Fair pricing activists applauded the news earlier this month that the FDA approved another drug to cure hepatitis C. That this new medicine is cheaper and treats people quicker than the existing hepatitis C drugs goes to show how fast healthy competition can change the outlook on health spending.
Not long ago, health economists were promoting a doomsday scenario that the new crop of hepatitis C drugs would break the bank. To be sure, these drugs were a huge advance, offering cures for hepatitis C rather than holding actions against this potentially disabling and even deadly liver disease. But they were expensive, and the costs would be felt over short time frame rather than be spread out over years.
Predictably, health care systems struggled to cope with the immediate budget impact, not least because health budgets operate in silos — the hospital budget, medical fees, drug budget, and the like. So there was an outcry about the increase in the pharmaceutical bill, with little acknowledgement of the future benefit of fewer hospital stays and reduced medical costs. Extrapolating the financial impact of these drugs on the basis of initial price and the potential number of patients that could be taking them was vastly exaggerated. Market dynamics came in, prices dropped, and patient numbers did not go up and up.
I believe that doomsday predictions should carry a health warning because they can mislead policy makers to make wrong decisions.
Take this famous prediction. Back in 1972, the Club of Rome’s book “The Limits to Growth” foretold that natural oil sources would dry up within 20 years and that reliance on fossil fuel was unsustainable. People took the forecast seriously. Yet here we are, 45 years later, knowing that the scenario was wrong, in part because it failed to predict that the United States would become one of the world’s largest oil and gas producers.
The problem with such doomsday predictions is that they make extrapolations based on static thinking, such as using consumption growth rates and reserves of finite resources known at the time.
Looking at today’s debates on health and pharmaceutical policies reminds me of the Club of Rome’s doomsday scenario. Predictions abound, warning that the health system budget is about to explode or that access to innovative medicines is unsustainable.
I have been hearing such predictions for more than 20 years. Don’t get me wrong: thinking about the sustainability of our health systems is legitimate, important, and necessary. Demographic trends on the one hand and achievements in biomedical research on the other offer considerable challenges for health systems, even in wealthier countries.
But the discussion isn’t really new. In the mid-1990s, the Danish government feared that a highly effective anti-migraine drug would break its health care budget. Based on an extrapolation of the price of the medicine and the potential number of migraine patients, some experts reckoned that the medicine would consume a significant chunk of Danish health care spending, not just pharmaceutical expenses. Such extrapolations were spectacularly wrong, which was fortunate for the Danish health care budget.
We are having a similar discussion today about the financial consequences of new hepatitis C medicines. These drugs are a demonstration of disruptive innovation at its best.
Before these medicines were developed, the heavy cost of treating hepatitis C complications, such as liver transplantation and liver cancer, was spread over many years. Then along came a disruptive medical innovation in 2014 that quickly cured this serious liver disease. That sea change has both immediate and long-term effects on health care costs. The immediate effect is the need to treat a large number of patients, while over time an increasingly smaller number of patients need treatment as the disease becomes rarer. In the United States alone, the long-term effect is that the use of these new medicines is predicted to prevent by 2050 more than 126,000 liver-related deaths, 78,800 cases of liver cancer, and nearly 10,000 liver transplants.
The FDA’s recent approval of glecaprevir and pibrentasvir (Mavyret) with a wholesale acquisition cost of $26,400, compared with $74,760 for the first similar curative treatment regimen for all forms of hepatitis C, launched in 2016, shows how quickly the situation can change.
Similar to the extrapolation of the drying up of oil reserves or the “budget-busting” migraine treatment, making projections based only on the current price and sales underestimates the dynamics of the pharmaceuticals market. Yes, the immediate budget impact in most countries is a matter for concern, in particular as budgeting generally looks at drug expenditures in silos and does not take into account the savings in hospital costs or increased productivity.
But what such extrapolations fail to take into account is that market dynamics can work quickly and effectively. As new competitors enter the market with other cures, prices come down. Regardless of administered pricing and tough negotiations in many countries, new competitors nowadays often enter the market within a few months of a first-in-class innovative medicine, leading to healthy price competition. The result: Doomsday scenarios of drug spending out of control prove to be exaggerated.
We certainly spend far more on cancer treatment today than we did 20 years ago but, in return, we have new medicines that have transformed cancer care. Between 1991 and 2014, the death rate from cancer dropped by 25 percent in the United States. This means 2,143,200 fewer cancer deaths occurred than if rates had persisted at the 1991 level. France spends almost five times more on diabetes medicines than it did 20 years ago, but the treatment for patients is like night and day for a much larger number of patients.
In comparison, costs for cardiovascular drugs have shrunk dramatically. In Germany, 12 percent of overall drug spending in 1995 went toward agents for lowering blood pressure or cholesterol; today it is 4 percent of drug spending. This is a significant change, especially since it has accompanied an equally dramatic reduction in deaths from heart disease.
The hepatitis C scenario shows how competition among innovative companies can bring costs down while the patent is still valid. The reduction in costs of cholesterol-lowering agents highlights another dynamic that takes effect when patents expire and these effective and therapeutically important medicines become considerably cheaper, often being sold for a few cents per pill. The expiration of drug patents is expected to reduce overall spending in the U.S. $143.5 billion in the next five years.
Medical progress clearly has its price, but doomsday scenarios based on simple extrapolations of today’s numbers are out of touch with reality.
Thomas B. Cueni is the director general of the International Federation of Pharmaceutical Manufacturers and Associations, which is funded by dues paid by member companies and associations. The opinions expressed here are his own.
