Drug Pricing: Lack of Transparency and Trust Compound the Problem

The latest attack on drug industry pricing has calmed down a little now, although the subject is sure to reignite as the 2016 Presidential election race heats up. Hillary Clinton, despite being the leading recipient of campaign contributions from drug industry insiders, recently issued a call to regulate drug pricing (and Bernie Sanders has actually co-sponsored new drug pricing legislation). These calls elicited the expected responses from PhRMA and BIO, with both trade organizations suggesting that such a move would restrict patient access and inhibit the development of new medicines.
The idea that drugs cost too much here in the U.S. is not a new one; it was the subject of lengthy congressional hearings way back in 1959-60. The recent dust-up could be characterized, as the late, great Yogi Berra once said, as “déjà vu all over again.” During those hearings Sen. Estes Kefauver was grilling a representative from Schering over it’s pricing of a form of estradiol, which is used to treat menstrual disorders. “You did no research on this drug. You bought a finished product from Roussel. All you did was put it in a tablet, put it out under your name, and sell it at a markup of 7,079 percent.” Sound familiar? This historical precedent is one reason exploitative types like Martin Shkreli and Michael Pearson think that they can get away with this practice, because it’s been going on a long, long time.

Those hearings eventually led to a number of
significant changes in how the pharmaceutical industry operates. However, none of the changes enacted actually affected drug pricing, and the current kerfuffle isn’t likely to either. After all, drug and medical device companies (and their trade associations) have over 1,400 lobbyists on their payrolls, and spent some $230 million funding their efforts in 2014. This was in addition to the nearly $73 million healthcare insurers spent on lobbying last year. Large pharma companies have already funneled millions of dollars into California to defeat an initiative that seeks to lower drug prices paid by state agencies via contracts that are tied to the (lower) prices paid by the U.S. Department of Veterans Affairs.

Much of the industry response to the pricing issue echoed what Amgen
said this past summer about one of its drugs, which is priced at $178,000 per treatment, "The price…reflects the significant clinical, economic and humanistic value of the product to patients and the healthcare system…The price also reflects the complexity of developing, manufacturing and reliably supplying innovative biologic medicines, ongoing investments in additional research in existing and new indications as well continued innovation in the formulations and delivery of our products." This quote, of course, would apply to nearly every new drug that hits the market.

Let’s say, for the sake of argument, that we buy the concept espoused in this quote. Drug companies admit that their prices are often untethered from actual costs, yet they want us to believe that they are somehow fairly derived. Their only link to economic reality is what drug purveyors think the market will bear when setting the price. Roche CEO Severin Schwan
criticized the decision by the U.K.’s Cancer Drug Fund to not pay for some of its drugs as “completely arbitrary.” This seems a bit hypocritical: Arbitrary prices on drugs equals good, while arbitrary decisions on paying for these medicines equals bad. The industry won’t really explain exactly why a drug’s price can’t be lower, nor will it tell us why the price isn’t actually higher. If a drug’s price truly “reflects the significant clinical, economic and humanistic value of the product to patients and the healthcare system,” how could we challenge the truthfulness of this statement for a drug whose price doubles? Or increases five times as much? Or fifty times as much? We can’t, because truth is not part of the equation here. And as expensive as drugs are now, I see the price of cancer treatments getting substantially higher in the future as combination therapies increasingly supplant the use of individual drugs.

A Lack of Transparency

Because there is often no direct linkage between drug prices and the resources expended to develop them, we don’t really know: 1) the true cost to discover and develop the drug, 2) manufacturing costs, 3) ancillary costs, such as the amount spent on marketing and protecting intellectual property, or 4) how much extra the company is spending (over and above costs) to fund the purchase, discovery, or development of future medicines. This information, of course, is proprietary and has to be kept from competitors, lest they obtain some unfair advantage in business dealings. On the other side of the equation, we also don’t know what kind of pricing reductions the companies offer to their best customers, the bundles available, quantity discounts, rebates, etc. This info, too, is proprietary, and we can’t evaluate it either. The pervasive aura of secrecy surrounding exactly who pays what leaves the rest of us stumbling about in the dark. And if we have no access to this information, we have no way to judge whether the prices being charged are just and reasonable.

The initial prices charged for new drugs are not the only concern here. Much of the industry’s revenue growth is tied to yearly price hikes. Pfizer, for example, derived 34 percent of its
revenue growth over the past three years from price increases on existing drugs. Bristol-Myers Squibb and AbbVie did even better, with 112 percent and 47 percent of their revenues tied to drug price increases, respectively. A study by Credit Suisse found that for twenty large drug companies, 80 percent of the growth in their net profits in 2014 was derived from hiking the prices of their drugs in the U.S. Being able to consistently raise prices at these inflated rates while still retaining customers is a practice that other industries can only dream of.

