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WHAT PRICE SHOULD WE PAY
FOR SPECIALTY DRUGS?
Len M. Nichols, Ph.D.
George Mason University
PQC Policy Forum
Washington, D...
OUTLINE
The “bargain” we have struck
Why we can’t afford the old bargain anymore
What Policy Choices are Really About
...
THE BARGAIN WE HAVE STRUCK
 “Fixed term” monopolies to spur innovation
• Patents = 20 years (formerly 17)
• Exclusivities...
63% Increase in
N of patients
with more than
$50,000 in drug
spend from
2013-2014
193% Increase in
N of patients
with more...
Hirsch et al, Health Affairs, Oct
2014
DRUG SPEND / TOTAL HEALTH SPEND
4.7
9.3
1980 2013
Hirsch et al, Health Affairs, Oct
2014
SOVALDI AS AN ILLUSTRATIVE CASE?
Gilead launched it at $1000 per dose, $84,000
per treatment episode
It cures Hepatitis ...
WHY ARE DRUG PRICES SO HIGH?
To recover past (sunk!) R&D Costs, accounting
for time lag since investment…
To capture val...
POLICY OPTIONS
 Accept our fate, read PhRMA speeches and move on
 Impose Price Controls
 Let Medicare bargain with manu...
Figure 1: Drug market dynamics
P1
a
b
C
SW1 = π + CS = P1abC + 0
P2
SW = π + CS
d
f
g
SW2 = P2dfC + P1adP2
SW3 = 0 + P1agC...
A MODEST PROPOSAL
This is America, you can price where you want
But we will make marketing and data
exclusivities contin...
HOW HIGH IS “TOO HIGH”?
A price that exceeds Aristotle’s “Just” Price
A price that would enable:
• ROS > 1.2* cost of ca...
A
B
C
C > B > A
Figure 2. Net Operating Profit From Alternative Drug Pricing Strategies
$
time
0
R&D
P1
P2
CONCLUSIONS
 We are not helpless in face of drug monopolies and
aggressive pricing behavior
 We will be hamstrung if the...
What Price Should We Pay for Specialty Drugs?
What Price Should We Pay for Specialty Drugs?
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What Price Should We Pay for Specialty Drugs?

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Len Nichols, PhD Director of the Center for Health Policy Research and Ethics, Professor of Health Policy, George Mason University

Published in: Healthcare
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What Price Should We Pay for Specialty Drugs?

  1. 1. WHAT PRICE SHOULD WE PAY FOR SPECIALTY DRUGS? Len M. Nichols, Ph.D. George Mason University PQC Policy Forum Washington, DC May 15, 2015
  2. 2. OUTLINE The “bargain” we have struck Why we can’t afford the old bargain anymore What Policy Choices are Really About Policy Options
  3. 3. THE BARGAIN WE HAVE STRUCK  “Fixed term” monopolies to spur innovation • Patents = 20 years (formerly 17) • Exclusivities, Data and Marketing, range from 180 days to 12 years  Competition from generics (Hatch-Waxman) or biosimilars (ACA) after exclusivities of 5 and 12 years, respectively  85% of scripts for small molecule drugs are generic today  FDA approved first biosimilar in March 2015, to compete with drug that was launched in 1991
  4. 4. 63% Increase in N of patients with more than $50,000 in drug spend from 2013-2014 193% Increase in N of patients with more than $100,000 in drug spend from 2013-2014
  5. 5. Hirsch et al, Health Affairs, Oct 2014
  6. 6. DRUG SPEND / TOTAL HEALTH SPEND 4.7 9.3 1980 2013
  7. 7. Hirsch et al, Health Affairs, Oct 2014
  8. 8. SOVALDI AS AN ILLUSTRATIVE CASE? Gilead launched it at $1000 per dose, $84,000 per treatment episode It cures Hepatitis C !!! Gilead agreed to sell in India for $900 per treatment episode Gilead earned $12.1B in profit from $24.9 in 2014 sales
  9. 9. WHY ARE DRUG PRICES SO HIGH? To recover past (sunk!) R&D Costs, accounting for time lag since investment… To capture value created – consumer willingness to pay – compared to alternative treatments To fund current research and marketing plans To reward investors hoping for monopoly returns
  10. 10. POLICY OPTIONS  Accept our fate, read PhRMA speeches and move on  Impose Price Controls  Let Medicare bargain with manufacturers  Replace private capital with public capital  Use fast access and diagnostics for better matches  Just say no to low-value drugs  Use indication-specific pricing  Binding arbitration for truly unique drugs
  11. 11. Figure 1: Drug market dynamics P1 a b C SW1 = π + CS = P1abC + 0 P2 SW = π + CS d f g SW2 = P2dfC + P1adP2 SW3 = 0 + P1agC Q1 $/Q Q0 P3 = Q2 Q3 POLICY affects the total and the distribution of SW
  12. 12. A MODEST PROPOSAL This is America, you can price where you want But we will make marketing and data exclusivities contingent on pricing behavior. IF you set launch price “too high”, you will not get exclusivities and we will fast track competitors to market
  13. 13. HOW HIGH IS “TOO HIGH”? A price that exceeds Aristotle’s “Just” Price A price that would enable: • ROS > 1.2* cost of capital (for small gain, est. firm) • ROS > 1.4* cost of capital (for large gain, est. firm) • ROS > 1.5* cost of capital (for new firm) This will require cost accounting data to be submitted to regulators
  14. 14. A B C C > B > A Figure 2. Net Operating Profit From Alternative Drug Pricing Strategies $ time 0 R&D P1 P2
  15. 15. CONCLUSIONS  We are not helpless in face of drug monopolies and aggressive pricing behavior  We will be hamstrung if the TPP trade agreement includes a provision granting biologics 12 years exclusivity regardless of how they are priced  Conditional exclusivity requires less bureaucratic judgment than other feasible policy options  All policy solutions require more bold regulation than PhRMA wants

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