In a recent speech Art Levinson, CEO of Genetech managed to simultaneously state that "the dollars going into health care are going up exponentially….That can’t happen forever. The question is when is it going to implode?" " and to demand that "if developed nations want access to breakthrough medicines, they should have to pay full price". He pours scorn on the tactics of his competitors "I think the drug industry, and I’m speaking largely about big pharma here, is shooting themselves in the foot by allowing people to buy drugs in Canada for as low as 10 cents on the dollar. I almost see it as unconscionable." While the logic may be somewhat contradictory, given that biotech drug prices are as more or less as high abroad as they here, even if the use of global budgeting and a more conservative medical culture means that they’re used far less and so the total revenues from them are far less, the Forbes article called Drug Prices: The Genentech Solution lays out the end-game as far as Levinson’s concerned.

Levinson says that if he had the choice, he would "draw a line in the sand." A country that refused to pay a fair price for a medicine simply wouldn’t get it. Levinson said it’s unfair to allow some countries to get drugs on the cheap just because the U.S. pays a great deal. Moreover, he added, if all drugs were sold at those cut-rate prices, the incentives that drive medical innovation would vanish.

As I suggested in my earlier post on this topic, there’s scant evidence that R&D would dissapear for good if US drug prices came down to closer to the European level, despite what some boneheaded columnists with no understanding of the health care "market" think. There would be less R&D at the margin but it would still be one of the most profitable industries to invest in, and there is plenty of R&D spending in lots of other industries which have lower margins and no exended patent protection. Marketing budgets and pharma executive compensation might also be closer to where it is on other industries too, which PhRMA doesn’t mention quite so loudly for some reason. I suspect that the type of logic big pharma is using to protect it’s pricing strategy, and the associated outbursts like Levinison’s, doesn’t help big pharma in the PR war–which if it bothers to read the papers or watch 60 Minutes it would notice that it is currently losing in a blow-out. Of course TCHB contributor The Industry Veteran is slightly more "colorful" in his analysis, which I print below.

Must a person relinquish 100 IQ points to become a Big Pharma CEO? by The Industry Veteran

It appears that Big Pharma is respnding to public outrage at their pricing by mounting a major PR campaign and by making indignant, f**k-you comments such as those by Genentech CEO Art Levinson. Levinson and Sanford Bernstein ass-kisser Rick Evans apparently want to play chicken with Brazil, India and several other countries by forcing them into compulsory licensing, i.e., patent busting. These two al Qaeda-like fanatics of crony capitalism seem to willfully ignore at least one market principle. Of course, Mr. Levinson should be free to sell his products at a single price around the world — but let him relinquish his rights of patent exclusivity. He can have it either one way or the other. If he desires a government sanctioned monopoly via patent protection, then let him function the way electric companies do and petition a public utilities board for every rate change he desires. Conversely if he wants to exert total control over pricing decisions for Herceptin, Activase, Avastin and his other products, then he must relinquish his monopoly over them. He can’t have it both ways. Levinson, Evans and their dim bulb epigoni have played a transparently rigged game long enough: a free market for you and me, a government sanctioned, government subsidized monopoly for themselves. Say, Art, is that the wolf I hear at the door, or is it the bowed and bloodied apostle of Big Tobacco trying to tell you that it’s the beginning of the end?

(BTW if like me you weren’t sure who the Epigoni were, here’s encylcopedia.com’s explanation).

Just in case you out there haven’t been keeping up with the big city papers, the Sunday Gazette-Mail from Charleston, West Virginia reports that West Virginia is the latest state to try to institute Canadian price levels in what it pays for drugs, presumably for Medicaid and state employees. How’s it going to do that? It’s going to

establish a "pricing schedule," a list of drugs and what they should cost. It would be based on either the Federal Supply Schedule (which is estimated to be 40 percent less expensive than retail prices), what the Canadian government pays, or another price reference "that will maximize savings to the broadest percentage of the population of this state."

