We are coming up on an election year. Candidates are kicking off campaign rallies and fundraisers, and grandstanding about hot-button issues that are sure to resonate with the largest possible number of voters. The best issues are those of “fairness” (whatever that means), as Americans on both ends of the political spectrum can get behind these.
“Getting away with murder”
One of the few places where Bernie Sanders and Don Trump could sit down and agree with one another is on drug pricing. Both campaigned strongly on this issue in 2016 without real meaningful plans for reducing cost to patients. Trump has famously repeated that drug companies are “getting away with murder” without really specifying what he means. Pharmaceutical industry gross profit margins average around 20% on a good year, which is in line with many other industries that have significantly less R&D expenditures.
We live in one of the few wealthy nations on earth where individuals can elect to go without health insurance, or to purchase aggressive plans which pass on very large (up to 20%!) cost-sharing to patients in the form of large copays. The problem is not the pricing of branded on-patent drugs…even if this were reduced by half or more, individuals would still be crushed by this arrangement.
The pharmaceutical industry is a convenient scapegoat for the soaring cost of healthcare in the US, but the benefit of these products to society and the actual costs involved need to be examined more closely. In terms of overall healthcare spend, around 12% of healthcare costs are due to retail pharmaceuticals; this has remained relatively flat for 30 years or more. Around 90% of prescriptions are for inexpensive generic drugs, those no longer on patent, and the margins for these products are are a small fraction of the margins on new cutting-edge therapies that still have patent protection.
Developing new medicines (and paying for them)
Bringing a new drug to market is exquisitely hard and exceedingly expensive. Early stage biopharmaceutical research, typically including the identification of new biological pathways and potential drug targets, often occurs in partnership with academic institutions that are tax exempt and partially funded by federal research grants. This has led some politicians, who are unfamiliar with the industry cost structure, to claim that consumers are paying for these products twice: first through tax support, and second through the cost of treatment. This is not true, as industry veteran Derek Lowe explains. There are many many steps involved between basic biological research and the identification and clinical validation of a drug! The all-in cost of of R&D that goes into a new medicine is between $500 million and $2 billion and many years of work. The lion’s share of these development expenses are realized at the end of the process in late-stage clinical development. Even AFTER the investment of tens or hundreds of millions of research dollars, around 90% of products fail to reach FDA approval.
Typically, at approval, a new medicine will have 8–12 years of patent life remaining. After this, other manufacturers can create carbon copies of the drug based on the original developer’s own patents, which has the effect of collapsing the price to lowest point where a producer can still make a small margin. To recoup the massive investment in development, pharmaceutical companies will set the highest justifiable prices for the limited period of time where the drug still has patent protection. Typically, health economic analyses are used to set these prices, which take into account the current standard-of-care medicine and the duration and magnitude of the benefit conferred to the patient.
Really really good drugs (those that confer a sustained life-changing benefit to patients), such as a cure for a chronic viral infection or a gene therapy for a childhood genetic disorder, can and should be priced highly. While this may be tens or hundreds of thousands of dollars for some medicines, in a matter of years, generic competition will push the price down towards the cost of manufacturing the medicine. You can think of these new medicines like new high-end sportscars, where only the very wealthy and very motivated will be able to purchase them while most continue to make do with their reliable daily driver (the standard of care treatment). The difference is, in 8–12 years, that supercar pricing will drop to the used-Corolla range.
But it’s not wealthy car enthusiasts who need these new products; it’s very sick people, who might not have good alternative treatments. In the US, these people might be under-insured or have health plans that pass on a large percentage of the treatment cost to the individual. What Bernie, Trump, AOC, and all the rest need to focus on is how to get new medicines to all patients who need them without causing financing ruin. High list prices for on-patent medicines make for snappy soundbites on the campaign trail. Reform in HOW new pharmaceuticals and healthcare in general is paid for is the issue.
