The pharma and biotech industries continue to face the perception of unfair drug pricing. If left unchecked the result will be an irreversible vilification of pharma as a whole. What can we do to mitigate these perceptions, and convey actual benefits?

The pharma and biotech industries continue to face a barrage of negative press and political attention based on what is perceived as unfair drug pricing. The negative sentiment has been prevalent throughout the 2016 presidential election with politicians taking aim at specific players in the pharma space who have built business models based on purchasing companies (or individual molecules) with the intent of dramatically raising prices. These practices have, in part, allowed some pharma companies to significantly outperform the S&P 500 over the past 5 years and further fueled the public perception that pharma as a whole is gouging US consumers to maximize profits. However, many companies operating in good faith are subject to arguments against current drug pricing which are fallacious.

If left unchecked with industry self-regulation of bad actors and a conscious effort to change the public discourse, the result will be an irreversible vilification of pharma as a whole. The outcome will be stronger government regulations on pricing, shorter patent cycles, and ultimately a disincentive to commercialize new medicines. We would no doubt see reduced investment into new product development, less innovation, and ultimately an impact on public health.

 

THE CAUSES SURROUNDING NEGATIVE SENTIMENT

The pharma industry is at a time when pricing has hit mainstream news and politics for all of the wrong reasons. It’s no surprise that recent news coverage has been dominated by ex-Turing CEO Martin Shkreli’s move to increase prices on a life saving drug, predominantly used by AIDs and cancer patients, by over 5000%. At 32 years old, Shkreli has masterminded a PR nightmare for the industry by following up the extreme price hikes with lavish personal purchases and flaunting his apparent wealth- including the purchase of a one-off Wu-Tang Clan album for $2 million followed by a public video feud with the artists of that album. When called to answer for the price hikes he evoked his Fifth Amendment rights at a congressional hearing, but not without smirking and coming to near laughter at the suggestion that many people will no longer be able to afford the life-saving treatment Turing had purchased. There have been antagonistic tweets and more horrible sound bites than anyone cares to count with events culminating in unrelated federal indictments on a number of fraud and conspiracy charges linked back to Shkreli’s hedge fund days.

No one can argue that these events lived in a vacuum and I acknowledge that Valeant is also front of mind and was present in the same congressional hearing. That said, even before anyone had heard of the childish Shkreli, pharma pricing was a loaded conversation in both Media and Politics. Hopefully Shkreli’s whirlwind will pass and responsibly-run pharmaceutical companies can re-enter the public discourse on pricing without his baggage attached to the conversations. When they do however, they will remain at a severe disadvantage with circular, pre-canned and often-illogical arguments being echoed by Media and Politicians.

Truth be told, pharma pricing has always had Public opinion constantly pushed to visceral reactions to current pricing. Ideologically, I truly believe that the American public believes that all companies have the right to make reasonable returns and that profits (to an extent), and fuel innovation by deploying more capital at finding solutions to some of our largest health issues. We are no doubt better as a society with more treatment options available and new drugs constantly being developed. If we as a population didn’t put value on these treatments, few people would be upset over pricing, which may limit access. The problem is that rehashed talking points try to sway opinions and remove us from the realities of pricing by creating slanted arguments solely created to play on emotions and cast pharma in the role of the villain. These arguments are circular- and opposing arguments are often made by the same people at different times- but the result is a lose-lose situation for pharma companies. Let’s look at the most frequently used arguments and the inherent emotions they elicit.

 

ARGUMENT 1: R&D SPEND VS. REVENUE

The first argument is one that seems to dominate the dialogue and normally appears in an a statement that sounds similar to this:

“R&D costs are only ‘x’ and they’ve already made that back with sales last year of ‘y’”

The reported/alleged cost of developing a drug and bringing it through the approval process varies tremendously be source. Some of these sources take into account only the cost of development while others include the resource-intensive clinical trials, regulatory filings, investments into drugs that failed, and reasonable expected returns on the committed capital throughout the process. It should be clear that the latter is the most accurate way to value a drug, leaving the cost somewhere near $2.6 Billion USD with another $300+ Million USDs for post-approval costs required, leaving the total burden at near $3 Billion USD for an approved US drug

That said, we’ve seen pared down (and older) estimates that show numbers as low as $100-500MM USD- though these sources clearly omit some very real costs along the way. We’ve also seen estimates like the one in Forbeswhich estimate the total cost to be $4-11 Billion USD.  The sub-dialogue on this actual cost often turns into a debate that comes off as a pharmaceutical defense against an unspoken accusation of price gouging.

