Pharmaceutical companies need to turn a profit, just like any other commercial operator, but are they also under an obligation to make their products more widely affordable?

If a carmaker developed the safest vehicle ever to hit the roads and put it on the market with a high price tag, no doubt company executives would be stunned if people demanded access to the vehicle for less. While making such demands of a private firm might seem absurd, the world’s giant pharmaceutical companies are frequently in this position. Their drugs, which can take years and billions of dollars to develop, save and prolong lives. At the same time, companies are facing increasingly angry criticism over the escalating prices of new medications, with some insurance and healthcare agencies crying corporate greed.

The reasons drug prices are high vary, depending on who is answering the question. But analysts agree that more efficient operating practices by pharmaceutical companies and stakeholder cooperation could help lower drug prices. “The price of medicines is determined by the costs of development and the size of the market,” says Susanne Stormer, vice-president for corporate sustainability at Denmark’s Novo Nordisk.

According to Bernard H Munos, founder of the InnoThink Center for Research in pharmaceutical Biomedical Innovation, a consultancy that focuses on pharmaceutical innovation, one of the reasons drug prices are high is that the larger companies have experienced a significant decline in research and development (R&D) productivity over the past 15 years. That has led to the creation of fewer drugs from which to recover their large research expenditures, says Munos, who has also worked as an adviser for corporate strategy at US drugs giant Eli Lilly. Large pharmaceutical companies typically spend between $4bn and $10bn in R&D for each drug they bring to market.

“The drug companies have also promised sales and earnings growth to investors,” Munos continues, “but half of their revenues come from products that are no longer protected by patents, and over which they have little pricing power. To meet their goals, they must price their newer patent-protected products aggressively, which has led to the extreme prices that are now routine.”

Scepticism about whether these pricing policies are sustainable is widespread. “Thankfully,” Munos says, “many of the large pharmaceutical companies are now led by a new generation of leaders who are resourceful and compassionate, and are trying to address the dire situation that they inherited. “This is an industry in mutation. It is changing, and that is good news for everyone, certainly patients.”

More pharmaceutical leaders are showing compassion

But while drug companies produce lifelines for people, they are nevertheless in business to make money, notes Kenneth Kaitin, professor and director of the Tufts Center for the Study of Drug Development at the Tufts University School of Medicine in Boston. Companies have many factors to consider when setting prices. “There is the value the company perceives the medicine has to offer; the cost of drug development and the need to generate adequate revenue for future development programmes,” says Kaitin. “Executives also consider if a drug will confront a lot of competition from generic drugs or other treatments and they will evaluate its patent position.” From an industry perspective, “a drug price has to be the highest price they can charge, but it doesn’t help if people can’t afford it.”

When it comes to pricing, executives at GlaxoSmithKline “aim to strike a fair and appropriate balance between the need to reward the innovation that has been demonstrated with the broader expectations that our customers and other stakeholders continue to communicate to us,” says a spokeswoman. “We believe that genuine innovation should be rewarded as it funds the medicines and vaccines of tomorrow. Equally, we are sensitive to concerns about the growing costs of healthcare.”

GSK recently developed “targeted” cancer medications, which treat certain types of cancer at different stages, eliminating the need for more general cancer medications that have limited effectiveness. “This helps us to further align with the objectives of payers and providers,” says the spokeswoman.

Leaner times

The growing cost of research in part is forcing drug companies to operate more efficiently after years of wasteful practices. Billions of dollars have been wasted on collecting irrelevant data from clinical trials of medications: about 20% of the data from clinical trials has nothing to do with a drug’s application. Companies also have been reluctant to shut down projects that were not showing progress. “They just kept funding projects until they failed on their own,” Kaitin says.

In a 2013 Forbes article, Munos wrote that Eli Lilly had written off the almost $100m cost of a half-built insulin plant in Virginia, only to resume the project a few years later – in Indiana. In the UK, AstraZeneca shut its R&D labs at Alderley Park, only to spend $500m on a new facility in Cambridge.

Companies were reluctant to shut down failing projects

Now some companies are collaborating with academic institutions to reduce the cost of early-stage research, Kaitin notes. Others are focusing on translational research, which involves discovering newer and better research tools, such as biomarkers, to facilitate the creation of new medications. Some are also seeking payer feedback earlier in the development process, to ensure common goals. In the U.S., payers are health insurance companies and in other countries, government or governmental bodies responsible for financial healthcare decisions. GSK staff review data with payers and payer advisory boards have been established so members can provide feedback during the R&D phase before a medication reaches the second stage of development, the GSK spokeswoman says.

At the same time many pharmaceutical companies have turned to developing medications for rare or “orphan” diseases, in part because of the financial incentive, Kaitin adds. “Even if only 1,000 people have a disease, a lifetime of treatment can cost hundreds of thousands of dollars.” If a company develops a drug for a chronic orphan disease, it is guaranteed income for years because patients have no alternative.