This is more or less the same thing that several other states have done by setting up links to Canadian pharmacies, but the first one that I recall that’s explicitly trying to piggyback of the discounts that the Feds get when they buy for the VA system. And I believe that this is the first one in a "Red" state.

While I can write a balanced article looking at the issue of drug profits home and abroad, and Derek Lowe can conduct a debate with his readers about it, we’d both probably admit that rather more people watch 60 Minutes than read our blogs. So today’s 60 Minutes on re-importation may have slightly more influence than Derek’s views or mine. I’m now pretty convinced that the Republicans are going to cave on the drug re-importation issue. With every senior in America watching, 60 Minutes showed an extremely pained Mark McClellan trying defend the indefensible–he was forced to say that the FDA is not allowed to check out if Canadian exporters are safe–"Under current law, we don’t have the authority to insure the safety of foreign produced, foreign distributed drugs." (I bet he’s damn happy he’s moving on to CMS and doesn’t have to sit through that interview again). They then showed that Lipitor is made in Ireland and that the same pill made there sells for twice as much here as it does in Canada. They showed that the taxpayers of Springfield, Mass will be $9 million better off because the city is buying its drugs in Canada, and that translates into more firefighters and cops on the beat. They even found a conservative Republican (Dan Burton) to attack both PDIMA and the pharma industry, and managed to say that no major drug company would come on the TV to defend their position. All in all, not the pharma industry’s finest 15 minutes ever of PR.

In a weird associated connection, there was also a commercial from AARP which seemed to first focus on the real "drug war" and then talked of AARP fighting the "other drug war, one we can win" demanding legalization not of marijuana but of Rx imports from Canada and for the ability of the government to negotiate drug prices. AARP’s blessing of course is what pushed PDIMA over the edge and won it through the house, so it looks like they’ve changed their PR position. Meanwhile, conservative Republican Dan Burton was featured prominently opposing PDIMA. He’s a long time drug-war warrior in that other drug war, but as he gets older he seems to be showing the odd bit of sense.

Just in case you thought drugs were too expensive in the USA, the Brits are discovering that their pharmacists (note: not the pharma companies but the corner chemist) are making big profits by buying at a discount well under the official rate. It’s like the mark-up for oncology drugs from Medicare, albeit on a much more modest scale. Still it does show you that drug pricing is a touchy subject everywhere!

And if you want to read more about the oncology story featured in Matt Quinn’s TCHB article yesterday, here’s an article from Doug Bandow, one of the "sensible libertarians" over at Cato (as opposed to the loony libertarians at take your pick of the Mellon-Scaife funded institutes….) in which he basically applauds Congress for eventually taking action on the taxpayers’ behalf here, and calls for more, and more logical, government intervention in the oncology market.

Hat tip to LM for the link.

Oops…for some reason this didn’t "publish" late last night…..

In a report out of The Delaware News Journal comes interesting news about the statin wars. The ACC meeting this week has lead to the release of a host of studies concluding that "stronger is better" in terms of the health effects of statins. Although bloggers Sydney Smith at Medpundit and Robert Centor at Medrants disagree on the exact significance of the PROVE-IT study, all concerned seem to believe that stronger is more or less better. Crestor from A-Z is usually believed to be the strongest statin, yet the folks at Medco, the nations biggest PBM have followed the lead of Wellpoint, one of the biggest health plans (and the most influential in terms of Rx trends) by leaving Crestor off its formulary listing. AdvancePCS, which is about to be the other big PBM gorilla after its pending merger to Caremark is complete, has put Crestor high up on its formulary.

So in the real world, will the dogs eat the dog food if they have to pay more for it? Astra-Zeneca is about to find out. Despite the carnage in the market lately, their stock is still doing fine. But the news from three-tier formulary land is not good, as an off-formulary position usually means that people won’t pay the extra for the non-preferred branded Rx.

From THCB Sacramento bureau, Matt Quinn continues his comments on the injectable oncology market by discussing an article in Physician Compensation Report titled Oncology Income May Drop 40% by 2005. (The article is in italics, Matt’s comments are in normal text).