A Matter of Trust

This lack of transparency in drug pricing moves us into a different realm. We are given no choice except to believe what the companies tell us. The problem, of course, is that most of us don’t feel very comfortable doing business with organizations that ask us to pay whatever they decide to charge for a product or service, especially those protected by monopoly pricing. Should we trust that these really are the lowest prices possible, and that the companies have our best interests at heart? The dictionary defines trust as “
reliance on the integrity, strength, ability, surety, etc. of a person or thing; confidence.” Those that lack integrity can’t, by definition, be trusted. And integrity, in turn, is defined as “honesty; possession of firm principles.” So now we have something we can judge. Let’s look at the industry’s track record: Does it have a history of being honest and acting with integrity in its dealings with its customers?

Sadly, the answer to this question is often no. The moral compasses employed by the sales and marketing groups of many biopharma companies are broken. They point in the direction of maximizing monetary returns via off-label drug promotions, steering around the path that leads towards protecting patient’s health. For those of you who aren’t familiar with the term, off-label drug promotion refers to selling drugs either to specific groups that the FDA has not approved selling to, or to patients with diseases that the agency hasn’t approved the drug to treat. Companies are eventually sued by lawyers (representing individuals who have been injured as well as whistleblowers) when they are caught with their hands in the cookie jar. As a result of these legal actions, both federal and state governments have enacted fines against many drug companies.

These penalties aren’t just a slap on the wrist. In the past five years pharma companies have agreed to pay over
$13 billion in fines to resolve civil and criminal charges for promoting their drugs for unapproved uses. It’s not the little guys that have felt the government’s wrath. It’s the biggest players, like Merck, Pfizer, GlaxoSmithKline, Eli Lilly, Johnson & Johnson, Abbott Laboratories, and Amgen. Off-label drug selling is so widespread that it’s clear that the companies consider these fines merely the cost of doing business. And this practice extends its tentacles into other shady areas, including ghostwritten articles about drugs and the production of fake medical journals. I wrote about the deterioration of the industry’s image back in 2009, and if anything it’s gotten worse since then. Repairing the industry’s image, of course, is much less important than actually changing the industry’s behaviors that have sullied its reputation.

Reading the details of how these illegal promotions take place will leave you more knowledgeable, but also infuriated and depressed. Take a look at
America's Most Admired Lawbreaker, Steven Brill’s detailed online exposé of J&J’s off-label marketing and sales programs (directed at children and the elderly) for the schizophrenia drug risperidone (Risperdal). One of the major points that Brill’s article illustrates clearly is the net profit that resulted from the risperidone off-label selling plan. Even after paying a $2.2 billion fine to the government, Brill estimates that J&J made $3 billion in profits from its off-label sales program, even after paying the cost of jury verdicts and other legal settlements.

Unfortunately, this was not an isolated case in the industry. Need further proof of the damaging effects of this practice? Read Alison Bass’s
Side Effects: A Prosecutor, a Whistleblower, and a Bestselling Antidepressant on Trial, which focuses on GlaxoSmithKline’s marketing of the antidepressant paroxetine (Paxil) to children and adolescents. Or Poison Pills: The Untold Story of the Vioxx Drug Scandal by Tom Nesi, which focuses on Merck’s questionable selling practices for a pain medication that was taken off the market in 2004. And the industry’s problems are not limited to lawsuits associated with off-label selling. Novartis just agreed to pay $390 million to settle charges that it paid kickbacks to specialty pharmacies to boost sales of several of its drugs.

A lack of corporate integrity is certainly not unique to the drug industry. Recent examples from the auto industry include Volkswagen’s
deceptive practices that hid the pollutants put out by their diesel cars, and GM’s failure to recall vehicles with defective ignition switches. In the food business, executives of the Peanut Corp. of America were recently sent to prison because they sold their products knowing that many of them were contaminated with salmonella, which wound up injuring and even killing some its customers.

Fines are clearly not enough to stop wealthy corporations from exhibiting egregious behavior. The government appears to be
increasing efforts to ban executives from working in the pharmaceutical industry as a result of their illegal behaviors. It’s also looking at sending some of these folks to jail. Executives of Warner Chilcott (now part of Actavis-Allergan) have been arrested and charged with violating government anti-kickback statutes. Two sales executives have already pleaded guilty, and the company’s ex-president, W. Carl Reichel, has also been indicted. Deputy Attorney General Sally Quillian Yates recently wrote in a memo that the Department of Justice is now, "encouraging the targeting of individuals in corporate wrongdoing cases." Maybe if more company executives are jailed as a result of their corrupt actions, we’ll see less of this conduct.

Some drug companies (e.g. Amarin Pharmaceuticals) are actively looking for a way to expand their off-label drug promotion and selling through the courts. They are suing the FDA and claiming that restrictions on providing information to doctors on other potential uses of their drugs is actually a free speech issue, and is permitted by the First Amendment as long as the information is truthful. Pacira Pharmaceuticals sued the FDA in 2015 to change the wording on the label for their drug bupivacaine liposome injectable suspension (Exparel). They wanted to promote its usage to treat pain at any surgical site (it was previously limited to only two sites that were studied in their clinical trials). Pacira recently
dropped their lawsuit when the FDA agreed to the changes, but the free speech issue remains at large.

