Volume 95 Issue 9 | pp. 30-34
Issue Date: February 27, 2017

Cover Stories

Costly drugs

Cornered on pricing, drugmakers fire back with their standard message about world-class science
Department: Business
Keywords: pharmaceuticals, drug discovery, generics, epigenetics, mergers and acquisitions

The TV advertisement’s voice-over recites familiar lines from Dylan Thomas’s villanelle “Do Not Go Gentle into That Good Night.” We watch cells dividing and a newborn being foot-printed. Determined researchers in white lab coats work in dramatically lit laboratories; a middle-aged man is prepared for what appears to be a diagnostic screening. “Rage,” says the voice, “rage against the dying of the light.”

[+]Enlarge
PhRMA’s “Go Boldly” ad pitches an expanding field of 21st-century life sciences research, promising pharmaceutical breakthroughs.
Credit: PhRMA
A researcher stands sillouetted against a large blue lighted screen depicting cells.
 
PhRMA’s “Go Boldly” ad pitches an expanding field of 21st-century life sciences research, promising pharmaceutical breakthroughs.
Credit: PhRMA

The ad closes as less poetic words—Immunotherapy…, Genomics…—traverse the screen, resolving on the message: “Go Boldly.”

That message comes to us from the Pharmaceutical Research & Manufacturers of America (PhRMA), the U.S. trade group representing research-based drug companies including the dozen often referred to as big pharma. It is the overture of a nearly $100 million multiyear advertising and communications outreach campaign funded by a significant increase in PhRMA membership dues. By far the largest program of its kind undertaken by the trade group, the campaign is a response to mounting public criticism and political pressure regarding the price of drugs and the industry’s research productivity.

Public discontent with the industry has risen steadily in the past two years. The high price of drugs such as Gilead’s hepatitis C treatment Harvoni, which costs $94,500 for a course, is blamed for burdening consumers and the health care system. Amplifying the problem, a handful of generic drug companies have instituted astronomical price increases on older medicines such as the allergy antidote EpiPen.

Meanwhile, political pressure on the industry ramped up during the 2016 presidential campaign, especially with Hillary Clinton’s stark condemnation of the industry’s pricing policies. Donald J. Trump’s concern registered succinctly when, a week before being sworn in as President, he said at a press conference that, with its ability to dictate prices, big pharma is “getting away with murder.”

PhRMA’s hope is to pivot the conversation to breakthrough science at a time when it can point to several wins out of its members’ hefty investment in research. Among the most notable are highly effective cancer immunotherapies, cures for hepatitis C, and the first drugs to address serious childhood rare diseases.

But the reality is that big pharma’s discoveries come alongside the skyrocketing cost of innovation—a cost they are seen as directly passing on to patients. The number of new treatments emerging from companies’ pipelines has simply not been sufficient to support their size. Instead, they have turned to business strategies—acquisitions, tactics to extend patent life, tax maneuvers, and price increases—to foster growth.

The current level of uncertainty for the drug industry and the health care system as a whole would seem to justify PhRMA’s muscular public relations effort. But observers are skeptical that big drug companies are prepared to make necessary changes in how they conduct business and research. Many see the message of “Go Boldly” as a distinct signal that big pharma is digging in on a status quo under which the price patients pay for medicines is reaching a catastrophic high while the number of true breakthrough drugs reaching the market—cures, for example, such as Gilead’s hepatitis C drug—steadily disappoints.

Bernard Munos, a senior fellow at the Milken Institute’s FasterCures research advocacy center, views the industry at a crisis point. To be viable, Munos notes that big pharma firms need to come up with multiple new drugs—one new blockbuster per $20 billion in revenue—each year. Even as internal investment grows and late-stage assets are brought in through acquisitions, none of the major companies has come close in the past five years to that level of productivity.

Courtesy of Bernard Munos

“We need to refocus on our core historic mission, which is basically what industry promises to patients all the time, and that is innovation.”