"Clinical oncologists in practices that infuse chemotherapy drugs say that changes made in their 2004 reimbursement schedule by the Medicare reform law will result in income losses ranging from 2%-3% up to 15%, depending on each practice’s payer mix and current prices for purchasing the drugs. For 2005, practice managers predict physician income losses of another 25% if Congress does not repeal the new law’s reimbursement cuts for next year."

This seems significant until you get to:

"Median physician compensation and benefit expense was $446,000 in 2002, the survey says."

So, my interpretation of this is that "the powers that be" are giving oncology practices 2004 to shift from a drug-based business to a service-based business (like 99% of other practices) at relative cost neutrality (using the bad assumption that per physician salary hasn’t grown since 2002, they are estimated to make between $379K and $437K in 2004). I don’t disagree that practices / physicians that cling to the drug-based reimbursement model in 2005 will stand to lose up to a quarter of their revenue (making them paupers who only make ~$285K to $328K per year). That’s the point. The government feels that oncologists are padding their salaries (at huge expense to the taxpayer) with excess drug utilization. Either take the carrot or get the stick. It will be interesting to see how utilization patterns change when (if) financial incentives change. This is hardly a situation that will leave cancer patients dying in the streets/driving hundreds of miles for lack of a community cancer center. Although it might leave a few oncologists short some of the income to which they have grown accustomed.

"Holcombe notes that ASPs do not reflect the markup that drug distributors charge to practices, or the drug inventory financing and handling costs that practices have."

This (which is the rationalization why the ASP for a drug must be greater than the cost of the drug), of course, contradicts the huge margins that oncologists make on administering drugs. There is a "cost of money" for maintaining the drugs necessary for running a practice, although healthy cash flows, favorable payment terms from distributors (60 to 90 days is standard), low interest rates, and mileage programs make this seem pretty darn negligible. There are shipping fees (very low, especially for planned purchases), and there is a cost associated with setting up and maintaining an oncology practice (must buy a chemo mixing hood, have ventilation, must have oncology specialist nurses), but these are not (obviously) anywhere near current (or projected) overall profit levels.

"The medical lobby opponents of the reimbursement changes are working to interest Congress in a change of direction."

They have scuttled this sort of legislation many times before. A membership that makes $450K per head has some influence, to say nothing of Big Pharma.

UPDATE: The NY Times reports that the situation is extra grim for some cancer patients in Marin County because the oncologists are laying off their massage therapists!

OK, maybe not, but in talking to a congressional committee who’s members do, or at least do read opinion polls like these, HHS secretary Thompson hints that the Republicans might cave on the drug re-importation issue to save the most unpopular part of the Medicare bill from becoming an election issue. Perhaps they noticed that Florida and Pennsylvania are both full of seniors and are both needed to be in the Red column on Nov 2, if Dubya is going to stay in the White House.

From California Healthline, 2 Dems and 2 "liberal" Republicans (can you really call McCain that?) introduced a bill to allow drug importation.

In reference to my post yesterday about the possibility of PhRMA and the Republicans backing down on the importation issue in order to minimize the backlash against the Medicare bill, well now the mechanism is in place if the Republican leadership want to use it.

There’s no question that in the US big pharma and its employees colleagues at USTR are on the attack over "low drug prices" in other countries, with the assumption that the US consumer is subsidizing R&D here and therefore allowing foreigners to get the benefit of new drugs without paying their fair share. Late last year I spent some futile time (aided by Derek Lowe who writes the excellent In the Pipeline blog) trying to get at the issue of whether this is true, and whether drug profit margins abroad are so low that they wouldn’t support said R&D. Of course the alternative is that drug prices are too high in the US (or at least higher than they need to be to attract investment in pharma R&D). It’s a common estimate that pharma companies make about 60-70% of their profits in the US. It’s also well known that net margins in the pharma industry are the highest of any major sector at roughly 17%, compared to the next highest, financial services at 14% and way above any other manufacturing industry, including software.

