So far it hasn’t been easy to diagnose where the Trump administration is going with Big Pharma. Although during his campaign the President railed against the high price of prescription drugs and talked about empowering Medicare to negotiate discounts — one of the few talking points he shared with rival Hillary Clinton — post-inauguration he has struck a different tone.
In a widely-covered January 31 meeting with top pharmaceutical industry executives, including representatives from Merck, Johnson & Johnson, Novartis, Lilly, and Amgen as well as the head of the powerful lobbying group Pharmaceutical Research and Manufacturers of America (PhRMA), he discussed loosening regulations and taxes on the industry and appointing an FDA director who would speed up drug approvals. He also reportedly backed away from the idea of giving Medicare any bargaining power, referring to it disparagingly as “price fixing.”
Yet a few days later at the February 7 White House press briefing, the administration appeared to flip-flop. Press Secretary Sean Spicer indicated that Trump was in fact in favor of granting Medicare bargaining power. “He’s for it,” he said, adding that the President would “use his skills as a businessman to drive down prices.”
“All the pharma stocks dropped like 2% the moment he said that,” notes Daniel Polsky, a Wharton professor of health care management and economics and executive director of the Leonard Davis Institute of Health Economics at the University of Pennsylvania. “I think it was a bit of a shock after the way he had a chummy experience with all the pharma executives, where he seemed to indicate that it was all about regulations.”
But in Polsky’s view, the most likely scenario is that regulations will be loosened. He predicts the FDA in four years will look different from today and that the pharmaceutical industry will most likely be “pleased with the direction.” He thinks the administration will try to remove some of the hurdles to getting drugs to market. “I think there’s going to be a real emphasis on not having the FDA be a block.”
Scott Harrington, a Wharton professor of health care management, believes the outlook is more uncertain. “Even with the January 31 meeting, there’s ambiguity subsequently about what they’re saying they support or not. So I would say it’s up in the air.”
A Balancing Act
Many Americans, depending on their politics, view the troubles with drug prices and availability as either a simple case of corporate greed (why drug prices are so high), or a simple case of government over-restricting business (why the FDA doesn’t push through new lifesaving medicines more quickly). But Polsky and Harrington say there is nothing simple about the system under which drugs are developed, priced and regulated in the U.S. It is, they agree, a balancing act.
“For every yin there’s a yang. If you bring drugs to market sooner … the FDA would have to lower the bar.” –Daniel Polsky
“For every yin there’s a yang,” says Polsky. For example, “if you bring drugs to market sooner, all else equal … the FDA would have to lower the bar in some way. You couldn’t look as carefully for safety concerns, or efficacy.”
Another big factor in the equation is the enormous amount of risk, time and expense involved in creating a new drug. A study from the Tufts Center for the Study of Drug Development reported that between 2006 and 2015, only 9.6% of drugs starting clinical trials were eventually approved for the market. A PhRMA publication cites the time needed to develop a new medication to be a decade at minimum. And a 2013 Forbes article quoted the cost of creating a new drug at $5 billion.
Given this extremely uncertain process, drug companies need to be incentivized to keep exploring new compounds, says Pierre Azoulay, a professor of technological innovation, entrepreneurship and strategic management at MIT’s Sloan School of Management. There needs to be a pot of gold at the end of the rainbow, he says, or we can expect a dampening effect on innovation. This is an argument that industry trade groups have made as well.
“Within about a mile of my office [in Boston] there are like 500 firms that have gotten funding and are doing research on very speculative, high-risk projects…,” he notes. “It is because if they ‘win the lottery,’ they can actually charge a bundle for their products.”
Harrington agrees that if price controls are imposed, this will negatively influence innovation over time and reduce the number of new drugs that come to market. He says that this could mean that we as a society will never know what cures went undiscovered, citing conditions “begging for substantial therapeutic breakthroughs” such as cancer and heart disease.
But, he notes, “The devil’s in the details … we don’t know how much innovation would be affected.”
The length of the drug development cycle also partly explains why different companies come up with similar medications, a phenomenon the industry often takes heat for. It’s not just a “me-too” attitude, says Harrington. Often multiple drug companies will pursue similar therapeutic compounds. By the time one reaches the finish line, others have come so far that it doesn’t make financial sense for them to scrap their project.
Pharmaceutical and biotech companies, of course, also have a responsibility to their shareholders to maximize profits. But none of the three experts believe this necessarily excuses egregious, headline-making price hikes — especially since much of this behavior is generated in situations where the drug already exists, so the firm incurs no R&D costs. Azoulay refers to companies that specifically seek these types of opportunities as “vulture firms”: “They just scoop up neglected assets and exploit regulatory loopholes.”