Bernie Sanders in his campaign for the Democratic Nomination for President has the following on his website:

Companies routinely distort the true cost of drug research and development to justify skyrocketing prescription drug prices. Under the Sanders plan, drug makers would be required to report certain price information to the federal government and the public on their products, including the total expenditures on research and development and clinical trials, as well as the portion of their drug development expenses offset by tax credits or paid for by federal grants.

Regardless of the true cost to bring a drug to market, the R&D costs alone have little place in the dialogue. Cost-plus pricing is something that many governments have asked pharma companies to move away from (health systems after all should try to optimize spending to achieve the best patient outcomes not to ensure that pharma costs are recovered), and even if they should be the basis for the pricing model, the R&D costs alone are only part of the true costs of selling a product. True, COGS are relatively small compared to other industries for simple molecules (less so for complex biologics), but SG&A costs are substantial, generally ranging from 30-60% of top line revenue. The R&D costs alone are only a piece of the puzzle and, are too often compared to top line product revenue in a way we wouldn’t think of doing in other industries.

A great example of this comes from an article published by Donald Light and Rebecca Warburton entitled “The Costly Myths about Pharmaceutical R&D” which claims the real R&D costs (or D anyway as they’ve excluded the research costs, costs of capital and any drug approval/post-approval costs) are in fact only $43 Million USD net of tax incentives. The article concludes:

Between 1995 and 2010 (the era of the so-called “innovation crisis”), they [pharmaceutical companies] reported spending $34.3 billion more in R&D and generating $200.4 billion more revenues – not a bad return. Pharmaceutical companies average several times more profit than the Fortune 500.

The error is comparing R&D costs (or Development costs alone in this case) with top line revenue and aligning these metrics with profit. We simply know this is not how profit calculations are made. Return cannot be calculated without all of the costs associated with not just successful R&D spend but also COGS, SG&A and all of the unsuccessful R&D spend.

It’s clear that the Health Care Index has outperformed the S&P Index overall if we take a 5 year timeframe, however it has not been the case in the past 1 year or 6 months (at the time of writing) and we seem not to have the same dialogue around price justification in financial services which has performed similarly over the previous 5 years.

The other uncomfortable truth is that R&D spending is getting less efficient—so if the basis for our willingness to pay is based on R&D costs should we expect to spend more on drugs? Eroom’s law (Moore’s law in reverse) outlined in a Nature Review’s Drug Discovery article states that Pharma R&D becomes half as efficient every 9 years (inflation adjusted). If this is the case, and a good argument is made to believe it is true, and we expect a cost-plus model based on R&D efficiency alone- we should expect to see drug prices double every 9 years. This is a commentary that has not baked into the political and media rhetoric or drug price reduction plans.

Additionally we’re left with the uncomfortable decoupling of generalities from specific cases. For instance, if one company is particularly poor at investing in R&D, are we prepared to pay more for their drugs than a competitor who is more efficient with R&D spend? Clearly the answer is no, and this hints very strongly at the missing point of cost-plus pricing which is the value behind the drugs produced.

If this commentary persists and parties allow the discussion to be solely based on R&D spend, the industry has done itself a disservice by fueling a false narrative. That false narrative will no doubt lead to government regulation that drastically, and arbitrarily, reduce top line revenue in an effort to marry R&D costs with an unrelated top line revenue number.

 

ARGUMENT 2: GEOGRAPHICAL OPPORTUNISM

The second argument evokes geographical pricing differences and normally sounds something similar to:

“It’s cheaper over there, so we must be getting gouged in the US”

This argument is somewhat similar to the first in that it is often an attempt to imply pharmaceutical price gouging via a gross margin argument (vs. an R&D spend argument as in the first case). The OUS pricing arguments generally strike a chord with US patients and politicians as it fundamentally plays on the human emotion of “fairness”. “It’s simply not fair that a drug is cheaper elsewhere” and on the surface it seems like a one-to-one comparison- the drug is often exactly the same after all. There are of course significantly different costs of attaining approval and post approval burdens in other markets that do drive down the OUS cost structures- but to be fair, these differences don’t explain the delta in geographic prices. Now if we were to take the illusion of “unfair” pricing to heart, we wouldn’t actually be comparing prices but, likely push into the realm of affordability or, of course, value-based pricing. These would clearly change dramatically by market, where GDP per capital and disposable incomes vary widely by geography. In fact, we know that it wouldn’t be fair to have pricing parity across geographies with differing incomes… but I’ll leave that to our next argument.

