Biotech Values

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WSJ Editorial -- Medical Innovation Threat

The attack on a near-cure for Hepatitis C is a prelude to price controls.

Aug. 19, 2014 7:06 p.m. ET

http://online.wsj.com/articles/the-medical-innovation-threat-1408489613?_outlook

An invasive species has been introduced into the U.S. health innovation ecosystem, with a growing danger of permanent damage to the development of specialty drugs. The relentless assault on the price of Sovaldi is becoming a threat to the 30-year political balance that has energized the biomedical revolution.

Sovaldi is the kind of medicine that the drug scolds claim to want—a true scientific advance with a near-perfect cure rate for Hepatitis C, the liver-destroying virus that infects one of every 100 Americans and some 150 million world-wide. The old critique was that pharmaceutical discovery had stalled and the industry produced only me-too drugs. Now they attack Sovaldi because its price is $84,000 a patient.

The claim by the insurance industry and liberals is that the market is producing irrational and anticompetitive prices. So politicians are moving to do what comes naturally, which is transfer pricing control to government.

"A big part of our concern is not just Sovaldi, but all the other specialty drugs," said Mario Molina, the CEO of Molina Healthcare that runs Medicaid and ObamaCare plans in nine states, on a July earnings call. He added: "I think that the government needs to step in here and make sure that the market is rational. If we as a health plan want a rate increase, we have to go to our regulators and get it approved. There's no such thing going on in the pharmaceutical market. Right now, pharmaceutical companies can charge whatever they want, and I think there needs to be a rational basis for all of this."

In other words, time to blow up the durable consensus of the Hatch-Waxman law of 1984. In exchange for the staggering risk and investment to make a new drug, and the far too slow and adversarial FDA approval process, companies are granted intellectual property protection and the freedom to set their own prices as an incentive for research and development. The life of a pharma patent is now roughly a decade. After that the long-run interest in cheaper medicines is satisfied with generic copies, which now make up 86% of prescriptions filled.

Supposedly Sovaldi's maker, Gilead Sciences, GILD +0.69% has broken some Hatch-Waxman social compact by charging too much, but the critics never define the "correct" level and in any case this first-in-class cure is priced comparably to Hep C treatments with life-long toxic side effects. The critics seem to know the price of everything and the value of nothing, which in this case includes the benefit to patients and eradicating this disease in the U.S. by 2036, according to an MD Anderson Cancer Center analysis.

The health insurers say they merely want to secure lower prices for consumers and more transparency about how drug prices are determined. Democrat Ron Wyden and Republican Chuck Grassley of the Senate Finance Committee seem to have missed this subtlety.

In a recent letter to Gilead, the Senators question "the extent to which the market for this drug is operating efficiently and rationally" and suggest that Sovaldi's price "appears to be higher than expected given the costs of development." They go on to make 21 demands for information with 41 subparts and 28 footnotes, such as "an itemized accounting of research and development costs" including "separate line items for personnel costs, clinical studies, materials and supplies, licenses and fees" and on and on.

Disclosing such sensitive proprietary data can only be meant as prelude to price controls or another form of regulation that treats drug makers as public utilities. As America's Health Insurance Plans CEO Karen Ignani recently asked in these pages, "Do the prices reflect the cost of investment, or are we entering a new phase where monopolies approved under patent law are producing prices entirely untethered to the cost of developing drugs?" In Washington such questions are rarely rhetorical.

The reality is that drug prices have never been tethered solely to R&D and other spending incurred over the course of their narrow development, as Messrs. Wyden and Grassley seem to favor. Drug researchers are not oracles. Most of the some 700 Hep C projects across the biotech industry over the last two decades miscarried in the lab or in trials before Sovaldi emerged.

To the extent drug prices are rising, one reason is because researchers are asking more challenging clinical and biological questions. Only two of every 10 drugs on the market ever earn back enough money to match the cost of R&D and FDA approval before patents expire. Successful drugs thus underwrite the uncertain, failure-prone, time-consuming and often wasteful and even random process of scientific invention.

One irony of the Sovaldi debate is that insurers already use many pharmacy management methods to contain consumer drug costs, such as step therapy, prior authorization and tiered benefit designs. They help explain why premiums in the Medicare drug benefit will rise by all of a dollar a month next year. For Hep C, a new generation of treatments is forthcoming from AbbVie, ABBV -0.97% Bristol-Meyers BMY -0.43% Squibb and Merck. Are those me-too drugs, or competitive alternatives that will pull down costs? Just asking.

And if insurers really believe that the benefits of this drug aren't worth the money, then they should refuse to pay and say the market cannot bear $84,000 for a breakthrough. Memorial Sloan-Kettering oncologists mounted a 2012 boycott of a colorectal cancer medicine called Zaltrap that cost $11,000 a month and forced Sanofi SAN.FR -0.79% to cut the price in half.

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We suspect the reason such a pricing ultimatum hasn't been made is that Sovaldi really does pass the cost-benefit test. The drug is nonetheless being demagogued to undermine the institutions and patent-certainty that make America the one market in the world that rewards medical progress as a sustainable financial enterprise.

We're told this Congress would never pass price controls, but don't be so sure. Populist wildfires burn in unpredictable directions—and might yet turn on Gilead's critics too. Advances in molecular biology, genetics, oncology, neuroscience and immunology could well produce therapies whose inventors charge now-unthinkable prices. Financial markets, insurance included, exist so consumers and businesses can afford large expenses over time like homes and education and for that matter jet engines.

If the insurance industry doesn't innovate beyond the status quo and develop modern financial products that allow patients to afford medicines like Sovaldi, consumers and politicians may conclude that insurers don't need to exist either.