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High Drug Prices Could Increase Industry Innovation

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Dr. Peter B. Bach is a physician at Memorial Sloan Kettering Cancer Center and the Director of its Center for Health Policy and Outcomes. He is a passionate advocate for patients and often eloquently expresses concerns on the high prices of drugs, particularly new cancer therapies. When he speaks, many people including myself pay close attention. However, his guest post on Forbes.com entitled “Could High Drug Prices Be Bad For Innovation” unfortunately is off-base.

Like many, Bach bemoans the cost of new drugs, such as Gilead’s breakthough hepatitis C treatment, Sovaldi. However, despite being priced at $1,000/pill and $84,000 for a course of therapy, economic analyses show that this drug actually will save the healthcare system money. By the way, it also cures the disease. In reality, this drug is priced based on the value it delivers. Curing hepatitis C will result in reducing the need for liver transplants in these patients and will stave off liver cancer, resulting in considerable savings to the healthcare system, thereby making Sovaldi use cost effective. The value that a drug brings should be the major determinant for the cost of a new medicine.

Bach’s thesis is that biopharmaceutical companies are doing research predominantly in areas where, if a drug successfully navigates development and FDA approval (always iffy), it will be guaranteed to be a blockbuster based on the high price the drug should be able to command. He uses research in lung cancer as his example.

Case in point: there are seven drugs in human trials that target lung or and/or (sic) other cancers caused by an acquired genetic abnormality called the ALK rearrangement. Roche’s Alectinib is in Phase 3. Ariad, Tesaro, Pfizer and Ignyta all have agents in Phase 2. There are four more drugs soon to enter human testing. That’s a lot of drugs that all target the same cancer causing mechanism.

Maybe this would make sense if ALK rearranged lung cancer constituted a vast market. But it doesn’t. The key first and second line indications in lung cancer are already occupied by Pfizer’s Xalkori and Novartis ’ Zykadia. Only three to eight percent of metastatic lung cancers are driven by ALK alteration which amounts to only a few thousand patients in the US.
If it’s not a huge market, then why the drug mosh pit? I think it is high drug prices.

Bach is correct to challenge the wisdom of so many competitors going after the same target. However, while they are good drugs, both Xalkori and Zykadia are not perfect. In general, only about 60% of ALK position lung cancer patients respond to Xalkori. Even those who eventually respond will relapse and thus the need for a second line therapy like Zykadia. However, the importance of this mechanism for these lung cancer patients supports the need for other options. Pfizer is not a stupid company. It undoubtedly believes that the compound that it is bringing forward will be superior to its own Xalkori. It wouldn’t make sense to advance it otherwise.

By bringing forward “next generation” drugs, ultimately the lung cancer patient will benefit either with a more effective agent or one that is better tolerated. However, companies that are advancing ALK inhibitors do so at their own risk. Unless they provide an advantage to already marketed agents, any next generation drug will fail miserably. That’s because oncologists will continue to use the marketed agents with which they are familiar and comfortable.

There is also a potential benefit to having multiple entrants in this lung cancer category. One way for a third or fourth agent to succeed is by pricing the new drug at a discount to the established agents. Payers are getting particularly aggressive in playing off one drug against another with respect to price when deciding which to offer as first line therapy. In fact, Dr. Bach himself showed that physicians could influence drug pricing. In November 2012, he and MSKCC oncologists balked at prescribing Sanofi’s advanced colorectal cancer drug, Zaltrap, because it was priced at double that of the equally effective Avastin. This action, and the ensuing publicity, forced Sanofi to cut Zaltrap’s price in half. The value for treating advanced colorectal cancer was supported by the Avastin price and not the unwarranted premium initially demanded by Sanofi.

Will the revenues accrued by high priced new drugs foster innovation? There are no guarantees. However, in general, roughly 15% of a biopharmaceutical company’s top line revenue is invested in new drug R&D. Thus, a major successful drug should lead to a corresponding increase in the R&D budget. Take, for example, the biotech company, Alexion. They sell the world’s most expensive drug, Soliris. Soliris is a drug used to treat two diseases: a rare form of anemia and a rare kidney ailment known as atypical hemolytic uremic syndrome. Soliris costs roughly $400K/year/patient, yet payers around the world reimburse the cost of this drug because, before this drug was available, each of these patients cost the healthcare system more than $1 million a year. Again, even at $440K, this drug ultimately saves money – and greatly improves the lives of patients!

What effect have the increased revenues generated by this $1.2 billion blockbuster had on Alexion’s R&D budget? In 2011, Alexion spent $137.2 million on R&D. In 2013, this number more than doubled to $317.1 million and in the first half of 2014 it has already invested $284 million. Again, increased R&D spending doesn’t guarantee innovation, but it is likely that Alexion is using these funds to grow its pipeline to find its next breakthrough.

Trying to extract high prices for drugs that offer little benefit over existing therapies is becoming harder and harder. Economic pressures and the increased focus on the real value that a new drug brings is having an effect on pricing. I sympathize with Bach’s concerns. But high prices eventually can lead to increased R&D investment, thus fostering innovation and not impeding it.