With drug costs rising, it’s time for pharma companies to open their books
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This weekly column offers opinions on the latest pharmaceutical industry news.

For years, drug makers have argued that the rising prices of prescription medicines reflect, in part, the rising costs of discovery and development. Now, President Obama wants to peek behind the pharmaceutical curtain to see for himself.

Buried inside the White House budget proposal released last week is language (on page 62) that would require drug makers to publicly disclose various data, including research and development costs. The administration hopes to use the information as part of a plan to negotiate lower prices for the Medicare drug program, known as Part D.

In doing so, Obama joins a growing list of lawmakers seeking transparency in order to understand drug pricing.

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From California to Massachusetts, state legislators have proposed bills that would force drug companies to open their books so the public can see how much is spent to develop, manufacture, and market new medicines. Just last month, New York Governor Andrew Cuomo included a disclosure demand in his own state budget proposal.

Whether these efforts will succeed is unclear. Drug makers have been lobbying aggressively to defeat the bills and, indeed, in many states the legislation has stalled.

Not surprisingly, the Pharmaceutical Research and Manufacturers of America has been the most vocal opponent of these sorts of measures. Last week, only hours after Obama outlined his plans, the industry trade group issued a statement criticizing the president’s budget proposal, arguing that it would stifle innovation, and that it failed to take into account both the cost of R&D failures and the long-term value that medicines provide.

To some extent, these are legitimate points. Just the same, drug companies have no one to blame but themselves for the increasing demands for openness.

Year after year, the pharmaceutical industry has maintained that advancing a drug to market is an expensive proposition. This is certainly true. But getting a handle on the true cost can be tricky.

The most recent figure stands at $2.6 billion, thanks to calculations released in late 2014 by the Tufts Center for the Study of Drug Development. Yet the estimate relies on a small data sample of just 106 drugs that was provided by manufacturers.

This is a rather limited and selective approach to gauging average expenses. Moreover, the per-drug total included $1.1 billion in so-called opportunity costs, which refers to the profits that companies might have made if they used the funds for other purposes.

This opaque approach to budgeting explains the demands for transparency and the growing cynicism that drugs cost as much as companies insist.

At an industry conference last week, one executive lamented that the industry ever walked down this path.

“It is absolutely right that, because we made an argument, society is coming back now and very rightfully holding us to account for the argument,” said Ron Cohen, chief executive of Acorda Therapeutics.

“It was always the wrong argument,” he added. “But we made our own bed and people are asking us to lie in it.”

Drug makers also maintain that cost information is proprietary, but the industry could lose this argument. The Sunshine Act provision of the Affordable Care Act requires companies to provide data on payments made to doctors, which appear in a publicly accessible federal database. This means a precedent exists for disclosing proprietary information.

Since the pharmaceutical industry conceded that data are available under the Sunshine Act, “they can hardly claim that these R&D bills aren’t fair political game,” said Scott Gottlieb, a former Food and Drug Administration official who is now a resident fellow at the American Enterprise Institute, a conservative think tank.

In effect, the call for cost transparency amounts to a “show me” moment for the pharmaceutical industry.

Drug makers can’t have it both ways. If costs really can be justified, then expenses should be disclosed. If not, then the industry will have to come up with another explanation for its approach to pricing — and that explanation will have to be transparent.

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