Ron- So you’re arguing that drug prices and their inexorable yearly increases are necessary to drive innovation. Insulin is not an outlier but is an example of the ridiculous system that we have in the US that allows unlimited pricing of drugs. But I suppose it helps a lot when you have 2 lobbyists for every member of congress. What if we cut prices by 50%? That would mean that a year’s worth of Alexion’s Solaris would cost $200,000 per year instead of what it costs now ($400,000 per year). What about Gilead’s drug for hepatitis C ($100,000 per year). I don’t think investment and “innovation ” would be affected one iota. The greed of the pharma industry is unjustifiable and is only sustained by creating fake studies and paying off legislators who are afraid to bite the hand that feeds them.
Jim, you seem bent on attacking the industry regardless of the facts, so this will be my final reply. I’ll just point out that several of your statements are demonstrably false. For example, it has been widely reported that the net price of the Hep C drugs such as Sovaldi is actually less than $50k, and the latest competitor from Merck just priced theirs well below $40k. It should also be noted that the prior multi-drug regimens for Hep C cost around $80k, cured fewer than 10% of patients while exposing all to horrific side effects for a year or more, while the current drugs cure over 95% in 8 or 12 weeks with virtually no side effects. That’s the kind of progress that is bought by the massive investments made by biopharma companies, in the face of 90% failure rates. I haven’t studies Soliris, but I can point out that it’s virtually certain they give back a meaningful percentage in rebates to the PBMs and other frictional players in our drug delivery system. Further, if they cut their price in half, they would cut their net revenue from $3 billion to $1.5 billion. If they invest the industry average of 19% of next sales in R&D, that’s $300 million less investment in R&D, which you state would not affect R&D investment “one iota.” You concept of an “iota” and that of the world generally would appear to be disparate.
Ron- I think it is you who is ignoring the “facts” (like citing 90% failure rates which is laughable). But anyway suffice it to say, with the current political regime in place, I think you and your pharma buddies are safe, at least for the moment. Hopefully though, the corporate takeover of the government and the quid pro quo in congress will end at some point and then maybe we’ll see some rationality in drug prices.
This is a variant of the same arguments always made by Pharma and its apologists. It goes something like “well prices are high but we can justify high prices because of all the innovative work we’re doing and you can’t lower prices because you’ll kill off innovation and investment .” This particular article is arguing that prices eventually come down due to the emergence of generics, patent expirations etc. The argument that diabetes treatment is far better today with high priced insulin variants is debatable. There is plenty of evidence that insulin variants have at best a marginal benefit over normal insulin. The argument that prices are coming down by billions of dollars rings hollow when one considers that the original prices of these drugs were outrageously high. This also ignores the fact that innovations are largely taxpayer funded through the NIH NOT by pharma companies who spend their profits enriching shareholders through stock buybacks and dividends.
Where are the data and facts to support your blanket statements? It is a fact that 90% of new drugs introduced into human clinical trials fail, that the 10% of successes on average take 10-15 years of development, at a cost of hundreds of millions, up to billions of dollars, each. When accounting for the failures (which also must be invested until it is learned that have failed) the Tufts Center for the Study of Drug Development estimates that new drugs require overall investment of over $2.6 billion each. It is a myth that government invents most drugs. NIH funded laboratories indeed generate many interesting ideas, and so do drug company labs, but these must then be painstakingly developed in the process I mention above in order to make them viable drugs, and this is done almost exclusively by biopharma companies. Putting it another way, biopharma companies invested over $140 billion in R&D last year, vs the entire NIH budget of about $30 billion. Finally, the high prices that are required to provide incentives to investors to continue to invest in innovation are not permanent. They last an average of 10-12 years for small molecules, soon to be mirrored by biologics, as biosimilars accelerate. After this limited exclusivity period, the drugs go generic and are cheap for all succeeding generations. I’m unaware of a single MRI center, or hospital surgery department that drops it prices by 30-80%, or indeed at all, for MRIs or heart surgery after 10-12 years.
@Ron Cohen The Tufts study was funded by the pharma industry. This is a matter of public record. The inflated statistics that it cites are just that. The idea that generics are lowering costs is a myth. The price of insulin is a good example. The “cost” of innovation is nil and yet the price of insulin has skyrocketed in the last decade. Why do people keep lying about these inconvenient facts. It is a matter of public record that the 18 largest pharma companies spent almost 100% of their profits in 2015 on 2 things: share buybacks and dividends (see Lazonick et al (2017): “The financialization of the Pharmaceutical Industry “. These serve to enrich executives and short term shareholders and deprive patients of medications largely because of high prices.
Jim WIlkins, the Tufts Center gets about 35% of its budget from industry and the remaining 65% from foundations, courses, publications etc. Industry cannot mandate topics and has no access to Tufts’ databases. It’s not possible to quibble factually with the fact that investment requirements for drug development are enormous and super high risk. When the industry spends $140b/year on R&D. BTW, this represents about 19% of net income, the highest such allocation of any industry. So when you talk about buybacks and dividends, let’s keep that in mind and also admit that public companies have a responsibility to share profits with shareholders. The insulin example is indeed egregious, but you apply the fallacy of anecdote to try to prove a larger case. As it turns out, some of the companies making insulin, such as Lilly and Novo Nordisk, have shown that their net income from insulin has actually been declining even as list prices have increased–that’s related to the byzantine, high-friction system we have in which PBMs, insurance companies, distributors, pharmacies, hospitals all take a piece of the list price. Thee are definitely behaviors among some of the larger pharma companies that should be moderated (for example what outcomes executives are incentivized to achieve), but the overall biopharma ecosystem is producing major medical progress at an accelerating rate. Misguided crude price control strategies will only kill the goose that is laying golden eggs on behalf of us all.