A Prescription for High American Drug Prices: Comment on a Proposed Legislation

Dec 22, 2019 | Drug Pricing, Monopolies, Negotiation, Price Watch

A Prescription for High American Drug Prices Comment on a Proposed Legislation

Would conditional FDA drug approvals improve competition, expand access and lower drug prices in America? So believes REP Bruce Westerman (R-AK), who declared this to be the answer to at least some of American ailments when it comes to incredibly high drug prices.  Unfortunately, his treatment pathway lacks an underlying connection to the true forces driving high drug prices.

The Opinion Piece

In an opinion piece in The Hill, Rep Westerman correctly reminds the reader that the U.S. health consumer pays more for prescription drugs than another other peer in a modernized country. That amount far exceeds $1,000 per person per annum—about more than double our peers.  Westerman believes that there are two elements behind high American drug prices, including 1) lack of competition and 2) risk-averse regulations by the FDA. Westerman is partially right that monopolistic tendencies can hurt competition, but we have seen record competition with generics and that has done little to impact many drug prices. Moreover, we will briefly touch on how the FDA is far more flexible than its often given credit for.

Deregulation Won’t Solve the Problem

Drug pricing may actually be more complicated than Rep Westerman proposes. Generics have replaced many of the blockbuster products of the past yet net pricing still is higher in many drug classes.

Westerman also identifies deregulation as a key driver toward lower costs. The idea is that monopolistic drug companies buy up small innovative biotech competitors, which cannot compete because of the high cost of conducting FDA clinical trials. However, there is evidence that the FDA is truly rolling up their sleeves and working with companies—setting up Fast Track, Breakthrough Therapy and Accelerated Approval Priority for record numbers of investigational therapies. In fact, the FDA suspects big pharma could be a culprit in entangled bureaucracy; the regulator has often pleaded to industry, investing in efficiencies to drive down drug development costs. Finally, a record number of emerging biotech are commercializing drugs because of the factors and forces mentioned above.  Over a decade ago, we would see few small biotech making it to the new drug application (NDA) mileston—today, we see many more.

We agree with Westerman that we should be pragmatic and flexible when it comes to life saving drugs—that some form of conditional approval could make sense. But that won’t necessarily drive down drug prices.

Why are Drug Prices so High then?

Because biopharmaceutical companies (big pharma) are doing what they are supposed to be doing—seeking to maximize their profits for shareholder value. It is no secret that, over the past decade, we have moved from the age of the blockbuster to the age of value, or as we at TrialSite News call, from “volume to value.” Over a decade ago, big pharma started to see the imminent patent cliffs—where monopolies for older medicines expired due to the availability of more economical generics; and the blockbuster drugs for treatments such as diabetes, depression and cholesterol not to mention blood pressure became subject to replacement with generic competition. Yet what Americans spent overall on drugs, continued to rise.

Transition from Volume to Value Painful

So as big pharma companies moved from volume (e.g. blockbusters that slipped away to generic competition) to value (new advanced therapies focusing more on precision cancer, specialty and orphan indications) where far few patients consume the treatment, the industry operated in a new and uncertain landscape. And there was a problem with the math: even though the value-driven new drugs were far more expensive than the blockbuster drugs of the past, there was still a major deficit—they failed to generate sufficient revenues to make up for the lost blockbuster monopoly revenues.

The Answer: Make up for the Difference

Biopharma was under tremendous shareholder pressure to do something. After all, if their share price tanks, then all hell breaks loose—managers and scientists lose their jobs; sizeable layoffs; a cataclysmic decline ensues in such dire events—or at least growing perception that this will occur. The answer was to inflate the pricing of all drugs still protected by monopolies—often at double digit rates per annum. Over a 3-, 4- and 5-year period, the net result is an exponential increase in branded drugs pricing, leading to the U.S. market being by far the most expensive drug market in the world. This is all despite the fact that a massive shift occurred during the same time where many of the name-brand drugs went off patent, and generic drugs became the common replacement.

