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Forget about greed, President Trump: the villain responsible for high drug prices is inefficiency

“I have directed my administration to make fixing the injustice of high drug prices one of my top priorities.” – President Donald Trump
2018 State of the Union address

→ Written by David Grainger, Co-Founder & Chairman of RxCelerate. Want to learn more about RxCelerate’s drug development platform? Read John Carroll’s article about our recent expansion here. You can also contact Laura Hamilton at laura@rxcelerate.com.

David Grainger

Directing people to fix problems is one thing, but actually fixing them is quite another. And while President Trump may see high drug prices as an “injustice”, the evidence that corporate greed is to blame is patchy at best. The truth is, there’s a complex set of factors at work behind high drug prices. And taking the time to understand it has to be the essential first step towards identifying the true villain and then “fixing” the problem.

First, while US healthcare costs are already a global outlier at around $10,000/person annually, and still rapidly growing, drugs of all kinds including OTCs represent approximately 14% of the total bill.  By far the largest contributor to costs are hospital and physician fees.  As a result, even halving drug costs (which is as impossible as it is undesirable) would fail to lower US healthcare spending to level of the next most profligate country — tiny Luxemburg.  If the President wants to address healthcare spending, he needs to take on physicians, not pharma companies, when he returns to the subject in his forthcoming speech.

If we narrow the focus just to the cost of drugs, we still do not see egregious inflation.  Annual growth in drug costs has been below 5% a year for the last decade, such that the proportion of healthcare spending on drugs is actually falling. That’s because hospital and physician costs grow faster.

If those are the figures, why then is there a perception of over-priced drugs? Let’s explore the reasons:

Bad actors are cheating the system by offering old, cheap drugs at exorbitant prices

The tale of Martin Shkreli’s ill-fated price hike for daraprim, an aging AIDS and cancer med sold by Turing Pharmaceuticals, made headline news but these brazen attempts to exploit the barriers created by the regulatory framework around prescription medicines have no meaningful impact on the overall drugs bill.  Of course we should take action to prevent consumers and taxpayers being exploited in this way, but we should not generalize the problem.

New drugs are launched with massive and unjustifiable price tags

Neither, too, do the introduction of new medicines, often with eye-watering price tags, contribute to runaway healthcare costs.  Indeed, the focus on the prices of these successful innovations is the most frustrating aspect of the debate.  Most egregious was the ire directed at Gilead following the launch of Sovaldi with a headline price of $84,000 for a course of pills that, in almost every patient, could cure HCV.  Sovaldi was cheaper than the older interferon-containing regimens, yet worked far better.  And cures save money in the long run, avoiding chronic costs of hospitalisation and ultimately transplantation.  How is that a problem? It should instead have been a cause for public celebration.

Similarly, highly effective treatment for so-called “rare” diseases, where prices can reach a million dollar per patient per year only seem expensive to the layman.  These high prices support the innovation needed to cure the previously uncurable, to extend lives and to improve lives.  There has been a burst of these medicines, such as Soliris, a high-priced antibody against C5a used to treat the rare but debilitating disease PNH — with more to come as gene therapies reach the market in increasing numbers—- born out of the triumph of the human genome project around the turn of the millennium. But even accounting for their introduction the overall drugs bill has barely budged.

Modern biological drugs are way more expensive than conventional chemical agents

Another “suspect” in the crosshairs of the “greedy pharma” lobbyists has been the increasing use of biologic drugs, such as the world’s biggest selling drug in history: Abbvie’s Humira.  The complex rules surrounding the manufacture of these protein drugs makes it very difficult to copy them even when patent protection expires, and this high hurdle for so-called “biosimilars” (the biologic equivalent to generic small molecule drugs) allows these drugs to keep earning a big premium for far longer than “conventional” drugs.  The same applies to vaccines, which for common diseases can be blockbusters every bit as valuable as treatments, although high-priced vaccines inexplicable seem to escape the same spotlight as high-priced biological drugs.  It is therefore appropriate that regulators are taking steps to simplify competition in the biologics space, but any suggestion that the shift to more complex therapeutic modalities, from monoclonal antibodies to gene therapies and most recently cell therapies, is somehow breaking the system are manifestly over-stated.

Every year, companies jack up the price of popular drugs by way more than the rate of inflation

Even the inflation-busting price rises seen for many “popular” drugs are more a sign of a system working well than a manifestation of greed.  Patent protection rightly creates a monopoly that allows the “winners” to sell their drugs at a substantial premium for a strictly limited period.  But contrary to popular assumption, even for these winners, it is rarely a license to name your price.  Almost always, the competition is hot on your heels (or should that be “hot on your heals”?), with other approaches that deliver similarly effective treatment.  While patents may prevent anyone making and selling exactly the same drug, the competition from other independently-developed products (whether a similar mechanism of action or not) limits the price premium the market will endure.  On the rare occasions someone opens a sufficient lead over the chasing pack, they need to extract maximum benefit to make up for the very many times they will lose the race.

Justifiable or not, all of these factors do nevertheless increase the drugs bill.  So why does the headline figure suggest a much more modest overall increase than might otherwise be expected?

Because there is a counter-balancing trend lowering prices: the patent cliff — which anti-pharma lobbyists conveniently ignore.

As older drugs come off patent, they mostly become susceptible to competition from cheap copies, which rapidly lower the price to close to the cost of making the pills.  Essentially all the innovative, expensive drugs of a decade ago, such as atorvastatin (originally only available as branded Lipitor), clopidogrel (initially branded as Plavix) and valsartan (Diovan), as well as many others, are now available in generic form for a few cents a tablet.  This inexorable shift to cheap generics creates a massive counter-balancing down-draught – and unless pharma companies can produce something new and even better, they will see their revenues decline rapidly.