Fundamentally, pushback on variable Geographic pricing is based again on an assumption of cost-plus pricing (COGS-plus actually), without the recognition that some markets are serviced for a public good rather than as significant profit centers. The large upfront R&D spend and the promotional spends in high income countries should be paid for by the countries that can bear the burden (in fact even if we said it should be split equally, it would only result in few people being able to afford these medications in the geographies in question, further raising the prices in the US). More importantly, as in the first argument, completely removing substantial costs such as R&D and SG&A costs from the dialogue is disingenuous on an argument making a claim for a cost-plus pricing model.

The truth is that geographic pricing differences aren’t just driven by higher SG&A costs in the US, higher US approval/post-approval costs, or even higher quality standards (Rambaxy’s past issues come to mind). Price differences are driven by power differences between drug purchasers in the US system vs. centralized government-controlled purchasing environments. Drug purchasing is decentralized in the US with no national (or regional) purchasing monopoly. Oddly Medicaid isn’t even allowed negotiate its own prices. Similarly, doctors and hospitals cost more in the US than in other geographies, as they operate independently (and with an American entrepreneurial spirit!) vs. having government-mandated billing rates and caps. That said, without something that sounds like ‘socialized medicine’ in the dialogue, this will always be the case and, substantial geographic price differences will continue to persist. Best said in a 2015 Forbes article by Ben Hirschler:

Researchers from Britain’s University of Liverpool also found U.S. prices were consistently higher than in other European markets. Elsewhere, U.S. prices were six times higher than in Brazil and 16 times higher than the average in the lowest-price country, which was usually India.

The United States, which leaves pricing to market competition, has higher drug pricesthan other countries where governments directly or indirectly control medicine costs.

Even without mentioning the benefits of purchasing power in a socialized medicine environment (which is almost never discussed directly in mainstream US politics or media), the geographic disparity argument still follows that same faulty logic as the R&D cost discussion, and will likely have the same result.

 

ARGUMENT 3: MIDDLE AND LOW-INCOME PATIENT INSENSITIVITY

The third argument is one I’ve been hearing more and more recently and often is the justification of some countries breaking patents and not recognizing IP. It normally sounds something like this:

“It’s not being made available to some of the most vulnerable groups who need it the most in Country X”

This argument is fundamentally the opposite of the second argument and points out the need for geographic pricing based on the differences in ability to pay. The public is meant to see the inability to offer widely different pricing in each market as insensitivity or a lack of caring on the part of Pharma.

In fact, President Bill Clinton, who while in office fought to maintain IP in lower and middle income countries has changed gears, and is now actively promoting the need for cheaper medication in developing countries. The New York Times walks through some of the Clinton Initiative’s support in breaking patents for much-needed AIDS drugs to cut costs by importing Indian manufactured generics.

Standing next to Thailand’s health minister, Mr. Clinton also forcefully endorsed recent decisions by Thailand and Brazil to break patents held by American pharmaceutical companies that are charging prices Mr. Clinton described as exorbitant, but that drug company officials said were reasonable.
“No company will live or die because of high price premiums for AIDS drugs in middle-income countries, but patients may,” he said.

The New York Times article walks through how US manufacturers have actively lowered (often halving) the costs of drugs in middle and lower income countries, but are still having generic companies come in at even lower prices. It’s clear that generics with virtually no R&D costs, approval costs, post-approval monitoring costs, offshored production and far lower quality control (again, Ranbaxy and Dr. Reddy’s huge recalls come to mind but an article by Roger Bate et al. in 2014 showed that nearly 11% of a sampling of Indian made drugs sold into middle income countries fail a basic assessment of Active Pharmaceutical Ingredients) will always be able to undercut prices. This however doesn’t make larger pharma or biotech insensitive, it only means that there are larger costs associated with innovation, approval and quality, a small part of which is being passed on to middle and lower income countries. The argument here essentially insists that in some countries, pharma should be pricing solely as cost plus based on offshore and sometimes substandard manufacturing costs… not an argument I think anyone wants to reasonably defend.