Drug costs also cannot be viewed in a vacuum. “The pricing of drugs has to be taken in the context of other healthcare costs, such as physicians’ fees and hospital costs,” Kaitin says. Observers need to keep this in mind when considering the prices of two new hepatitis C medications developed by Gilead Sciences, explains Kaitin. The first, Sovaldi, was approved by the US Food & Drug Administration in December 2013. The estimated cost for 12 weeks of treatment with Sovaldi alone is $84,000.

In October, Gilead earned approval for another hepatitis C drug, Harvoni, the first drug ever created that cures hepatitis C. The cost for a 12-week course: $94,500, although Gilead estimates that about half of eligible patients may need only eight weeks of treatment. While the cost of eight weeks of treatment with Harvoni may seem extreme, if a patient is cured, that patient no longer will need other medical treatment, such as hospitalizations and regular doctor visits.

Payers fight back

The combatants in the drug price wars are pharmaceutical companies on one side, and those paying the bills on the other. These payers – the insurance companies in the US and healthcare administrators in other countries – are balking at automatically picking up the tab for drugs whose prices never seem to top out.

“The industry is experiencing lots of pushback,” says Bernard Munos, founder of the InnoThink Center for Research in Biomedical Innovation, a consultancy that focuses on pharmaceutical innovation. “Foreign governments, which are the single payers in many countries, are using their bargaining power to extract heavy discounts. Even in the US, which has historically enjoyed freer pricing policies, there is a risk that upset consumers will trigger a backlash, and pressure policymakers to allow interventionist policies. There is concern, for instance, that at some point, the US government, which buys $100bn worth of drugs annually, might be tempted – or forced – to use its bargaining power.”

In October, the UK’s (Nice) announced it will be looking beyond drug companies’ assurances about their products to independent research to determine if all medications Nice covers are worth the cost. Nice plans to seek clinical data directly from European regulatory agencies if pharmaceutical companies are not forthcoming with information Nice staff need to make informed decisions.

The new wave of hepatitis C drugs is also increasing scrutiny of prices. Healthcare providers were still weighing in on Sovaldi, a Gilead Sciences-produced drug with an estimated cost for treatment of $84,000, when Gilead released Harvoni, at a cost of $1,125 per daily pill. Harvoni, though, is the first drug to cure hepatitis C.

The $84,000 bottle

Brendan Buck, spokesman for America’s Health Insurance Plans (AHIP), the national trade association representing the US health insurance industry, says about Harvoni: “Gilead had an opportunity to demonstrate that it wants to be part of the affordability solution, but the company still seems to believe it has a blank check. Our healthcare system has long relied upon a careful balance between affordability and rewarding innovation, and this pricing topples it.

“The calls for sustainable pricing are growing louder. A sustainable pricing solution will require all private sector stakeholders working together, and health plans will continue to fight for affordability on behalf of American consumers.”

But Gilead defends the cost. “We believe the price of Harvoni reflects the value of the medicine,” says Michele Rest, spokeswoman for Gilead. “Harvoni represents a significant advance in the treatment of hepatitis C because it delivers cure rates of 94 to 99%.”

Payers are operating in an increasingly challenging environment with greater pressures to contain costs, notes a spokeswoman for GlaxoSmith Kline. She says: “This makes it even more important for pharmaceutical companies to deliver medicines of value – to the payer, the patient and the physician.”

Out of reach

Those price tags have generated harsh criticism from insurance companies in the US and raised concerns about affordability in Europe, although the European Medicines Agency has recommended the authorisation of Harvoni. “Pricing like this drives up premiums for everyone, decimates public programmes, threatens jobs and, most importantly, puts promising treatments – like this one – out of reach for many in our society,” says Brendan Buck, spokesman for America’s Health Insurance Plans (AHIP), the national trade association representing the US health insurance industry.

“It’s rare that you find something that is a cure and get lambasted for it,” notes Kaitin. “Harvoni has a 99% success rate – it provides an actual cure, it reduces the costs of hospital stays and the risk of liver damage,” he adds. “We have cancer treatments that extend life for three or four months that cost hundreds of thousands of dollars. Some lifelong medications cost even more.” Gilead probably included in its calculations of the drug price the limited time the company has to recover its development expenses before other compounds come along, according to Kaitin.

Rest added that Gilead has taken steps to make Harvoni more affordable, at least to US patients. “We have programmes in place to ensure that HCV patients in the US with limited or no health insurance options can access Harvoni, and that patients will not be burdened with high insurance co-payments,” she says.

Numerous companies have formal programmes to provide free or low-cost medication to people in underdeveloped countries. Many of these programmes are tied in with the companies’ efforts to meet components of the UN’s Millennium Development Goals (MDGs).

