Consumer access to affordable and effective medicines is an important issue. As the cost of many drugs continues to rise, sometimes astronomically, some have suggested imposing price controls on the U.S. pharmaceutical industry. Doing that risks crippling our only hope of curing the many serious diseases that still plague us.

The global pharmaceutical industry is among the most profitable, driven by its ability to price to value, especially in the United States. High profits attract investors and generate money for research. The global pharmaceutical industry’s investment in research and development is second, barely, to the computer and electronics industry and well beyond that of most other industries. For comparison, the top 10 pharmaceutical companies spend five times more on research and development as a percent of sales than do the top 18 U.S. chemical companies.

The pharma industry’s efforts have been quite productive in attacking some of the most vexing problems in medicine. Cardiovascular mortality in the U.S. has declined more than 50 percent since the introduction of propranolol, the first beta blocker, in 1964. Many cancers, such as childhood leukemia, have almost been cured. AIDS is now a chronic disease, as the death rate has declined from near 100 percent to near 0 percent. Hepatitis C is now curable. Even metastatic melanoma, formerly a death sentence for 95 percent of its victims, is now curable for many. Lung cancer may be next. All these miracles have been brought through the clinic and into the market by commercial pharmaceutical companies.

advertisement

Yet there remain huge unmet needs for new and better treatments for most cancers; all neurological problems, especially Alzheimer’s disease; most autoimmune diseases; most major gastrointestinal disorders; macular degeneration; and diabetes — not to mention the global scourge of drug-resistant bacterial and viral infections. Advances in these areas will come if money continues flowing to pharmaceutical companies and their primary sources of innovation, biotechnology startups.

But if U.S. drug prices come under bureaucratic control, as they have in most of Europe and Japan, it will be a different story. Little pharmaceutical innovation occurs in price-control jurisdictions. The United States has always, by a large margin, led the world as a source of new drugs, and that lead has widened as Japan and Germany have imposed price controls over the past few decades. All major international pharmaceutical companies, without exception, have instituted R&D and commercial operations in the U.S. to take advantage of its pricing environment.

If price controls pressure the U.S. industry into a more conventional process industry model, like that of the chemical industry, pharmaceutical R&D budgets would be slashed. To achieve the chemical industry’s rate of R&D spending, as would be required to achieve profitability competitive with the chemical industry, top pharmaceutical companies would have to reduce their R&D budgets by 80 percent — almost $50 billion in total. This reduction in spending would take a few years to realize, but would be completely evident by 2023 or earlier.

An important corollary is that, if profitability and value creation opportunities for new drugs declined, the appetite of the venture community for risky, long-term biopharmaceutical investments would shrink exponentially. Price controls on drugs would have the surprising effect of accelerating the flow of investment into high technology, where timelines to market are shorter, less regulated, and less risky. The venture capital community is flush with cash and anxious to invest where high returns can be achieved — ideally within a much shorter time than is typically possible in the realm of drug R&D.

As a society, if we force pharma into a chemical industry model, where there is no biotech equivalent and no venture investing, we will be trading better and sooner effective drugs for better and sooner virtual reality devices and self-driving cars.

Newsletters

Sign up for our Pharmalot newsletter

Please enter a valid email address.

Squeezing pharmaceutical R&D spending down to one-fifth of what it is today would also have an enormous impact on the problems that drug developers often choose to address. Orphan diseases would be deprioritized, as the returns under price controls would not warrant the investment. Complex diseases would also be deselected. While Alzheimer’s disease and diabetes have huge patient populations, the extremely high cost of conducting the difficult research and the need for huge and complex clinical trials would dissuade all but the largest companies from pursuing those illnesses if the potential pricing upside was to be significantly constrained. Moreover, for difficult diseases like schizophrenia, where today’s treatments are mostly inadequate, the flow of more effective new treatments would slow from a trickle to a rivulet, depriving those with these conditions from the possibility of relief.

The upshot is simple. Forcing drug prices down would surely shave a few percentage points off what we spend on health care today. By 2032, drug prices could be half of what they are today, as every drug would be a generic. But our ability to treat or cure the many serious diseases that still afflict us will have been crippled and squandered. In my view that is terrible policy.

Robert J. Easton is co-chairman of Bionest Partners, a global medical business consultancy serving pharmaceutical, medical device, and diagnostic firms and their investors.

Leave a Comment

Please enter your name.
Please enter a comment.

  • Nothing but propaganda and fear mongering. Europe introduced price controls in 2011 and since the launch of AMNOG, by August 2016, 146 new drugs had been assessed with arguably great efficacy and proven clinical superiority than what is seen in US drug releases. Vice continuing with this sad excuse outlined by Mr Easton,. States should follow Vermont’s lead and get onboard with legislation to open the doors to foreign drug competition.

