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Drug Pricing Complexity: What’s Behind the Scene?

by: Mark Ediger

In the midst of consistent debate regarding the ‘pace’ of innovation in drug discovery, a new monster has emerged: the ever-increasing cost of new drugs, especially those for rare diseases. The recent releases of Sovaldi (Gilead Sciences) and Thiola (Retrophin) have illustrated to many that this trend is unsustainable and real changes are required in the pricing, innovation, and even the patent system inside the pharmaceutical industry. Still others have cried corruption, blaming profit-minded CEOs and an industry taking advantage of needy patients. Truthfully, however, the factors that affect drug pricing strategy are less obvious and much more complex.

The most pervasive myth in drug pricing is that the cost of drugs directly reimburses the R&D money used to design the drug molecule. In truth, pharmaceutical companies return between 10 and 20 percent of profits to the research and development process. The sales from most blockbuster drugs are well above what the company spent on developing it – even by the most liberal estimates. Although drug development is an extremely laborious and expensive process, there are clearly many more factors at play.

Regardless, with its $84,000 price tag, Gilead’s Sovaldi is attracting heavy criticism. Sovaldi was released at the end of 2013 for the treatment of Hepatitis C. Since then, the drug has been both highly successful and the spark for an international debate. So what is the underlying defense for Gilead, if the blame does not lie on an expensive development run? A separate example will serve well.Since 2007, Alexion Pharmaceuticals has marketed its drug Soliris for an extremely rare blood disorder. The cost of this drug is above $440,000 yearly – making it the most expensive drug in history – and yet insurers as well as the UK’s National Health Service continue to happily pay for Soliris. The reason is that the alternative is, incredibly, more expensive in the long run. Untreated, these patients require blood transfusions, kidney dialysis, and eventually kidney transplants. The high cost of these therapies, even multiplied by the relatively smaller disease population, puts an extraordinarily pricey drug as the economic choice.

And this was no coincidence: high drug prices are not always a purposeful offense to patients, but rather a carefully researched, multi-factorial decision. For one, pharmaco-economical analyses are employed prior to every drug launch to determine an appropriate price, and the drug must come out on top in terms of healthcare savings. In other words, it must improve on the status quo. It was this type of analysis that ensured Alexion Pharmaceuticals that they would have payers for Soliris after its launch.

It is rare that this distinction is understood. In the case of Gilead’s drug, however, the improvements are clear. Sovaldi is a breakthrough drug in every sense of the word. Unlike previous Hep C therapies, Sovaldi is a cure. Prior to the release of Sovaldi, doctors were hesitant to prescribe the existing Hep C therapies due to their low efficacy, low cure rate, and high toxicity. With the approval of Sovaldi, patients are given a highly efficient cure, and payers are awarded with overall lower healthcare costs. Just like Soliris, Sovaldi eliminates millions of healthcare dollars annually, here in the form of liver transplant surgeries and liver cancer treatments. Shouldn’t a drug that disruptive be priced accordingly?

This is not to say this system cannot be abused, however. One potential example here is the recent purchase of the drug Thiola by Retrophin. Once again a treatment for an orphan (kidney) disorder, Thiola may have fewer than 500 patients worldwide. Previously available for $4,000 per year from San Antonio-based Mission Pharmacal, Retrophin plans to increase the price to over $100,000 annually. Unlike Sovaldi, Thiola is not a cure and is not a novel drug – it has been available in its current form for decades, and treatment must continue throughout a patient’s life. Thus, in addition to performing no costly R&D activities on this drug, Retrophin currently has no competition in the marketplace, and the market will assume no healthcare savings for this disease.

These myths about the true source of drug prices have downstream considerations beyond the public outrage. If prices were truly tied to R&D costs, the industry would have a prime directive: find ways to reduce the development costs of novel drugs, lower prices, regain customer and public support, and everybody wins. To be fair, this is definitely a current goal of the pharmaceutical industry. Directly lower drug prices, however, it will not. A highly efficient R&D machine will be beneficial, but as long as drug pricing is tied to pricing of competitor drugs and healthcare market changes, it will not greatly affect lowering pharmaceutical costs.

Clearly, drug pricing is becoming an area of hot debate. Even potentially justifiable examples such as Sovaldi still do not negate the fact that this trend in prices is unsustainable. Regulatory bodies have already promised an investigation of Retrophin’s price hike, and perhaps this search will prompt further reform to pricing strategy or even biotechnology patent law. Many questions remain: What policy changes will enact a swift change toward effective pricing? Will such changes wear down the core of innovation in biotechnology? Perhaps most jarring: What will come from higher regulation in this industry?

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