Desperately Seeking Price Reform: The Pharmaceutical Industry Needs To Change Its Ways

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By David Beier, John Osborn and Merv Turner

A familiar trope employed at the climax of movie thrillers is the zombie who returns from the dead to devour the brains of the living.

The biopharmaceutical industry may feel as if it is living in its very own horror show as zombies take the form of retooled, failed policies that are resurrected by presidential candidates and office holders who clamor for price controls that are thinly disguised as liberalized drug importation laws, statutory price ceilings under Medicare, or price discounts and rebates set by formula or by an unaccountable government bureaucrat. For example, legislation has been introduced in the Massachusetts state senate that would require extensive disclosure of a manufacturer’s research, production and marketing expenses, and empower the state’s Health Policy Commission to set a cap on prices for certain high cost drugs.

Populism is a politically powerful elixir, but naked opportunism deserves to be refuted with hard evidence and sound analysis. These proposals are not only simplistic (and in some cases at odds with legitimate safety concerns), they also threaten to further limit the flow of investment capital essential to continued biomedical innovation that will enable physicians to manage successfully cancer, autoimmune disorders, and CNS diseases like Alzheimer’s and Parkinson’s. At the same time, evidence of significant increased spending on biopharmaceuticals in 2014 suggests that the industry would be well served to consider more creative, thoughtful approaches to drug pricing.

Ironically, the primary driver for these proposals is the increased success of the life sciences sector in discovering and developing innovative specialty pharmaceuticals that treat previously difficult or impossible to treat medical conditions. With the launch of these new medicines, the health insurance industry invariably ignores their contribution to human health and speaks only of the costs and the negative effect on state budgets. During the past year, for example, Express Scripts and the Medicaid Health Plans of America (among others) have screamed bloody murder that we cannot afford these breakthrough treatments and are bankrupting the system.

There is legitimate concern over access to personalized cancer treatment regimes involving multiple drugs and biologics that cumulatively make the overall financial burden very difficult for patients to afford. As precision medicines are developed with small, targeted populations, high prices will follow unless the industry can develop more efficient approaches to clinical development such as the Accelerating Medicines Partnership under way in collaboration with Dr. Francis Collins and the National Institutes of Health.

Let’s consider the political environment and associated public policy challenges facing the industry with respect to pricing. The first challenge concerns the question of how we choose to define the problem. Some contend that the prices of new medicines have increased dramatically to an unsustainable level. Yet the portion of spending on healthcare for pharmaceuticals historically has been only about 10%.

The projected healthcare costs of our leading diseases are very substantial, and the potential for treatment advances for Alzheimer’s, diabetes and cancer are very compelling: how can we afford NOT to press forward in search of these cures? If we rely on current treatment regimens, it is estimated that cardiovascular disease and Alzheimer’s alone will cost society nearly $2 trillion by 2030. Now is the time to accelerate drug development, and the bipartisan approach embodied in the 21st Century Cures legislation recently passed by the U.S. House of Representatives will help to do just that.

Those who propose draconian methods of dealing with anecdotal reports of high drug prices ignore two critical facts: the impact that new medicines have on< reducing non-drug hospitalization and other healthcare costs, and the overall decline in spending on the most widely used medicines. As to the former, the Congressional Budget Office began to build this very assumption into its cost scoring in late 2012. As to the latter, a study by IMS Health showed that total drug spending in 2013 increased but spending on the ten most popular drugs declined, and the federal agency that administers the Medicare Part D drug program projects that spending will increase between now and 2022 at about the same rate as other healthcare expenses simply due to the expanding population pool.

How does this work in practice? At the same time as innovative new treatments are introduced with a high list price, massive reductions in the actual selling prices of certain drugs occur annually with the expiration of patent protection and the concomitant introduction of bioequivalent generic alternatives. In fact, the cost savings from patent expiries in the year 2012 alone exceeded the total expenditures for that year for all cancer drugs, and an estimated $90 billion in branded revenue turned into low priced generics in the last five years with about the same amount to come in the next five years and that figure does not include the impact of the introduction of generic biologics, or biosimilars.

The second challenge amounts to willful ignorance of the adverse consequences of price controls. Indeed, advocates conveniently ignore the failure of previous attempts at price controls and blithely shrug off the adverse consequences for innovation and economic growth generated by the life sciences sector. In this evidence-free world, there is a superficial appeal of simple, government directed solutions that will stop the surge of price increases and salve consumer ire.

