David Beier Op-Ed: Drug price reforms that limit incentives for biomedical innovation are shortsighted

By David Beier and John Osborn

Article in Stat News

   The ongoing furor over the price of prescription pharmaceuticals has become so intense that even an august, establishment group like the National Academy of Sciences, Engineering, and Medicine (NAS) cannot help but weigh in. Its report, “Making Medicines Affordable: A National Imperative,” released Thursday, is encouraging, as it is from an eminent group long on scientists and short on politicos, hinting at a rare, nonpartisan objectivity befitting the Academies.

The report is a valuable addition to the public debate. The 17-person panel that wrote it reached consensus on many, though not all, of its recommendations. But if there is a culprit lurking beneath the surface of these many policy recommendations, it is the biopharmaceutical industry. The report includes calls to demand more financial transparency from drug manufacturers as if they were utilities, to outlaw so-called “pay for delay” patent settlements, and to limit the benefits of the Orphan Drug Act.

The panel gets more things right than wrong. However, in failing to emphasize strongly the importance of continuing adequate financial incentives for biomedical innovation and the safeguarding of intellectual property, the report ignores a central tenet of medicine itself — do no harm. Moreover, the call for direct price negotiations by the government on behalf of Medicare Part D for outpatient drugs largely ignores the risk that this scheme will exacerbate rationing through the expansion of restrictive formularies.

There’s no question that the cost of drugs is a problem for some consumers. Some sick and elderly patients go without their medicines because they cannot afford to fill or refill prescriptions. They may lack effective insurance coverage for prescription drugs, or need a newly developed — and very expensive — cancer immunotherapy or therapy for a rare disease. Perhaps their insurance coverage is inadequate, or leaves them with a substantial copayment to meet their obligation. In fact, medical debt is the leading cause of personal bankruptcy in the United States.

The cost of drugs is also a problem from a macroeconomic perspective. Total American spending on health care is 16.7 percent of our gross domestic product. Biopharmaceuticals now total of 17 percent of these health care dollars; spending on them exceeds $500 billion per year. Is this level of spending unsustainable? The answer would seem to stem largely from whether or not the use of drugs reduces non-drug health care spending in the face of a rapidly aging demographic.

The chair of the NAS panel, Norman Augustine, the former chair and CEO of Lockheed Martin, acknowledged that developing a consensus on reform has been difficult, largely because of the ongoing philosophical divide between those who believe that health care is a fundamental human right and those who do not. During a press conference for the release of the report, Augustine offered his belief that the current system in the United States is not sustainable and, absent reform, we will likely end up with a government mandated, price-controlled system. His unambiguous message to Congress and the American people: Reform or else!

There are two dissenting reports, one with a market-oriented perspective from the late Henri Termeer, former CEO of Genzyme, and Michael Rosenblatt of Flagship Pioneering, and formerly from Merck, that strongly defends patents and other intellectual property as essential for investment and the foundation of our economy.

The NAS report includes more than two dozen action points. The panelists declined to push any of these as paramount. They did, however, emphasize the importance of capping total out-of-pocket costs for patients, of supporting the government’s ability to negotiate directly for Medicare Part D prescription outpatient drugs, and of limiting direct-to-consumer advertising that spurs patient demand.

On the prospect of direct government price negotiations, there is a sense from the panelists that there really is a free lunch. In response to a question during the press conference about the government’s ability to effectively reduce prices without the threat of limiting drug availability, one panelist seemed unaware that this is the prevailing business model for every health insurance company in America. Companies will be happy to offer their drugs and accept a lower price, he said, since they want the sales. But the only way to save money is to create leverage with the very real threat of an onerous, restrictive formulary that limits access for some patients to the very medicine that might just be the right one for them. What is the point of our brave, new world of personalized medicine if it is to be limited by the government? In fact, the NAS report asks the Congress “to expand flexibility in formulary design, including very selective exclusion of drugs, such as when less costly drugs provide similar clinical benefit.”

