Transparency into Drug Pricing: Can it Help with the High Drug Costs?

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Drug pricing became a topic of common and passionate interest in 2015 when Martin Shkreli, then CEO of Turing Pharmaceuticals, dramatically increased the price of a single Daraprim tablet – from $13.50 to $750.00, the price of an average lunch to that of a large household appliance. The interest intensified in 2016, when Mylan increased the cost of the EpiPen by 400 percent. Public outcry was intense and politicians were forced to act, holding hearings that are only now rivaled by probes into Russian election interference.

Shkreli justified the price increase as an investment to develop better treatments for toxoplasmosis. Furthermore, he stated that patients use the drug for less than a year, therefore, the cost would be comparable to the cost of other rare disease drugs that are used for longer periods. Meanwhile, Heather Bresh, the CEO of Mylan, defended price hikes of EpiPen to account for discounts, rebates, patient assistance programs, and other expenses. Congress responded with an initiative to create transparency into drug pricing, to help curtail high drug costs. The public was mollified.

Unfortunately, although this initiative sounds great in theory, it won’t necessarily address the issue of high drug costs.

Several bills have been introduced in Congress to create transparency. The Fair Accountability and Innovative Research Drug Pricing Act (FAIR) would require drug companies to give thirty-days’ notice and provide justification whenever the price of certain drugs that cost at least $100 increased by more than 10 percent in one year or 25 percent over three years. This prerequisite is intended to provide more transparency into drug pricing and hold companies accountable for these decisions, and as Senator McCain has stated, to prevent patients from choosing between a mortgage payment or treatment. Focusing on Medicare, The Creating Transparency to Have Drug Rebates Unlocked (C-THRU) Act, would require pharmacy benefits managers (PBMs) to disclose the rebates provided by drug manufacturers, as well as the portion of those rebates that are passed on to health plans. This bill would help disclose the financial arrangement between PBMs and health plans, since it is presently unknown. Furthermore, the Affordable and Safe Prescription Drug Importation Act would allow drugs to be imported from other countries at a lower cost.

Although these bills, and the awareness brought by Congressional investigation, are positives for drug pricing transparency, the bills will not fully solve the issue of high drug costs.  Drug developers can still, and are anticipated to, justify price hikes to support the expensive drug discovery process, during which companies spend millions and in many cases billions of dollars to develop a drug and bring it to market. According to a 2014 study, the Tufts Center for the Study of Drug Development estimated that pharmaceutical companies spend about $2.56 billion to develop a drug, which does not include the cost of post-approval marketing, patient assistance programs, and patient and physician drug education.

For most drugs, setting aggressive price points is a matter of simple economics as the Tufts study shows; drug development is a costly undertaking, regardless of the public vetting of price increases and rebate structures.  Other economic options, such as allowing government programs, Medicare and Medicaid, to negotiate prices will be necessary to fully address increasing drug costs.  Since the manufacture, distribution and use of pharmaceutical therapies is a complex process, touched by many market players, several fixes will be needed to completely address the issue of increasing drug costs.

For pharmaceutical companies, the core issue is one of competitive strategy. Pharmaceutical executives will need a greater understanding of the external ecosystem as they develop and launch prescriptions.

The public is now focused on the pricing of drugs, as are physicians and politicians, so executives need to factor consumer action and public law into their pricing. Similarly, assessing competitor activity is critical in this ecosystem, given the intense nature of competition and often overlapping drugs.  Would CSL Behring offer the drug Haegarda at an 18 percent discount to Shire’s Cinryze for treatment of hereditary angioedema, or Roche offer the medication Ocrevus at a 25 percent discount to EMD Serono’s Rebif to the multiple sclerosis market, if the existing bills were law at the time of their launch? More robust, comprehensive competitive analysis will be an absolute must for pharmaceutical companies moving forward, to include not only competitors but public demand and advocacy, drug positioning, competitor actions and intentions, and, of course, regulatory and political response.

Tags: BioPharma, Competitive Strategy, Health & Life Science, New Product Launch, Pricing Strategy, Product Lifecycle Management