Price control regimes in countries like the United Kingdom, Canada, Germany purport to assess the value of new medicines. Yet in reality, government agencies like the UK’s National Institute for Health & Care Excellence (NICE) are a poorly disguised vehicle for rationing drugs and health care services to meet pre-established fiscal spending targets. While there may be comparative value analyses done in some cases, the bottom line is the bottom line and these schemes often fail to consider the health and wellness of patients. In addition, the European states are able to ignore the impact on the future development of medicines since they implicitly presume that the American consumer will go on subsidizing the effort. If we were to follow their lead, the impact on innovation surely would be felt in the coming years.

Recent demands for price controls in the United States suffer from the same problems, and introduce a third public policy challenge in the form of the proposed method of analysis. Of late, this has been put forth by the health insurance industry whose surrogate — a Harvard affiliated group called ICER — appears to place a higher premium on insurance company margins than patient outcomes. Under their approach modest increases in spending for drugs — regardless of the merits or health outcomes of such new medicines — will automatically be deemed too expensive. ICER focuses on short-term budget impacts, which does not recognize that biopharmaceuticals are investments in human health such that the societal benefits in reduced medical costs accrue over time. Invariably, employing a short-term budget driven framework will bias outcomes against the development and prescription of drugs.

For example, for two oncology drugs with similar medial overall survival, but with differing survival curves, reflecting different remission rates, the ICER approach will likely favor the cheaper option, irrespective of patient interests in the chance of a long-term remission, if that is offered by the more expensive option.

While the industry has dealt effectively with these policy challenges in the past using data analysis and effective advocacy, this time more is needed given the pressures of the aging demographic base, the expense of developing sophisticated treatments for rare and difficult to treat diseases, and the ongoing struggle of many in our society to make end’s meet in the midst of a lethargic economic recovery. In this environment, the biopharmaceutical industry must convince the American people that it is acting fairly and transparently in its pricing of drugs and biologics. Absent this, there may well be a bipartisan effort to reign in spending under the Medicare Part D outpatient drug benefit program.

It is clear that biopharmaceutical companies need a new approach to evaluating and pricing their innovative products. In recent years, drug manufacturers have offered customers price volume guarantees, “performance” guarantees and other contractually negotiated incentives and discounts, but going forward the focus in Washington will shift toward an examination of how each company sets its prices and justifies the associated value proposition.

One relatively straightforward way to address this question would be to ask a company to answer the following questions: (1) Does the medicine meet a real medical need and is it a meaningful improvement over the existing standard of care?; (2) Does the medicine substantially improve the quality or duration of life?; (3) Is there a clear pharmacoeconomic case that demonstrates that the drug provides cost savings or is at least cost-neutral relative to the existing standard of care, or does it offer other attributes that offer overall medical cost savings (such as increased compliance and adherence, and thereby lower the costs associated with treating the underlying disease or condition)?; (4) Does the medicine offer a substantial societal benefit in terms of the underlying productivity that will likely be made by the patient because of the enhanced length and improved quality of life?; and (5) Does the price for the medicine make it more or less likely that patients will be treated equitably and get the right treatment for them taking into account their personal genomic or biochemical profile, which in turn may require tailoring the contemplated treatment to a limited patient population?

Public officials and candidates for high office should fairly challenge the life sciences industry to develop criteria for drug pricing — and a means of paying for them — based on their value to the health care system. This would match the life science industry’s rhetoric with the reality that such firms need to present a competing idea to the recently announced alternative value schemes put forth by major medical centers like Memorial Sloan Kettering in New York, or by clinical physician groups such as ASCO, the leading group of oncologists, or even insurance industry surrogates.

The real question is whether or not headlines and hysterics over drug pricing will cause us to kill yet another source of innovation, or whether the inherent value proposition of biomedical research and development can be presented more effectively. A transparent, fulsome approach by the industry may well determine whether – and for how long – it will continue to enjoy the freedom to price its products as it sees fit in the United States.

Mr. Beier is a managing director of Bay City Capital in San Francisco, and previously held senior policy positions in the White House and on Capitol Hill, as well as senior executive positions with Amgen and Genentech. Mr. Osborn is a regular contributor to, a senior advisor with Hogan Lovells and an executive-in-residence with Warburg Pincus, and previously held senior executive positions with Cephalon, Onyx Pharmaceuticals and US Oncology. Mr. Turner runs his own consulting firm and is an advisor to Bay City Capital, and previously was chief strategy officer at Merck & Co., Inc.

Source: Forbes