The Great American Drug Deal

by Peter Kolchinsky

  But, in practice, it’s likely to come out differently. The US, being the biggest and most price-insensitive market, will end up exporting higher US prices to Europe. The economics are quite clear on this point, and company pricing departments are well aware of the global dynamics and highly incentivized to stay ahead of the game. Therefore, those who think that referencing US prices to those in Europe will lower prices substantially in the US would be disappointed. The endgame would actually end up being even worse for America. The US Congressional Budget Office has said as much.206

  Reference Pricing Already Exists in America

  Some critics of reference pricing would be wrong to say that the general approach is unprecedented or would be highly unusual for the US. It is going on now in virtually all drug markets, including the US with its Medicaid “best price” regulation and even Medicare with its “average sale price” reimbursement model.207 When Medicaid, which provides health insurance for the very poor, decrees that it will take a discount off the best price in the US private sector, it’s getting the benefit of the low price negotiated by the best negotiator in the private sector and then taking a further discount.

  Let’s say US policy requires a company to sell a drug in the US at the German price. And for simplicity’s sake, let’s assume that the company controls the global commercialization of the drug and that it is launching the drug in both markets at about the same time. Any price concession the company grants to Germany will, in theory, flow through to the US. So the company sets a single price that will maximize the sum of the profits from the two markets. Because the US is price-insensitive and is the largest market in the world, that price will be high, calibrated to extract value from the US. In Germany this will result in access to the drug being restricted to only the sickest patients. The decision is regrettable from the company’s perspective but is especially clear because there are four times as many potential patients in the US. Still, even if Germany were the same size as the US, as long as the US is fundamentally unwilling to deny access based on price, the optimal pricing strategy in certain circumstances might be to just charge a very high price in the US and forget about the German market entirely.

  Piling on: Reference Pricing with Penalties and Outright Price Controls

  Some drug price control proposals call for both international reference pricing and penalties for companies that raise their prices in the US.208 That would appear to deter companies that export their US price to Europe from recouping lost profits abroad by raising their price in the US. So it’s possible that this particular combination of policies would result in either US prices of existing products staying the same or maybe even going down to be closer to Europe’s levels depending on how much of their profits they were getting from Europe. However, such a policy would not stop companies from setting a single, very high price on new drugs, which is what I describe in the US-Germany example. Some policies have therefore also proposed that the US government would simply negotiate the price of all new drugs. That would entail the company offering a price, the US government offering a price, and if they couldn’t agree, then a third party would pick a price. Ultimately, this is simply a price control. It would introduce so much uncertainty into the industry’s ability to generate a return from its successes that current and future R&D would wither.209

  The Germans are worse off in this scenario, but Americans are not better off and could end up paying more. If Germans decide to deny some patients treatment with the drug because they find the price too high, which they do, the drug company will make less money in Germany and therefore charge a higher price in less price-sensitive markets such as the US.210 At this new higher price, Germany might treat even fewer patients, requiring companies to again raise their prices to make up the difference. In the end, maybe no one would get treated with the drug in Germany, though the company would reassure American payers that they are paying the same price as what is charged in Germany. In that case, referencing results in higher costs for US patients and zero access for German patients. And absurd as it may seem, pricing parity could assuage those drug pricing critics focused on “fair” pricing around the world, blinding them to what they could be doing to keep absolute costs in the US as low as possible by other means.

  If other countries now stop buying branded drugs because they consider the price too high, we trigger the exact America-only scenario we already discussed. To preserve their profitability, drug companies would then raise prices in the US to make up for 1) lost international profits, 2) higher development costs from having to move their clinical testing entirely to the US, and 3) longer drug development timelines. If a drug company hit a limit on how high it could price its existing drugs (e.g., a company might sell only drugs that have several me-too competitors and be unable to raise prices), then it would collapse, cutting its workforce until it could survive on whatever revenues it still had coming in.

  But we also have to speculate that the countries to which America pegs its drug prices, if they couldn’t then afford the higher American prices exported to them, might feel justified to turn to compulsory licensing, especially the less wealthy ones in Europe with nationalist governments. The end result for the drug industry would be lost profits, protracted disputes in various courts to prevent compulsory licensing, and a lot of bad press made worse by having to raise their prices in the US.