Bernard Munos, senior fellow, the Milken Institute’s FasterCures

“I’m not sure PhRMA truly appreciates the predicament in which it finds itself,” says Munos, who worked at Eli Lilly & Co. for three decades, ultimately as an innovation strategist. “Its increasing reliance on a variety of strategies that do not even address the core problem of the industry, which is the production of innovation, seems to me very worrisome and ominous.”

Financial maneuvers yield only short-term gains and do not address the underlying problem of research productivity, Munos says. “Long term, this will make the situation less tenable and ultimately devastating for the industry.”

Munos acknowledges that some companies, such as Novartis and Johnson & Johnson, have managed to establish standout research enterprises. And he notes that the years-long downsizing of big pharma firms’ R&D operations has set the stage for innovative partnerships. As a whole, however, Munos sees business concerns directing an industry that used to be steered by science.

“We need to refocus on our core historic mission, which is basically what industry promises to patients all the time, and that is innovation,” says Munos. “It needs to be more than words and more than an expensive media campaign.”

Pricing is a particularly worrisome front in the push to boost profits, Munos says. He contends, for example, that his former employer, Lilly, has compensated for a string of disappointments in the lab in recent years with a huge increase in the price of insulin—a strategy being exploited throughout the industry.

Nor can the traditional firms truthfully distance themselves from companies whose high drug prices have dominated the news. In 2015, Turing Pharmaceuticals’ former chief executive officer Martin Shkreli emerged as the poster child for industry greed when his company increased the price of Daraprim, a treatment for a parasitic infection, by 5,000% to $750 per pill. Mylan took over the spotlight last year for upping the price of two-pack EpiPen, an allergy-fighting device, from about $100 when it acquired the product in 2007 to $600.

But those egregious cases of price hikes have only drawn the public’s attention away from a systematic upsweep in the price of medicines, says Munos. He views the big-picture pricing dilemma as symptomatic of a convoluted health care payment regimen in which price and access are determined by cycles of negotiation between drugmakers, insurance companies, and pharmacy benefit management (PBM) firms.

Opaque complexity

George Poste, chief scientist at the Complex Adaptive Systems Initiative, a health care technology research venture at Arizona State University, agrees with Munos. Drugmakers are blamed for high prices, Poste says, but the system that sets prices and determines patients’ access to drugs should also be taken to task.

Courtesy of George Poste

“Is the industry being innovative? My answer would definitely be yes. Has the industry been effective in communicating the complexity of this matrix? The answer is unequivocally no.”

George Poste, chief scientist, Complex Adaptive Systems Initiative, on the complexity of drug pricing

“Everyone sort of focuses on list price,” says Poste, who worked as the chief technology officer and president of R&D at drugmaker SmithKline Beecham from 1981 to 2000. “But in reality, we are dealing with a byzantine and, more importantly, opaque system with rebates, discounts, patient copays, and all the other issues that affect intermediaries in this.”

News coverage has focused on individual companies accused of price gouging, he says, resulting in a vilification of drug companies and their executives as a category.

Signpost drugs

Drugs in the news over the past five years offer case histories on medical break- throughs, research shortcomings, regulatory uncertainties, and pricing mayhem.

2012
Zaltrap
Sanofi’s colorectal cancer drug became a lightning rod for critics of cancer drug prices when doctors refused to prescribe it at $11,000 per month. After an op-ed piece by oncologists appeared in the New York Times, Sanofi effectively halved the drug’s price.

2014
Sovaldi/Harvoni
Gilead’s breakthrough drugs can cure hepatitis C, but they immediately came under fire for their unexpected high price: $80,000 for a course of treatment for Sovaldi and $94,500 for Harvoni.

2015
Daraprim
After acquiring this de- cades-old treatment for a parasitic infection, Turing Pharmaceuticals jacked the price of Daraprim by 5,000% to $750 per pill. The move made Turing’s then-CEO Martin Shkreli the emblem of industry greed.

