Trump says the biopharma industry can no longer depend on the higher US profit margins with his initiative to peg US drug prices to global norms. The US president needs second and third initiatives to be successful: Enable the regulators and biopharma industry to rationalize R&D, and to eliminate selling costs that collectively account for one-half of the industry, writes Viren Mehta, founding partner of Mehta Partners LLC.
The US Administration’s proposal to peg Medicare Part B payments to foreign drug prices cannot be realized unless two parallel fundamental shifts take place. The first is a dramatic rationalization of regulatory norms and the second is a drastic change to the biopharma industry cost structure. Without those changes, the very existence of the biopharma industry as we know it may need to become optional in the interest of ensuring that the costs of biopharma innovations are equitably shared around the world among all who benefit.
Logic argues that the US should not be footing the lion’s share of the bill for better health that new drugs offer. Yet many of the healthcare industry’s incentives globally are anything but logical. And the relentless maximization of market forces in a sector offering a regulatory veil to hide behind has enabled healthcare providers, especially the biopharma industry, to compound the illogical perversities that now threaten to undo the industry structure.
Trump would seem to be the least likely of the recent US presidents to pull the rug from under the biopharma industry by yoking its pricing power to global norms. Then again, Trump readily tears apart norms that have shaped the world since the 1920s. Many such moves by Trump do not progress far.
Already a wide spectrum of the industry, as well as its stakeholders, especially the oncology community, have concluded that the proposed pegging of pricing to a dozen countries would not succeed.
Rushing to such a conclusion may prove short-sighted, as it ignores the urgent need for a more sustainable biopharma innovation model. Pharma industry profits have continued to grow at a healthy clip despite increasingly effective cost containment actions internationally. In the US, on the other hand, the biopharma share of the healthcare pie has soared to as high as 25% among many payers. While this may be welcomed by short-term investors, the warning signs have been flashing bright amber. This Trump proposal signals that they are now about to turn red, as the cost of R&D on the one hand and selling and marketing costs on the other increasingly limit biopharma managers’ options.
The Regulator: Easy Scapegoat…Or R&D Enabler
Regulators are an easy scapegoat for R&D costs that are clearly out of control. Just as the new tools of science are refining ways to target a therapy precisely for a smaller and smaller subset of patients, the time and money needed to get such precision products to the market are reaching levels where few products can recoup their investments—even at five- and six-digit dollar prices.
One FDA action in October illustrates the scale of the challenge: FDA qualified a group of kidney injury biomarkers from a consortium of four institutions (the Foundation for the National Institutes of Health (FNIH) Biomarkers Consortium (BC) and the Critical Path Institute (C-Path) Predictive Safety Testing Consortium (PSTC),) marking the first qualification of a clinical safety biomarker. The qualification applies to a single composite measure of six urine biomarkers that can now be used in Phase I trials in conjunction with traditional measures of kidney function to aid in detecting treatment-induced acute kidney tubular injury in healthy volunteers. The Kidney Safety Project was launched in 2011 to identify the best biomarkers. Identifying biomarkers for use in the clinic has been a priority of biopharma and FDA since the agency announced its Critical Path initiative in 2004. Here we are at the end of 2018, and one micro-component of safety evaluation has arrived—with hundreds more to go!
Despite such complexity of science, or rather specifically because of the accumulating evidence from such precise tools, regulators and industry should be able to streamline the criteria for safety and efficacy evaluation of new therapies so that data from adaptively designed Phase II studies can be sufficient for NDA filing and for market approval. Phase III and Phase IV can be combined with the IT tools so that any unexpected safety signal can be promptly addressed with the tools already in place for an immediate recall.
This and a number of other regulatory refinements should enable therapies to be brought to market for low three-digit millions of dollars, and in a handful of years—making it possible for most of the effective new drugs to generate a healthy profit even at two- and three-digit dollar prices. A large portion of the industry’s R&D costs, about one-fifth of its revenue, can be avoided with such rational refinements.
Selling Costs – The Other Opportunity
The day cannot be far off when the new precision medicines and their companion diagnostics will sell themselves based on the pivotal Phase II data, eliminating need for over a third of industry revenues being spent on selling and related activities. Only a highly qualified marketing team deploying global online resources will be needed to support each patient’s team – a team of clinicians and of family, friends, and other patients like herself – to ensure that an optimal treatment is administered. Non-compliance will be a thing of the past, as the patient and her team would seek out such tailored therapies, having followed their clinical studies.
How far is the science and its practical application from allowing regulatory and commercial practices to be rationalized enough for the entire world to be able to afford to contribute its fair share to biopharma innovation? Such a change cannot be expected within the usual five-year planning horizon, but it would be foolhardy of the industry to believe that the US pricing will not be harmonized to a certain global threshold, and to just carry one with business as usual.
This disruption is at least on the horizon, even if the healthcare industry manages to generate opposition to this otherwise logical Trump proposal by focusing on how innovation and patient care could be harmed if the current US margins are not allowed. Just as the PBMs ignored the accumulating alerts only to be forced into recent precipitous actions, biopharma will not escape this reality for long even if the price pegging proposal is delayed.
Done right, the biopharma industry can not only focus its spending on what matters, but by focusing on value it can ensure that it fulfills its contract with society when it accepts monopoly rights from the patents on its innovations: this contract being that its products will be accessible to every patient globally who may benefit – all at a fair profit once the industry learns to sustain itself on global profit margins, no longer depending on the US margins. The moment is ripe for all biopharma stakeholders to begin streamlining both regulatory and commercial practices with this singular objective.
This column originally appeared on Scrip Biopharma Intelligence, November 07th, 2018.