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.