Duexis
With the media focused on high drug prices in the wake of Daraprim, Horizon Pharmaceuticals became the next target of public ire over the $1,500 price for Duexis, a combination of generic equivalents of painkillers Motrin and Pepcid.

2016
PCSK9 inhibitors
The $14,000-per-year price tag of Repatha and Praluent, cholesterol-low- ering drugs introduced by Amgen and Sanofi, re- spectively, led insurers to direct patients to cheaper generic treatments. Mar- ket acceptance influenced Pfizer’s decision to drop its PCSK9 program.

Exondys
Sarepta’s drug to treat Duchenne muscular dystrophy was granted accelerated approval based on a trial of just 12 patients that offered little evidence of effectiveness. Critics accused FDA of bowing to pressure from advocacy groups and lowering the bar for drug approvals.

EpiPen
When Mylan increased the price on a two-pack of its injectable epineph- rine pens from $100 in 2007 to $600 in 2016, the spotlight on industry price gouging shifted from Turing to Mylan.

Tarceva
Genentech announced that doctors should no longer prescribe the lung cancer drug for most patients after a clinical trial found it benefited only a small group. FDA approved Tarceva despite indication that it was ineffective for 90% of patients.

Spinraza
Biogen’s spinal muscular atrophy drug was lauded for its ability to save the lives of infants with the rare disease, but it was scrutinized when it was priced at $750,000 for the first year of treatment.

2017
Acthar
Mallinckrodt Pharmaceu- ticals paid $100 million to settle with the Federal Trade Commission over charges that it main- tained a monopoly on a drug for infantile spasms and multiple sclerosis priced at $34,000 per vial. The price of the drug, which Mallinckrodt pur- chased in 2014, has risen 85,000% over 15 years.

“No one shines the hot spotlight on the PBMs and the health care providers and the insurers in this debate,” says Poste. “This will inevitably lead to flawed conclusions and dangerous consequences.”

A few pointed changes to the regulatory landscape could alleviate some of that complexity. But there’s disagreement about how to move forward. Many balked last month when, during a meeting with pharmaceutical industry executives, Trump suggested that regulatory reform—including what some interpret as a lower bar for new drug approvals—would solve industry’s problems.

Poste is among those concerned about lower clinical hurdles for new drugs, but he also cautions against taking a reactionary stance toward notions of regulatory reform. “The minute you talk about easing regulation doesn’t mean that mayhem automatically follows,” he says. For example, current rules barring companies that have filed a new drug application from communicating with payers could be scrapped. “This is important information that helps everyone better understand pricing policy, formulary allocation, and so forth.”

A firmer conditional drug approval framework could also be established, allowing drugs that have proven efficacy for subsets of patients onto the market. “Drugs will come to the market earlier, R&D costs will be reduced, and therefore the price should be lower,” Poste says.

But critics of the industry are doubtful the answer lies in regulatory reform. Aaron Kesselheim, a professor of medicine at Brigham & Women’s Hospital and Harvard Medical School, notes that the Food & Drug Administration is already the fastest drug approval agency in the world.

And even with the new Administration’s talk of accelerating drug approvals, Kesselheim doesn’t foresee major legislative shifts enacted by the federal government. “If there is going to be change, I guess it happens within the companies,” he says. “But the drug companies in recent decades have been among the most profitable in the world. That sort of environment doesn’t necessarily lead people to make major changes.”

And indeed, the concept of faster approval pathways hit a bump last year when Sarepta Therapeutics’ drug for Duchenne muscular dystrophy was approved under an accelerated process despite what critics felt was a lack of evidence that it worked.

Industry experts also advocate an easier pathway to approval for drugs that have long been used off-label or are widely used outside the U.S. Because FDA requires companies to run expensive clinical trials to prove those older drugs’ efficacy, firms are rewarded with the same benefits—patent exclusivity and pricing flexibility—as those offered for novel treatments.

Another Duchenne drug recently brought the perils of that system to the fore. Marathon Pharmaceuticals did limited clinical work to get FDA’s nod for an older steroid that has long been approved in Europe. Despite its minimal work, Marathon, a member of PhRMA, initially priced its drug, Emflaza, at $89,000 per year.

