Drug Baron

An open letter to Congressman Waxman on the subject of drug pricing

| 21 Comments

Dear Congressman Waxman (and anyone else concerned about the price of Sovaldi™),

I write to you in response to your letter to John Martin, Chief Excutive at Gilead, on March 20th this year.

With spiraling healthcare costs and government debt at an all-time high, taking aim at high-priced drugs seems certain to win public support, and on the face of it may seem to serve the public, whose mandate you represent, very well.  But  there are considerable dangers in attempting to influence drug pricing in this way.  It could conceivably cost millions of lives.

To understand the issue, you have to go back to the established institutions that allow Gilead to charge such a high premium over the cost of manufacture for Solvadi.  Principal among those is the concept of the patent.   Arguably, issuing patent protection for new inventions is the single most powerful tool stimulate innovation any government has ever devised.  And attacking drug pricing now threatens that principle.

The concept of a patent is simple: it is a bargain, a contract, between the state (representing the public) and the inventor.  In return for fully disclosing the details of your invention, you will be given a monopoly to make and sell that invention for a limited period (usually around twenty years).  Thereafter, for the rest of time, anyone will be able to make use of your invention in their products without further obligation to the inventor.

By creating a temporary monopoly, the patent allows the inventor to secure an abnormally high price (and hence margin) on his product which (in theory) pays back the risk capital that had to be invested to create the invention in the first place.  This pay-back needs to be substantial because many inventions cost a lot to create but often turn out as failures.  The successes have to bear the cost not only of their own creation but also that of the numerous failures that littered the route to success.

Monopolies (even temporary ones) are dangerous beasts. In the absence of competition, the supplier can set any price he chooses without fearing competition from a lower priced supplier of the same goods.  The price could go very high indeed, as it has with Sovaldi™ priced at $1,000 a pill, translating into $84,000 for a 12 week course required to cure patients with Hepatitis C.

Usually, though, prices don’t climb to such astronomical heights even in monopoly conditions.  Two factors act to limit price: firstly, and most importantly, the monopoly only applies to strict copies.  There are usually other options on the market that are nearly as good as the new invention, and if the price of the newcomer rises too high people will opt to buy the cheaper, slightly inferior, alternative.  The premium available to the monopoly-holder, therefore, is dependent on the degree of superiority he has over the next-best alternative.  Secondly, there is a limit to what anyone would pay for the particular benefit being delivered, even if it is the only alternative available.

The last point is less relevant for drugs.  History tells us that people will pay almost anything for even the hope of extending life.  And when states or insurers baulk at the cost of buying these treatments for us, they come under severe pressure from public opinion.

The danger, then, is that governments and insurers try to deflect that pressure off themselves and on to the drug companies.

Doing so risks breaking the central contract of the patent.  The monopoly holder should be free to set their own price, and the buyers (including the public) then have only two choices: buy it at the set price if they believe the superiority of the product justifies the price set by the supplier; or vote with their wallets and refuse to pay (giving up access to the benefit).  The third (and currently seemingly the most popular) option – to try and force the price down so as to gain access to the benefits of the invention without paying the price set by the monopoly holder – is manifestly a breach of the patent contract.

Breaking contracts and undermining essential business institutions are actions we have come to associate with third world governments – indeed it has often been argued that economic prosperity is built on the unshakable adherence to the concept of property.  Dictators in military uniforms stealing from their citizens rightly provokes condemnation from the US government.  But breaking the patent contract is as damaging, if considerably less visible.

The general public do not understand (and do not need to understand) how innovation is paid for.  But governments should.  And they should not disturb these key institutions in the name of political support, or the misguided belief that they are serving the public interest.  Your letter suggests that you are coming dangerously close to such a position.

Worst of all, not only are these actions dangerous because they undermine the principles of paying for innovation, but they are also largely unnecessary.  Gilead will soon face competition despite their monopoly position on Sovaldi™ – other innovators, such as AbbVie and Merck are coming to market with alternative treatments for HCV that may be as good as Sovaldi™.  The monopoly position for Gilead will be diluted long before the composition of matter patents that underpin their premium pricing expire.  We have seen this before – when Incivek™ from Vertex (an earlier generation HCV treatment) burst onto the market, only to be displaced very quickly by, most recently, Sovaldi™.  This is a very different situation from, for example, Microsoft Windows, where “technological lock-in” makes the monopoly very hard to shift once established.

Even if the newcomers prove not to be quite as good as Solvadi™, by chipping away at its magnitude of superiority they will surely threaten its current price premium nonetheless.  A slightly less effective drug that is considerably cheaper still represents an attractive option.

And there are other, more important, targets for your ire.  There is the issue of biosimilars.  Biological drugs have delivered real clinical benefit over the last decade, but the current regulations ensure that the innovation premium payable on these drugs is not as temporary as the patent monopoly.  The ability to charge high prices, and earn eye-watering margins, persists for far longer because of the challenging regulatory demands for competitors.

