A quantum of incentive for a quantum of innovation

Although the heroic actions of the biopharmaceutical industry granted it a temporary reprieve from intense scrutiny on pricing, it is sure to return as influential leaders on both ends of the political spectrum in the US find it politically advantageous to capitalize on people’s general low regard for the industry.

We often hear the phrase “sky-rocketing drug prices” in the media and from policy makers, but the data shows this is not the case. In fact, work done by the Drug Channels Institute reveals net drug price increases have been on the decline and in single digits for the last six years. This includes innovative as well as generic drugs, despite the outliers we see from time to time.

Pharma is a popular target, because out-of-pocket costs to individuals are high relative to the rest of the world. US consumers spend roughly three times as much on drugs as their European counterparts, and 90% more as a share of income according to a report from University of Southern California. Calculations suggest that the US market accounts for 64 to 78 % of worldwide pharmaceutical profits. These profits drive the cycle of drug innovation that ultimately benefits patients around the globe.

This is frustrating to many, but the solution is not to lower US revenues. RA Capital’s Peter Kolchinsky has done work elucidating the fact that this would alter net present value (NPV) calculations, potentially turning them negative, and in that case, innovation would cease. Therefore, it is important to get other countries to pay more. Until then, EU countries are like bad roommates, merely pitching in. Since every bit of revenue helps, you do not want to turn them out (ie refuse to sell them drug), but if you insist on them paying the same, they will leave (ie deny their citizens access).

The reason the US biotech landscape is so fertile and well funded is because there is that willingness to pay. Michael Kauffman, who co-founded Karyopharm Therapeutics along with his wife, Dr. Sharon Shacham, remarked: “The fact of the matter is that it is great that the US reimburses drug prices at the levels they do because without that engine we would not have such a robust biotechnology and pharmaceutical industry. We cannot do the kind of work we want to do if we do not get sufficient return on the successful investments to continue to work.”

The fear around imposing price controls as proposed in HR 3 is that it will stymie innovation. The Department of Health and Human Services has calculated that legalizing importation would shave only 1% to 2% off the nation’s collective pharmaceutical bill, but the bill could result in investors being less willing to pursue drug development for diseases in areas where there have been many historic failures. For instance, pancreatic cancer is a devastating diagnosis for which we need breakthrough drugs; but because the historical probability of success is much lower than in other areas of oncology (per BIO, a drug for pancreatic cancer entering Phase 1 trials has only a 1.1% chance of approval), investors would need to know that a drug that shows needle-moving efficacy would be reimbursed at a higher price than the average cancer drug.


“In our Boston study we showed that patients were spending 37% less time in the clinic, and their disease progressed for 30% less time. That means less doctors’ visits, less clinic time and less progression. Different countries put very different values on that.”

Michael Kauffman, CEO, Karyopharm Therapeutics

Increasing transparency

Calls for price controls come on the back of already increased scrutiny over price transparency. Porzio Life Sciences LLC, a provider of compliance software for transparency reporting, has unique insight into this push from state and national governments around the world. John Patrick Oroho, the company’s executive vice president and chief strategy officer, observed that states have become increasingly strict in requiring transparency around prices, such that they want to see if a pharma company increased its price more than a certain percentage in a given year. Today this trend continues to grow stronger, as individual states in the US are requiring companies to show them how they arrived at a price for their new product. The government thinks that if they force companies to be transparent, then they will be more reluctant to engage in significant price increases.

Because of these more stringent dynamics biopharma companies increasingly want to diversify their sources of revenue and they want to do it earlier than they did before. “In the past, most companies always went for approval in the US, and then launched their product first in the US. Only once it was up and successful in the US after a number of years would you seek approvals elsewhere around the world, because the US provided your best opportunity to recoup all the money you put into R&D. Now, with controls around price increases and requirements for price reductions or price controls, you are starting to see parallel approvals. Companies launching their first drug are seeking approval in the US, and also seeking approval in various countries elsewhere in the world,” explained Oroho.

“At Poseida, we are developing therapies to revolutionize the treatment of cancers and genetic disease in pursuit of single treatment cures. It is important to consider the curative potential of our therapies as compared to current modalities, which may require a lifetime of doctor’s visits, treatments, lifetime drug therapies, or hospitalizations. We believe our novel approach can drive better patient outcomes with less toxicity.”

Eric Ostertag, M.D., Ph.D., CEO, Poseida Therapeutics

Distribution inefficiencies

One of the key problems with the system is that affordability is a function of out-of-pocket costs imposed by payers and premiums are impacted by net drug prices. The manufacturer of a drug establishes the drug’s list (gross) price, which is called the Wholesale Acquisition Cost (WAC). A drug’s net price equals its list price minus rebates and such other reductions as distribution fees, product returns, discounts to hospitals, price reductions from the 340B Drug Pricing Program, and other purchase discounts. Negotiated and statutory rebates to third-party payers, however, are the largest and most significant components of gross-to-net price differences.

Consequently, brand-name manufacturers earn substantially less revenue than drug list prices imply, due to the gross-to-net difference between a manufacturer’s list and net prices.

To address this issue of therapeutics distribution, Signet Healthcare Partners CEO James Gale suggests: “We should consider the allocation of the final consumer price to the various parties in the supply chain. There is enormous waste in the money being paid to distributors, retailers, PBMs and other intermediaries. It is not sexy, but a major solution to lowering US drug costs is in improving these intermediation costs. We should ask why parties who have not invested in innovation nor taken development risks are taking a big portion of the price that the consumer pays.”

Improvements in this area would also make manufacturing within the US more competitive. From Nivagen Pharmaceuticals’ CEO Jay Shukla’s perspective: “The issue we have is that the consumer does not see the savings because there are so many middlemen – the wholesaler, PBM, and insurance company – each getting a percentage. That is what is inflating the price, and that is putting pressure on manufacturers to operate in lower cost jurisdictions. If there were a way to either reduce the middleman's exposure, sell direct-to-consumer, or direct-to-pharmacy, then the cost of manufacturing would not be a significant factor.”


Social contract

One of the key proposals being advanced by RA Capital’s Peter Kolchinsky is the idea of a social contract between patients and the biopharma industry. At its core, the proposal is about accepting that prices will be initially high on branded drugs in order to pay for innovation. But in return for paying a high price up front for drugs, companies via government legislation, will agree to allow genericization without undue delay. After a patent expires, society will enjoy the benefits of the cheap, effective generic versions for the rest of time. Similar to a home mortgage, what society pays during a period of exclusivity leads to it collectively owning a forever upgraded standard of care and longer lives. It is essential, however, that during the period in which society is paying high prices for the branded drug that insurers make appropriate care affordable for all patients.

Under this proposal a middle ground is established where the innovative ecosystem would be minimally disrupted, and society’s burden of paying high prices for that innovation would not proceed beyond the duration of patents. If successful, it could go a long way in ratcheting down the rhetoric on price controls

Image courtesy of Lonza Capsules and Health Ingredients