Trying to limit direct-to-consumer advertising could clash with the First Amendment’s protection of commercial speech. Recognizing this, the panel cleverly suggested using the tax code to limit the deductibility of certain DTC expenses that support less efficacious drugs or are considered to have effects that are adverse to the public’s health. That may, or may not, pass muster under the Constitution. While we oppose content-based discrimination that would limit speech, we support a healthy, contentious debate that might lead to industry self-regulation that limits a practice that has cheapened the discourse over medicine and damaged the industry’s reputation.

On the prospect of overt price fixing, some have suggested that drugs already approved in the European Union or Japan ought to be eligible for importation into the United States. Many industry watchers can recall that the FDA was deeply unenthusiastic about proposals to allow drugs to be reimported from Canada.

Four distinct problems

The problem of high drug prices is not one problem. It is really four problems that we need to view as distinctly different with different solutions.

First, there is the problem of the irresponsible actor, which is embodied (literally) by pharmaceutical bad boy Martin Shkreli and by Mylan’s pricing of its EpiPen. Augustine highlighted these cases in his opening remarks at the press conference, but then didn’t square the circle in noting that nothing contained in the recommendations will prevent scoundrels from behaving like scoundrels. In this situation, a hedge fund-like business model leads some to scout for underappreciated, off-patent products without generic competition. They acquire the old product rights, increase the price by an obscene percentage, and reap the financial rewards.

The answer to this problem is, more or less, the kind of public shaming that was demonstrated quite ably by Sens. Susan Collins, Claire McCaskill and their colleagues on the Senate’s Special Committee on Aging last year. The PhRMA and BIO industry trade groups piled on as well, pruning their memberships and emphasizing that research-based drug companies do not do this sort of thing. Our hope is that we will not be seeing the likes of Shkreli or copycat versions in the foreseeable future.

Second, there is the problem of aggressive annual (or even semi-annual) price increases. This also was highlighted, less sensationally, during the aging committee’s proceedings. Major pharmaceutical companies got into the unfortunate habit of depending upon these price increases to drive top-line revenue growth at a level that satisfied Wall Street. In the absence of direct price setting by the government, curbing this trend depends largely on self-regulation by the industry. Allergan CEO Brent Saunders made headlines when he pledged to hold down his company’s annual price increases to the single digits at or below the rate of inflation.

The NAS panel’s recommendation to accelerate the approval of generic drugs will help keep prices low. FDA Commissioner Scott Gottlieb is taking actions that will work to that end.

Third, there is the market disintermediation problem. This occurs when an innovative company like Gilead Sciences develops a breakthrough drug to treat, or even cure, a disease for which there has been no treatment or cure to date. This, of course, actually happened following Gilead’s acquisition of Pharmasset and the approval of Sovaldi for the treatment of hepatitis C. The introductory price for a course of treatment was a staggering $84,000. Yet that shouldn’t be so staggering when compared to the cost of a liver transplant or extended hospitalization.

There was an understandable hue and cry after Sovaldi was approved, particularly from those managing state Medicaid programs that cover a large number of hepatitis C patients, who faced a bolus of payments. After a short time, even though Gilead’s patent remained in force, competing product entries from Merck and AbbVie came on the market and managed care payers negotiated the price to a competitive level.

Fourth, there is the rare or orphan disease problem including esoteric forms of cancer. This is a quandary because we have rightly established regulatory incentives to encourage companies and investors to take the risks to develop drugs for patient populations under 200,000 that would otherwise go undeveloped and untreated. In light of the relatively small patient populations, without a fairly substantial price and a concomitant return-on-investment, drugs for many of these conditions simply will not be developed.

Even progressive commentators are loath to undermine continued biomedical progress on immunotherapy, gene therapy, and other fronts. One NAS panelist suggested that the NIH and university research was at the core of many of these breakthroughs while biopharmaceutical companies merely earn the profits. That unfairly dismisses the costs and risks of clinical development and ignores the reality that small, venture-backed companies often take the lead in developing such drugs.

Taken together, these disparate circumstances increase costs and limit access to lifesaving and life-prolonging medicines in America. But it is important to remember that the vast majority of prescriptions written and filled for American consumers are fairly low cost, generic medications that were developed years or even decades ago and have lost patent protection along the way. Reform efforts that limit innovation incentives and intellectual property protections invariably will lead to fewer new medicines and more costly non-medicinal treatment.


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 and a former senior executive with Cephalon and US Oncology.

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