Then there is the “unearned premium” (as DrugBaron previously called it) for proprietary drugs that are little or no better than generic alternatives.  And there is no better example than the current travesty of billion-dollar sales of Crestor™ when generic atorvastatin is available at a tenth of the price.  There are many other examples of drugs whose sales owe more to marketing than clinical benefit.

But Sovaldi™ is not one of them.  Thanks to the innovation of the scientists behind its discovery and development, within a generation the scourge that is HCV will be consigned to the history books, like smallpox and polio.   This is a drug that really works – 95% cure rates are a paragon for the industry as it searches for cures for other currently incurable conditions, such as various cancers, heart disease, diabetes and Alzheimer’s Disease.  Paying a temporary premium, as the state contracted to do to incentivize the innovation in the first place, is quite simply the right thing to do.

If politicians, such as yourself, marshal public anger and direct it against the innovators to force a price cut, they are no better than masked militia enraging ethnic clashes and seizing property with machetes or machine guns.  And the long term consequences will be equally dire – innovators will cease to trust the patent contract to pay back their risk capital and the pace of innovation will slow dramatically.  That would be a black day for governments (particularly in the west, who increasingly rely on high technology sectors for tax revenues), for taxpayers and, worst of all, for patients – the very people you are trying to ‘protect’ by calling for price cuts.

Perhaps, having read this letter, you will reconsider the appropriateness of your intervention on drug pricing?

With best wishes,

DrugBaron

 

21 Comments

  1. profiteering off of sick people…

    • Yeah, just like doctors and nurses! Oh, some how it is OK if they make money treating sick people but it is wrong for people who make the drugs that doctors and nurses administer to make money.

      Really, do you expect companies to invest billions of dollars and not make a profit?

      Do you not understand that if the government limits the return from novel, innovative drugs, then we will have fewer new drugs?

      Society can make that choice, but it should be made explicitly. Complaining that people make a profit on drugs while avoiding the real issues is just silly.

      But it allows you — Mr. Martin — to feel morally superior whether or not you have ever actually contributed anything to society.

      • I can choose my own doctor, yes? Can I make the same choice about a drug I need in order to stay alive? Not really. Or say I stumbled into an ER and have the audacity not to have an insurance card? Would I still be treated? Could I say the same thing if I didn’t have the money to pay for your fancy new drug? Next you should “innovate” a novel beta-blocker! We already have plenty approved by the FDA, but a saturated market is a market none-the-less and you can always send in sexy drug reps to push your products. Did you know that I think doctors are vastly over payed in this country, especially considering 95% of care can be administered through nursing staff? I also think that offering doctors incentives doctors to write scripts for your drug is absolutely deplorable. But that’s business as usual really, and just forget the fact that the US isn’t even top 10 in healthcare outcomes, and the countries that out-rank the US do so at a fraction of the cost. I must just be avoiding the “real” issues here.

        “Really, do you expect companies to invest billions of dollars and not make a profit?”
        No, I think there’s a serious distinction to be made between capitalizing on an investment, and maximizing ROI and in such a way that unjustly jeopardizes public health. Yes, other companies do it all the time, but I would hope that there are people who would still hold themselves to a higher standard. Something morally superior to say insatiable money grubbing.

        “Do you not understand that if the government limits the return from novel, innovative drugs, then we will have fewer new drugs?”
        Ah yes, you’re an oracle as well! Any actual empirical data to back that up at all? No, then I guess I don’t understand in the slightest how you could know this apriori.

        And it’s amazing the degree of entitlement your ilk has about all of this. Like you are entitled to profit off of your drug at everyone elses expense. As if you are entitled to blabber on and on about patents and monopolies, as if I or anyone else with more than half a brain should feel sorry that you are allowed to legally maintain a complete monopoly for 20 years. So please, while you’re at it, cry me a river.

        “But it allows you — Mr. Martin — to feel morally superior whether or
        not you have ever actually contributed anything to society.”
        Alas I’ll never be as all these fancy and sophisticated internet bloggers.

        • “Do you not understand that if the government limits the return from
          novel, innovative drugs, then we will have fewer new drugs?”
          Ah yes,
          you’re an oracle as well! Any actual empirical data to back that up? No,
          then I guess I can’t understand how you could know this apriori.

          Yes, look at all the innovative drugs coming out of India, Russia and North Korea. Take away the profit incentive and you take away the incentive.

    • The alternative is all patients would be abandoned. It is up to the charities to help these sick people, not businesses.

  2. I recognise that while the article I wrote makes a lot of sense to people around the industry, to many outside the industry the arguments I make seem hard to fathom (see some of the comments below).

    In the end it comes down to your belief system.

    Are you an ‘entitlement’ person, which believes that people should have access, as of right, to all available healthcare technologies, whether or not their government can afford it? If so, my arguments make little sense. The old communist slogan “property is theft” would apply, and pharma companies should presumably be brought into state control so that we can dictate the price that they will charge for their products.