Overall, if companies don’t offer enormous discounts in low and middle-income countries, innovative pharma companies are publicly shamed (even if part of the additional costs are associated with ensuring people actually receive the right dosing of active ingredient in their products). However, if they do offer these discounts, they can be attacked as unfairly pricing in the US. The end result of allowing this narrative to play out is the vilification of the industry and public sentiment in favor of increased government regulation based on emotionally charged but illogical arguments.

 

ARGUMENT 4: VALUE CREATES NEED

The fourth and final argument I’ll consider here is one that pushes back on value-based pricing and generally sounds something like this:

“It’s a lifesaving product and they know it, which is why they think they charge so much”

In truth I once thought value-based pricing was the way the world was moving. It seems objective and by definition, inherently worth paying for. We should pay for results, not COGS, SG&A or even R&D. DALYs averted (Disability Adjusted Life Years averted) or QALYs (Quality Adjusted Life Years) can be roughly determined and costs can be associated with the value of a DALY averted or QALY. The WHO (World Health Organization) suggests the hurdle rate for a “cost effective intervention” as less than 3x GDP per capita. A “highly cost effective intervention” is one that provides a DALY averted at 1x GDP per capita or less. This assumes the cost of human life varies by country- an uncomfortable thought, but maybe a way of helping to ensure consistency across countries in affordability. (Affordability is obviously distinct from GDP per capita and without taking into account current therapy costs the suggestion, isn’t perfect but for this argument it is the thought of value-based pricing that is important.)

Value-based pricing is rarely taken up by the media or discussed (especially outside of oncology where QALYs are common in the dialogue). In fact, value-based pricing seems to inevitably push the dialogue back to one of two places:

  1. The lack of cost parity by geography raising the second argument we discussed or,
  2. Exceptionally well-performing drugs become unaffordable by the system or by individuals – pushing the conversation into an overall budget argument.

To dive deeper into how these dialogues normally happen, we have to look no further then the much vilified pricing of HCV (Hepatitis C) drugs. Two of which, Sovaldi and combo-therapy Harvoni from Gilead, were of the first to revolutionize the “treatment” of HCV offering what is tantamount to a reliable cure for the disease. Worded far better than I could in a 2015 Forbes article guest written by Jack Scannell (remember Eroom’s Law- that’s him),

Five years ago, drugs priced at $50,000 in the US cured just over 1 out of 3 patients with a hepatitis C infection, at a “cost per cure” near $140,000. Two years ago, a new drug, Sovaldi, was launched at a price around $85,000. It cured 95% of patients, at a cost per cure near $90,000. The price of Sovaldi has caused intercontinental apoplexy, but the cost per cure has fallen, and Sovaldi is cheaper than many drugs that never cure anyone.

Harvoni has even better clinical outcomes than Sovaldi (at a slightly higher cost) and the drugs have been widely adopted in the US marketplace. The reference pricing to older HCV drugs is clear and the value-based argument is sound. (Most of the calculations don’t even take into account the costs of liver transplants and a lifetime of anti-rejection medication that followed old therapies that didn’t offer a cure.) That said, value-based pricing simply doesn’t seem to justify prices in the marketplace or public discourse.

In the US, it is alleged that insurance companies have disproportionately looked for ways to “legitimately” deny coverage and patient groups, resulting in at least one lawsuit. Another lawsuit was targeted at the FDA in an attempt to get the information as to why pricing is so high. All this because there are drugs that work phenomenally well (and with far fewer side effects), and are presumably priced either in reference to inferior drugs on the market or are priced based on the value they provide. It’s clear that value-based pricing turns heads in the US when drugs actually deliver immense value.

The same is true in Japan, however with a centralized Social Insurance Medical Council, the results are much different. Japan announced that certain drugs (including Sovaldi and Harvoni) with “huge sales” that exceed their sales projections by at least 50% will face price cuts of up to 50%. Clearly, the power lies with single-sourced national purchasers rather than the disparate US system that leaves pricing to individual payers to negotiate. But either way, it’s clear that payers don’t respect value-based pricing in either system.

