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How to Lower Drug Prices, Improve Care, and Save Pharma

Opinion

Xconomy San Diego — 

I recently received a note from a longtime friend who questioned me on the issue of pharma pricing.

I answered with the always-reliable alleviating-the-scourge-of-disease-through-the-miracle-of-modern-medicine defense of “free-market pricing.”  My friend, who is not in the pharmaceutical business, responded:

The fundamental flaw in your argument centers on the notion that there is any relevance to “market efficiency” in discussing drug pricing.  The entire system of drug delivery operates outside anything resembling a free market.  … Explaining (again) the risks of price controls does not solve the problem of predatory pricing.  …[You have to] find a way to rein in the extraordinary greed shown by parts of your industry and get past the “you can’t talk about our pricing or we will simply go out of business” rejoinder.  You and your industry have a problem and you need to get out in front of it.

I prepared another volley, insisting that the threat of price controls to innovation was real.  (No one outside of pharma can really understand how difficult this business is.)  Over the next two weeks, I tried several times to send my reply, before finally deciding that I had to agree with him.  For a number of reasons, the “golden goose” defense will not save us.

First, once the public reaches the breaking point on prices, the threat of denying future drugs will not dissuade an angry populous that can’t afford the ones we have.

Second, the good intentions of a few well-meaning industry leaders to limit prices will not stop an industry addicted to price increases.  (In September prices were up 7 percent year-over-year.)

Third, price controls will work, at least in the short term.

Fourth, and most importantly, the “pricing crisis” is not about prices.

This last point is actually a good thing for the industry. If the problem were only prices, the government would have the solution.

The problem is not prices but productivity, or more precisely, lack of productivity.  Prices are a secondary effect of the industry’s inability to develop new drugs in sufficient quantities to sustain a market, to say nothing of meeting the needs of patients.  The pharmaceutical industry is failing at its principle task—making drugs.  Worse, it is reaping huge rewards for its shortcomings, which in turn compromises its ability to deal with the problem.

Pharma benefits handsomely from inadequate supply shortcomings in the form of what-the-market-will-bear pricing.  The industry proselytizes about the need for free-markets but does its best to evade them.  We talk about alleviating suffering while delivering a … Next Page »

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Standish Fleming is a 29-year veteran of early stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK). Follow @

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