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Love ‘Em? Hate ‘Em? No Matter. The Drug Industry Gets What It Wants.

Xconomy National — 

Anyone reading this column should be familiar with the fight over drug prices. Many of you would argue that drug makers are too easy a target in political debates and the media, getting little credit for developing lifesaving drugs. Others of you believe that prices have gotten out of hand, and that price gouger Martin Shkreli, now a target of federal fraud prosecution, is the tip of the iceberg. Many of you would say yes to both arguments, as well as to the gray area between.

At last week’s J.P. Morgan healthcare investment conference in San Francisco, and the events around it, many of these arguments were on full display. I highlighted on Twitter a panel discussion that included Ron Cohen, CEO of Acorda Therapeutics (NASDAQ: ACOR) and the chair of the Biotechnology Innovation Organization, the industry’s highest-profile trade group. Held at the Biotech Showcase satellite conference, it was billed as “The great pricing debate: Navigating through an industry sea change.”

There was little debate. Cohen and the others, fielding provocative questions from a moderator, punched back at a litany of persecutors—the media, the public, insurance companies, the government, and so on—but didn’t dwell much on the drug industry’s own shortcomings. (Cohen also took to Twitter afterwards to take issue with my numerous tweets, and those of other journalists.)

My point last week and now: Yes, drug makers have a hard job. Yes, drug makers attract a lot of criticism, much of it too facile. But it was disingenuous to hold an event like that with barely a nod to the industry’s own foibles.

There’s another piece of the puzzle in the drug-price debate that rarely gets mentioned. For years now, the drug industry has mostly gotten what it wants: favorable laws, millions more customers, and amenable regulation.

After we traded tweets last week, I reached out to Cohen to arrange a less harried phone call. I asked him if he agreed with my assessment. He did only to an extent, saying that biomedical science “has expanded broadly and deeply on so many fronts. I wouldn’t say that the industry is on a roll. I would say that science is on the biggest roll in the history of humanity.”

Cohen seems to have a penchant for big statements like that. (He also said during the panel last week that making drugs is “innovation at the very highest level human beings are capable of. It’s harder than sending people to Mars. That’s an engineering problem; math and physics tell you how to get there.”)

I’m not sure we’re ready to give up “rocket science” as the linguistic gold standard of professional complexity. But I accept the general point: Drug making is hard and unpredictable, yet the field has never been more promising. It’s also worth repeating, as I did in this column, that prescription drug costs accounted for only about 10 percent of the total of $3 trillion U.S. health spending in 2014, according to the Centers for Medicare and Medicaid Services. It’s a nontrivial slice—and the percentage is expected to grow in coming years—but other areas of healthcare spending, like hospital costs (nearly 30 percent), also matter at least as much, if not more.

Cohen complained during our call that he rarely sees articles focusing on those costs, or other complex parts of the healthcare system. “The finger pointing is almost 100 percent in the direction of the biopharma industry charging high prices,” he said.

Meanwhile, last year’s Gallup poll ranked drug makers near the bottom in public esteem, and even Republican presidential hopefuls have taken rhetorical jabs at them. On the phone, Cohen justified high prices, as he and the panelists did last week, by citing the industry’s huge R&D costs—tabbed now to be more than $2 billion per drug, factoring in all those that don’t make it to the finish line—but acknowledged not everyone is happy about the prices.

“It’s very clear there’s real anger and dismay on the part of the public with respect to their perceptions that drug prices are too high,” he said. “These are real issues, not just the fad of the day.”

If biomedical researchers and drug makers are some of the most innovative people on Earth, surely they could come up with creative solutions for the pricing mess? I asked Cohen that, too, and I’ll give you his answer later. But first, that point about the industry getting what it wants: Here’s a list of big wins for the industry since George W. Bush took office; it would suggest that the public’s thumbs-down and a few political slings and arrows are not what matters.

—In 2003, Bush signed into law the Medicare Modernization Act that added the prescription drug benefit to the national insurance program. Some people wanted a quid pro quo: In exchange for a huge new market for drug makers, Medicare should be able to negotiate prescription drug prices directly, not through a patchwork of private regional contractors. The MMA went in the other direction, explicitly forbidding direct negotiation for drugs covered under the “Part D” drug benefit that the MMA created. Four years later, another effort to allow Medicare negotiation was squashed in Congress.

Last summer, Democratic presidential hopeful Hillary Clinton made the issue part of her campaign, and Congressional Democrats will look into the issue again this year.