Still, Poste is confident most drugs introduced via a well-crafted conditional approval framework will remain on the market because of the quality of research in key areas. The trick, Poste says, is to sustain that innovation while maintaining affordability and access to drugs. Pricing transparency is also key.

“Is the industry being innovative? My answer would definitely be yes,” says Poste. “Has the industry been effective in communicating the complexity of this matrix? The answer is unequivocally no.”

A time-honored response

John LaMattina, former head of R&D at Pfizer and now a nonexecutive director at PureTech Ventures, is certain the traditional pharmaceutical companies are pushing forward with innovative science, and he takes issue with claims that big pharma is lagging on productivity. The fact that 2016 saw a roughly 50% drop in FDA drug approvals is, he says, a natural downturn after two years with extraordinarily high numbers of approvals.

Courtesy of John LaMattina

"What Gilead did was right. Every economic analysis done shows the price is more than reasonable given the savings down the road.”

John LaMattina, nonexecutive director at PureTech Ventures, on the cost of Gilead’s hepatitis C treatment

“There is so much good science going on,” says LaMattina. “The challenge is in coming up with drugs that have value, that payers are willing to put on formularies, and that doctors are willing to prescribe.”

LaMattina says the concept of value-based pricing is gaining momentum. That approach rewards drugmakers for delivering successful results for patients: Their drugs are priced according to the value they deliver to the health care system.

Gilead’s hepatitis C drugs, for example, were given very high price tags on the basis of savings that accrue from curing a chronic disease. “What Gilead did was right,” says LaMattina. “Every economic analysis done shows the price is more than reasonable given the savings down the road.”

But consumers find that value-based argument tough to swallow when confronted with drug firms’ sizable profits. LaMattina falls back on big pharma’s time-honored response: The industry does make a lot of money, but it plows 15% of it back into research. “The more money we make, the more R&D goes on,” says LaMattina. “But at the end of the day, a company should be able to get a price based on the value of the drug they produce.”

Ian Read, the CEO of Pfizer, recently defended drug pricing at the annual economic forum in Davos, Switzerland, evoking the R&D investment argument. Read also defended the industry on pricing against the CEO of a biopharmaceutical company, Leonard Schleifer, on a panel on restoring the industry’s reputation hosted by Forbes magazine in New York City last December.

“The real reason we’re not liked, in my opinion, is because we as an industry have used price increases to cover up the gaps in innovation,” said Schleifer, CEO of Regeneron. Read replied that drug prices have not changed as a percentage of health care costs in 20 years, an argument that has been the standard defensive play from big companies.

Watching the panel, LaMattina says he was more aggravated by comments from John F. Milligan, CEO of Gilead, who, in effect, apologized for the price of his company’s hepatitis C treatments. “I took offense because there was nothing to apologize for,” says LaMattina. “It was a chance for him to talk about paying for value and not paying for lack of value. And he blew it.”

LaMattina says the industry’s reputation as a whole has been badly affected by outlying price gougers. “The public does not distinguish between Ken Frazier and Martin Shkreli,” LaMattina says, referring to the CEO of Merck & Co. and the former CEO of Turing. “When these companies exhibit bad behavior, then everyone is bad.”

PhRMA members such as Marathon that have been called out for outrageous price increases are of serious concern, says LaMattina. But he insists that the major drug companies, despite the high prices of their drugs, are utterly distinct from bad actors. He suggests that the 12 largest drug companies split from PhRMA to form their own association.

Munos notes, however, that former CEOs and research directors of the top 12 companies are on the advisory boards of smaller companies within PhRMA that have been accused of price gouging, complicating any claims of ethical distinction on the part of the large players. Further, he is not convinced that gathering forces is the right strategy for big pharma.