Being sensitive to the idea that many payers have finite budgets, true value-based pricing suggests that if a new great drug is approved, payers should optimize toward overall value and delist/unfund other (often unrelated) drugs. Something that is difficult to do with patients currently on therapies that may be unfunded (optically, this looks like a step backwards in funding rather than a step forward).

Reducing or eliminating funding of other drugs is not the only reason that value-based pricing does not work. Patient advocacy groups push to extend labels and add indications regularly (even where data suggests the drug doesn’t meet the bar for value-based pricing approval), and new indications get approved without mandatory reviews on pricing. All this to say that pharma companies cannot hope to use value-based pricing to overcome the negative rhetoric and media surrounding drug prices.

To be clear, there are reasons US citizens pay more for pharmaceuticals. With an open market in healthcare, no centralized national purchasing power (which often comes with nationalized healthcare), the ability to increase prices once a drug is listed (which is not the case in other countries), and a high ability to pay, the US is an environment where drugs will continue to cost more. That said, the issue that persists is that there seems to be no fair way to have an open and honest dialogue about pharma pricing without a knee jerk reaction from the media and politicians. Drug companies will continue to play defense in the media and everyone will continue to push the dialogue into emotionally charged but often poorly thought out, unjustified, and circular arguments that presuppose there is a better / more palatable way to price medications. It’s a tough pill to swallow on the pharma side, but if allowed, will remain a first-line therapy to politicians looking for votes and media looking for an engaging story.

So given that public discourse is dominated by the actions of a few players acting in bad faith, arguments that draw the conversation back to non-sensible cost-plus discussions and that value-based pricing rarely if ever enters mainstream discussions- what can we do to help change the future dialogue? How can we stop the harm caused by fallacious arguments and devote our time to honest, well-intentioned discussions? Here are a few initial thoughts.

 

WHAT THE INDUSTRY SHOULD DO

There is no single silver bullet that will instantly change the public discourse on pharma and biotech pricing. What is clear is that there are things the industry should be doing to ensure that the current negative sentiment doesn’t persist and ultimately result in a US regulatory environment that will negatively impact public health.

  1. Everyone involved in the conversation has to be vigilant in pointing out flaws in public discourse rather than responding to them in kind. Continuing to allow public opinion to be swayed by a few bad actors on the pharma side and some emotionally loaded arguments in the media will not end in better public health or patient outcomes.
  2. The Pharma Industry needs to self-regulate price increases of in-market drugs to ensure that they roughly track inflationary indices. This doesn’t mean that if new data emerge or new indications are added to a label, there isn’t an opportunity to increase prices based on new value-based metrics. However, purposefully increasing prices (even by a very few players) solely to maximize profits on in-market drugs will ultimately lead to a public opinion that pharma is unable to self-govern and will not prioritize health outcomes and the public good.
  3. The Pharma Industry and their Marketing and PR Agency Partners also need to prioritize communicating the value of their products through making third-party audited pharmacoeconomic analyses widely available to the media and public – and even these analyses alone will not be enough. The industry must develop innovative, consumable and transparent ways of communicating value to the general public, rather than economic calculations of QALYs or DALYs averted. Demonstrating the value of these drugs in real world (or abstracted) patient journeys may be the most impactful method of visually showing patient value (or HCP value) in a broadly consumable way. Regardless of if it is via a patient journey or not, we need to push ourselves, and the industry, to find new ways to communicate value externally in a manner digestible to the general public.
  4. Insurers need to embrace value-based pricing, prioritizing public health over public perception. Short-term budgetary impacts need to be overridden in favor of long-term healthcare savings. Denying patients drug coverage must be done in good faith and with the intent of optimizing patient outcomes rather than quarterly profits reported to investors. Drugs that drive value to public health should be reimbursed accordingly and those that don’t should not be covered or subject to high deductibles.

The public discourse around pharma pricing is a difficult one for any one stakeholder to manage. Dialogue is distorted and swayed by emotionally charged arguments and many of those arguments are not based in logic. These arguments are amplified by bad actors in pharma that play into the negative public narrative. However, the industry as a whole can take steps to better guide the conversation and convey value to the public. It’s my opinion that we must transform the current dialogue by providing easily digestible assets that speak to this value and leverage them heavily, as a group to change public perception.

Originally published on the Klick Blog- Check it out here:

THE PUBLIC DISCOURSE AROUND PHARMA AND BIOTECH PRICING AND WHAT THE INDUSTRY CAN DO