A Social Contract
Peter Kolchinsky has a fantastic series of blog posts that focus on the price that America and the rest of world pays for new medicines, and what this should mean for industry behavior. Americans are willing to pay a premium for earlier access to innovation and drug developers, in exchange, are only able to charge this premium for a short period of time. Biopharmaceutical companies typically develop new medicines with the US in mind for initial market entry, due to the ability to command higher price points. As a result, American patients get access to new therapies years earlier than other international markets. List prices in international markets, such as the EU, where single-payer healthcare systems may have more negotiating power, tend to be significantly lower. Typically list prices can be as much as 20–40% lower…but not 5x lower. Progressive healthcare systems instead focus on insulating patients from on-patent pharmaceutical prices and ensuring that they receive appropriate care without the financial stresses imposed by cost-sharing.
In the US, it’s lack of healthcare insurance coverage and high copays that prevent patients from accessing new medicines. Ironically, it’s incrementally lower price points that delay the introduction of new products into international markets where patients also need them.
In every industry there will be morally bankrupt individuals who seek to bend or break established industry rules and practices. The business of developing new medicines is no different. One recent practice focuses on identifying older generic medicines for life-threatening rare diseases where there is only a single manufacturer of the product. In these cases, where there are not enough affected patients to advocate or lobby on their own behalf, a bad actor can (legally) raise the price of the generic medicine astronomically. Martin Shkreli, owner of Turing Pharmaceuticals and the most punchable face you have ever seen, pioneered this practice a few years ago, raising the price of an anti-parasitic medication by 5,000 percent overnight. Martin is in jail now, for something unrelated to this abhorrent move. He has a blog. Check it out.
Other pharmaceutical executives have used “pay to delay” tactics to prevent the development and launch of generic competitors and used highly suspect practices to extend and defend patents, in short, violating the social contract above. These are the places that lawmakers need to focus on to restore fairness to the system.
Unrestricted pricing power can get out of hand. Novartis’ new gene therapy for a rare neuromuscular disease, Zolgensma, now lists for more than $2 million per treatment. The analysis used to set this pricing is suspect… Since this is a new therapeutic modality, directly modifying the DNA of affected patients, the duration of the effect is unknown. There simply hasn’t been enough time to study it. For the sake of patients and other companies developing these types of products, I hope it lasts. Hype and enthusiasm around gene therapy in general further contributed to Novartis’ decision to price the product this high.
“Sometimes new drugs are not available, not because the price is too high, but because it is too low”
Ken Frazier, CEO of Merck & Co., put it bluntly above: if a biopharmaceutical company cannot recoup the cost of investment in developing a product, they will simply choose to put their R&D efforts elsewhere. Products are typically those where the addressable market is not attractive due to lack of ability to set high list prices. This includes the market for new antibiotics, where anticipated sales volumes are low and price points are anchored to the many (mostly) effective generic medicines available. Recently approved antibiotics are unlikely to ever recoup the cost of development and those developing them are struggling.
In the developing world, Neglected Tropical Diseases (NTDs) and tuberculosis remain leading causes of death. However, there is no ability to command high price points for medicines that are effective against these diseases; the affected countries simply don’t have the resources. As a result, it falls to the public sector and NGOs to support development of these products with very limited success.
Lawmakers need to focus on ensuring that patients have access to new medicines without falling into financing ruin. A universal healthcare mandate or public insurance option would be a place to start. Furthermore, new incentive structures need to be put in place to encourage drug companies to invest in underserved disease areas. As the world warms, some neglected tropical diseases will soon be sickening people far from the equator in our own backyard. Congress should further enact legislation to close the loopholes that drug developers exploit to delay generic competition and to set longterm abusive monopolistic pricing.
The current level of healthcare spending in the US is unsustainable. Rather than driving these costs, new medicines result in long-term savings. Kolchinsky describes branded pharmaceuticals like a mortgage: we as a society will pay off the cost of development over a number of years and then have a valuable asset that we can pass on to many future generations. Branded drugs have an 8–12 year mortgage. Society ends up with inexpensive generic treatments that will reduce healthcare costs for the rest of time.