The
issues are complicated and I’ll leave it to the legal scholars to sort this out. However, this matter brings up a troubling point. Presumably, if drug companies are forced to toe the line and can’t sell their medicines to non-FDA approved patient groups or for other diseases, they will simply jack up the prices for the drug’s primary use(s). Put another way, successfully banning off-label promotion and sales will likely lead to higher drug prices, with the trade off being patients would be safer.

The other side of the coin is equally disturbing. If biopharma companies win the right to promote their drugs off-label for a wide spectrum of potential uses, it’ll be a lawyers dream and a patient’s worst nightmare. Taking the brakes off of their sales and marketing groups will be a healthcare disaster if it’s not possible to hold individuals accountable when the inevitable problems crop up.

A recent
article in Forbes by economist Jack Scannell did a terrific job of laying out many of the financial factors that impact drug pricing, and I strongly suggest you read it. It’s clear that this is an incredibly complex problem, and that different solutions, even if they might work, might be needed for different classes of drugs (e.g. antibiotics and cancer drugs). As with nearly all articles that cover drug pricing (including the ones I’ve written), it’s short of definitive answers. Many of the possible solutions that have been put forth in recent months have been circulating for years without being adopted. These ideas include:

Allowing re-importation of drugs from countries where they are sold for less, such as Canada or India.

Allowing Medicare to negotiate pricing with drug makers.

Reimbursing patients/insurance companies for a drug’s cost where it can be shown that it was ineffective (this idea has gained
a little traction in Great Britain with the National Health Service).

Instituting value-based pricing, where payments are linked to how well a drug performs in each patient and for specific medical indications.

Shortening the length of drug exclusivity (currently set at 12 years) to speed up the entry of generics into the marketplace.

Using reference pricing, where drugs are
grouped into classes, and insurance pays for the lowest priced member of the class.

Defining clear
guidelines regarding the use of “march-in rights” under the Bayh-Dole Act, which would allow the government to take action when the health care needs of the public are not being satisfied by the marketplace.

Given the small likelihood of biopharma companies readily agreeing to adopt any of these approaches in the U.S., we might be better off exploring some different ideas. Maybe we could move forward with a
plan by MIT economist Andrew Lo to issue $30 billion in bonds to pay for cancer cures, or a nearly $39 billion plan to pay for Alzheimer’s research? There are a lot of smart people out there. Perhaps some foundation would like to fund a challenge not just to cure a disease, but to solicit innovative ways to pay for the development of new treatments and drugs? Or come up with new ways to insure and pay for these medicines?

Developing drugs is an expensive enterprise that requires expertise in a wide variety of areas, and as a result nearly all drugs are developed by industry. The basic discoveries that underpin the work often come out of academia, but universities don’t have the knowledge, the infrastructure, the resources, or the mission to develop new medicines. Unless someone figures out a way to reduce R&D costs tremendously, drug prices are likely to stay high for a very long time.

I can envision some ways that drug prices might drop significantly. The recently developed (but still immature) CRISPR/Cas9 gene editing technology might eventually be useful in treating both a very wide spectrum of rare monogenic diseases (i.e. those caused by single gene mutations, such as cystic fibrosis and Duchenne muscular dystrophy) as well as diseases like cancer, where it could be focused on repairing critical mutations thought to drive the disease. I
suggested that the industry collectively institute a gene repair technology project back in 2012 (before the CRISPR gene editing papers were published), but I’m unaware of any efforts made to implement such an approach.

There are many who will argue that we shouldn’t do anything to rein in high drug prices because the hand of the free market will assert itself if necessary. After all, the world didn’t end when drug pricing wasn’t changed after the 1959-60 congressional hearings. Unfortunately, it’s impossible to calculate the number of people who have suffered and/or died over the years because they couldn’t afford their medications. A recent
poll by the Kaiser Family Foundation revealed that three quarters of Americans are worried about the cost of prescription drugs for serious diseases. We need to rid ourselves of the quaint notion that most drug companies are run by folks whose primary goal is to serve mankind. Their focus, which some will freely admit, is on generating profits for their shareholders, which (happily) will fill their own pockets as well. That’s why we continue to see an increase in the number of biopharma companies whose primary “innovation” is new ways to raise the cost of existing drugs.

It’s unlikely that drug prices will be greatly affected by new hearings to be conducted in 2016 by the U.S. House Committee on Oversight and Government Reform. However, as we saw in the early 1960s,
substantial changes in how the drug industry operates did come out of the government hearings. Change, though slow and often difficult to achieve, is possible. The Berlin Wall came tumbling down, America elected its first black president, and the leaders of China and Taiwan recently met for the first time since 1949. We clearly need more companies that are truly focused on “patients over profits” as the foundation of their basic business model. As the U.S. Supreme Court stated in a recent case, “Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.” Maybe the first step in drug pricing reform is to figure out a harsh way to deal with the non-innovative entities. Potential investors will stop putting in capital if they worry that these companies won’t become the money-minting machines they are looking for. That same money might fuel truly innovative work at other startups that will produce novel and helpful medicines that will benefit all of us.


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