Drug pricing: caught between ethics and politics

April 2017 | EXPERT BRIEFING | SECTOR ANALYSIS

financierworldwide.com

Drug pricing has become a topic of much heated debate, both on the political stage and among drug companies, patients and payors. Many of us are either directly or indirectly (through friends and family) affected by what seem to be ever-rising drugs prices, insurance premiums or co-payments.

Society, in the form of public payors or sickness funds, finances a great part of the pharma industry’s activities, governed through the social contract. What does society expect in return for this investment? The development of innovative drugs that help improve symptoms, quality of life, or in the rare case, even provide a cure. But not only that, payors should – at least theoretically – be provided access to all approved drugs.

Yet, ever-increasing prices for drugs that sometimes offer only incremental benefits for patients’ life expectancy or quality put a strain on this contract between payors and the industry. Snowballing drug prices fuel an emotional debate, in which the lines between ethics and economics often blur, sometimes dividing society, illustrated by last year’s US presidential election campaign. The debate is often carried out on the social media battleground, where so-called ‘solutions’ to complex problems can be formulated in a few lines or less.

Why innovative drugs are expensive

Creating successful drugs is a risky and expensive business that requires appropriate incentives for the main actors. This core argument that the pharma industry employs to justify price increases is hard to refute. Cost estimates for developing a drug from initial research to market vary greatly from one to several billion dollars. There is consensus, however, that making drugs is extremely expensive, especially if you consider all of the failures (only one in 10 drugs makes it through all phases of clinical development). Truly innovative breakthrough drugs tend to be much more expensive than incrementally modified ‘me-toos’. If one takes into account both risk-adjusted costs and dramatic loss of sales after patent expiration typically after 10 years on the market (in some cases more than 90 percent of sales in year one), one can easily calculate that prices need to be high for manufacturers to create value in excess of their cost of capital.

In several cases, recent drug price increases have been derived from true innovations which could transform the field of medicine. This is especially true for cancer treatment, where both innovative therapies and drug prices have surged in recent years. Immunotherapies that teach the patient’s immune system to recognise and destroy tumours have revolutionised the treatment of late stage skin cancer and might do so for many other cancer types. Yet, those new therapies are often biological formats, such as monoclonal antibodies, which are more expensive in development and manufacturing than classical therapies.

Moreover, improved biomarker screening methods identify ever-smaller patient populations that might benefit from a certain drug, further segmenting the market. Those orphan drugs are usually more expensive than drugs for a broader population. Targeted drugs that address a specific patient phenotype are often more efficacious. However, because of prices that have steadily risen to $50,000 to $100,000 or more, relative cost-effectiveness is decreasing for cancer drugs overall, despite advances in patient selection.

Cancer drugs illustrate both benefits and issues around drug pricing

The unique features of cancer treatment allow several high-priced drugs to coexist for the same patient segment. Many types of cancer are, in a long-term view, incurable. Thus, few cancer drugs have a truly durable effect. While cancer drugs lead to initial betterment of the disease, the cancer will return eventually, and will require treatment with additional drugs. As a result rather than a ‘which drug to use’ decision, there is often a ‘which drug next’ decision for cancer treatment.

While reimbursement for cancer drugs represents only a small amount of total healthcare costs (typically only 10 percent), and even of the total cost of cancer care, the increase in cancer drug prices is starting to put a strain on healthcare systems. The key question is who will be willing, and able, to pay for the high cost of cancer care in the long run?

Approaches to reimbursement differ strongly between national health care systems worldwide. This difference is dictated by the percentage of public healthcare expenditure and the power credited to public healthcare instruments. While public funding makes up around 80 percent of the healthcare bill in Europe and Japan, it constitutes only around 50 percent in the US. The US healthcare system is based on the belief that medical care should be above the consideration of cost. The Medicare Prescription Drug, Improvement and Modernisation Act, forbids Medicare from directly negotiating with manufacturers. In contrast, many EU countries have implemented additional instruments that evaluate approved drugs for efficacy (Germany, for example) or cost-efficiency (UK). In 2015, prices for top-selling drugs were three times higher in the US than in the UK.

