As President Trump prepares to give a speech next week to address the issue of prescription drug prices, we wonder if we will witness the Trump of the presidential campaign, who slams the pharmaceutical industry for “getting away with murder” or a more measured, constructive Trump who recognizes the industry’s vital role in biomedical innovation and homes in on the role of payers and other middlemen?

The president, as we have all come to know, appears to devote far more attention to the politics of public policy than to the underlying policy itself. Indeed, he has tossed aside the script of formal speeches because the wonkish details offered by his aides were “a little boring.”

Although this is a disconcerting trait in the leader of the free world, it can be illustrative and even helpful in framing the conundrum that is drug pricing policy.

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There are actually two different kinds of drug pricing problems that need to be addressed, albeit in different ways: micro-oriented policies focused on alleviating the impact of the high prices consumers directly pay in the form of insurance premiums, reimbursement caps, and out-of-pocket drug copays; and macro-oriented policies that attempt to better rationalize and maximize the collective value of health benefits that Americans derive from our aggregate spending on prescription drugs.

In addressing the first problem, it’s important not to worsen the second one.

This choice can be framed rather crudely like this: Do American consumers pay too much for each prescription because of lousy insurance coverage and middlemen who siphon off discounts as an integral part of their business model? Do drug companies charge too much money for their products? Both? Neither?

Most people recognize that the American biopharmaceutical industry is a complicated hodgepodge of elements and motivations that — to some — appear simultaneously ennobling and dispiriting. It is heavily subsidized by taxpayers, yet also must satisfy Wall Street as it raises billions of dollars of private capital necessary to bring safe and effective medicines to patients. The industry employs thousands of brilliant biomedical scientists in the effort to treat the formerly untreatable, but it widely ignores diseases that predominantly afflict those in the developing world. It can only survive over the long run if it reaps blockbuster revenues from innovation, and yet the long-term residual benefits of its groundbreaking research are available to millions over decades as low-cost generics eventually take the place of high priced branded products.

In the past year, the pharmaceutical industry and its trade group advocates have heaped praise on FDA Commissioner Scott Gottlieb for regulatory initiatives designed to accelerate generic drug approvals and accelerate the development of biosimilars.

Gottlieb also is beloved for using his bully pulpit to highlight some uncomfortable facts about pharmacy benefit managers and their penchant for keeping a fair portion of the discounts and rebates that are offered up by the manufacturers. He said as much in a speech last month to America’s Health Insurance Plans. “Too often, we see situations where consolidated firms — the PBMs, the distributors, and the drug stores — team up with payers. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.”

In essence, Gottlieb pointed out that by negotiating and retaining a percentage of the top line as fees, the middlemen in the drug industry benefit unreasonably as they spur manufacturers to set high base or list prices while undermining the purported purpose of insurance: to protect and insulate the sick against unaffordable expense.

If Trump wants to focus on the consumer welfare problem, and continue to pander to the crowd who want to pay less for their medications, he might begin by proposing legislation that mandates transparency and rebate sharing with consumers.

Of course, the president delights in tweaking powerful interests, and he very well could return to attacking the industry directly on its pricing practices. Few voters understand the nuances associated with calculating discounts from the wholesaler acquisition cost. Even though manufacturers offer coupons and patient assistance to support access to drugs, events of the last few years suggest that there is a lot to attack, ranging from roguish practices from the likes of Martin Shkreli to the routine 9.9 percent list price increase that has become an annual ritual for many large manufacturers.

It does not seem likely that the president will propose draconian changes to existing law that would limit the industry’s current prerogative to unilaterally decide on its U.S. product launch price, and it’s even less likely that the Congress would act in this election year. But it is possible. If he leans in this direction, there are any number of bad ideas that he could resurrect: allowing drugs sold in Canada to be re-imported for sale here (though this seems at odds with his anti-trade instincts); authorizing the government to take over from managed care providers the Medicare Part D outpatient drug program acquisition negotiations; expanding the current 23.1 percent statutory discount offered on innovator drugs to Medicaid recipients by extending it to Medicare patients, or at least to so-called dual eligibles.

Any of these ideas, should they be adopted, would reduce our capacity to discover and develop new medicines. Like it or not, American drug companies are essential for this task. These companies earn the lion’s share of their money on branded prescriptions written for American patients — as the rest of the developed world sets prices based upon their respective public health budgets — in an era in which federal funding for the National Institutes of Health has declined in real terms and will continue to be threatened by budget shortfalls.

Among other things, we need to do more to develop abuse-deterrent and non-opioid pain treatments, overcome antibiotic resistance with new medicines, and begin to make inroads to treatments for the 35 million Americans who suffer from rare diseases — 95 percent of which have no approved treatment.

Patients have access to more high-quality, low-cost generic drugs than ever before. Most will pay for genuine innovation of the sort represented by cancer immunotherapy and gene therapy, to name just two extraordinary therapeutic trends. Patients want cures that actually work for them, and thoughtful companies like Novartis, Spark Therapeutics, Amgen, and others are working with payers to develop value-based pricing contracts should expensive new therapies fail to work.

It would be a win for all if the president uses his upcoming speech to move beyond the sound bite and address the subtleties and implications of drug pricing policy in an effort to address both the short-term interests of consumers and the long-term interests of patients.

David Beier is a managing director of Bay City Capital and a former senior executive of Amgen and Genentech. John Osborn is a senior adviser with Hogan Lovells US LLP, which represents companies in the pharmaceutical sector, and a former senior executive with Cephalon and US Oncology.

