The Price is Right Replay

Here is another post from the vault, September 26, 2013 to be exact.

When a pharmaceutical company puts a price tag on a new drug it will sell in the US, it employs more art than science. Its launch team considers the prices of competing products, the acceptability of the price to reimbursers like Medicare, the perception of value by the prescribing physicians, and other factors with the goal of maximizing revenues during the period of patent exclusivity. This is a sound strategy since those revenues, with the revenues of a handful of other drugs the company sells, need to cover the substantial cost of R and D, manufacturing, regulatory compliance, lobbying, shareholder dividends, and fat salaries of its senior managers. In the EU countries, national health care agencies evaluate the cost and benefit of new drugs before approving use so a company needs to provide more objective measures of the value of its product. Apparently, the more objective approach results in lower prices; according to a 2011 European Parliament study cited by a recent Reuters article, prices of drugs in the EU are about half of those in the US. Outside the US and EU, companies typically employ “tiered pricing,” setting lower prices in low- and middle-income countries that generally reflect the ability of (some) patients or national health agencies to pay. Needless to say, not everyone who needs drugs can afford them. I recently found two studies of the pricing of drugs for these rest-of-world markets that offered interesting conclusions and alternatives to tiered pricing aimed at improving accessibility to medicines.

In the first (Moon et al. 2011), the authors studied drug prices and the effect of entry of generic competing drugs for five cases: HIV antiretrovirals, artemisinin combination therapies for malaria, drug-resistant tuberculosis drugs, liposomal amphotericin B for visceral leishmaniasis, and pneumococcal vaccines. While acknowledging the difficulty of comparing complex situations, the authors found that “when markets were sizeable and multiple sources of production were available, tiered pricing performed poorly compared to competitive production in generating reliable and sustained price reductions.” They also noted that tiered pricing contributed to short term, improved access “when markets were small, highly uncertain, where production capacity was limited, or there was a time delay to overcoming barriers to competition.” To achieve long term equitable or affordable pricing, the authors recommended that governments of low- and middle-income countries encourage the growth of a domestic pharmaceutical industry, make public sector purchases at negotiated prices, and set reimbursement policies based on public health benefit and overall cost savings. To increase competition, they also advocated governments issuing compulsory licensing of patented products and that companies license their products more widely, participate in patent pools, and scale back patent coverage and enforcement in ROW countries. However, they also noted “such a system will only work in the long term if markets are large enough and alternate solutions for financing R&D can be implemented.” Unfortunately, with the biotech/pharmaceutical industry under pressure to increase R and D productivity and justify prices to skeptical reimbursers, its interest and support for alternatives is limited.

In the second article (Dow and Mora 2012), the authors used publicly available data to estimate the economic burden of viral disease, dengue fever, and the maximum potential market for a new dengue drug and, building on their findings, propose an alternative to the tiered pricing approach. Dengue is a mosquito-borne viral disease that infects approximately 100 million persons annually in the endemic tropical and subtropical countries, one-quarter of whom suffer debilitating symptoms and need medical attention and 3-6% advance to the deadly hemorrhagic shock syndrome. There is no specific drug therapy but several vaccines are in development (CDC Dengue). Utilizing data on the costs of treating dengue fever patients in eight countries collected by others (Suaya et al. 2009) and adjusting for unreported cases, the authors calculated a global cost of $1.7 billion and a per case cost of about $300. Then, after accounting for the introduction of a dengue vaccine and subsequent reduction in cases beginning in 2020, the authors proposed an alternative in which, during a temporary period of market exclusivity for a new dengue drug, individual countries would agree to pay 50% of the per-case equivalent of economic costs saved through its use. Depending on drug effectiveness and cost of medical and indirect costs and lost productivity in specific countries, the prices for treating a case would be $13–$239, and the maximum potential market for a such a drug would be about US $338 million annually. To me, this analysis presented a sound economic rationale for countries to use a new drug, for a company and its investors to expect an attractive return on investment, and for an approach to fair pricing based on economic burden and drug effectiveness. Of course, two unknown potential torpedoes to this approach are the cost of developing a dengue drug and how countries will pay for the drug. For the former, I posit that if the exclusivity period is five years and the desired ROI is five times cost, then the cost may be around $300 million which is not unrealistic. The latter is part of the continuing struggle to provide basic worldwide health care.

Interestingly, the estimates of Dow and Mora may be under-estimates; researchers reported in a recent letter to the journal Nature that the incidence of dengue is closer to 390 million per year, further increasing the market potential of a drug (Bhatt et al. 2013). Also interestingly, Dow is the CEO of 60° Pharmaceuticals LLC, a company founded in 2010 with a “mission to discover, develop and distribute new medicines for neglected tropical diseases … while also providing an economic return.” The company has a preclinical dengue drug program (60 Degrees) and I hope to learn more.

What is needed to advance the Dow-Mora approach? More data on the economic burden of diseases are needed, and I suggest the Global Disease Burden program of the University of Washington’s Institute for Health Metrics and Evaluation add the cost of care to their data collection and evaluation (GBD). Then regulatory agencies need to encourage the marketing groups of the multi-national pharmaceutical companies to use the data to justify the prices of their new drugs, first in the high-income countries and then in the rest of the world.


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