  • It is possible to agree about the efficacy of capitalism/markets but note that something else is going on with US pharma.

    We can buy a bottle of water in a convenience store for a $1 and change. Suppose we are marooned in the desert, off the beaten track with a broken vehicle, it’s 105F, we are out of water, we only have a few hours left, if that…….. Someone comes rolling up in a Jeep and has a bottle of water. What will they sell it to us for? $1,000? $10,000? $100,000? That’s value pricing. Pharma has enthusiastically adopted value pricing and even uses the word as did the article above.

    But that is not a business model from the ideas of capitalism and markets. It’s more a Godfather business model; that is, they have segued into extortion. The author claims that capital is attracted to that model like flies to a picnic table.

    That will at some point result in a reaction that will have the result the author claims to fear. It also may start a discussion about whether medical care in general is a good in a market, like buying a car. Clearly it’s a good in some ways and benefits from competition and so on. In other ways it is not a good in a market at all.

    We need to talk about that. The US is spending a growing 18% GDP on medical care, by far the highest in the world, to be around #26 in life expectancy among sizeable developed countries. We can see that healthspan and lifespan are separating by economic class, exacerbating the stripping of people of middle class and below in income. Our present turmoil should show that we won’t get away with stripping them of life too.

  • NO! I will support leaving the Pharmaceutical Companies with the Freedom of Unlimited Profits when They Charge the Same Price to Most Other Countries As Well. I will support leaving the Pharmaceutical Companies with the Freedom of Unlimited Profits when They Stop Using Those Profits to Lobby Congress and State Legislatures. I will support leaving the Pharmaceutical Companies with the Freedom of Unlimited Profits when They Stop Bribing Physicians to Use Their Expensive Drugs when Generics Would Do Just Fine.

    • Amen, Larry W. Price. Maybe we should just suck it up and publicly support all research – the extreme position, but the taxpayer already picks up the tab for a great deal of basic and developmental research through the CTSI mechanisms, not to mention the rest of the NIH funding. Subsequent to development, pharmas big and small could bid on the products and, after covering developmental costs, make a reasonable profit rather than the outrageous sums currently being gouged out of us. And as to the “rare” diseases, this has to be one of the more cynical justifications for flat out robbery. Rare diseases, and we all agree that they need to be addressed and remedied, have been seized upon because they come with ready made constituencies and compelling stories, not because of any deep humanitarian impulse on the part of the pharmaceutical industry. The sad side consequence to the current system is the collusion on the part of academic medical research. The enormous overheads (65% and up), researcher external subsidies, and potential down the road royalties have had, my opinion, a less then salubrious influence on the medical schools and the universities that house them both of which have been slow to regulate faculty financial involvements and lax in oversight (heart stem cells, e.g.).

  • There is no doubt that there have been many benefits from the research. The fact that many of these benefits are priced out of the reach of most who need them is also indisputable. The thief who says he’ll leave you enough money for bus-fare home is hardly to be commended. $20 million/yr for executives. You might be tempted to think they actually did something useful to earn such obscene money. Think Sears. Think GE. And a few more.

  • Generic Prednisone, 10mg pills, 60 count, went from $40 to over $400 overnight a few years ago. There was nothing market-based about that rise in price. It was price gouging. Why do low prices in Mexico and most other third-world countries, as well as all across Europe, not throw the pharmaceutical industry into free-fall? Why is it that only the U.S. has to pay these exorbitant prices in order for that industry to continue research? It’s BS.

  • With all due respect, Mr. Easton, your all or none approach to regulation of big pharma’s pricing is absurd and short sighted. Of course research and development require significant capital, but the present price gouging on even old generic drugs is pushing yet higher the already obscene cost of health care. The unbridled corporitization of our health care system is literally killing its sustainability. YOU consultants and your greedy clients are nothing short of fat sharks swarming a big sinking ship which is our present health care system. Shame on you.

  • We’ve heard this song before. But as long as Big Pharma’s marketing budget continues to exceed their R&D budget by a large margin, it will continue to fall upon deaf ears.

    • Can I have your credentials? (Other than the fact that you have a Masters) It would be to my best interest to quote you for a speech, so it would really help me if you could be creditable.

  • Cardiovascular mortality in the U.S. has declined more than 50 percent since the introduction of propranolol, the first beta blocker, in 1964.

    I don’t think the pharmaceutical industry can take the lion’s share of the credit for that. In the late 1960’s, there was a lurid series of photographs of diseased vessels in Life magazine which did much to raise awareness of fat and cholestrol and kick off the healthy eating movement, which has only become more intense to the present day.

Sign up for our Daily Recap newsletter

A roundup of STAT’s top stories of the day in science and medicine

Privacy Policy