Public outcries over profiteering

Continual drug price increases worry politicians and the public; according to a Kaiser Health Tracking poll in 2015, 72 percent of American patients believed “drug costs to be unreasonable” and 74 percent thought that “pharma cares more about profits than people”. A number of recent price hike scandals did nothing to improve trust in the pharma industry. Martin Shrkeli, former chief executive of Turing, became the posterboy for greedy drug company executives after increasing the price for Turing’s toxoplasmosis drug Daraprim by 5000 percent. Representative Cummings, in a congressional hearing in February 2016, addressed Mr Shkreli in an emotionally-charged speech, appealing to his better nature. Mr Shkreli sat silent and smirking, and discharged his views on the members of Congress via Twitter after the hearing. The biotech firm Valent caused a similar outrage in patients and politicians, by in-buying existing drugs and then massively increasing prices.

Those (rare) examples of clear profiteering unfortunately solidify the image of a pharma industry that fills its pockets on overpriced drugs, sold to people suffering from incurable diseases. Patients will not be able to afford the life-saving drugs in the long run.

However, are all price increases unwarranted? The shaming-approach is effective, as seen by stock drops not only of Valent but the whole biotech sector, when the threat of government action started looming over the industry. Yet, this shaming-approach can hit off-target. Senator Sanders, aided by Representative Cummings, attacked US biotech Ariad for the allegedly greedy pricing strategy for its leukemia drug Iclusig. Yet, opposed to Valeant, which invested only 3 percent of its 2015 sales in R&D, Ariad spent one and a half times its 2015 sales in R&D. Ariad had dedicated itself to developing a drug that benefits only a small patient pool. Iclusig, which saw staggered price increases of a total 27 percent in 2016, might not bring in any earnings beyond covering development costs. While the emotional outcries that follow price increases for un-innovative drugs seem intuitive, they may be unfair in other areas.

What is a drug really worth?

Assessing the value a drug brings to patients and healthcare systems could help decision makers to negotiate pricing strategies that benefit patients and healthcare systems (and, in the long-term, the industry which depends on payors). However, how can one objectively define value in a setting, where the valuable good is health, which is a highly subjective quality, and tough to measure?

One approach taken by the UK’s NHS price-watchdog NICE is the QALY score that gives a measure of years with reasonable life quality a person might gain as a result of treatment. Generally, NICE is willing to pay £30,000 per QALY. For so-called ‘end of life treatment’, the value increases to £50,000 per QALY for drugs that prolong life expectancy for three or more months. Yet, patient organisations have harshly criticised NICE for turning down a number of oncology drugs that were not deemed cost effective.

Overall, it seems that globally a lot of innovation is necessary not only in developing drugs but also in assessing the value of those drugs to healthcare systems, as no universally adopted standards have been developed.

President Trump stepping In

Within the emotionally charged climate of the pricing debate, newly elected US president Trump, further shocked the pharma industry and its investors by demanding more price regulation. Yet, he made his announcement more digestible for the industry by announcing a number of cushioning proposals for US companies (such as corporate taxation reforms).

The president also demanded an end to “global freeloading”, by enforcing higher reimbursement especially within the EU, where prices are typically much lower than in the US. One could therefore argue that the US cross-subsidises low EU drug prices by keeping its prices high.

Outlook

Two things seem clear from the debate so far: patients need innovative drugs that provide meaningful benefits. If these drugs serve their purpose, they are typically the most cost-effective form of healthcare. Companies that are dedicated to developing innovative drugs in these areas take on a lot of risk (and capital) and require appropriate incentives (high prices) to start the journey that is modern drug R&D. On the other hand, unfortunately those companies that invest little to nothing in R&D and simply exploit inefficiencies in pricing dominate the public and political discussion and drag all the other companies that do meaningful work down with them. One consequence will hopefully be that the industry improves in explaining and measuring the value of real innovation of drugs to healthcare systems.

Louise von Stechow is an analyst and Markus Thunecke is a senior partner at Catenion. Ms von Stechow can be contacted on +49 16 3850 9164 or by email: louise.stechow@catenion.com. Mr Thunecke can be contacted on +49 163 850 9154 or by email: markus.thunecke@catenion.com.

Louise von Stechow and Markus Thunecke

Catenion