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  • Intersting discussion. Linked article might be of interest.
    The Flow of Money Through the Pharmaceutical Distribution System: http://healthpolicy.usc.edu/Flow_of_Money_Through_the_Pharmaceutical_Distribution_System.aspx

    It looks at who is benefiting.

    Generic drugs are out of the realm of reach of the big pharma. There are opportunities.

    Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient): https://pharmachemicalscoatings.blogspot.com/2018/03/opportunities-to-lower-drug-prices-and.html

    Debate will go on.

    Girish Malhotra

    • I would add to these articles that what we pay at the pharmacy for new drugs is directly correlated to the cost of meeting FDA regulations (r2=0.94, for the technically inclined). Somehow, this is rarely discussed, even though the evidence for regulatory costs driving drug prices is widely available.

  • Michael, the higher prices of generic drugs is often a result of increasing regulatory pressures, especially when only one manufacturer is left. Martin Shkreli, for example, increased daraprim’s price from $13.50 to $750 a pill once he acquired exclusive rights to it.

    When the FDA took Epi-Pen’s sole competitor off the market and refused to approve another, similar device, EpiPen’s price went from $60 to $600. When the FDA re-approved Auvi-Q and approved Adrenaclick, devices that compete with Epi-Pen, its manufacturer started giving huge discount coupons. Competition keeps prices in check; excessive regulation creates monopolies (or cartels) and higher prices, even for generics.

    • I was in the PrRMA industry for 37 years and noted that many generic manufacturers that receive F&DA penalties/shut-down order, it is due to failure to implement good manufacturing guidelines, quality control issues, and or bioequivalence issues. These are not considered ‘excessive regulation,’ but necessary regulations to assure to quality of generic drugs.

    • Michael, your comments are more accurate when applied to new generics not yet approved by the FDA. Once a generic is approved and manufactured by the same companies, the GMP, quality control, and bioequivalence issues have presumably been dealt with. However, when the FDA ups these standards for approved generics, some manufacturers abandon them. This is often the reason for price increases in already marketed generics. It’s not unusual for the FDA to cite a manufacturer, not for unsafe products, but for violations of the record-keeping it demands. I consider regulation to be unnecessary when the cost in money and lives exceeds the gain in money and lives, which appears to be the case in already-approved generics. I was in R&D in the pharmaceutical industry for a couple decades and saw many examples of such excess regulation for new drugs. Perhaps you did too.

  • The prices of new drugs at the pharmacy are directly correlated (r2 = 0.94 for the technically inclined) with what drug companies pay for R&D, which soars annually due to the increasing regulatory demands of the FDA. Any attempt to decrease prices without lowering these costs will drive down innovation and competition. John Garrett is correct: Big Pharma puts about 15% into innovation. Before the 1962 Amendments, which gave the FDA virtually dictatorial power over the industry, the big drug companies spent about 50% on innovation. Now, companies like John’s often need to license their discoveries to Big Pharma, since the small biotechs often can’t raise the $2.5 billion to put a new drug on the market. The drugs for rare diseases that Michael Heinzmann cites are an indirect product of these Amendments as well. Manufacturers stopped investing in drugs to treat small groups of people because of the added Amendment costs. Consequently, Congress passed the Orphan Drug Act, which gives manufacturers an easier path to market and allows them a 7-year monopoly. The saddest part of all of this is that the Amendments, while increasing prices about 40-fold, didn’t make drugs any safer. The withdrawal rate of drugs after approval didn’t decrease at all.

    • Mary, your comments are all spot on. You did, however, not discuss why generic drugs which have none of the originator’s discovery, R&D, advertising, clinical trials, etc. costs, raise prices exponentially. Most health plan formularies even now have 2 tiers for generic drugs because of their continued price increases. Any thoughts?

    • Mary,
      Can you offer a citation or any proof that prior to 1962 pharma companies were spending about 50% on “innovation?” That’s a pretty bold claim to make, and I’m not sure how you are defining innovation. The 1962 Kefauver Harris amendments were one of the best pieces of consumer protection legislation ever written, and it actually benefited pharma companies (despite the fact that they were opposed to it) by adding the requirement that companies actually prove that their drugs were effective, not merely safe. This drove many “pharma” companies out of business that were selling drugs with no real benefit, and let those who could actually make real, effective medicines thrive.

  • The problems are simple and obvious, despite the author’s claims: drugs cost several times more in the US than elsewhere; we are the only developed country that permits drug advertising, most of it misleading; without transparency in drug pricing and medical services, there is little incentive for anyone — especially insurers — to pay much attention to costs. Oh, and big pharma now adays rarely if ever innovates; that’s the job of small companies like mine.

  • Despite the optimistic view of this article regarding U.S. drug prices, there remain serious pricing issues not experienced in most other countries. Diabetes is a very common disease for which many patients are prescribed insulin – a drug first produced over 100 years ago. Yet modern insulin analogs cost patients more in deductibles and co-pays than a car payment. I take a 50+ year-old oral drug for hypertension that has increased in price by over 400% during the past 5 years. Most all newly approved drugs for rare diseases cost a minimum of 6-figures per year. The only reason that such prices occur is due to a lack of competition. Without competition, only governments can use their negotiating power to force brand and generic drug companies to compete based upon bidding and sole-source awards for the lowest bidder (for both generic and therapeutic drug equivalents).

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