Think Obamacare Will Suffocate New Drug Development With Price Controls? Think Again
Luke Timmerman3/21/11Follow @ldtimmerman
There were a million arguments against healthcare reform a year ago. One was that if President Obama got his way and expanded health insurance to millions of uninsured people, and the government made a real effort to study the comparative effectiveness of drugs at high and low prices, it was really the first step toward government-imposed price controls on new prescription drugs.
Once you have government price controls, opponents argued, drugmakers will lose the windfall profits the marketplace offers today to companies that take the substantial risk to develop innovative new drugs. The U.S., in turn, would lose its competitive edge as the center of innovative pharmaceutical R&D.
Guess what happened? One year after Obama signed healthcare reform into law, drugmakers are still in the midst of a golden age. Drugmakers still command ever-higher prices for innovative new medicines. And they will almost surely continue to enjoy this kind of pricing power in the U.S. at least until the end of this decade.
The latest bit of evidence arrived last week in a report from the Government Accountability Office (GAO). The report said that brand-name drug prices climbed by an annual average of 8.3 percent from 2006 through the first quarter of 2010, compared with a 3.8 percent annual uptick in the consumer price index for overall medical goods and services. (When generics were factored in, the overall amount of spending on the 100 most commonly used drugs was a much more modest 2.6 percent annual increase, according to the GAO.)
Still, that’s a big rate of price increases for new brand-name drugs. Yet despite the evidence, plenty of people like to argue that we are starting to see a new era of “stealth” price controls that are part of healthcare reform.
When the FDA proposed the revocation of Genentech’s approval of bevacizumab (Avastin) for breast cancer in December, opponents of healthcare reform surmised the agency was actually cracking down on the drug because of its price—which isn’t the FDA’s job. The same point—about nameless, unaccountable bureaucrats exercising some hidden policy on behalf of price controls—was made in August when the FDA delayed Genentech’s application to market a supercharged version of Herceptin which is sure to have a supercharged price. And plenty of observers—me included—sensed that a hidden agenda against high-priced drugs was really driving Medicare’s decision to force Dendreon to publicly explain the safety and effectiveness of its new prostate cancer drug last November.
Whatever the true motivations are—and there are plenty of other reasons why government agencies might have made those decisions—I haven’t seen any compelling evidence that says any of the recent regulatory decisions are creating downward pressure on drug prices. Here’s what we know has happened since healthcare reform passed:
—Dendreon (NASDAQ: DNDN), after analysts expected it to set a price of $62,000 for a course of treatment for its prostate cancer drug last April, set the price at $93,000. And while Medicare did haul Dendreon in front of a public hearing to explain the drug’s safety and effectiveness last November, every regional Medicare branch has agreed to reimburse at that price. The national Medicare agency is expected to issue a decision this spring that says this drug can be covered as long as it is used in accordance with the FDA-approved prescribing label.
—Vertex Pharmaceuticals (NASDAQ: VRTX) released some groundbreaking clinical results of new treatments for hepatitis C and cystic fibrosis. The cystic fibrosis drug will probably be priced at about $150,000 a year, according to Thomas Russo, an analyst with Robert W. Baird.
—Seattle Genetics has released some stellar results of a new “empowered antibody” drug for rare lymphomas. This drug is estimated to cost about $108,000 a year, according to JP Morgan analyst Cory Kasimov. That would make the Seattle Genetics treatment more expensive than Genentech’s bevacizumab (Avastin), or Eli Lilly’s cetuximab (Erbitux), a couple of the poster children for high-priced cancer drugs.
How long can the drugmakers carry on like this, setting sky-high prices? The current state of affairs will probably last until about 2020, says David Miller, president of Biotech Stock Research, an independent equity research firm in Seattle.
The reason things will the stay the same has everything to do with politics. Healthcare reform became law without any real provision to clamp down on drug prices a year ago. Now with Republicans in control of the House, the pressure is on to gut the new reform law—not give it new teeth to clamp down on costs.
If Obama wins re-election to a second term that keeps him in the White House until January 2017, it’s possible he could do a second round of healthcare reform that does more to corral healthcare costs. But it’s more likely, Miller says, that Obama will use his political capital in a second term to do other things besides Health Reform 2.0.
The bet here is that nothing substantial will happen to blunt prices of new brand-name drugs until 2017, when a new President from either party takes office. By then, with many aging Boomers retired, there will be huge new pressure to curb healthcare costs of all kinds—including the costs of new drugs. Curbing healthcare costs will be a hugely controversial, so it’s reasonable to project nothing serious will get enacted until about 2018, 2019, or even 2020.
What does that mean for drugmakers? Serious risks stand in the way of budget-hawk politicians, who will be accused of denying dying patients a potentially lifesaving drug just to save money. So it’s safe to bet on the status quo for a long time.
Even so, the party can’t last forever. Drugmakers know it, and will feel a sense of urgency to get while the getting’s still good. But there’s no question that the pricing environment is very favorable for them now, and for the foreseeable future, no matter how much scary rhetoric about price controls may come out of D.C.
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