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WHAT PRICE SHOULD WE PAY
FOR SPECIALTY DRUGS?
Len M. Nichols, Ph.D.
George Mason University
PQC Policy Forum
Washington, DC
May 15, 2015
OUTLINE
The “bargain” we have struck
Why we can’t afford the old bargain anymore
What Policy Choices are Really About
Policy Options
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
What Price Should We Pay for Specialty Drugs?
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
Hirsch et al, Health Affairs, Oct
2014
What Price Should We Pay for Specialty Drugs?
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 C !!!
Gilead agreed to sell in India for $900 per
treatment episode
Gilead earned $12.1B in profit from $24.9 in
2014 sales
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
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
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
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
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
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 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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What Price Should We Pay for Specialty Drugs?

  • 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. OUTLINE The “bargain” we have struck Why we can’t afford the old bargain anymore What Policy Choices are Really About Policy Options
  • 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
  • 5. 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
  • 6. Hirsch et al, Health Affairs, Oct 2014
  • 8. DRUG SPEND / TOTAL HEALTH SPEND 4.7 9.3 1980 2013
  • 9. Hirsch et al, Health Affairs, Oct 2014
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. A B C C > B > A Figure 2. Net Operating Profit From Alternative Drug Pricing Strategies $ time 0 R&D P1 P2
  • 17. 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