Drug companies and others contend allowing Medicare to negotiate with drug companies would be tantamount to letting the federal government set prices—and that would be a very bad thing. I won’t wade into that debate here. The point is, the drug industry has so far prevailed.

—The one-time tax holiday in 2004 known as the American Jobs Creation Act allowed U.S. companies to bring overseas profits home at a 5.25 percent tax rate. Those lobbying for it promised to reinvest the cash and create jobs, as the act’s title suggests.

How’d that work out? The top 15 repatriating companies, six of which were Big Pharma, shed nearly 21,000 jobs through 2007 while accelerating stock buybacks. Pfizer, at the top of the list, was the main culprit. It brought home $35.5 billion and cut nearly 12,000 jobs in the next three years, according to a Congressional Democratic report. Merck, Eli Lilly, Johnson & Johnson, and Bristol-Myers Squibb all shed jobs, too. Schering-Plough and Wyeth added jobs.

Don’t trust the Dems on this? Here’s a 2011 report from the staunchly conservative Heritage Foundation: The 2004 tax holiday “produced the expected immediate results—the return of a significant amount of foreign earnings to the United States. However, the evidence is clear that these repatriations did not produce the hoped-for subsequent surge in domestic investment.”

Later efforts to pass new repatriation “holidays” have stalled out, but drug companies have continued to skirt U.S. tax payments with so-called inversions that move their U.S. headquarters overseas to friendlier tax climates. The latest, of course, is the proposed Pfizer-Allergan merger, which isn’t likely to be derailed by regulation.

—The Patient Protection and Affordable Care Act. OK, this has been more of a mixed bag of success for biopharma. When the ACA, aka Obamacare, passed, it did so with the drug industry’s blessing and a grand bargain in place. Insurers would no longer be allowed to cap coverage of a patient’s annual or lifetime essential benefits. Tens of millions of previously uninsured people would become drug-industry customers—with much of their bills paid by the government—-in exchange for a series of rebates, discounts, and taxes the industry would pay to help fund the vast new program. In one example, a drug seller has to pay a tax on its branded drug sales that is proportional to its share of the overall market. That excise tax alone is designed to bring in $27 billion in new revenue over 10 years. (A side note on that: Sales of orphan drugs aren’t included. In other words, the more orphan drug sales are part of a company’s revenue stream, the lower its potential tax hit.)

The bargain was expected to be good for pharma. A 2013 report pegged the benefit at $10 billion to $35 billion in extra profits in the decade to come.

But last year, the industry’s go-to data provider IMS Health said the first year of Obamacare, 2014, was responsible for only a small slice of the overall big uptick in drug spending, and it didn’t expect 2015 to be different. Much is in flux and in dispute: actual enrollment numbers, the amount and size of industry rebates, fees, and taxes, and other possible requirements, like data collection, that could add costs. So it’s hard to say so far that the industry got what it wanted in the grand bargain.

But one area where the industry is satisfied is biosimilars. The ACA created for the first time a framework for bringing copycat biologic drugs to market in the U.S. (Europe has allowed biosimilars for nearly a decade.) Biologics, such as Roche’s bevacizumab (Avastin) and AbbVie’s adalimumab (Humira), are among the highest-selling drugs ever and account for more than a quarter of all new drugs approved the past two years. They are also harder—if not impossible—to reproduce than traditional drugs, big biotechs and others argued. So the new biosimilar approval framework sets a higher scientific bar than the one already in place for traditional generics, which means biotech drugs likely won’t face the same competition from plentiful, dramatically cheaper copies as traditional drugs have faced.

The ACA also included another big win for the branded drug industry: 12 years of market exclusivity for the company making an original biologic drug. Even if the company’s patent expires a few years after approval, it still receives 12 years of protection. (Traditional chemical drugs are supposed to get just five years of exclusivity, or seven if they are approved for orphan diseases—see next item below.) Whether you consider that protection wholly appropriate or far too generous, the folks with big biologic franchises to protect and products in development were quite happy with it.

—The 12 years of market protection for biologics is just one of many extra protections and incentives drug makers can take advantage of—for new antibiotics, treatments of rare diseases and other unmet medical needs, for example—and Congress always seems to be considering more.

Former pharma executive Bernard Munos, writing for Forbes last year, called the 2012 introduction of the FDA’s breakthrough designation which lets the agency speed up development and review of drugs it deems a big advance treating a serious or deadly disease, “a remarkable regulatory innovation that changes the economics of drug R&D.” In the 21st Century Cures Act, an FDA reform bill working its way through Congress now, there are even more incentives for antibiotic and rare-disease drug development, and more provisions for speeding up clinical trials.