US insurance companies are challenging drug costs

Effective public-private partnerships are starting to emerge. “The industry is regaining its soul,” says Munos “There is acknowledgement that they must help to the extent they can and it is the right thing to do.” Since 2001, for example, Novo Nordisk has offered tiered pricing for insulin. Governments in all of the 49 Least Developed Countries as defined by the United Nations are eligible. The policy ensures that the price of insulin in those countries does not exceed 20% of the average price for Europe, the US, Canada and Japan.

“Childhood diabetes has a very high mortality rate in developing countries, where life expectancy for a child with newly diagnosed type 1diabetes is often less than one year,” says Novo Nordisk’s Stormer. Despite some obstacles, such as not all eligible nations participating and lower costs not always being passed on to patients, in 2013 5.2 million patients were treated with insulin for less than 20 cents a day, according to Stormer. The company also founded the World Diabetes Foundation, the largest funding institution for diabetes health care capacity in the developing world.

Novo Nordisk’s pricing policy contributes to MDG 8 – providing access to affordable, essential drugs in developing countries. Another Novo Nordisk programme builds on the MDG 3 – promoting gender equality and empowering women – and goal 5, improving maternal health. The aim of these programmes is to increase access to screening for gestational diabetes and provide care and lifestyle education for pregnant women with diabetes in low- and middle-income countries.

Novartis focuses on providing treatment for leprosy and malaria patients in underserved areas and reached more than 100 million patients in 2013, according to the company’s website. “Every second, Novartis delivers three malaria treatments,” it says, and the company has delivered more than 600m anti-malarial treatments without profit over the past 10 years. Novartis also offers free care to leprosy patients anywhere in the world, working in collaboration with the World Health Organisation. Since 2000, more than 5 million leprosy patients have received free treatment.

Developing countries need access to affordable drugs

Such corporate philanthropy is to be welcomed, but doesn’t go far enough to address drug costs, Munos says. “It's good to help people in poor countries, but what about the poor in rich countries?”

Most companies offer programmes to help people in the U.S. and other countries who can’t afford their medications. But these programmes are often less than ideal, according to Munos. “They tend to be underused because they are not well-known,” he says. “The qualification process is cumbersome and difficult. The assistance can be total or partial. In the latter case, it leaves patients with costs they still may not be able to afford.”

GSK, for example, provides U.S. patient assistance programmes. In 2013, 316,580 eligible patients enrolled in the programmes, which provided prescribed GSK medicines and vaccines worth a total of US$176 million (£112 million), up from $159 million (£100 million) in 2012, according to a GSK spokeswoman.

Healthy balance

While it has its flaws, tiered pricing is the best compromise to make the pricing-access situation a win-win for everyone, Munos says, although not all entities eligible for discount pricing are taking advantage of it. “It is one aspect of trying to get medications to people in the US and developing countries, but it’s part of the solution, not the solution,” Kaitin notes. “It doesn’t address the larger issues: drug companies are under pressure to generate new medicines, the cost of drug development is rising and the ability to control the cost of healthcare is reaching a breaking point.”

Among the reasons the cost of drug development is increasing is that the industry is focusing more on chronic and complex indications, such as cancer and paediatric diseases, Kaitin explains. “This is leading to larger and longer clinical trials, and patient recruitment and retention continues to be a major bottleneck for conducting trials in many disease areas.” Also, as health plans and other payers have become more cost conscious, companies increasingly have to conduct studies that demonstrate the “economic value” of their products, to ensure formulary inclusion and reimbursement. “This is especially true in the EU,” he adds. Companies also must cope with an increase in regulatory hurdles, especially in the areas of risk assessment and management.

Another reason for higher development costs is that the failure rate of drug candidates in clinical development has gone up, says Munos. “The costs of the drugs that fail before they are approved must be recovered by those that are approved.”

Finding the cure to the drug-pricing problem is going to take more public-private cooperation. “I think governments, drug developers and payers must work together to come up with solutions,” Kaitin says. Governments play an important role in stimulating pharmaceutical innovation, he continues. “They do this through policies and initiatives that lower barriers to development, such as the recently-introduced Breakthrough Therapy Designation, and improve regulatory transparency and efficiency [through measures such as] the 1992 Prescription Drug User Fee Act, and all the subsequent reauthorizations that were passed every five years.”

Many governments also offer significant market incentives, such as the Orphan Drug Act, which provides seven years of market exclusivity, and the Pediatric Initiative, which allows six months of additional market exclusivity on any product in a company’s portfolio, he notes. “It’s on governments’ shoulders to make sure companies can continue to innovate, while ensuring that patients can get the medicines they need,” Kaitin adds.

drugs  Gilead  medicine  Novo Nordisk  pharmaceutical  pharmaceutical sustainability 

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