Will the Pharmaceutical Industry Learn From Past Mistakes?

Soeren MattkeAwash in negative headlines, public condemnation and government scrutiny, the pharmaceutical industry faces a public relations problem that, left untreated, could bring new regulations or sanctions either from governments or the courts. At the same time, though, the recent scandals over price gouging could offer an opportunity for responsible, research-based companies to distance themselves from the profiteers.

The industry has come under fire at a time of unprecedented innovation. As a physician who trained in the 1990s, I am in awe of the recent breakthroughs. Immuno-oncology drugs like Keytruda (pembrolizumab) and Opdivo (nivolumab) offer hope for patients with previously untreatable cancers. Entresto (sacubitril/valsartan) – the first novel treatment in over a decade for congestive heart failure, a condition deadlier than most cancers – was approved this year. There is a cure for many forms of Hepatitis C with Sovaldi (sofosbuvir) and vaccines for dengue fever and maybe even malaria may become available soon. More patients in developing countries than expected have access to antiretroviral drugs for HIV/AIDS and companies are devoting resources to achieving the same for the new scourge of noncommunicable diseases.

At the same time, some in the industry have been seeking to tackle the image problems. Overeager sales representatives are being reined in. Financial ties to physicians and clinical trial data are being disclosed. The main industry bodies in the United States, PhRMA and BIO, disowned Turing Pharmaceuticals, the company behind the notorious 5,000 percent price increase for Daraprim, a critical drug for certain infections in immunocompromised patients.

But more needs to be done and, in my opinion, the challenge is that most large companies are still being ruled by executives who are laser-focused on quarterly numbers and short-term profit; and lawyers who instinctively prefer established business strategy because its risks are known and manageable. This combination creates a blind spot for the coming tectonic shift in the health care system from fee-for-service to pay-for-value. This shift will radically change how health care is organized and financed over the next decade, and the industry will only get to help shape its future operating environment if it is seen as a responsible partner. Otherwise it will be at the receiving end of fundamental reforms that may well include price regulation in the United States, price negotiations by Medicare or permissions to reimport drugs from other countries.

An important step would be for the “research-based” companies, who truly innovate, to distance themselves from companies that operate like hedge funds, seeking out investment opportunities rather than focusing on research. The hedge fund business model focuses on generic but essential drugs that are only made by one or two manufacturers, because the market is so small, as in the Daraprim example above, or because they are costly to manufacture relative to their price, such as some intravenous drugs.

Companies buy up those assets and then raise prices substantially. Customers have little choice but to accept the new prices, because those drugs are essential and because the weak manufacturing base makes finding alternative suppliers hard. An example is Isuprel, an intravenous drug to treat certain arrhythmias in ICU patients. Isuprel was already a generic product when I trained, but its price increased by over 500% last year after Valeant Pharmaceuticals, a well-known protagonist of the hedge fund model, acquired the rights to it.

In themselves, eye-popping prices for breakthrough drugs do not generate lasting public perception problems, if the prices reflect true innovation. Even notoriously skeptical institutions have come to accept the high price of newly developed drugs. The U.K.’s health technology assessment body, the National Institute for Health Care and Excellence, endorsed Sovaldi, albeit at a discount to the $1,000 per pill list price. The feared Institute for Clinical and Economic Review, an independent evaluation organization in the United States, ruled Entresto’s price about right.

It would not be difficult for the research-based companies to distance themselves from the likes of Valeant, which spends about 5 percent of its revenue on R&D, compared to a typical 20 percent for the research-based companies. Their problem, however, is that they exploit similar, though less radical, pricing strategies for their own established products, just more quietly. So they are unhappy about the attention that companies like Turing draw to price increases, but they are not in a good position to squarely denounce the practice.

A solution could be for the research-based companies to adopt a voluntary code of conduct that would limit price increases on established products to inflation or to the cost of inputs. The short-term hit to profits would help protect the industry from getting thrown in with “hedge-fund pharma.” Moreover, the code of conduct would signal that its subscribers want to be rewarded for improving patients’ lives with innovative products, not for using market power for short-term gains. This would be a small step for multi-billion dollar companies, but a giant leap towards becoming a respected partner when decisions about the future of healthcare are being made.

Soeren Mattke is a senior scientist at the nonprofit, nonpartisan RAND Corporation and the managing director, RAND Health Advisory Services.

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  1. Will they learn from past mistakes? My Magic 8 Ball says “Don’t count on it.”

    You nailed it with this line, “the challenge is that most large companies are still being ruled by executives who are laser-focused on quarterly numbers and short-term profit.” Complicating that issue in the US is Medicare Part D’s specific prohibition from negotiating drug prices, and since CMS’s price list is the bedrock upon which payer reimbursement $$ is built … derp.

    The lack of transparency in pricing is another roadblock. Pharma execs are fond of saying “no one pays the sticker price,” but what exactly *is* the sticker price? Is it the rack rate, or the price my coupon says, i.e. “cost $XXXXX, with coupon $YY”? If no one pays the sticker price, why is it the sticker price? What is this, a car dealership, or how I stay alive?

    Add to this some of the stupid payer tricks I’ve witnessed, like making specialty pharmacy items bought locally – i.e. Kroger Pharmacy, or a local Walgreen’s – only available via mail order? IOW, an MD prescribes via CPoE, which goes to the Kroger/Walgreen’s, but for reasons known only to the payer *must be shipped via a third party*, adding who knows how much additional cost to the mix.

    Americans are Huckster Nation – we’re great at selling stuff, so good that we repackage stuff at each other every blinkin’ day, as in the Kroger/Walgreen’s question above. Valeant, Turing, et al are great examples of the ultimate result of hucksterism. When 20% of US GDP is being eaten alive by healthcare, how can we end the systemic huckster infection in our healthcare delivery chain … and in our body politic, who reaps rewards via campaign contributions from the very folks they’re supposed to regulate?

    Asking for a friend.

  2. Q: Will Pharma learn from past mistakes?
    A: No. Not so long as their mistakes make so much money.… via @THCBstaff

  3. I agree with your point that major drug companies should limit price increases on established drugs to about the rate of general inflation or the cost of production if that is higher. Many of these companies routinely increase prices of established drugs by 9%-10% per year and often more even though the overall inflation rate in the economy right now is close to zero.

    I also think it would be helpful if the biggest insurers and the PBM’s were more willing to refuse to place drugs deemed to cost much more than they’re worth on their formulary. They could have a discussion with the manufacturer about how much lower the price would need to be to win inclusion on the formulary.

    Finally, doctors should be more mindful about the cost of the most expensive drugs and, if there are viable lower cost alternatives, use those instead. Recently, I understand that many oncologists are starting to do just that. Good for them.

    In 2014, generic drugs accounted for 81.7% of prescriptions written, a record high. The expensive specialty drugs, which account for only 1% of prescriptions, are about 33% of drug costs. That’s where the focus needs to be. As for Valeant and other smaller manufacturers charging exorbitant prices for low volume older drugs, public shaming is probably the best strategy at least for now until we can develop an easier and less expensive FDA process for new competitors to enter the market.

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