Pharmaceutical Price Controls Might Be Closer Than You Think

Opinion

Amid the hue and cry over the Mylan EpiPen pricing debacle, Hillary Clinton unveiled her “Plan to Respond to Unjustified Price Hikes for Long-Available Drugs.”  Clinton’s plan calls for “dedicated oversight to protect consumers.”  To that end she would “convene representatives of federal agencies…to create a dedicated group charged with protecting consumers from outlier price increases.  They would work closely with and be advised by patient advocates, independent non-government experts on drug pricing and comparative effectiveness, and state and local regulators to investigate and respond” to unjustified pricing activities.

Charley Grant, writing in The Wall Street Journal, commented that, “Any action to curb price increases on older drugs would hurt manufacturers that rely on them to generate growth.” But he reassured investors “that scenario is unlikely to come to pass.”  Good advice for investors; not so good for industry.

That dependence on price increases won’t change any time soon.  These ideas—if not the specifics—constitute a real threat the pharmaceutical industry must take seriously.  The Democratic presidential nominee has proposed a nuclear solution for pricing generics that, once established, would almost certainly get out of hand, and could end the business of making proprietary drugs as we know it.

Clinton’s plan does not seem far-fetched in light of a possible Democratic sweep that could see appointments to high office for people like Democratic senators Elizabeth Warren and Bernie Sanders. Calling for cheap imports and Medicare price negotiations, Donald Trump, too, has demonized “Big Pharma.”

Grant pointed out that, “The harsher aspects, such as a panel to review the fairness of drug pricing or a change to Medicare negotiating policy, would likely need congressional approval.”  However, in a government by executive order, such as we have today, many of the constitutional checks and balances like Congressional oversight don’t apply.  Judicial redress, as the failed Pfizer-Allergan merger demonstrated, cannot provide relief in a commercially relevant timeframe.

Allergan CEO Brent Saunders recently told Reuters, “My biggest fear, every time there’s another headline…is that venture capital needed for innovation [and early drug discovery] could move out of the sector… .  It has started.”  In an article for the January edition of the MedicineMaker Markus Thunacke and Pauline Ceccato, made a similar point that with “the implementation of tighter pricing systems in both the US and EU…[w]e may end up in a situation where drug makers will shift their focus from risky, costly R&D to cheaper, more stable generics/biosimilar businesses…at a great cost for innovation and, ultimately, patients’ health.”

A number of industry pundits addressed the crisis in blog posts that condemned “irresponsible price gouging” and described possible remedies, including transparent pricing, increased competition through accelerated approval of generics and value-based pricing of proprietary drugs. The proposals from the politicians and the pharma experts reflect contradictory perspectives on an issue of existential importance to the industry.  The future of the drug business may well depend on its ability to reconcile the two.

Interestingly, both sides drew the critical distinction between generic and proprietary drugs and the need for different pricing mechanisms. In his blog Bruce Booth of Atlas Ventures contrasted “exploiters and innovators,” the former a subset of the generic industry.  However, as he points out, it would be wrong to place too much confidence in the public’s ability to distinguish between the two—controlled prices only for generics.  John Lechleiter, CEO of Lilly, once summed up a day on Capitol Hill, by saying that he thought he might have convinced a few Congressmen that generic companies don’t invent generic drugs.  From the perspective of voters and politicians, what is important is not whether a drug is generic or proprietary, but whether they need it.

Clinton proposes to combat “unjustified price hikes.”  What constitutes “unjustified?”  Is it like former Justice Potter Stewart’s definition of pornography, “I know it when I see it?”  If so, it is a license to intercede whenever politically expedient, a standard that will not serve the industry well in the long run.  Do we want to place politicians in the position of weighing profits for drug companies against the sanctity of human life?  What is justified if health-care spending threatens to consume the Federal budget?  Is any price “justified” when a child’s life is at stake?

Despite the outcry, as long as the industry continues to struggle with innovation, it will depend on price increases as a major driver of growth. Matt Herper at Forbes pointed out that the price of the world’s best-selling drug Humira increased at an average of 6% per quarter over the last three-and-a-half years and is expected to continue growing into the 2020s.

Even when innovation works, revolutionary treatment platforms can bring with them revolutionary price tags.  Glybera, the first gene therapy drug approved in Europe, was introduced in Germany last year at 1.1 million Euros ($1.4 million).  While this reflected the potential savings over a lifetime, the real-time impact on health-care budgets could be devastating.

Rather than accepting the question as Clinton has framed it, i.e. “What price is justified?” the industry must ask, “What is causing price dislocations and the failure of the market to accurately value goods and services?”  In considering answers, it must be prepared to push beyond simplistic, emotionally-charged responses along the lines of “greedy CEOs” that address only the symptoms.  Gretchen Morgenson devoted a column in The New York Times to executive pay at Mylan.

Competitive markets are the most-efficient mechanism yet devised for matching price and value.  CEOs operate within the market landscape.  Some may see a bit farther than others in setting prices, but the conditions that permit a 5,000-percent increase in the price of a generic drug represent a failure of the market.  That should be the focus of inquiry, not what is a “justified” price.

In making its case to the public, the industry must concentrate on simple foundation concepts: efficient pricing of generics through market-driven competition, and value-based compensation for proprietary drugs—value in the avoided cost of previous treatments, in the quality and productivity of lives saved, in the incentive for future drugs.

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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