Competition in the Pharmaceutical Marketplace: It's Not About Prices

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Last week I wrote about pharmacoeconomics and drug prices. Pharmacoeconomics, which attempts to quantify the value of drug benefits in economic terms, certainly can be an important tool in our national discussion about health care costs generally and pharmaceutical prices in particular. However, while pharmacoeconomics can sometimes serve to make the high price of a drug seem more reasonable by showing that it produces an overall savings in health care costs, it doesn't explain why competition in the pharmaceutical marketplace does not result in substantially lower prices. After all, if two or more drugs for the same indication provide the same pharmacoeconomic benefit, it would be logical to expect that buyers would choose the least expensive, the other pharmaceutical companies would respond by lowering their prices, and this process would continue until a price equilibrium was reached below which the producers of the drug would be unable to earn a profit or reasonable return on their investment. But that does not happen. Prices do not drop substantially on a name brand drug until a generic of that drug is introduced. Even then, the prices of its competitor drugs are not significantly reduced, although their market share may drop as adoption of the generic increases. How can this be?

Still more on Pricing and Pharmacoecomics- this time from the American Society for Clinical Oncology

Just after putting up today's post on Pricing and Pharmacoeconomics, I came upon yet another major story on this topic:

Sasha Damouni and Robert Langreth, Cancer Doctors Will Rate Cost Effectiveness of Expensive Drugs, Bloomberg/Business Week, April 17, 2014 available at http://www.businessweek.com/news/2014-04-16/cancer-doctors-plan-to-rate-expensive-drugs-cost-effectiveness  

Clearly this is a very hot topic, and I hope the post below aids in understanding this complicated and important subject.

Pricing and Pharmacoeconomics

Last week's (April 12th) blog post was an overview of the highly idiosyncratic nature of the pharmaceutical marketplace and the pricing of pharmaceuticals. Today's The New York Times carried a front page story by Andrew Pollack, The New York Times biotechnology industry reporter, about how doctors may increasingly be influenced by treatment costs when advising patients.¹ Interestingly, while the focus of the article is on the general impact of health care costs on physicians' decision-making, other than a passing mention of MRIs, the only other examples of cost are drawn from the world of pharmaceuticals-- Avastin vs. Lucentis for macular degeneration, Aloxi for chemotherapy-related vomiting and, everyone's favorite target of late, Solvadi for Hepatitis C. Pollack's article also discusses the decision by some physician groups, such as the American Cardiology Society (ACS), to rate the value (that is economic value) of treatments in their joint clinical practice guidelines and performance standards. The article notes that the ACS committee that wrote the new policy recommended using QALYs (quality adjusted life years, a widely used standard in health economics) as a principal metric in measuring a treatment's cost effectiveness. So, given the continuing public attention to pharmaceutical prices, this week I will briefly discuss pharmacoeconomics, which should have, but only in some cases does have, an effect on pharmaceutical prices.

Drug Prices and the Pharmaceutical Market

In recent weeks a fair amount of discussion in the news has focused on the high price of drugs. Some of that is attributable to the high price Gilead Pharmaceuticals set for Solvadi, as mentioned in my last post. Last week, the Massachusetts Biotechnology Council "MassBio" issued a report which warned that the increasing pressure on drug prices along with the overall push to contain healthcare costs could threaten the future growth of the biotechnology industry and the rate of innovation in the pharmaceutical industry.¹ For many years, the major pharmaceutical companies and their trade association, now known as PhRMA,² have been engaged in a reasonably successful effort to convince the American public and their elected representatives that the high cost of many drugs is the result of the very high costs of drug development, which is frequently estimated at $1.2 billion to bring a new drug to market. I don't want to use this post to debate that $1.2 billion dollar figure. Drug discovery and development is a very expensive process, with high costs and many failures, which may well bring the total costs per new drug approval to $1.2 billion. However, I begin my course on FDA Law by asking students "What determines the high cost of drugs?" The success of the PhRMA public relations effort is reflected in the very large percentage of students who do indeed answer, "The high cost of developing new drugs." I then proceed to give them their first lesson on pharmaceutical policy-- which is that the market for pharmaceuticals is like almost every market in our essentially free market U.S. economy. This means that sellers set the price of their goods at what the market will bear.

Continuing the Discussion of "Conditional Approval" and the Accelerating Access/Ensuring Safety and Efficacy Dilemma

Last week I commented on an excellent New England Journal of Medicine article by Darrow, Avorn and Kesselheim -New FDA Breakthrough-Drug Category- Implications for Patients, 370 New Eng. J. of Med. 1252-1258 (March 27, 2014)- on the problems of accelerated approval. Then today my attention was drawn to another excellent article on the early access dilemma for critically ill patients: Karl Thiel, Did Chimerix, Inc. (CMRX) Set A Bad Example For Biopharma?, available at http://www.biospace.com/News/Did-Chimerix-Set-A-Bad-Example-For-Biopharma/328076?type=email&source=BE_032614 (visited April 4th 2014). The topic is clearly an extremely important one, and in need of much more serious discussion.