  America’s Generosity Must Hold

  Millions of patients around the world in developing countries enjoy medicines for everything from HIV to heart failure because wealthy nations like the US, indeed the US most of all, paid higher prices for those medicines while they were still branded. While the subsidy that the US pays to help make new medicines available affordably in poor countries can be embraced as philanthropy, Americans can be forgiven for struggling to understand why they should be subsidizing the treatment of patients in other wealthy nations that could be but aren’t making a proportional contribution to the Biotech Social Contract.

  So the question is what America should do about this perceived unfairness.

  If, in our indignation at paying more than others, we adopt other countries’ practice of denying access altogether on the basis of price, there will only be losers: The biotechnology industry, much of which is based in the US, would likely collapse, and the growth of society’s highly cost-effective generic drug armamentarium would soon slow or cease entirely to the detriment of current patients and future generations.211

  Should America insist that companies deny other countries access if they aren’t willing to pay the same price or higher prices than they do now?

  Some countries might be inspired to pay more (either by paying higher prices or treating more of their eligible patients in cases where they now restrict access), which might take trade diplomacy (as the US did with Canada when negotiating NAFTA).212 But merely dictating higher prices to other countries could reduce their participation in the Biotech Social Contract and make industry even more dependent on generating profits in the US, raising drug prices for Americans.

  It’s worth weighing all of what works in the status quo, both the obvious and subtle, against the unintended consequences of radically changing how we handle branded drug pricing to make sure that we don’t accidentally give up more than we stand to gain.

  Just as many countries buy into global efforts to curb pollution or stop overfishing, we need to make the case for the global long-term benefits of paying for branded drugs to help patients today as an investment towards generic drugs that will cost-effectively serve the world for the rest of time. In the meantime, America has to decide what it wants for itself and whether it is willing to support the Biotech Social Contract, regardless of what other countries decide to do.

  * * *

  175Clinicaltrials.gov; a few of these trials were actually run by Pharmasset, a small biotech company that Gilead acquired which had discovered sofosbuvir, a critical component o
f Harvoni.

  176https://clinicaltrials.gov/ct2/results/map?term=sofosbuvir&map= ; some of these represent overlapping trials run in multiple countries at the same time.

  “Map: Sofosbuvir,” Clinical Trials.gov, US National Library of Medicine, accessed Nov. 1, 2019.

  177“Hepatitis C,” World Health Organization, July 9, 2019, https://www.who.int/news-room/fact-sheets/detail/hepatitis-c.

  178In India, Sovaldi generics hit the market at $10/pill, but competition drove the price down to roughly $4/pill, which is $224-336/course of treatment, >99% less than in the US.

  Ketaki Gokhale, “The Same Pill that Costs $1,000 in the US Sells for $4 in India,” Chicago Tribune, Jan. 4, 2016, https://www.chicagotribune.com/business/ct-drug-price-sofosbuvir-sovaldi-india-us-20160104-story.html.

  179Q4 2019 Earning Results, Gilead, Feb. 4, 2019, http://investors.gilead.com/static-files/d37c8017-5ae2-40d1-b8e3-371604c33341.

  180Q4 2019 Earning Results, Gilead

  181Michael Mezher, “European Commission Says Compulsory Licensing Can Only Happen at National Level,” Regulatory Focus, June 26, 2015, https://www.raps.org/regulatory-focus%E2%84%A2/news-articles/2015/6/european-commission-says-compulsory-licensing-can-only-happen-at-national-level.

  182Dr. Anupam B. Jena, “US Drug Prices Higher Than in the Rest of the World, Here’s Why,” The Hill, Jan. 19, 2018, http://thehill.com/opinion/healthcare/369727-us-drug-prices-higher-than-in-the-rest-of-the-world-heres-why;

  QuintilesIMS Institute, Outlook for Global Medicines Through 2021 (Parsippany, NJ: QuintilesIMS Institute, 2016), https://morningconsult.com/wp-content/uploads/2016/12/QuintilesIMS-Institute-Global-Outlook-FINAL.pdf

  183“Pharmaceutical Spending,” OECD Data, Organisation for Economic Co-operation and Development, accessed Oct. 15, 2019 https://data.oecd.org/healthres/pharmaceutical-spending.htm#indicator-chart

  184Irene Papanicolas et al., “Health Care Spending in the United States.”

