What Is The Rationale For The Pricing Of New Drugs?

“Would longer drug patents really lead to lower drug prices?”  This question was posed by Stewart Lyman on Xconomy.  Lyman’s post was driven by the recent announcement by Amgen that a new patent for its blockbuster rheumatoid arthritis (RA) drug, Enbrel, would extend the patent life of this drug from 2013 to 2028.  This led Lyman to the following:

“The lengthy patent extension – which could end up giving Amgen a 30-year monopoly – raised an obvious question: would it lead Amgen to lower the price of Enbrel?"

There is no way that this will happen.  Nor should it.

The pricing of new drugs is not done haphazardly.  For any drug, be it a new medicine to treat diabetes in millions of patients, or a drug to treat a rare disease afflicting only a few thousand people around the world, intense discussions and analyses are carried out to determine how best to price such a drug.  There are a number of factors that come into play in these discussions.  How unique is this drug?  What is the competition and what benefit does this new drug offer over existing therapy?  What is the cost of currently treating the disease this drug targets?  Will the new drug change the practice of medicine such that patients will no longer face costly hospital procedures?  Does this new drug save or extend lives?  Answers to these and other questions will determine the drug’s price.

Getting the price wrong on a new drug can greatly impact its potential success.  For example, if it is priced too high, physicians and payers may shy away from prescribing or reimbursing it because they might perceive that the drug provides too little benefit for the added cost.  Ironically, if a new drug is priced at a discount to an existing therapy, it might also be avoided because the lower price might imply inferiority.  But the goal for any pricing discussion is simple: how do we maximize revenues for this new medicine?

Coincident with Lyman’s blog, Matt Herper published a terrific article on Forbes about a biotech company, Alexion, and its blockbuster drug, Soliris.  Soliris is considered an orphan drug – one that is taken only by patients with rare diseases.  Soliris is very valuable in treating two conditions: a rare form of anemia and an even rarer kidney ailment known as atypical hemolytic uremic syndrome.  Only a few thousand patients around the world are taking Soliris and yet it will generate $1.1 billion in sales in 2012.  How?  The cost of this drug is $440,000 per patient per year.  Yet, as Herper points out, private insurers and national health agencies like the difficult UK are willing to pay.  Why?  They do so because drugs like Solaris actually save the health care system money.  Without this drug, the costs of caring for people with rare diseases like this can run into the millions.  When looked at in this way, the pricing for this drug is justified.

The high prices of new medicines horrify people.  When this issue is discussed, words like “monopoly," “cash-cow” and  “unreasonable” are used in reference to profits.  But these same people have little appreciation for how difficult and expensive it is to find the next Solaris.  This was recently brought home by the CEO of Roche, Severin Schwan, who again emphasized Roche’s commitment to R&D with their 2012 R&D spending projected to be $8.4 billion.  To put this number into perspective, the entire NIH budget is $31 billion.  For any company to fund its R&D efforts, it needs to price its drugs as high as it can.

Will this mean that there will be an ever-upward spiral for new drugs?  Not necessarily.  For one thing, competition works wonders in pricing.  As an example, I believe that the spate of new drugs to treat cancer that will be available in the coming years will result in lower costs.  When there is only one drug available to treat kidney cancer, it is hard for payers to negotiate prices with the innovator companies.  But, when physicians and payers have a choice of ten different kidney cancer drugs, the situation changes drastically.  The same can be said with biological drugs to treat RA.  While the Enbrel patent may last until 2028, it is possible that biosimilar versions of other RA treatments will be available long before then and these will be cheaper.  It is reasonable to assume that patients will be prescribed these inexpensive versions of drugs rather than Enbrel, thereby delivering savings to health care plans.

Longer patent lives will not result in lower prices for drugs.

Pricing is determined by the value a new drug brings to patients and the competitive environment it enters.