You don’t see software companies complaining about their need for government to ensure high prices to promote R&D, although monopolies by technology standards work equally well for one well known company. Pharma companies will argue the they only have limited time to make money, as patent expiration takes away their monopoly position and essentially forces them to start again from scratch, but in any other business, competitors will also come into the market using lower prices as their wedge in. (And to be fair to big Pharma they are by no means alone in looking to regulation or tariffs to protect them–which is why American car companies concentrate on minivans and SUVs, as there’s a 25% tax on foreign "light trucks"). Pharma companies also must essentially give away the fruit of their research to generic companies. So the whole issue is very complex.

Although my own effort to get original data was futile, I’ve recently seen two contradictory articles about the pharma R&D spend. One is a Bain report extensively quoted in The Trouble With Cheap Drugs in The Economist of January 31, 2004 and the other is an article called Will Lower Drug Prices Jeopardize Drug Research? by Donald Light of Univ of medicine and Dentistry of New Jersey and Joel Lexchin from York Univ in Toronto (yes he’s one of those naughty cheap old Canucks). These two papers take very different tacks. Given that Bain makes much of its living selling consulting to the pharma companies and Lexchin gets his salary from the Canadian government, you get no prizes for guessing which side of the issue they respectively fall on.

According to The Economist Europe is now spending 60% less per head on drugs than the US did compared to 30% less in 1992. That translates into $160 billion in annual "savings" compared to what the Europeans would have spent if their drug spending had gone up at the US’ rate of increase–which of course was very high over that time. Bain’s argument is that back in 1992 Europe and the US both spent $10bn a year on drug research but now whereas the US spends $30bn, Europe only spends $20bn. In consequence new drug development in terms of NCEs (new chemical entities) has gone down by half in Europe while it’s doubled in the US. While globally pharma profits are up from $60bn in 1992 to $121bn in 2002, the share of those profits made in the US has gone from less than 50% to 60%. The core of Bain’s argument is that new R&D goes where profits are made and that the loss of the high wage jobs in the drug business and the consolidation of pharma power in the US has hurt the European drug giants (especially the Germans like Bayer and Hoescht). So far so good, although in these days of everyone being headquartered in Bermuda, it’s pushing it to claim that any drug company is "national", given the success of GlaxoSmithKline in the US.

But Bain then goes on to argue that Germans get worse care and access to drugs than Americans because of spending constraints, and quotes some ridiculous numbers about cancer care mortality rates, which according to the OECD are virtually identical in both countries, and higher in both cases than in Switzerland, to back it up (and ignore plenty that would refute it such as relative life expectancy and child mortality rates). And then they claim that while Germany "saved" $19 billion on comparative drug costs, the cost of not having the R&D jobs, associated patents, and the cost of "worse health care" actually came to $22bn. This calculation, which is pretty hypothetical, appears not to reckon with the fact that not all the extra pharma spending would stay in Germany, but I guess that’s by the by. (For those of you remembering your Econ 101, the article also quotes the fact that there would be a "multiplier" effect from all that R&D spending, which is the first time that I can recall the monetarist Economist spouting long disparaged Keynesian theory).

So if the argument can be made that price controls — or more accurately as it happens in most of Europe relatively fixed global budgets for drugs — hurt the economy. Can you not argue the inverse–that expensive drugs hurt it too? Light and Lexchin certainly give that a good go. They have several arguments, some of which I’ll summarize here, but the whole document is short and worth reading.

They start by using British and Canadian government reports to demolish the "myth" of low profits hurting R&D.

On the contrary, audited financial reports of major drug firms in the UK, show that all research costs are paid, with substantial profits left over, based solely on domestic sales at British prices (Pharmaceutical Price Regulation Scheme 2002). Likewise, 79 research drug companies in Canada submitted reports showing their R&D expenditures have risen more than 50% since 1995, all paid for by domestic sales at Canadian prices (Patented Medicine Prices Review Board 2002). Sales to the U.S. and elsewhere are in addition to the positive, domestic balance sheets.

