Drug prices: Higher and higher

In an effort save money on continually rising drug costs, the Germans passed the Reform of the Market for Medicinal Products act in 2010 to assess whether newly approved brands in that country justify their higher prices with greater benefits than older products. Germany's Federal Joint Committee, composed of physicians, hospital administrators and health insurers was charged with assessing the comparative benefits of new products. Their findings then form the basis for price negotiations between the manufacturers and the statutory health insurance funds. New brands that offer no added benefits cannot receive prices higher than what existing products charge.

by Daniel R. Hoffman, Ph.D.

Published Jan. 30, 2014, 11:59 a.m. ET

The Federal Joint Committee started its work in 2012 and, to date, 60% of the new drugs they analyzed failed to show additional therapeutic benefits beyond those of older medications. Despite this cost saving to payers and consumers, the German government of Conservative Chancellor Angela Merkel, in a bow to pharma pressure, is set to scrap the Reform system.

Interestingly, physicians in Germany do not fall into the typical pattern of their American counterparts. In most cases, American practitioners remain eager to prescribe pharma's newest offerings, even though their only knowledge of the costs and benefits of new medications is generally limited to what sales reps spoon feed them. German physicians and their organizations, by contrast, are now urging the country's new coalition government not to discontinue the drug review process. For example, the chairman of the German Medical Association's Drug Commission publicly stated that scrapping the review will make it more difficult for physicians and others to obtain independent information about new drugs (see here).

If the Germans intend to adopt the American system of allowing pharma companies to charge whatever they wish, they should know that employers here who provide their workers with health coverage are requiring them to shoulder steadily increasing percentages of prescription drug costs. At the same time, pharma is planning on regular, across the board price increases. The industry intends to justify such price increases with its classic and much maligned argument that the use of their drugs reduces other health care costs.

After several decades of offering that as a justification for rising drug costs, the story has worn thin. Despite the deep economic recession, the vaunted patent cliff and the supposed slowdown in overall health care costs, U.S. spending on branded prescriptions has grown steadily during the past five years. For example, U.S. spending on the top 20 prescription medications rose 14% between 2008 and 2012. During this same period, drug spending for various specialty conditions such as multiple sclerosis more than doubled and spending on cancer therapies rose by 30%. As a result, while the U.S. has 5% of global population, prescription spending here is 35% of the world's total (see here).

In developing this strategy for making more money while selling fewer pills, the pharma companies claim they will be able to prove that their new, branded products are more effective than cheaper alternatives. In most cases, however, they were unable to demonstrate such benefits. Nevertheless, the march of steadily increasing drug prices continued without pause.

The medications for hepatitis C (HCV) illustrate just how aggressive pharma intends to move in raising its prices.

In 2011 Gilead paid $11 billion for Pharmasset to acquire the latter's oral NS5B inhibitor, sofosbuvir. Gilead completed the development of sofosbuvir, which it branded as Solvaldi, and last month the FDA approved the product.

Sovaldi's approval left a sweet and sour taste in the mouths of patient advocates because the best results ever obtained in treating HCV appeared last year in a Phase 2 study that combined sofosbuvir with BMS' NS5A inhibitor, daclatasvir. The combination is orally dosed and uses no interferon or ribavirin, thereby sparing users a year of withering side effects. Results showed that the regimen reduced the viral presence down to undetectable levels (i.e., sustained viral response) in almost 100% of test patients, including nearly all genotypes and among treatment-naive patients, as well as those who failed on the previous standard of care.

No sooner did those Phase 2 results appear, than Gilead refused to participate in Phase 3 studies with BMS for the combination. Instead Gilead wanted to develop and combine its own NS5A inhibitor, ledispasvir, with Sovaldi. Now Gilead is charging $84,000 per patient for a 12-week course of Sovaldi by itself, and many patient groups are angered because they know most insurers will limit coverage and/or require a steep copayment from patients.

In any other industry, this would immediately trigger a pricing battle among competitors. Other companies such as AbbVie and Johnson & Johnson are also developing potent combination therapies and in a competitive market, buyers could force the drug companies into a pricing war. But this is pharma and pricing battles appear about as frequently as Halley's comet.

India seems to be emerging as a tenacious roadblock to pharma's plan of shoot-for-the-moon pricing and a cowboy market for medications. Recall that India remains one of the crown jewels in the Emerging Global Markets fable with which pharma executives have been beguiling investors for most of the past decade. Yet now the government there is planning to regulate the prices of medicines and devices for patients with life-threatening diseases.

Next month a committee with representatives from the national health ministry and other agencies will meet to decide just how they intend to control pharma pricing. An earlier committee recommended a procedure under which the government and the manufacturers would negotiate prices, but that approach has apparently fallen out of favor. While a negotiated pricing system still remains an option, the current, inter-agency committee will also explore two other price-setting approaches: reference pricing and differential pricing.

If India adopts a policy of reference pricing, the government would base drug prices on what some comparable, low-priced country permits. In a system of differential pricing, the government would establish separate price tiers, one for its own purchases and other levels for purchases by private organizations and individuals (see here).

Pharma doesn't take kindly to India's stout pushback against constantly rising drug prices. This week Businessweek published a comment made by Bayer CEO, Marijn Dekkers, at an industry conference in December. Someone asked Dekkers about the Bayer product, Nexavar, on which India had declared compulsory licensing, voiding its patent there.

"We did not develop this medicine (Nexavar) for Indians," Marijn Dekkers declared with unconcealed disdain. "We developed it for western patients who can afford it."

A spokesperson for Doctors Without Borders later claimed that Dekkers represents " 'everything that is wrong' with the multinational pharmaceutical industry." (See here.)

That may be one way of looking at it. The other is that Dekkers is just more candid in admitting that pharma is all about making money and if millions of people have to die as a result, that's just the way it is.