    Or are you a “market” person, who believes that market economics lead to a much stronger economy, where people will invest their own money (as well as their time and their genius) to create things for the common good, incentivised by the financial return they will make? Both the US and the UK are free market economies, not Soviet-style command-and-control economies – so its not unreasonable to expect them to operate a “fair” market. And a “fair” market is simply one where the rules are set out BEFORE the participants make their investments!

    The only point of my letter is to set out in black and white that what Congressman Waxman in the US (and more recently Jeremy Hunt, Health Secretary in the UK) are doing is BREAKING THE PACT. They incentivised people to invest in drug discovery and innovation through the patent system, with clearly set out rules. And then, when they don’t like what is happening as a result they try and intervene.

    That is wrong.

    If we believe that pharma make an undeserved profit from proprietary drugs, then we must change the rules IN ADVANCE. Cut the patent term from 20 years to 15 years, for example. That will hugely reduce the return to the pharma industry. But at least everyone knows where they stand.

    Go in further, and vote in a communist party that takes pharma companies into state control if you believe that will deliver better healthcare at a lower cost in the long term.

    These are viable choices for a democracy that are fair to all. But intervening to influence the price in a temporary monopoly granted by the state in return for investing in innovation is morally wrong simply because its trying to have your cake and eat it.

    And for the record, the DrugBaron blog is hardly a “pharma apologist” site. There are numerous criticisms of inefficient Research & Development models, of “unearned premiums” VOLUNTARILY paid by states who buy proprietary drugs when there is already a generic equivalent available, of “incremental innovation” where pharma attempts to earn a profit by selling drugs that are scarcely better than the competition at a much higher price through 21st Century marketing expertise, of the regulatory framework for “biosimilars” that earns the industry far more than temporary high prices for rare disease drugs or even Sovaldi™.

    The state should be doing much more to get a better deal in terms of healthcare delivered per tax dollar (MY tax dollar). But they have picked just about the worst possible target to go after, probably because its the most visible, and the one with the greatest “public support” – namely high-priced proprietary drugs. All DrugBaron asks is that they think again, and go after the many other egregious sources of waste, rather than breaking their own state contracts, the patent system.

    • “These are viable choices for a democracy that are fair to all. But
      intervening to influence the price in a temporary monopoly granted by
      the state in return for investing in innovation is morally wrong simply
      because its trying to have your cake and eat it.”
      But it’s a monopoly in the first place! It’s the exact opposite of a token based economy. In what other industry and for what type of product are you able to hold a complete monopoly? For me, it’s the pharma companies that are acting entitled, thinking that a patent means they can do whatever the hell they want, charge whatever the hell they want, and all at the expense of the people who gave them the patent in the first place. I’m sorry, absolutely not. There’s a reason why healthcare insurance is broken in this country, and a big portion of it is due to the absurdities of big pharma patents.

      • You miss the point, though. Its a monopoly FREELY GIVEN by the state to persuade people to discover and develop new technologies. If you don’t believe in the system, fine – vote to not have a patent system and see how many people bother to invent things you find essential (not just drugs). But if we do believe a patent system is a good thing (and most people do), then you have to accept BOTH sides of the trade: the inventor gets the TEMPORARY monopoly; society gets free use of the invention for ever and ever thereafter (as opposed to the inventor simply keeping his invention secret to earn a return on his investment, when no-one else might ever get to use it).

        There is no absurdity in big pharma patents. Without them you would have no drugs at all to take when you are sick (at any price).

      • Drugs and devices account for a mere 10% of healthcare costs. They thus cannot play as large a role in our broken market for healthcare as you make them out to. In fact, their prices are inflated in almost exactly the same way as all other healthcare services. Shouldn’t you be bitching about hospital costs (40% of healthcare spending) or the broken insurance system, which gives people little incentive to consider costs, instead?

    • Are we not guaranteed the right to life, liberty, and the pursuit of happiness? Without affordable access to this cure, we will be denied our rights to any of the above. If it was you or a loved one with this dreadful disease, I guarantee you would be ‘singing a completely different song’. We are not talking about a drug to cure diarrhea, a common cold, headache, etc. This is a drug combination that could stamp out a worldwide epidemic!

  3. Pingback: An open letter to Congressman Waxman on the subject of drug pricing

  4. What happened with cancer thanks to new drugs will happen to hep C…

    Since 1990 new cancer
    medicines have doubled the number of cancer survivors from 6 million to 13
    million. They have extended life, about
    43 million life years worth. These are not life years of pain and
    desperation: The added value of these
    longer lives is about $4.2 trillion. And new cancer medicines aren’t breaking
    the bank: Every dollar we spend on new cancer medicines reduces spending on
    hospitals and doctors by 7 dollars. Such innovative treatments are about one percent of total health care spending.

    All one has to do is imagine what life would be like wthout advances in medical care to know that in their absence we’d spend more on health care, die sooner and be less productive.

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