The next allegation they refute is that price controls cause less R&D hence fewer new products, in fact their answer is that:

R&D expenditures have been growing rapidly, though it is becoming more and more difficult to discover breakthrough drugs on targets not already hit (Harris 2003).

And claim that we don’t need all that many new products anyway

The truth kept from Americans is that first-line treatment for 96% of all medical problems requires only 320 drugs (Laing et al. 2003).

As for the price gap that the Economist/Bain article points out

The widening gap between prices for patented drugs in the U.S. and other countries is due to drug companies raising U.S. prices, not other countries lowering theirs (Sager and Socolar 2003; Families USA 2003).

In addition to all this, Licht and Lexchin claim that we spend more on R&D in the US because we’re not that good at it. Only about 18% goes on breakthrough research, the rest goes on me-too drugs and refinements of existing drugs to extend patent life:

But while the U.S. accounts for 51% of world sales, it took 58% of global R&D expenditures invested in the US to discover only 43% of the more important new drugs (NCEs) (European Federation of Pharmaceutical Industries and Associations 2003). This means that other countries are helping to pay for the large, inefficient U.S. R&D enterprise, the opposite of what the editors of Business Week claimed (Business Week editors 2003).

They then, correctly in my opinion (and that of some of my other contributors) attack the often quoted $800 million sum that a new drug "costs"

About half of the $800 million figure consists of "opportunity costs", the money that would have been made if the R&D funds had been invested in equities, in effect a presumed profit built in and compounded every year and then called a "cost." Drug companies then expect to make a profit on this compounded profit, as well as on their actual costs. Minus the built-in profits, R&D costs would average about $108 million 93% of the time and $400 million 7% of the time.

And they also claim that much of that money comes from taxpayer-funded research at the NIH, which again is true although the exact value in the marketplace of the NIH contribution is unclear, as Derek Lowe discusses here. Then they come to the rub of their argument, and this is the gist of the whole thing

If American prices were cut in half, research budgets would not have to suffer unless executives decided to cut them in favor of marketing, luxurious managerial allowances or high profits. They probably would not, because R&D gets such favorable tax treatment compared to other expenses. Lower prices would save other Fortune 500 companies billions in drug benefit costs, and drug company profits could come into line with the profits of the companies who pay for their drugs.

To me this is the most compelling part of the argument. If drug prices were cut there would indeed be a lowering of costs within the drug industry. To this time, the highest ROI within big pharma has been in its marketing and sales function. The reason Pfizer became such a big player is that it had the marketing capacity to make a big success of not only its own drugs but others it licensed in or purchased outright, notably Lipitor. Merck’s story as the big Kahuna in the 1980s is roughly similar with many of its products licensed in. There’s even a whole industry doing just R&D called biotech, with an exit strategy of feeding the big pharmas’ marketing machines. So if prices go down, my first expectation would be for marketing efforts to increase (in order to make it up on volume!).

But there will inevitably be a drop-off in R&D. The question is how much? Given that overall margins are so high in the drug business, and given that prices pretty much equate directly to gross margins as production costs are so small, an R&D effort rewarded by even net margins of 12% is still better than a dollar invested in virtually any other industry.

So we have two anomalous situations in which neither system figures out the true "market" value of drugs. In Europe they have strict defined budgets or price controls which force a limit on the price or volume or both of all drugs and limit access to some drugs as a consequence. On the other hand in the US, as with the rest of health care, we have a supplier-induced patent-protected oligopoly market, with no effective market discipline due to our free-flowing third party payment system which can’t say no, (despite the attempts of managed care, CDHPs, etc, etc to bring rational choice "market" discipline to bear in medical care consumption decisions).

My guess is that the US will eventually end up somewhere in the middle, but that the pharma industry will remain the most profitable segment of the economy. In the end American’s love medical technology and will want their government to pay for it. But with the government slowly moving into the business of being a purchaser of drugs, the free-ride that the pharmas have enjoyed for so long won’t last forever.