Study Dismantles PhRMA’s Long-Standing Argument on Drug Pricing

Mar 07, 2017

A blog posted on Health Affairs on March 7, 2017 presents a study that tested PhRMA’s long-standing argument that high prices for drugs fund research and development in the pharmaceutical industry.

The researchers, who included famed drug pricing critic Peter Bach, combed through pricing data from 15 drug companies that manufactured the 20 top-selling drugs globally in 2015. They compared the prices of these drugs in the United States versus the list prices charged for the medications in Denmark, Ireland, the United Kingdom, and Canada, and calculated “excess revenue” in the US based on the amount of total US revenue that resulted from US premium pricing. The researchers then compared the excess money to the R&D spend for each company. Information on drug pricing in the US came from average sales price (ASP) files for physician-administered drugs from Truven Health’s Redbook, and pricing on the wholesale acquisition costs of retail drugs came from the same source.

Although the authors did not account for rebates in Denmark, Ireland, the United Kingdom, and Canada, saying that the magnitude of such discounts is not published, they did include rebate estimations in the calculation of US drug prices. Bach et al. said this provided a “conservative assumption that serves to lessen our estimate of the premium companies earn through charging higher prices to US patients…”

The researchers concluded that the US spends an average of 66% of its excess revenue on global R&D (approximately $76 billion of the $116 billion in excess funds). Some companies spent a larger portion of their excess revenue on R&D (Novartis, AstraZeneca, Bristol Myers-Squibb), while others produced excess revenue that was more than double their R&D spend (Amgen, Biogen, Pfizer, and Teva). In fact, according to researcher estimates, “three companies covered or nearly covered their research spending through premium pricing of just their top-selling product: AbbVie with Humira, Biogen with Tecfidera, and Teva with Copaxone.”

The point of the research was to illustrate that in the US, premium prices for drugs produce billions of dollars more in revenue than is necessary to fund R&D operations at pharma companies. If premium prices were lowered to just meet R&D expenditures, the researchers pointed out, patients, business, and taxpayers could have saved $40 billion in 2015. The conclusions are in direct opposition with PhRMA’s explanation that drugs are priced to allow for innovation in the industry and are required to fund R&D operations.

In essence—as President Trump has implied in his comments on pharma—the US funds a chunk of the world’s pharmaceutical research. Meanwhile, other countries pay lower prices for drugs that come out of this research. According to Brian Henry, a spokesperson for pharmacy benefit manager Express Scripts, the findings of the study are not surprising. “The takeaways are consistent with what we have been saying: drug makers set drug prices, and, more and more, those prices are set higher and higher—basically orphan drug pricing for non-orphan drugs,” Henry told BioPharm International in an email. “Our job is to bring down the cost of those medications to put them within reach of those who need them.”

Critics of the Health Affairs piece
Experts on the the economic analysis of innovation say the piece in Health Affairs is flawed, and say that while the piece identifies a correlation between the share of revenue coming from the US and innovation spending, it does not offer any explanation about whether higher US prices cause greater investments in innovation. Darius N. Lakdawalla, PhD, quintiles chair in pharmaceutical development and regulatory innovation at the University of Southern California, told BioPharm International that the study suffers from poor empirical research design, and that a variety of other factors that influence a firm's revenue could potentially invalidate the study's findings. 

"For instance, smaller, less-diversified companies are probably more likely to sell their products in the US, because they lack the resources to access other markets. And, they are also likely to have smaller R&D budgets," Lakdawalla notes. "This set of facts would lead to the correlation found in the Bach piece, but it does not imply anything about whether higher prices cause higher innovation spending." He added that the best way to conduct these types of studies is to look at the impact of a shift in US prices or revenue that is unrelated to any other factors that influence R&D spend. “For example, prior studies have used policy changes like Medicare Part D’s implementation, or demographic shifts like the aging of the US Baby Boom cohort—these events shifted prices and/or revenues and allow us to study the implications of higher prices or revenues.”

Lakdawalla adds, "I also think there is some confusion about the economic issues here. Innovation investment is driven by expectations of future revenues, not necessarily by current revenues...'More money today' does not necessarily translate into more innovation spending today. Rather, the mechanism works through expectations about the future policy and market environment, and how these are likely to influence the revenues that can be earned when a pipeline drug is eventually launched."

According to PhRMA spokesperson Holly Campbell, the study "advances a misleading narrative by understating how the competitive marketplace for medicines in the United States helps control costs and provides patients with access to innovative treatments and cures faster than in many parts of the world. In the United States, generic utilization rates are nearly 90 percent, competition occurs among brand name medicines and large, powerful purchasers negotiate aggressively." Campbell also told BioPharm International that price differences between the US and other countries are often due to price controls that effectively restrict access to medicines for patients overseas.

Source: Health Affairs

*Article updated to include comments from Darius N. Lakdawalla
*Article updated again on 3/9/17 to include comments from PhRMA

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