High Drug Prices And Innovation

The high cost of drugs has been a topic of debate among many people, including me and Dr. Peter Bach, the eminent Director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center (MSKCC). Essentially, Dr. Bach and I disagree on the importance of pricing on sustaining innovation in pharmaceutical drug R&D. This is an important debate to have, as all can benefit by understanding the issues at hand.

First of all, Dr. Bach and I are both concerned about the high cost of drugs. He and oncologists at MSKCC were both right and just when they took a stand against the unwarranted premium sought by Sanofi for their colorectal cancer drug, Zaltrap, which offers little advantage over Avastin which is half the price. Their public stance resulted in Sanofi slashing the price of its drug. I also deplore the outrageous price increases foisted by generic companies who, as the sole provider of a long off-patent drug, charge higher prices for no other reason than that they can. I also have concerns over the cost of cancer drugs, particularly as advances in medicine will convert cancer from a death sentence to a chronic disease that will require long-term drug therapy.

But make no mistake: revenues from new drugs drive innovation. The pharmaceutical industry invests more of its top line earnings into R&D than any other industry – roughly 15%. Thus, there is a direct tie to drug sales and the amount of money available for new drug discovery and development. If it is in the public’s benefit to capitalize on the knowledge being garnered with the understanding of the genetic causes of diseases, then new patented drugs need to be priced high enough to enable companies to get a significant return on their investment (ROI).

I have talked often about how drugs are priced and why high prices can be justified due to the economic value that they bring to society. Dr. Bach takes issue with this and he uses two examples: aspirin and antibiotics.

“When taken after a heart attack, aspirin reduces the risk of a recurrent MI by an enormous amount. How many thousands of dollars should it therefore cost? What about antibiotics that prevent sepsis and hospitalizations? How much for them?”

Actually, these aspirin and the older antibiotics should cost pennies a day and that’s the exact price that they cost today in spite of their life-saving benefits. This is because once a drug loses its patent protection, roughly 12 – 15 years after it reaches the marketplace, the price drops precipitously due to generic competition. Thus, innovator companies need to charge a price that is justified by the value the drug brings to healthcare as well as a price that provides a ROI to help the company continue to seek the next breakthrough.

In fact, getting a good ROI is helping to set the agenda for pharmaceutical R&D investment. It is ironic that Dr. Bach picked antibiotics as one of his examples. We have a crisis right now with a dearth of compounds in development to treat the growing list of infections that are becoming resistant to existing drugs. One of the drivers for the de-emphasis in antibacterial R&D at Pfizer, Merck and other major players, is that any breakthrough antibiotic discovered will be used sparingly to slow down the eventual emergence of resistance to the new agent, thereby limiting sales.

Conversely, the potential for a high ROI is what drove the pharmaceutical industry’s extraordinary investment into oncology drug R&D in the 1990s resulting in a pipeline of nearly 1000 drugs in clinical development today. The promise of a high ROI has also led the industry into R&D on rare or orphan diseases and new drugs are emerging here as well. Success can also foster altruism. Companies also have the wherewithal to invest in diseases of the developing world where no ROI can be anticipated. J&J's Sirturo for TB and Sanofi’s Dengue fever vaccine are two examples.

Drug pricing is a very emotional subject. People are justified in their belief that access to needed medicines shouldn’t be limited to those who can afford them. That is certainly true. But pharmaceutical companies must turn a profit to survive. As long as a new drug brings legitimate and demonstrable value to the healthcare system, a high price is justified.

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