  185Irene Papanicolas et al., “Health Care Spending in the United States.”

  186William H. Shrank et al., “Waste in the US Health Care System Estimated Costs and Potential for Savings,” Jama 322, no. 15 (2019): 1501-09, accessed Oct. 15, 2019. doi: 10.1001/jama.2019.13978, https://jamanetwork.com/journals/jama/articlepdf/2752664/jama_shrank_2019_sc_190005.pdf.

  187Panos Kanavos et al., “Higher US Branded Drug Prices and Spending Compared to Other Countries May Stem Partly from Quick Uptake of New Drugs,” Health Affairs 32, no. 4 (2013), accessed Oct. 15, 2019. doi: 10.1377/hlthaff.2012.0920, https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2012.0920.

  188Ariel D. Stern et al., “The Impact of Price Regulation on the Availability of New Drugs in Germany,” Health Affairs 38, no. 7 (2019): 1182-87, accessed Oct. 15, 2019. doi: 10.1377/hlthaff.2018.05142, https://www.ncbi.nlm.nih.gov/pubmed/31260362.

  189Ariel D. Stern et al., “The Impact of Price Regulation,” 1182-87.

  190Summary of Feedback: PHARMAC’s Proposal to Decline a Funding Application for Eculizumab (PHARMAC, 2013), https://www.pharmac.govt.nz/assets/eculizumab-2013-08-analysis-of-feedback.pdf;

  “Your Support Is Invaluable,” PNH Support Association of NZ, accessed Oct. 15, 2019, http://www.pnhsanz.org.nz/advocacy1.html.

  191Lydia O’Neal, “How to Stop Drug Prices from Rising? New Study Points to Single-Payer Health Care System,” International Business Times, June 19, 2017, https://www.ibtimes.com/political-capital/how-stop-drug-prices-rising-new-study-points-single-payer-health-care-system.

  192Dana O. Sarnak et al., Paying for Prescription Drugs Around the World: Why Is the US an Outlier? (The Commonwealth Fund, 2017), https://www.commonwealthfund.org/sites/default/files/documents/___media_files_publications_issue_brief_2017_oct_sarnak_paying_for_rx_ib_v2.pdf.

  193“Health Care That Works Harder,” Express Scripts, accessed Oct. 15, 2019, https://www.express-scripts.com/corporate/.

  194Jerome H. Reichman, “Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options,” Journal of Law, Medicine & Ethics 37, no. 2 (2009): 247-63, accessed Oct. 15, 2019. doi: 10.1111/j.1748-720X.2009.00369.x., https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2893582/pdf/nihms204056.pdf.

  195Kristina M. Lybecker and Elisabeth Fowler, “Compulsory Licensing in Canada and Thailand,” Journal of Law, Medicine & Ethics (2009): 222-39. https://www.wardhealth.com/file/1734/download?token=FMWb6w26;

  “The Campaign for Use of Compulsory Licensing in Thailand,” Make Medicines Affordable, Feb. 18, 2015, http://makemedicinesaffordable.org/en/the-campaign-for-use-of-compulsory-licensing-in-thailand/.

  196McKenna Moore, “Russian Drugmaker Granted License to Produce Celgene Copycat,” Fortune, July 11, 2018, http://fortune.com/2018/07/11/celgene-russia-nativa-revlimid/;

  “Legal Scene Set for Russian Drugmaker to Get Compulsory License on Sutent,” The Pharmaletter, April 30, 2019, https://www.thepharmaletter.com/article/legal-scene-set-for-russian-drugmaker-to-get-compulsory-license-on-sutent.

  197It’s entirely possible that companies will try to be generous, partly out of kindness and partly to shut competitors out of being able to recruit untreated patients into clinical trials of similar drugs. But affording the cost of making those donated doses will mean that companies have to charge more in wealthy countries.

