Replies to post #160998 on Biotech Values

[biocqr]

BSR_David (David Miller) has an interesting take on the subject...

snip...

Those on the far left think strict drug price controls are the answer. Perhaps they are, but few people trust that any group of individuals created to determine prices will have the knowledge and foresight necessary to balance cost to society with sufficient profits to maintain rewards necessary to navigate one of the planet’s riskiest R&D endeavors.

Those on the far right believe market forces will control costs. Perhaps they will, but we've seen little to no evidence of that among the most expensive drugs -- those for cancer or orphan indications. Companies can and do charge whatever they want in the US because, (1) The consumer doesn’t actually pay for it -- a private or public insurer does, and (2) We have no mechanism that allows public insurers to negotiate prices.

Congress, not surprisingly, has navigated a middle road.

On one hand, it requires the Centers for Medicare and Medicaid Services (abbreviated as CMS) to cover every FDA-approved drug. It prohibits the FDA from considering cost or economics when making drug approvals. It bans CMS from using its considerable buying power to negotiate better pricing for taxpayer-funded plans.

On the opposite hand, Congress has directed CMS to never reimburse more than the average wholesale price available in the US marketplace. This policy is a subtle way around the negotiation prohibition because it essentially lets CMS piggyback on price breaks negotiated by private health-care providers, wholesalers, and insurers. CMS can get quite feisty when wielding this limited cost control club, taking drugmakers to court for fraud if they try to hide price breaks given to private parties. This system allows the US government to not pay “over retail,” which pretty much everyone can agree is a wise protection of taxpayer dollars.

This system has one certain side effect. US drug consumers get the shaft. The price for any given drug is almost always higher in the US than it is in other developed economies. And it’s not just the price. To get their blood cancer drug Velcade approved in the UK, Johnson & Johnson (JNJ) had to agree that it would rebate the government the cost of the drug if Velcade didn’t improve the patient’s condition.

Everyone raise their hand if they’d like that money-back guarantee on their own health-care expenditures!

Cost controls are more broadly used overseas. That’s a fact. The effect of this on American consumers is we bear more than our fair share of drug company profits and R&D expense. When Pfizer (PFE) blew $800 million on its torcetrapib failure, someone had to pay for that. Americans, who pay more for a Lipitor pill than nearly anyone else in the world, paid for more of that R&D failure than anyone.

It should be noted that drug manufacturers go into these negotiations and cut their prices more or less willingly. Sure, some countries threaten to invalidate a patent if a drugmaker doesn’t play ball, but to actually do so would ensnare the country in international patent and trade litigation and make them a pariah nation. Drug companies make deals like the makers of Velcade did with the UK because they know they can make up the difference in the US marketplace.

The solution to the unfair burden American consumers bear is pretty simple. In fact, Congress already thought of the mechanism and CMS has the procedures in place to make it workable.

All Congress needs to do is tweak its instructions to CMS. Instead of directing CMS to never reimburse more than the average price in the US marketplace, direct CMS to never reimburse more than the average price in the worldwide marketplace. If a drug company wants to cut a sweetheart deal with another country, that’s fine. They just have to cut the same sweetheart deal here in the US.

Read more: http://www.minyanville.com/businessmarkets/articles/pharmaceutical-pricing-congress-democrats-republicans-pharmaceutical/9/30/2010/id/30328#ixzz2Sv2gc39l

[iwfal]

The conventional wisdom, as described in a Reuters piece today (in.reuters.com/article/2013/05/10/us-usa-health-drugs-idINBRE9490UB20130510 ) is that the US has the highest branded-drug prices because of political imperatives and/or greed by the drug companies. However, these explanations miss a major point: the US is one of only a few countries in the world with fully substitutable generic drugs, which causes US branded drugs to lose almost all of their pricing power once they go off-patent.

In most other countries (including most countries in Europe), branded drugs continue to enjoy healthy market share even after patent expiration because generic drugs are not substitutable by a pharmacist or hospital, but rather must be explicitly prescribed (i.e. they are branded generics).

An interesting thesis for discussion - but I would suggest your logic implies much too strong a connection. E.g.:

1) If you got rid of substitutible generics in the US would you expect that the price inflation of on-patent drugs would start to significantly level out? No chance whatsoever IMO.

2) If you instituted substitutible generics in Europe would you expect that significantly more of the companies would just say "no, not worth our time - do without our drug". Again, no chance whatsoever IMO.

The reason is that even without substitible generics the life of a drug is generally a long way off (i.e. uncertain future discount results in small NPV deltas) and is in any case limited by other means - by non-substitutible, by Me-too's, by technological obsolesence, ... . I would suggest that substitutibility is only a small player in the initial NPV for most drugs due to the long time horizon and all the other factors at play