Are Sky-­High Prices For New Drugs Justified?

Source: Forbes

23 Feb 2015

Ask any pharmaceutical executive to justify the high price tags attached to most new drugs and you’re likely to hear a common refrain: Drug companies must charge lofty prices so they can make a sufficient return on investment, which they can then pour into research meant to yield new breakthrough products.

Now they can point to a new study to back up that viewpoint. The journal Health Affairs has just published a paper provocatively titled “Decline In Economic Returns From New Drugs Raises Questions About Sustaining Innovations.” The study—a joint effort of the Massachusetts Institute of Technology and the IMS Institute for Healthcare Informatics—concludes that the returns on new drugs have diminished in recent years and that, in fact, drug companies may not be recouping enough R&D expenses to fund innovation.

IMS's Murray Aitken says concerns about drug ROI may be justified

IMS’s Murray Aitken says concerns about drug ROI may be justified

Before examining the caveats of this conclusion—and the authors are the first to admit there are some—it’s worth looking at the bottom-line results. The authors analyzed multiple financial data points for 466 novel drugs launched in the U.S. between 1991 and 2009. Using a variety of data modeling methods, they determined the average “present values of lifetime net economic returns,” which is essentially the likely sales of each drug over its entire life, with future sales discounted somewhat to accurately reflect the point in time during which the calculation was made.

The authors found that net economic returns peaked in the 10-year period ending in 2004, but then fell in the following five years. Specifically, they found that the average total cost of launching a novel drug was $3 billion between 2004 and 2009, but that the R&D portion of that total rose from between 18% and 23% to 34%, despite the fact that revenues were declining in pharma during that time. That five-year period marked the first time expenses exceeded sales of novel drugs.
Co-author Murray Aitken, executive director of the IMS Institute for Healthcare Informatics, attributes the change to a variety of forces coming together around that time, including the introduction of many “orphan drugs” to treat rare diseases. Such drugs “typically have lower lifetime sales than non-orphans,” Aitken says.

But there were also broader market forces at work that are still in play today and that affect drug development more broadly, Atiken says. “The marketplace for drugs has become more competitive, and the actions by payers and intermediaries to limit the increase in spending on medicines has been gathering steam,” he says.

So what are the caveats? Firstly, the study did not include the product that has become the poster child for high drug prices: Sovaldi (sofosbuvir), the hepatitis C treatment from Gilead Sciences GILD -0.1% that costs roughly $1,000 a pill, or $84,000 for a full 12-week treatment. Despite protests from payers and politicians about the cost burden on the healthcare system imposed by the drug, Sovaldi has redefined “blockbuster,” pulling in more than $10 billion in sales in 2014, its first year on the market. That drug alone would have likely skewed the average returns in a positive direction, had it been included in the MIT/IMS study.

“We recognize that the most recent launches we looked at were in 2009 and subsequent to that there’s been some very strong launches, this one in particular breaking all the records,” Aitken says. “But we would caution against drawing broad conclusions from the experience of one particular drug.”

Caveat No. 2: In the fine print at the end of the article, the authors disclose that the study was partially funded by Pharmaceutical Research and Manufacturers of America (PhRMA), a large and powerful trade group that has consistently defended high drug prices. PhRMA provided funding for IMS’s analysis but not for the lead author on the piece, Ernst R. Berndt, a professor at MIT’s Sloan School of Management.

Skeptics might assume PhRMA funded the research to push its own agenda, but Aitken pooh-poohs that notion. “The reason we undertook the research was to really bring into the public domain, for discussion, what is happening with the lifetime sales for these drugs,” he says.

Aitken adds that there are still many unanswered questions worth delving into with further data analysis, including what the current costs of R&D really are, and how Sovaldi and other breakthrough drugs have changed the story. “There has been more pressure from a payer perspective, so the big question is what’s happening with the drugs launched more recently?” he says. “That’s something we’d like to answer down the road.”

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