessity ad limited resources.

  2. Project Osprey says:

    Polemic question: The system is weighted to the development of new therapies (and by consequence profit) by virtue of if being the most moral choice. But what if it isn’t? Many cannot afford these new therapies. Would a different model, in which treatments were more accessible but development was slower, be a better or worse option?

    1. Pierre R Bedard says:

      US drug price structure is unique to US
      PBMs are unique to US
      Rebates obtained by PBM are PBMs revenue first and not used to reduce drug prices
      Hospital and MD compensation is 2-3 fold larger in US than other developed country
      So health care cost structure is the real issue not just drug prices

      1. anon says:

        I agree with this. High drug prices are side effects of our current health care system.

      2. Project Osprey says:

        US does develop most of the worlds drugs and its healthcare system as a whole is often defended as being necessary in order to allow such a high level of development. Personally I don’t see that the 2 are that intimately connected – but lets assume that they are. Would a different system, in which healthcare was cheaper but new drugs rarer be better or worse?

        1. Wavefunction says:

          Personally I think it would be better since the bigger problem is accessibility; I think we have a real problem when 3 million children die of an entirely preventable disease like diarrhea. IMHO there are several conditions, especially ones afflicting the developed world such as heart disease and diabetes, for which the drugs we have are good enough and where we could do with diverting some of the R&D in those areas to more neglected or rare diseases. Part of the problem stems from continuing to try to solve problems where the gap between what’s needed and what’s available isn’t as big as what it used to be. Heart disease was a pressing problem before statins came along; it’s still a problem but not as pressing.

    2. MrRogers says:

      You can have such a system right now. Just wait until a drug is off patent to buy it.

  3. zero says:

    The word “dying” appears zero times. The word “insulin” appears once and is only mentioned to illustrate the list vs. discount price game.

    This article fails to address the reality: people are dying from lack of access, dying of preventable illnesses, dying of suicide under the immense weight of medical debt. The industry as a whole appears to be OK with this outcome and actively fighting against a wide variety of legislative changes that might offer relief. The current bill that provoked this response did not occur in a vacuum.

    There are two key points I can agree with:

    Drug development is a high-risk capital-intensive field that is absolutely essential. Changes to the cost structure of pharma risk disrupting that field.

    Many of the current situation’s problems are due to middlemen – insurance companies, benefit managers, etc. The sharp eye of legislators should turn to those targets and squeeze that rent-seeking behavior out of the market.

    Beyond that I’m not seeing much common ground. His cautions are well-founded but his view seems too narrowly focused on capital to represent a consensus. He also doesn’t seem to consider single-payer as a means of addressing costs, which is weird since he also admits that insurance companies and other middlemen are the main driver behind cost growth and those are exactly the players that lose with universal healthcare.

    First, stop the dying. Then we can talk about risks to drug development and how we will address them. If the industry does nothing (or worse, doubles down on the obstructionist course it’s currently on) then don’t be surprised when healthcare gets nationalized by torch and pitchfork and we all lose for one reason or another.

    1. zero says:

      This comment links to another take on why the proposed legislation is a bit ridiculous. We shouldn’t have to do this kind of elaborate eleven-dimensional accounting to provide basic healthcare.

  4. Dave says:

    I liked much of what was written, but was upset by this comment: “Elderly consumers often get cheaper tickets to the movies; if, by example, Britain wants to be the elderly consumer of pharmaceutical innovation, then so be it – within moderation.” The big difference in this is that most people eventually become elderly. It is not the case that most US citizens will become British citizens. This is a strong area for politicians to get invovled

  5. Lorry Turner says:

    It is something of a trope to blame the nameless and diverse media, but I’ll do it anyway. The way social media today present views without dialogue works in total antagonism to topics that require a great deal of context, understanding and nuance to grasp. Reduce drug pricing now is a far catchier slogan than anything Bruce, Derek or other wise practitioners have to say.

  6. ScientistSailor says:

    To add more fuel to the conversation, a panel of experts on antibiotic R&D gave an analysis on the broken market there. In short, even after a drug is approved, there is ~$400 million in required expenditure in the first 5 years on the market to cover pediatric trials, CMC, pharmacovigilance, etc…

    1. Me says:

      meh! They spend more than that marketing the thing in the first couple years

      1. ScientistSailor says:

        not even close.

      2. Dr. Manhattan says:

        “meh! They spend more than that marketing the thing in the first couple years”

        Really?? When was the last time you saw a television commercial or internet E-commerce which says, “Ask your doctor if Wondercillin is right for you!”. Antibiotic R&D is in very dire shape from a commercial standpoint. It’s almost exclusively small to medium biotechs, and two of them closed up shop last couple of years (Melinta & Achaogen) WITH products on the market. There’s a large effort going on internationally to try to come up with a different model for sustaining antibiotic R&D.

  7. njc says:

    One of the problems for both producers and consumers is the sharp drop-off in price when a drug goes generic. This blocks the gradual increase in use as the price is eased back. Has anyone investigated a system that would extend the patent lifetime in exchange for licensing production to multiple companies for a gradually-decreasing share of the wholesale price?

    1. Me says:

      I think there have actually been a few legal cases where companies have been doing this on the sly: something like paying generics companies not to release the drug in exchange for giving them data on the formulation, and maybe some kind of licensing agreement to use the brand name.

