The debate over America’s drug-pricing system is built on myths. It’s time to face reality

America’s drug-pricing system is broken.

Any system in which the list price of insulin triples in a decade, leading patients to ration it and sometimes die, is not working. Cancer patients should not worry that their disease will bankrupt them. The U.S. insurance system, which has instead gone decades without making tough decisions about how to pay for medicines, should not be passing on so many costs to patients.

But it’s also a reality — one that many politicians and pundits on the left seem eager to ignore — that cutting drug prices will mean companies spend less money on research and development. The result will be fewer new drugs. When nearly 150 biotech CEOs warned that the drug pricing bill passed by the House of Representatives on Dec. 12 would destroy their businesses, they were freaking out for a reason. 

What should be bracing is that it’s impossible to gauge how, exactly, the bill would affect the development of new medicines. Anywhere between 17 and 59 drugs are approved annually. The Congressional Budget Office concluded the House bill would reduce the number of drugs approved over a decade by as many as 15. The President’s Council of Economic Advisers puts the number at 100. Plans like the one from Sen. Elizabeth Warren, which would explicitly cut prices for branded drugs by 70%, are even more threatening for the pharmaceutical industry. 

Facing this seemingly intractable problem, both sides are retreating into fantasy. Drug company executives still don’t realize how much things need to change. But reformers often seem more focused on vilifying drug companies than proposing commonsense solutions. Pharma, they say, is super-profitable and spends more on marketing than on research and development. (This is not true, though the industry does spend more on selling, general, and administrative expenses, which includes a lot more than marketing, than on R&D.)

The good news is that there are paths forward, ways to lower drug prices while minimizing the impact of those changes on the invention of new drugs. But getting the best of both worlds requires dealing with reality as it is, not as either side of the debate wants it to be. I’m not going to solve the problems inherent in our drug pricing system here, but I have some stories that I think can get us closer to the truth.

Today, we are overwhelmingly reliant on drug companies to develop new medicines. But it wasn’t always the case.

In the early 1960s, government research at the National Cancer Institute delivered human beings their first real victory against cancer. At the time, two NCI researchers, Emil Frei and Emil Freireich, showed that giving children with acute lymphoblastic leukemia a combination of four high-dose chemotherapy drugs could make cancer temporarily vanish in two-thirds of patients. A third would see their remission last years, and some were cured. It was the first time “cured” and “cancer” could be used in the same sentence.

For the next few decades, the NCI was the epicenter of cancer drug development. Cancer drugs were invented there or discovered by researchers sent on globe-trotting jaunts.

“Back in the good old days of the 1960s and early ’70s, a lot of the anticancer drugs were sort of found through serendipity,” remembered Johns Hopkins professor Dr. Otis Brawley, who wrote about his time at the NCI in his memoir, “How We Do Harm.” “They literally sent people around the world to get tree, bark and leaves and plants and stuff. And they would make emulsions of these things and then see if they inhibited the growth of cancer cells.”

A drug whose story began on one of those globe-trotting jaunts was made from the Pacific yew tree and later licensed to Bristol-Myers Squibb. The drug was known as Taxol, and it became a blockbuster. Approved in 1992, by 1998 it had annual sales of $1.6 billion. 

The advent of big-selling cancer drugs helped give birth to the biotechnology industry, in which small companies using cutting-edge science raised huge amounts of money to take on the likes of Merck and Pfizer. Cancer drugs became biotech’s engine. In the late ’90s, one biotechnology firm, Genentech, launched two highly effective cancer medicines, Rituxan and Herceptin, that each became a multibillion-dollar seller. Big pharma started to pay attention to cancer drugs, too.

The results were stunning. Between 1980 and 1999, 55 cancer drugs were approved. Over the next 20 years, that figure tripled to 147, according to Innothink, a consultancy.

But prices seemed to rise each time a new drug was introduced. The median price for a month’s worth of a newly approved cancer drug increased by 800% to $17,106 between the five-year period ending in 1999 and the one ending in 2019, according to Memorial Sloan Kettering’s Center for Health Policy and Outcomes.

Insurers would accept not only higher prices on new drugs, but annual increases on old ones. Novartis’ Gleevec, approved in 2001, turned a form of leukemia into a chronic disease. It initially cost $24,000 a year, but the price reached $100,000 a year by the time it went generic in 2016. Now new cancer drugs can routinely cost $200,000 or more a year.

“I’m one of these people who has no problem with people who come up with good drugs being able to profit from the fact that they have come up with a good drug,” said Brawley. But he worries that drugs never seem to compete on price, and that their makers get to charge more for slight benefits.