In this vein, Harrington mentions Martin Shkreli, the former hedge fund manager best known for raising the price on a medication to treat infections in AIDS and cancer patients by 5,000% in 2015. More recently, in February a drug long available in Europe for a devastating disease known as Duchenne muscular dystrophy received FDA approval, at which point its U.S. company hiked patients’ estimated annual costs from $1,200 to $89,000, according to CNN. (The volume of outcry from advocates and politicians caused the company to temporarily suspend the drug’s rollout.)
A study from the Tufts Center for the Study of Drug Development reported that between 2006 and 2015, only 9.6% of drugs starting clinical trials were eventually approved for the market.
Harrington says that as a result of such situations being brought into focus during the recent presidential campaign, “the pharma and biotech trade groups are trying to be on top of their game here. And I think they’re open to discussion that would at least show some willingness to acknowledge there might be some issues that need to be addressed.”
The Dark Side of Deregulation
If the FDA bar was lowered so it was easier to bring drugs to market, new medications might become available faster for critically ill patients. But some, like Azoulay, are concerned that it might also open a Pandora’s box of vulture firms and “snake oil salesmen,” which would be confusing and dangerous for the public. Polsky agrees: “It wouldn’t fix the price problem, [and] you’re going to get more marginal, more lower-value drugs in the market.”
It would also be bad for pharmaceutical firms that actually invest in R&D, Azoulay says, as they might face a struggle to distinguish their products among a welter of slick, unregulated advertising claims. “In that kind of environment, it’s not clear you want to spend 10 years and a billion dollars funding the development of a very uncertain but potentially lifesaving product.”
He adds that although Trump describes deregulation as “a big help for the industry,” he doesn’t think the pharmaceutical industry uniformly sees it that way. “I would think they would be very skeptical as well.”
The President has said he will announce a new FDA director soon, and his choice will, of course, affect the outlook for the industry. One name currently being floated is Jim O’Neill, a former official at the Department of Health and Human Services known for his libertarian views, who according to The New York Times has argued that companies should not have to show that their drugs work in clinical trials before selling them to the public. This proposed reduction of the FDA’s role — from approving drugs as safe and effective to only approving them as safe — would represent a major change.
Azoulay called the idea that safety and effectiveness can be neatly separated “an illusion.… It’s very difficult to unbundle because every drug has safety problems; every drug has side effects.”
Other candidates such as Scott Gottlieb, a former FDA official with ties to pharmaceutical and biotech companies, and Joseph Gulfo, a former biotech and medical device executive, are also known to be in favor of reducing regulatory scrutiny.
Should Medicare Have Muscle?
Will President Trump work to bring down the high price of prescription drugs as he has claimed he will? Should the government– the pharmaceutical industry’s largest customer — be given the power to negotiate prices?
“[The pharmaceutical industry] sees changing Medicare’s ability to negotiate prices even a little bit as a slippery slope toward the abyss.” –Pierre Azoulay
Polsky thinks giving Medicare some bargaining power would be a step in the right direction toward getting out-of-whack drug prices down for the consumer. “I don’t have a lot of faith in loosening market controls as a way to improve a problem that I think is a direct result of [the fact that] drug prices aren’t really set in a well-functioning market to begin with,” he says.
He observes that in other countries where there has been some success in reining in drug prices, it is because of a “strong purchaser” or an arrangement in which the government can negotiate or even set prices.
Harrington says that even if the administration did come out in strong support of having Medicare negotiate prices, there’s still the question of getting legislative support. “I think right now it would be a very tough slog to have that go through.” And according to Azoulay, the pharmaceutical industry would be “dead set against it … they see changing Medicare’s ability to negotiate prices even a little bit as a slippery slope toward the abyss.”
Azoulay adds that if Medicare were allowed to negotiate, it would have a firmer basis if it could benchmark drugs based on real-world value and performance. He says that generating the evidence for the agency to do so would require Congress to appropriate an extra $5 billion a year for the National Institutes of Health to fund post-approval trials. But the chances of that happening are “roughly zero,” he says wryly. “It would make too much sense.” Polsky cites a similar value-based concept being developed by some groups, saying it might offer a win-win for business and consumers.
The prescription drug pricing problem is very difficult to solve, Polsky says. “Trump might want to solve it, but I think the challenge of it may prove to be such that it’s delayed.”
Article by Knowledge@Wharton