Focus On Pricing Puts Rx Industry On Defensive

By John McManus, president and founder, The McManus Group

When the candidates in the Democratic presidential debate named their biggest enemies, Hillary Clinton placed drug companies next to Iran. Drug companies! Those totalitarian, human-rights-abusing foes — mitigating and eradicating horrific diseases, supporting over 3.5 million high-paying jobs in the U.S., contributing over $50 billion in annual R&D to conquer devastating diseases like Alzheimer’s — are being fingered along with the Mullahs of Iran as the principal enemies of the most likely next president of the United States.

It is certainly not because drug companies have campaigned against Hillary Clinton. Since her first Senate campaign in 2000, she has collected more than $1 million from drug and health companies. So far this year she’s collected more than any other presidential candidate as well.

Hillary Clinton is an adroit politician. She identified drug companies as villains because she is tapping into a growing political concern regarding the aggressive pricing strategies of many pharma companies. An August Kaiser Family Foundation poll found that 72 percent of Americans feel that drug costs are unreasonable, and 74 percent feel that drug companies put profits over people.

First came Valeant, the Canadianbased firm that earned a reputation for acquiring companies with limitedcompetition products, pricing those products at a premium, and then shuttering most of the R&D capacity of the acquired companies. Valeant tripled the price of Isuprel and hiked the price of Nitropress, another heart medication, by six-fold soon after acquiring them. Both products are generic.

Then Turing Pharmaceuticals, an obscure drug firm recently acquired by a young, avaricious hedge fund manager, ignited the recent firestorm when the New York Times skewered its effort to hike the price of Daraphim, a product marketed since 1953 to treat toxoplasmosis infections for those with weakened immune systems, from $13.50 to $750 per pill.

Bad behavior does not go unnoticed, and, for Turing and Valeant, overly aggressive price increases attracted prosecutorial attention to the companies’ general business practices. Turing is now being investigated for anti-trust activities by the New York attorney general for restricting sales of the product to a select few pharmacies. Turing’s CEO is also being investigated for violations of allegedly misusing company funds while at Retrophin, another company he founded.

Meanwhile, Valeant was subpoenaed in October by federal prosecutors looking for information on its patient assistance programs, drug pricing, and distribution practices. This follows congressional investigations by the Government Reform and Oversight Committee‘s Ranking Member Elijah Cummings (D-MD) and Senator Bernie Sanders (I-VT), who is running for president.

Sensing a political opportunity, Clinton released her plan to combat drug prices a few weeks ago. Her package includes a number of familiar proposals — negotiation of prices for Medicare drugs, drug importation, reducing exclusivity of biotech products from 12 years to seven, and extending Medicaid-style rebates to Medicare plans serving low-income seniors. But it also included ideas that are percolating in several states, including limiting profits of pharmaceutical companies to an arbitrary metric. The announcement of Clinton’s plan sent biopharmaceutical stocks tumbling, with over $40 billion in market value wiped away in a few hours.

Feeling vulnerable, PhRMA turned guns on Turing — condemning the dramatic price hikes of these products as outliers that do not represent the industry’s standards. Biogen CEO George Scangos, who is also the chairman of PhRMA, characterized the price hike as a “perversion of the system” and called the move by Turing “arrogant and naïve.” (Neither Turing nor Valeant are members of the trade association, nor do they perform even minimal research to develop new products.)

The Wall Street Journal piled on with a lengthy piece in early October documenting substantial wholesale price increases on many leading products. When the Wall Street Journal attacks, it’s hard to know where the industry can find shelter.

That analysis of wholesale prices of course fails to paint the full picture because it excludes the significant discounts health plans negotiate with manufacturers and even greater price concessions through pricing schemes run by public payers. Moreover, most companies offer generous patient assistance programs to reduce or eliminate obligations for patients who cannot afford their medications.

The industry has made headway in explaining the transformative power that medicines can have. Most payers are now covering the Hepatitis C cures, which have been lifesavers for patients and eliminated the need for costly liver transplants. But the public’s ire over pricing now appears to be most acute regarding existing products that have been on the market for years.

The pharmaceutical industry has historically relied on arguments that pricing reflects enormous and risky investments in research and development. The Tufts Center of Drug Development found that just 12 percent of drugs that enter clinical trials make it to market. But those arguments are beginning to fall flat, and some want those costs explicitly and publicly spelled out.

Now some states are considering legislation that would require disclosure of R&D expenditures related to particular products, and many would even limit prices based on those expenditures. More troubling, the White House is now allegedly working on a comprehensive package to address drug pricing that may include similar ideas. The industry is waiting with bated breath.

The National Association of Manufacturers (NAM) has responded forcefully, stating, “There are efforts underway to require manufacturers to turn over highly sensitive operational information, such as pricing on specific products, marketing costs, and product development funding streams. From the view of the manufacturer, publicly releasing this kind of information is contrary to commonly understood business practice, surrenders federal protections, leaves markets and their company open to manipulation… .” NAM is right. However, telling the story of products whose price exceeds the marginal cost of production in the short-run while the long-run economic and clinical benefits are much more difficult to quantify is complicated. Scurrilous demonstrations from the campaign bully pulpit are far easier.

Since enactment of the Affordable Care Act five years ago, the industry has experienced a relative lull in activity as the policy focus has been on implementing that gargantuan law. But increased public ire at both real and perceived pricing issues means that the industry must move rapidly to a war footing in Congress.

A new opportunity to educate policymakers on the role and economics of pharmaceuticals presents itself with the ascension of Stephen Ubl as president of the lead trade group, PhRMA. Just 46 years old, Mr. Ubl is an experienced operator in Washington but brings new energy and focus to an industry now finding itself in a defensive posture. It’s high time to develop and convey more forceful arguments regarding the value of innovation in driving down overall healthcare costs and assisting society in addressing unmet medical needs that no other sector can deliver.