In short, the common “suspects” in the drug-price game of whodunit are mostly accused of a fictional crime.  The whole notion of too-high drug prices is, in the words of the President himself, fake news.

Despite that, the punches swung by the misguided lobbyists are not hitting thin air.  Public sentiment, whether righteous or whipped up by fake news, is a powerful force.  And price reductions will come.

Listening to pharma companies, one might think the biggest losers will not be the pharma companies or their shareholders (although they will undoubtedly suffer to some degree) but patients.  Pricing pressure, they claim, will hit investment in innovation at least as much as it hits profits.  The dynamics of public capital markets will ensure companies maintain short-term profits, even at the expense of long-term innovation, stability and growth.

OK, so everything in the garden is rosy when it comes to pricing?  Perhaps we need a few tweaks to the regulatory framework to stop the next Shkreli jacking up the price of cheap, old drugs and to speed up market access for biosmilars, but that is mostly in hand already.  We can just sit back and do nothing for fear that cutting prices will stifle innovation?

Absolutely not.

There really are villains in this story — and they are costing YOU billions. It’s just we haven’t met them yet.  Let me introduce you to three of the biggest:

1. The unearned premium

Defined by DrugBaron as a price-differential between two drugs that cannot be justified by the difference in efficacy or safety between them.  The most obvious and straightforward examples are continued prescription of branded drugs when a generic has been introduced.  Since the composition of the tablet is identical, there can never be a justification for using a higher price branded product.  Yet it happens surprisingly commonly.

Slightly more insidiously, when one member of a drug class goes generic but others are only available as branded products, the price differential can be massive – yet the difference between the two insignificant.  The clearest example is the continued use of Crestor™ rosuvastatin, which clocked up sales in excess of $6billion per annum, even when generic atorvastatin was available at close to a tenth of the price.  It could be argued that, in some settings, Crestor™ is superior – indeed the AHA guidelines do indeed make that case – but the difference, if it is real at all given that there is no direct comparative data (a problem we will look at next), is insignificant and could certainly never justify such a massive price differential.

Hardest of all, patients often demand high-priced drugs that offer only marginally superior effects.  Nowhere is this more obvious than in cancer care, where there are drugs that can offer patients at most a month or two of extra life compared to cheap, generic alternatives yet cost hundreds of thousands of dollars per patient.  It is not for me to decide the value of those extra days, but it is illogical to call for reduced healthcare spending but at the same time demand treatments that offer such poor value for money.

2. Lack of head-to-head comparator data.

The problem of the “unearned premium” is not restricted to obviously comparable proprietary and generic agents.  Even between two proprietary treatments with very different mechanisms, significant pricing anomalies can persist – principally because of the paucity of direct head-to-head comparisons of different treatment pathways.  This lack of data suits the companies, who make profits from undeserved premiums, so there is little wonder they avoid collecting expensive head-to-head comparisons that may undermine their even more expensive marketing campaigns, particularly since such studies are not mandated by regulators.

But without that data big pricing inefficiencies will persist, costing us all billions of dollars.  Someone, then, needs to pay to collect that data – and whether that is insurance companies, the government or the companies (under compulsion from the regulatory authorities) it matters little.

3. Inefficiency in the innovation engine.

However, perhaps the biggest ghost in the machine is growing inefficiency of the innovation engine – pharmaceutical R&D – to the point it is today wasting money on a biblical scale.  There is debate about the precise numbers, but the trend is unambiguous: each new approved drug is costing ten times as much to develop as it was at the turn of the millennium – perhaps as much as $5billion each.

Most of that cost is accounted for by the failures – drugs progressed to expensive late-stage clinical trials that fail, wasting all the development dollars spent to get to that point.  As few as one in three pivotal trials of genuinely innovative medicines succeed.  The causes of this high failure rate are manifold, and have been discussed extensively elsewhere (here, here and here for example).

But the fundamental problem is the lack of incentive to fix these issues.

And that comes down to drug pricing.

Current prices allow, and perhaps even incentivize, large pharma companies to be profligate in their spending.  We have shown that rigorous focus on capital efficiency and the use of out-sourced drug development platforms such as RxCelerate, that it is possible to dramatically cut the costs of discovery and early development but the “gold rush” economics of the blockbuster model releases that pressure on firms to be capital efficient.  If it costs more to develop, we will just pay more for the final product.

Irrespective of whether the drugs bill, or healthcare costs as a whole, are going up or down, these pricing inefficiencies are costing billions.  Fixing these problems would lead to a declining drugs bill which would at least help keep a lid on spiralling healthcare costs as a whole.  And the common solution to all these problems is to drive down prices, thereby forcing the actors in the game to find efficiencies.

Drug price lobbyists may, therefore, be tilting at the wrong fences — there is no “injustice” of high drug prices.  For the most part there is no corporate greed either, but rather an indolent, inefficient machine that has grown rather fat and lazy on a diet of generous prices with little or no scrutiny of value for money.

When President Trump returns to the subject, as soon as today, he needs to fix his language but hold his focus — pricing pressure will save billions and make us all richer.  And over the longer term, it will not harm innovation but instead make our innovation engine purr with greater efficiency.  There is plenty of fat to squeeze out of this system before the pace of innovation is slowed.


Images: AP Photo/Pablo Martinez Monsivais

Want to learn more about RxCelerate’s drug development platform? Read John Carroll’s article about our expansion in the US here. You can also contact Laura Hamilton at laura@rxcelerate.com.