“I think that there’s a lot of people who are making out like bandits,” he said.

The current drug-pricing system creates an environment in which research scientists who want to see their discoveries turned into treatments inevitably turn to industry.

The funding numbers are irresistible. When researchers at Memorial Sloan Kettering Cancer Center and the Fred Hutchinson Cancer Research Center started developing genetically engineered cells that could literally eat tumors, they started a company, Juno Therapeutics, in 2013. It raised $316 million from venture capitalists, and $1.2 billion from investors in the stock market before being purchased by the biotech firm Celgene for $10.4 billion.

With that kind of capital available, scientists who want to develop a new medicine flock to industry. What results is a feedback loop. Not only are most drugs developed by industry, but more and more of the economic and scientific risk is taken by small companies that want a big return. And important areas like antibiotics research, with fewer drugs and fewer price increases, get left behind.

This is an extraordinarily inefficient way to fund anything, but it creates incredible treatments. Investors don’t back an idea unless it is possible it will yield a tenfold or hundredfold return. We’ll probably get blood tests for cancer, new gene therapies, and many more cancer drugs out of this system, but we can assume they won’t be cheap.

“There’s no question the pace of innovation is faster,” said Dr. Peter Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering. “That doesn’t mean it’s more efficient or better allocated.”

Both sides also like to misstate how the free market incentives new drugs, saying that today’s profits pay for tomorrow’s cures. Pharmaceutical companies like that this sounds altruistic, and their opponents feel it shows drug companies are not living up to their social contract. But it’s more accurate to say that the revenues give investors, be they in pharmaceutical giants or venture capital firms, a reason to believe that it’s worth backing future projects with a low probability of success. 

Current revenue isn’t a funding stream. It’s a lottery ticket that encourages gamblers to ante up.

Critics of drug companies argue that really important medicines don’t come from industry. It’s true that every single drug approved between 2010 and 2016 relied on science that came from NIH research. But academia doesn’t invent the drugs. A 2011 study in the New England Journal of Medicine delved through every drug approved between 1990 and 2007. Of the 1,541 medicines approved over that span, 143, or 9.3%, were invented by public sector institutions. Other papers have reached the same result.

So are there ways to reduce drug prices without hurting biomedical innovation? No. But there are ways to minimize the damage. There is waste in the system. Some large drug makers, such as Pfizer and AstraZeneca, have been able to increase their research productivity while cutting budgets. 

There are also high drug prices that don’t incentivize innovation as much. Such was the case with Valeant Pharmaceuticals and Martin Shkreli (remember him?) when they jacked up the prices of generic drugs. The de rigeur price increases that led to the insulin crisis just can’t continue. There are all sorts of incentives in the pricing system that everyone acknowledges need to be adjusted. Many biotech company CEOs had been hoping that legislation on drug pricing would stop here. 

If those CEOs are honest, though, they might concede that there are probably plenty of ways that Medicare could move slowly into the business of more directly negotiating lower drug prices that would still allow enough incentive to keep the wheels of innovation spinning. What’s scariest about the new House bill, to biopharma executives, is that it would fix prices based on how drugs are priced in other countries, forcing them into an unpredictable, multi-faceted dance in launching their products. And no, it’s not fair for the U.S. to pay more than other countries, but fairness has no effect on whether the science gets done.

Those writing the new rules should remember that even when pharma seems to have ripped off an idea, sometimes it turns out to have taken the critical steps.

Take Vertex Pharmaceuticals’ new drug Trikafta, lauded by the Food and Drug Administration as a “breakthrough” when it was approved in October. Based on research originally funded by the Cystic Fibrosis Foundation, a philanthropy, it can help 90% of the people with this deadly, lung-clogging disease, but costs $311,503 a year, 34% more than the median listing price of a house.

That stark contrast — funded by charity, but priced at a sky-high level by industry — is exactly what puts a lump in anyone’s stomach about drug prices. But the CF Foundation wasn’t paying for the creation of a drug. It was offering funding to get someone to start doing the work. That preserved the CF program until Vertex executives saw its potential, at which point the entire company pivoted to developing CF medicines. This was done by chemists and biologists in Vertex’s San Diego labs, not by charity or academia, using Vertex’s money. The CF gene was discovered in 1989; it took a drug company to turn the resulting knowledge into medicines. 

So argue about whether the drug, an undisputed breakthrough, is a good value. But remember that, right now, drugs come from drug companies. And that is a reality reformers can’t ignore.