Had it not been for these pricing schemes over the past several years, big pharma as an industry would have experienced flatter revenue growth for the decade. Big pharma share prices would have more than likely tanked. Moreover, flat revenue scenario branded drug prices would decline given the ubiquitous generic competition for key drug classes. Drug prices would have been lower. 

Higher Prices Led to More Profits but Not Greater R&D

One report from the GAO reveals drug company profit margins grew north of 20% (double the average profit margin for big 500 industrials); according to one report, R&D spend from 2008 to 2014 increased only $8 billion, and PhRMA companies report $18 billion total in R&D increase from 2015 to 2017. In fact, tons of R&D spend was actually redirected toward acquisitions of third party biotech where big pharma spent an inordinate amount of money to possess new intellectual property. Additionally, drug pipelines, whether part of biotech or academic research centers, have been subsidized by publicly-funded research often via the federal government.

Government Lobbying: Do Monopolies equal R&D and Innovation?

Probably not. Drug companies spent tremendous amounts of time, money and energy on government lobbying to secure more monopolistic features in the system. From patent term extensions to market exclusivity benefits, the average monopoly period has extended from under 8 years to over 14 years for high profile drugs. There are creative ways to continue to delay and persist these monopolies from “pay-for-delay patent settlements” to “patent evergreening” (think the AbbVie Humira patent thicket). In this way, drug producers utilize lengthier monopolies as a substitute rather than an incentive for innovation as they can produce higher profits with less overall costs. The creativity and ingenuity went less in many respects to R&D but more into legal, financial and business engineering—this mode of operation becomes a habit, a way of life—for perceived survival.

The Net

Ultimately, despite high drug prices and robust share value, biopharma companies have operated in survival mode. The move from volume to value put them into a sort of permanent crisis mode. There is little security in a biopharma company today. Although they still keep a sizeable middle management and waste lots of money on legacy bureaucracy—including lots of global travel, all expense meetings in exotic locations, etc., they are just buying for time. The surplus profits they were able to accumulate help pay to keep the labor force engaged but there is a continuous and constant underlying anxiety. Despite high-priced precision drugs, many don’t feel that the go-go good times of yesteryear, for example, will ever come back.

Aside from the rogue bad apples that cause the trouble, the big pharma companies hire a lot of great, smart and well-intentioned people, who have had to work tirelessly and furiously over the last decade to save their companies from what at least was a perceived abyss—that move from volume to value. And these companies pay well, and contribute to local, regional and national—not to mention global—economies. When PhRMA touts that a healthy, high-value drug industry in a community is a good thing, they are correct—the industry brings enormous economic sustenance to communities, especially when counting not only the primary but secondary and tertiary job creation.

Moreover, they (big pharma) have made incredible breakthroughs in various disciplines, from radiopharmaceuticals to gene therapy to cell therapy. TrialSite News on a monthly basis covers scenarios where a new advanced experimental cancer therapy saves a life during a clinical trial.  The breakthroughs are real—whether drug makers develop in house or acquire from third parties, the value of many of these drugs is undeniable.

Any Answer Creates more Conflict, Contradiction & Creative Accumulation

The future is not certain. The only true way to curtail big pharma exorbitant pricing activity includes 1) at least for public payers, new rules around serious price negotiation and price increases (e.g. eliminate Part D, etc.), and 2) a transition to true value-based pricing. New rules around negotiation and caps on price increases (imposed for Medicare and Medicaid as a start) would cause quite a serious tiff that we won’t delve into anymore for now.

Value-based pricing—pricing a drug based on its true clinical value—which is being embraced by other developed countries during drug negotiations with public buyers of drugs, will go a long way to bringing more rational pricing. But each and any of the answers above, in the American system, would set off a chain of other contradictory forces and crises. And even if the American public revolted and forced new negotiation and pricing rules, big pharma—with the better science, more flexible systems, and adept culture and superior talent—would figure out a way to keep building value.

Source: The Hill


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