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Big Pharma Leaders Face Dilemma Over Rising Drug Prices

Industry CEOs need to rethink how they set prices—or face price controls that could wreak havoc with innovation.

Pfizer CEO Ian Read is not thrilled about Hillary Clinton’s plan to lower drug prices. Speaking at Wells Fargo’s annual healthcare conference, Read said, “It will be very negative for innovation.” The Democratic presidential candidate said that if elected, she would create an oversight panel to protect U.S. consumers from price hikes on life-saving drugs and important alternative treatments if necessary. Clinton already considered letting Medicare negotiate drug prices as one way to rein in costs, but after Mylan jacked up the price of its EpiPen, she doubled down saying she would institute an “aggressive new set of enforcement tools.” Last March, the candidate said she was “going after” Valeant, whose price hikes for a number of therapies have drawn widespread fire from all sides.

Read believes such moves will not only lead to a single payer health system, but will squash innovation in pharmaceuticals. He also repeated the familiar line that the public does not appreciate that new drugs are expensive to produce and that they curb other healthcare costs such as hospital stays. Drugmakers could be seen as the Rodney Dangerfield of American industry. They don’t get respect—or at least the respect leaders like Read feel they deserve.

“Read’s concern is that more government regulation—in effect price controls—is a remedy that is worse than the disease it purports to cure. Pharma’s ability to innovate depends upon its profitability.”

The curious thing about escalating drug prices is that it is hardly new. It was only when Martin Shkreli, then the CEO of Turing Pharmaceuticals, did something considered so reprehensible that he was dubbed “the most hated man in America” that this made the news. Shkreli increased the price of a little-known but important drug called Daraprim from $13.50 to $750 per pill. Daraprim is the best treatment for toxoplasmosis, an infection to which those with HIV/AIDs or cancer are susceptible. After that action, Shkreli became the poster child of pharma industry greed despite the fact that the price increase was completely legal.

Dealing with the backlash
What makes the case of Daraprim so critical is that it brought a serious—and growing—healthcare problem out into the open: America spends a staggering amount of money for prescription drugs—$424 billion last year alone before discounts, according to a new report by IMS Institute for Healthcare Informatics, a firm that tracks the pharmaceutical industry.

Surely Read and other drug leaders have been aware of the public’s growing backlash for decades. That they have dithered over what to do about it doesn’t speak well for anticipating external threats to the industry’s current pricing model. Unlike other industries, the market for specialist drugs is inelastic. In the grocery business, if the price of beef rises to unacceptable levels consumers can substitute chicken or pork. If patients are trying to treat hepatitis C and can’t afford the cost, they have few options.

Observers argue that high prices for generic and brand-name drugs stem in part from a battle over profit between big pharma and insurance companies—with consumers caught in the middle. On the one hand, pharmaceutical companies blame insurance companies for passing along high costs to consumers. And insurance companies point to very high-priced drugs for which there are few or no alternatives, which ultimately affect how much insurance coverage people receive and how much they must pay out of their pockets.

The practice of raising drug prices on new—and old—medications is common and widespread. A Consumer Reports survey earlier this year revealed that three in 10 Americans (about 96 million people) were hit with price hikes within the previous 12 months, costing them an average of $63 more for a drug they routinely take—and a few paid $500 or more. This included generics used to treat common conditions such as diabetes, high blood pressure, and high cholesterol to new treatments for diseases such as hepatitis C. The CR poll showed that when people were hit with higher drug costs, they were more likely to take unhealthy measures such as skipping doctors’ appointments, tests, or procedures, or not filling their prescriptions or taking them as directed.

Regulations and R&D
Read’s concern is that more government regulation—in effect price controls—is a remedy that is worse than the disease it purports to cure. Pharma’s ability to innovate depends upon its profitability. Data from a recent PhRMA survey of member companies found that companies invested $58.8 billion on research and development in 2015, up 10.3% from the prior year. Revenue from commercially successful medicines is reinvested in research for the next generation of treatments, according to the industry group. And this doesn’t account for failure rates and delays in the approval process. And coming up with new effective drugs ain’t cheap. (Johnson & Johnson and Pfizer spent about 13 percent and 16 percent of revenue on R&D, respectively. At the same time, both companies spent about 30 percent of revenue on selling, marketing, and administrative expenses.)

It would be ironic if the U.S. drifts toward the European drug industry model. 20 years ago pharmaceuticals were largely developed in Europe; European price controls forced drug development to America. Fifteen of the 20 top-selling drugs worldwide this year were created in the U.S. (This is why European firms such as GlaxoSmithKline have moved essential R&D work to the U.S.) It is ironic that the EU is reconsidering its system of price controls just as the politics in America is going in the other direction.

The “social contract”
The most obvious help pharmaceutical makers can provide is to charge less—or at least slow the pace of price increases. There is a precedent: Rising drug prices in the 1990s led to public outcry and congressional hearings. And fearing price controls, nine drug companies, led by Merck, made a pledge to keep price increases at or below increases in inflation.

At least one other big pharma CEO is taking a similar approach. Brent Saunders, Allergan chief executive, recently pledged a “social contract” with patients that include “reasonable” drug pricing and limited price hikes. In a blog post on Allergan’s site, Saunders promised to balance the profit motive with legitimate investments in R&D that could yield life-saving drugs. He also condemned the controversial price increases that have placed the biopharma industry in its present untenable position. “I understand the public outcry and add my voice to the condemnation of these behaviors,” Saunders wrote. He went on to make several promises, including that Allergan won’t raise prices on branded medications by 10% or more and won’t hike price tags more than once per year, after discounts and coupons are taken into account. In addition, he pledged the firm will provide an “aggregate” explanation of how its price increases affect medical spending and the industry at large at least once per year.

“I think the entire biopharmaceutical sector needs to take a step back, look in the mirror and figure out how we discipline and self-police ourselves to be able to balance investing in research and development and innovation—and pricing our medicines responsibly,” Saunders told the Washington Post’s Carolyn Johnson. Saunders’s approach may not be appropriate for every company. Early institutional analyst reaction to Allergan’s move was positive.

But the question is, will Saunders be joined by his fellow pharma leaders before the current political tide forces the industry’s hand?


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