  8. myma says:

    I had to grapple with this a bit in a recent boot camp. As a chemist not as a policy wonk or marketing guru, this is very roughly how I understand the strangest and most perverse part of the most expensive drugs value chain:
    A drug list price is set by the pharma, lets call it $100k.
    The insurance company/PBM set the copay, lets call that 20% or $20k
    Family can’t pay that copay. What to do.
    The pharma sets up a charity, and contributes money to offset copays for people who can’t afford it.
    Pharma via the charity rebate pays the $20k copay
    Pharma gets $80k from sale from the insurance company/PBM, minus whatever their take is
    Because it is a charitable donation, Pharma also gets to deduct the $20k off their books, so lets call that 20% tax rate or thereabouts.
    Net to Pharma: some $84k minus the insurance/PBM take whatever that is.
    Out of pocket for consumer “$0”. Although the health insurance plan pays the rest of the bill and the premiums go up, but that is a wholly separate mystery for another day.
    And this is all perfectly legal, and OK’d by Congress because =it helps with the high cost of healthcare=

    1. Churlish says:

      Thanks, that’s an unusually clear summary of this nonsense!

    2. terry g says:

      One thing missing in your list – the charities usually support a patient once. Yes once.
      Most of the higher priced products are for chronic diseases and cancer, and the patient is required to taken as long as they can tolerate the product. This time period can be years. I personally know of cancer patients that spend their time hunting for a new charity on a monthly basis. It’s not as easy as it appears.
      So sure it looks nice for the patient during the first dose or two.

      1. myma says:

        I could make a smart-ass quip here, but it really isn’t a funny situation to be in.
        And then there are those who are insured or co-insured by Medicare/Medicaid.
        = Add even more boxes to that flowchart!

  9. DTX says:

    Here”s a real example of the challenges in drug pricing. A company makes a spider antivenom that is essential for saving lives. If patients don’t get the antivenom, they die or are in bed for weeks to months. It’s only sold in the US. <1000 doses/year are sold.

    The only company that makes the antivenom sells it for <$30/dose, i.e., at a huge loss. Regardless of how low a volume of drug is, you still need full regulatory support & technical staff who know & understand the challenges of making such a difficult material. You need the manufacturing processes to support it. It has a very limited shelf-life. You need a trained doctor available 24 hours/day, 365-days/year to answer questions on its use. The company continues to make it because it's a medically essential drug.

    If the company stops making it, an outside company could do so (no other company will do so now because they'd lose lots of money).

    What is the "right" price? Even $3,000 dose wouldn't cover manufacturing, regulatory, packaging, product support, etc. Even $10k/dose might not be enough for non-profit to make it at no profit. What's the "right" price?

    1. njc says:

      It’s clear that the decision has been made to make this drug and sell it at a compassionate price. In that case, the price to consider is the price of a lifesaving course of the drug, not of a single dose. I would argue that the price should be set at a point where 95+% of the people who need it can afford it without crippling themselves financially. Maybe $300 for the course? And make provision for the indigent who can’t afford it, the wait/er/ress for whom it would destroy the monthly budget, and the case of a family of seven, all bitten at once.

  10. Earl Boebert says:

    The Booth posting dodges the question of whether the current pop-up corporation model is good for society. I suggest it is not. The cycle of “get an idea/form a company/hustle for money/sell out” is a very thin line away from a pump and dump scam. It encourages hype, eliminates institutional memory, and is devoid of cross-project pollination and the ability to subsidize unprofitable socially responsible products with the revenue from more profitable ones.

    What we have is a bunch of little one-trick ponies, each with its own P&L, and zero synergy. That may be cool if you’re doing dating apps but to this ex-CTO it looks like a lousy way to provide new drugs.

    1. Pierre R Bedard says:

      What do you propose instead?
      How do you fund it?

      1. 10 Fingers says:

        This topic is a whole set of columns for Derek all by itself.

        It has always seemed to me to be inherently wasteful that the “asset-acquisition” part of biotech startup life and the “institutional assimilation/destruction” are almost always inseparable.

        However, when you get into it, there are a lot of questionable assumptions (pro & con) about startup organizations being able to replicate “success”. This is particularly true when the incentives change during the switchover from VC-backed to whatever public or private corporate structure comes next.

        This doesn’t even count the embedded criticism in Earl’s comment – that the “pump and dump” side of a lot of startups is incentivized by the current model. But, even if you put that (significant problem) aside and assume that all “successes” are legitimate and in good faith, the goal of maximizing the ability of biotech organizations to generate them (and not just have VCs make money off of them through artful risk management) is complicated *even* if you assume that past success of an organization is an indicator of higher probability of future success.

      2. Earl Boebert says:

        Sadly, I haven’t a clue. The days when major corporations had R&D facilities that worked on a variety of projects are long gone. I feel privileged to have worked in such an environment, and have great sympathy for the worker bees who have to strive in the environment of today.

  11. Biotechie says:

    Here is another freely available article that goes deeper than most into the pricing issues. It also makes clear that the brand biopharma industry is rather disingenuous. Many off-patent brands still get heft year-on-year hikes above inflation. There is no innovation at all. On the other hand, those who don’t think the new innovative drugs that many of the same companies produce are not worth their premium are wrong headed. › articles › nbt.3734.pdf

  12. Mostapha Benhenda says:

    Price control is an opportunity for a New Drug Deal

Comments are closed.