COMMENTARY

Goodwill Hunting

 

Martin Shkreli and Hillary Clinton last week provided the flint and steel that ignited a dry tinderbox of well-worn ideas about controlling drug prices.

 

Like all wildfires, the furor flared in the blink of an eye, even by the standards of today’s hyperkinetic, Twitter-driven news cycle. Shkreli and his Turing Pharmaceuticals AG were called to account by The New York Times on Sunday for increasing the price of Daraprim pyrimethamine by more than fiftyfold. Clinton rushed in on Monday to fan the flames with a populist crusader’s call for reforms, which she issued on Tuesday.

 

By week’s end, Turing had been drummed out of BIO. But not before $145 billion, or 10% of the market value of BioCentury’s biotech universe, was wiped out on Wall Street (see “Loose Lips”).

 

While throwing Shkreli and Turing overboard was the obvious thing to do in this fire drill, there’s actually little the industry can do collectively to douse the remaining embers.

 

The price control fires will keep flaring up because they are such easy political pickings, especially as the election season wears on. BIO and PhRMA probably will find ways to lower the heat temporarily because they command seasoned inside-the-Beltway skills. But in the end, it’s up to each biopharma company, acting alone, to build goodwill with the public while juggling the apparently conflicting interests of shareholders and patients.

 

The path forward will be hard, but BioCentury has been pointing out the obvious for years.

 

Each company’s cost structure must be reformed to create headroom for creativity on pricing. Commercial players have to get serious — quickly — about experimenting with new pricing and access models, coupled to broader approaches for adding patient value. And R&D players as well as commercial companies have to go beyond platitudes and involve patients in identifying priorities for development of drugs that the patients will want both public and private payers to pay for.

 

These steps will not usher in an era of peace and harmony for the biopharmaceutical industry, but they are the best responses to the political and economic realities of healthcare.

 

IT WASN’T ME

Clinton teased her drug pricing policy announcement by tweeting on Monday: “Price gouging like this in the specialty drug market is outrageous,” and linking to The Times’ story reporting that Turing increased the price of Daraprim from $13.50 per pill to $750. The company had acquired U.S. rights to the antiparasitic compound from Impax Laboratories Inc. earlier in September.

 

By the end of the week, CEO Shkreli had been thoroughly tarred and feathered in social and mainstream media, and both BIO and PhRMA issued statements distancing themselves from Turing. The biotech trade group then proceeded to formally jettison the company from its membership.

 

The last step was completely necessary as industry leaders must avoid guilt by association with the handful of companies that cynically extort patients and the healthcare system by jacking up prices on ancient drugs that are in short supply.

 

At the same time, shunning bad actors won’t solve the problem. Shkreli is an excellent piñata for politicians and the media, but he isn’t their real target. In fact, the public and politicians don’t distinguish between the Turings of the world and companies that actually engage in discovery and development. All they look at is what a drug costs. And what they see is five- and six-digit prices, double-digit price increases, and rising co-pays.

 

In her tweet and in a campaign speech on Tuesday, Clinton tried to conflate eye-popping increases in the price of an old generic drug with the broader, and far more consequential, issue of the pricing of novel drugs that change the course of disease in unprecedented ways.

 

Clinton accurately called Turing’s pricing of Daraprim “price gouging, pure and simple.” However, she followed this with a broader attack on the drug industry. “At the same time this is happening, top pharmaceutical companies are receiving billions of dollars in tax relief every single year and earning billions of dollar in profits every year. And many of them spend more money on marketing and advertising than they do on research.”

 

Clinton went on to accuse industry of marketing me-too drugs as breakthroughs: “Too often, so-called “new” drugs are really old drugs that have just been tweaked a little bit, but then they’re marketed as breakthrough drugs, and they’re sold for high prices.”

 

HILLARYCARE

 

Readers who weren’t born yesterday will recognize that Clinton’s proposals for hammering drug prices were in the works long before she or anyone else had heard of Turing. Her rhetoric likewise will bring back memories of the first years of the Bill Clinton White House in the early 1990s, when Hillary Clinton and her team of acolytes created a healthcare reform plan that inspired Democrats in Congress to propose a national board to impose “price controls on breakthrough drugs.”

 

That first version of Hillarycare cratered, while the nostrums she proposed last week have been pursued unsuccessfully by the Obama administration for years (see “A Brief History”).

