Drugs Should Be Priced Based On One Factor – Value – Forbes

For a number of years, the price of drugs has drawn extraordinary attention. Based on the current discourse, one would think that the nation’s healthcare costs were dominated by medicines. In reality, drugs account for less than 15% of all medical spending. Yet, the clamor raised about drug prices has been such that Congress, as part of the Inflation Reduction Act, for the first time gave Medicare the power to dictate the price of drugs. One would have thought that this step would lessen the issue of drug pricing.
(PHOTO BY Francis Dean / Deanpictures (Photo by Francis Dean/Corbis via Getty Images)
Unfortunately, a recent paper in the Journal of the American Medical Association entitled “Association of Research and Development Investments With Treatment Costs for New Drugs Approved From 2009 to 2018” has proven otherwise. The authors provide data to show that the price of drugs has little to do with the research and development expenses generated in bringing new medicines to market. As stated in their conclusion: “In this cross-sectional study, research and development investments for 60 new agents approved by the FDA from 2009 – 2018 did not explain the variation in list prices. Drug companies should supply further data to support claims that high drug prices are needed to recover research and development investments, if this argument will continue to be used to justify high prices.”
As has been pointed out by others, notably by Ron Cohen, CEO of Acorda Therapeutics, this study is flawed. First of all, the data for only 60 drugs out of the 355 approved by the FDA from January 1, 2009 to December 31, 2018 were analyzed. The authors were also limited by the fact that they only had LIST prices available for the drugs in question and not the NET prices that the drug company actually receives as a result of negotiations with payers. Few realize, in fact, that drug companies on average only receive 48% of what patients pays for their medicines with the remainder going to insurance companies, pharmacists, distributors, etc.
There is no doubt that pharmaceutical R&D is difficult and expensive. It can take anywhere from 8- 15 years and cost about $2.5 billion to bring a medical breakthrough to market. Furthermore, 90% of the experimental medicines put into development fail. This is not a business for those with little patience or little tolerance for risk. Thus, when pricing a new drug, a company needs to get a significant return on investment in order to keep the business viable. That certainly impacts the drug’s ultimate price.
But, there is one overriding factor when pricing a new drug – the VALUE it brings to patients and the healthcare system
A great example of the value of a new medicine came from Gilead and its hepatitis C treatment, Sovaldi. Before this drug was available, the cocktail of drugs used to treat hepatitis C was not very effective. Plus, it was expensive and poorly tolerated causing patients to suffer flu-like symptoms for months. As a result many patients shunned treatment despite the fact that hepatitis C can lead to liver cirrhosis, liver cancer and in the worst cases the need for a liver transplant. One would have thought that the launch of Sovaldi, a pill that needs to be taken once-a-day for only 12 weeks, would have been hailed as a major medical breakthrough. After all, Sovaldi was far more effective, safer, and much easier to administer than the older therapy. But instead, Gilead was assailed because of the price of this drug – $84,000 for a course of therapy or $1000/pill. Yet, even at this price, which is the LIST price, Sovaldi was cheaper than the previous treatment regimen that cost upwards of $100,000.
But, $1,000/pill was just the starting point. Within a year, competition for Sovaldi appeared from AbbVie and Merck. As a result, payers had other options and negotiations for hepatitis C drugs heated up. While the actual price now paid for these drugs (NET price) is not transparent, it is believed that using these drugs to cure hepatitis C costs around $25,000/patient – certainly a bargain to the healthcare system which now has ways to prevent the leading cause of liver cancer and liver transplants. And it must be noted that in the coming years, the patents for these drugs will expire and generic versions will be available thereby resulting in much, much lower prices. Hepatitis C drugs provide extraordinary value.
When the value of a new drug is questionable, there can be a justifiable backlash. This is what occurred with a drug for Alzheimer’s Disease– Biogen’s Aduhelm. The Aduhelm FDA approval was shocking as its efficacy data for this drug were, at best, weak. In fact, when the FDA’s Peripheral and Central Nervous System Drug Advisory Committee met to review the results of Biogen’s clinical trials, eight members voted against approval, two were unsure, and only one voted to approve. Despite this negative vote, the FDA approved Aduhelm thus spurring tremendous controversy. These people were even more infuriated when Biogen announced that Aduhelm would cost $56,000/patient/year. Despite the dire need for drugs to treat Alzheimer’s disease, the value of Aduhelm was highly questionable and, as a result, sales were negligible. Biogen even resorted to cutting the price of Aduhelm in half with the hope of improving uptake of the drug, but this ploy failed. Eventually, Biogen pulled the drug from the market.
Value is the overriding factor when pricing a new medicine. Yes, companies must get a return on investment to survive. But, in order to command a high price, a company needs to show how the new drug is either life-saving or dramatically improves the lives of the patients who are suffering. The company then must show that from an economic standpoint, the drug can provide financial benefits to the healthcare system. This is nothing new. Companies in recent years have been doing this to justify their prices to payers.
Yes, drug R&D is difficult, costly and risky. But these factors don’t really justify a high price. Value does.
John LaMattina is the former president of Pfizer Global R&D and the author of Pharma & Profits: Balancing Innovation, Medicines, & Drug Pricing.


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