—When I first began covering the life sciences in 2004, it seemed impossible to sit through a conference, panel discussion, or interview without the requisite FDA bashing by people in the drug industry. My, how times have changed. Under recently retired commissioner Margaret “Peggy” Hamburg, the FDA became an industry ally, so much so that the agency approved 45 drugs last year, just shy of the all-time record set in the 1990s. That’s on top of the 41 approved in 2014. The pendulum has swung back from the lows of the mid-2000s, when the agency, stung by the 2004 market withdrawal of painkiller rofecoxib (Vioxx) and other big safety problems, instituted new clinical guidelines that added big costs to drug development. It also struggled with resources and in 2007 the agency’s drug-review chief gave his reviewers the leeway to miss their review deadlines; the agency ultimately approved just 18 drugs that year.

Has the pendulum swung too far back? Last week, the Government Accountability Office reported that FDA is doing a bad job tracking drug safety after products come to market, especially for drugs that have received FDA’s breakthrough and fast-track designations to get to market faster.

And last year, Forbes reporter Matthew Herper compiled data to show the FDA was “basically providing a rubber stamp” for companies asking for drug approvals.

One caveat: We only know a drug has been submitted for approval, and rejected, when a company wants us to know about it. BIO’s Cohen seized upon that caveat when I asked about the soaring approval numbers. He didn’t have data at hand but suspected that more drugs are coming through the clinical pipeline than ever before—meaning more approvals and more rejections. An FDA report on 2014 approvals, however, notes that applications from drug companies—the final step before FDA gives a thumbs-up or thumbs-down—“over time has remained relatively stable.”

I submit that either way, the larger point remains, and that most biopharma people would agree: The FDA is now a help, not a hindrance, to the drug industry.

All in all, I would say biopharma’s wheels have been well greased the last several years. The industry should be able to bear the current scrutiny of its pricing practices without circling the wagons. Even more, I’d love to see the industry talk about solutions to the drug pricing problem instead of finding new ways to fight rhetorical battles.

Creative pricing ideas have in fact been circulating for a while, and a few executives have talked about changing practices. Most recently, Alnylam Pharmaceuticals (NASDAQ: ALNY) CEO John Maraganore told Xconomy last week that his company won’t simply raise prices as the calendar turns over, a common practice, if Alnylam brings a drug to market. (What he will do, however, he’s not ready to say.)

Novartis (NYSE: NVS), meanwhile, wanted to try a pay-for-performance scheme with its heart failure drug Entresto, which showed in big clinical trials a marked improvement over generic alternatives in reducing deaths. At launch last year, the company said it would ask insurers to agree to pay a bonus if patients fared better on the drug and stayed out of hospitals.

But in November, Novartis CEO Joseph Jimenez told Reuters that insurers balked at the idea. Jimenez and Roche CEO Severin Schwan also said medical data infrastructure wasn’t yet up to the task of tracking patients’ outcomes well enough to use for complex pricing deals.

Developers of gene therapies that could offer one-shot cures or long-term treatments for diseases such as hemophilia have also discussed pay-for-performance to help spread the upfront cost—potentially hundreds of thousands of dollars per treatment—over years.

Emory University professor David Howard, who studies healthcare and drug costs, agrees that price schemes that rely on tracking patient outcomes will be tough to put in place. And even if they come to fruition, he’s skeptical that overall prices will come down. “For new drugs, companies will just adjust to charge even higher prices” for the patients who respond to the treatments, he said.

Creative price schemes will likely require buy-in from insurers, regulators, and lawmakers, as Ron Cohen stressed to me. He also cautioned that agreement on the meaning of “value” when negotiating pay-for-performance schemes with insurers and others won’t be easy.

On the pricing panel last week, attorney and industry lobbyist Beth Roberts of Hogan Lovells said, “There are many legal restraints. Lots of things are impeding biopharma’s ability to be part of the solution.”

Drug companies are not the underdog. It would serve them well to spend more time acknowledging that they are part of the problem as well.

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  • Walter White

    A very informative piece! I would just add to this the fact that Big Pharma paid $70B to the federal government and supported the ACA; in exchange, it received legal guarantees that the government couldn’t negotiate drug prices. Seems like good business, Suffering the slings and arrows of public outcry is an unfortunate, but not entirely unexpected “side effect.”