In fact, if value-based pricing hits its mark, there may not be enough companies to unite in pharma’s defense. “Frankly, I think it is a prospect the industry dreads,” he says. “They know full well that a number of them won’t be able to pass the test because their drugs just don’t deliver that much value.”

“Real patients and researchers”

PhRMA, however, insists the industry is committed to value-based pricing. “We feel the health care system should evolve to move away from the current model to one where benefits are paid according to how drugs work for patients,” says Robert Zirkelbach, executive vice president for public affairs at PhRMA.

At the same time, Zirkelbach contends that current critiques of the pharmaceutical industry overemphasize pricing. “The interesting thing is that we are living in a new era of medicine where the drugs coming on the market would have been considered science fiction just five or 10 years ago,” says Zirkelbach. “For most of the general public there is no understanding of how far the science has come in recent years.”

Still, PhRMA in recent weeks has managed to get bogged down in a public pricing debate. After PhRMA’s CEO Stephen Ubl publicly disparaged price-gouging tactics by Turing’s former CEO Martin Shkreli, the smirking bad boy shot back that major drug companies are no different than Turing when it comes to outrageous pricing.

And days after the public outcry over Marathon’s $89,000 annual price tag on an old steroid, PhRMA said it was conducting a “comprehensive review” of its membership criteria to guarantee that it serves only research-based firms.

Still, Zirkelbach says PhRMA has no plans to release advertising addressing the issue. “Conversation around outcomes-based payment for medicines is not something that lends itself to a 30-second or 60-second sound bite,” he says. PhRMA, instead, will stick with themes such as immunotherapy and genomics, introducing “real patients and researchers” in upcoming ads, Zirkelbach says.

The problem, according to Poste, is that patients fully expect drug companies to have fantastic science at their fingertips and assume that they do. They want a response on pricing. “Creating a war chest was a recognition that there were turbulent times ahead,” he says of PhRMA’s costly new campaign. “That was sensible, proactive planning. But the message of innovation is still going to be drowned out by the price issue. People will say, ‘Wonderful commercials, you’re innovative, but you’re creating products that we can’t afford.’ ”

Munos adds that PhRMA may be selling patients short on their understanding of value as a pricing issue.

“I think the CEOs are out of their depths,” he says. “Patients do get it. If you have to choose between food for your kids and insulin, you’ll see value differently than the way CEOs see it. That is what the CEOs don’t understand.” 

 
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Comments
Chad Brick (February 28, 2017 2:53 AM)
"The industry does make a lot of money, but it plows 15% of it back into research."

So we can overpay for drugs, and get $0.15 of research for each dollar. Or we can take the same dollar, give it to NIH, and get $0.95 of research. Quite obviously, we'd be much better off negotiating drug prices like every other major country on earth, and then taking our ten-figure annual savings and reinvesting a portion into drug research.
Girish Malhotra (March 1, 2017 3:13 PM)
Chad: Most of orphan drugs come from NIH and they are tax payer money and we get nothing back. Companies benefit from the research and then they get tax credits for the orphan drugs under the ODA act of 1983.

While working on ACA pharma donated about $95 billion to make sure Medicare does not negotiate prices.
Girish Malhotra (March 1, 2017 3:32 PM)
It is fascinating that most of the writers drool over how many drugs were approved year before and how many will become blockbusters. Unfortunately no one cares ho many patients benefit per drug and are they affordable.

Linked might be of interest.

https://pharmachemicalscoatings.blogspot.com/2017/02/pharmaceutical-sales-forecasts-fiction.html?m=0
As long as pharma lobby is strong and drug prices are not controlled patients in the United States will continue to pay high prices through mutually subsidized system. Recent under ten percent price rise is another reflection of pharma not having any exceptionally better drugs for masses.

By the way if drugs were affordable and global population could spend ONE cent per person per day pharma revenue will go up by about $28 billion per year. There are opportunities but the recent pharma focus has been to create and sell new drugs for limited population.
Anon. (March 2, 2017 3:15 PM)
I wonder if anyone connected to the drug business ever looked up the Greek word for sorcery?
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