 

Nevertheless, given the gift of the “Turing moment,” Clinton last week vowed to make drug prices a centerpiece of her campaign. The candidate asserted that most new drugs are “me-toos” and said that if elected, in addition to extracting billions of dollars in rebates from drug companies, she would regulate their operations to ensure that they spend a “sufficient” amount on research.

 

Fortunately, campaigning is not governing, and by the time the dust settles on the elections next November and a new president and Congress take over in January 2017, few will remember the promises and proposals candidates made in September 2015. And no substantive legislation, and certainly nothing that fundamentally changes the economics of drug development, will be enacted for the remainder of the Obama administration.

 

This means there is some breathing room, but it doesn’t mean the issue will go away on its own.

 

Clinton’s proposals, and the words she used to present them, were propelled by polling and polished by focus groups that have convinced sophisticated campaign operatives that a substantial segment of the voting population will respond favorably to promises to lower their out-of-pocket costs for drugs, and to assertions that drug companies are rapacious.

 

HARD CHOICES

 

The headlines, and the inevitability of continued political attacks on drug prices, reinforce the messages BioCentury has been sending in its annual Back to School essays for the last three years.

 

In 2013, Back to School argued the “drug industry is going to have to come to grips with the reality that the existing pricing paradigm is not sustainable. This is precisely the opposite of the direction companies are pursuing with their focus on Orphan drugs and ever-smaller cancer indications, which they expect will continue to be priced at eye-popping levels with eye popping margins and a steady dose of price increases.”

 

At the time, Back to School also said industry was heading in a direction that was “destructive to both the industry and its investors in the long run by making payer and public backlash even harsher than it already is.” BioCentury called for the drug industry to “participate in shaping the system that defines innovation,” or face the prospect of payers making decisions based solely on cost.

 

In 2014, Back to School warned that a backlash against drug pricing in the U.S. meant the “last bastion of free pricing is crumbling” and argued that “biotech and pharma had better start experimenting with new pricing models based on value for money while they still have the chance.”

 

This year, Back to School argued for much deeper industry engagement with patients, noting that they can “help define the value of medical interventions for payers, and for other patients, in ways that are far more convincing than anything drug developers can say.”

 

Patient-driven drug development, BioCentury argued, is “both inevitable and essential to improving product offerings, shortening development times and achieving product approval and reimbursement.”

 

These necessary changes will be difficult, and some will be painful, but there will be no way around the fact that drug companies need to adapt to a world in which they have less pricing power.

 

It means drug companies will have to dig far more deeply to reform their cost structures to shore up profits and dividends as prices flatten, discounts rise and the cost of providing the clinical outcomes beyond simply distributing pills and vials goes up.

 

They also will have to reset the expectations of shareholders who have come to expect profits that are not just above average, but far above average. The resulting short-term reduction in valuations, and a turnover in shareholders who want above-average dividends rather than innovation, may be the price pharma companies have to pay to make the kinds of changes that are necessary to ensure their long-term viability.

 

The key point is that goodwill is created one company at a time, not by trade groups inside Washington.

 

This is not a PR exercise. No amount of investment by trade associations in communications or lobbying will get the job done. Indeed, PhRMA and BIO have spent decades trying to improve the public’s perception about the industry, with little if anything to show for their efforts.

 

The trade groups have had important lobbying successes, preventing Congress from afflicting the industry with countless plagues. But the rising influence of populists in both parties will make it increasingly more arduous for them to kill legislation.

 

The only thing that can work is for each drug company to show through pricing and access decisions that it is serving the public interest.

 

Some promising first steps have been made along these lines. For example, Novartis AG is working on a performance-based pricing model for Entresto sacubitril/valsartan under which the pharma would have to earn an increase in price from deep discounts offered at launch by showing the new heart failure drug produces downstream healthcare savings, such as by reducing hospitalizations.

 

In collaboration with drug companies — and, in fact, in response to pharma interest in pricing experiments — Express Scripts Holding Co. will pilot an indication-based pricing scheme that involves variable reimbursement rates for cancer drugs that are commensurate with the degree of bene t the drugs provide in different cancers.

 

If more R&D companies partner with patients and payers to prioritize clinical needs, define and demonstrate value, and agree on plans that ensure access to medicines, then these constituents will have a stake in preventing the most ruinous political policies that would be imposed if the current trajectory is not modified.