  198Swathi Iyengar et al., “Prices, Costs, and Affordability of New Medicines for Hepatitis C in 30 Countries: An Economic Analysis,” PLoS Med 13, no. 5 (2016): e1002032, accessed Oct. 15, 2019. doi: 10/1371/journal.pmed.1002032, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4886962/pdf/pmed.1002032.pdf.

  199Daniel A. Goldstein et al., “A Global Comparison of the Cost of Patented Cancer Drugs in Relation to Global Differences in Wealth,” Oncotarget 8, no. 42 (2017): 71548-71555, accessed Oct. 15, 2019. doi: 10.18632/oncotarget.17742, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5641070/.

  200K.E. Young, “The Perverse Impact of External Reference Pricing (ERP): A Comparison of Orphan Drugs Affordability in 12 European Countries. A Call for Policy Change,” Journal of Market Access & Health Policy 5, no. 1 (2017), accessed Oct. 15, 2019. doi: 10.1080/20016689.2017.1369817, https://www.tandfonline.com/doi/full/10.1080/20016689.2017.1369817.

  201The Council of Economic Advisers, Reforming Biopharmaceutical Pricing at Home and Abroad (Washington DC: Executive Office of the President of the US, 2017), https://www.whitehouse.gov/wp-content/uploads/2017/11/CEA-Rx-White-Paper-Final2.pdf.

  202Zoltán Kaló et al., “International Comparison of Pharmaceutical Expenditure in Middle Income Countries—Methodological Questions,” Value in Health 15, no. 4 (2012), accessed Oct. 15, 2019, https://www.ispor.org/research_pdfs/40/pdffiles/PHP44.pdf.

  203Dr. Anupam B. Jena, “US Drug Prices Higher.”;

  QuintilesIMS Institute, Outlook for Global Medicines Through 2021.

  204Jerome H. Reichman, “Compulsory Licensing of Patented Pharmaceutical Inventions,” 267-73.

  205This is already occurring in the UK, with its euphemistic private “patient access schemes” that provide discounts to the UK National Health Service that cannot be price-referenced on the European continent by countries that want to reference the prices the UK pays.

  206Phillip L. Swagel to Honorable Frank Pallone Jr., official email, Oct. 11, 2019, “Effects of Drug Price Negotiation Stemming from Title 1 of H.R. 3, the Lower Drug Costs Now Act of 2019, on Spending and Revenues Related to Part D of Medicare,” https://www.cbo.gov/system/files/2019-10/hr3ltr.pdf.

  207“2018 ASP Drug Pricing Files,” CMS, US Centers for Medicare & Medicaid Services, modified Nov. 30, 2018 https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Part-B-Drugs/McrPar
tBDrugAvgSalesPrice/2018ASPFiles.html.

  208US Congress, House, Lower Drug Costs Now Act of 2019, HR 3, 116th Cong., 1st sess., introduced in House Sept., 19, 2019, https://www.congress.gov/bill/116th-congress/house-bill/3/text?q=%7B%22search%22%3A%5B%22hr3%22%5D%7D&r=1&s=2.

  209Peter Kolchinsky, “Patients Will Be the Losers as Pelosi’s Paln to Control Drug Prices Nearly Strikes Out,” Stat, Sept. 23, 2019, https://www.statnews.com/2019/09/23/patients-losers-pelosi-drug-prices-plan/.

  210Ariel D. Stern et al., “The Impact of Price Regulation,” 1182-87.

  211We’ll be paying for hip replacement surgeries forever while the bone building drug that could obviate the need for those surgeries would remain a hypothetical.

  212Jerome H. Reichman and Catherine Hasenzahl, Non-voluntary Licensing of Patented Inventions. (Geneva, Switzerland: ICTSD & UNCTAD, 2003), https://www.ictsd.org/downloads/2008/06/cs_reichman_hasenzahl.pdf.

  11

  In Total: Drug Prices Are Close to Where They Need to Be

  One might think that companies already maximize their prices in the US, but that’s clearly not true. If America really is unwilling to deny essential drugs based on cost, then those prices could easily be higher. One way to tell whether prices are too high is to look for evidence of grossly inflated salaries or profits.