The Impact of Price Controls and Biologics on the Future of U.S. Pharmaceutical Innovation and Investment

Over the last several years the pharmaceutical industry has come under increased pressure. While many often say the pharmaceutical industry has the most powerful lobby, the truth is many politicians have grown increasingly frustrated with what they characterize as high drug prices; or at least much higher than in virtually every other country around the world. This has led to patents being blamed, with billboards and buses in Washington, DC, wrapped with slogans like “patents kill”.

Ultimately, the pharmaceutical industry has been squeezed both with price controls and bad patent policy, and this unfortunately calls into question the future of pharmaceutical innovation. And while the long-term future of pharmaceutical innovation is probably secure, things could get dicey over the short-term and intermediate term as the Trump Administration attempts to restructure global trade in the industry so drug prices in the United States fall and a larger portion of the required research and development investment is borne by affluent countries, particularly in Europe.

The viability of investing billions of dollars will no doubt be questioned by at least some, perhaps many, investors. Investing in pharmaceutical research is always at best speculative and is often frustrated by the science. There is nothing inevitable about the future of pharmaceutical innovation, but there is still time and opportunity to navigate the treacherous waters that lie ahead. If done properly, the pharmaceutical industry will come out stronger, drug prices will be lower in the United States, and innovation will not only not suffer but it should flourish. Of course, the path to a positive future requires a fundamental understanding of the problems, and the two big problems facing the pharmaceutical industry are price controls and an exaggerated incentive to abandon small molecule drugs in favor of biologics.

Price Controls

Last month, President Donald J. Trump shook up the drug pricing debate with the signing of an Executive Order that aims to significantly reduce the prices paid by Americans for pharmaceuticals. Most directly, and likely most immediately, the Executive Order seeks to implement most-favored-nation pricing for those covered by Medicare and Medicaid. But if the Executive Order is successful, those receiving public health insurance through Medicare and Medicaid will not be the only ones to see drug prices decrease. President Trump directs the Secretary of Health and Human Services “to the extent consistent with law” to “facilitate direct-to-consumer purchasing programs for pharmaceutical manufacturers that sell their products to American patients at the most-favored-nation price.”

The reason Americans pay so much more for pharmaceuticals is not because of patents, although patents have historically been blamed by those who are not familiar with the behind-the-scenes business dealings of the pharmaceutical industry. There are primarily two reasons why drug prices in America are high.

First, drugs are cheaper in other countries because those other countries have price controls that artificially set prices extremely low—specifically, so low that pharmaceutical companies are unable to recoup any of the significant costs associated with research, development and the byzantine regulatory approval process, all of which costs multiple billions of dollars for each drug that ultimately makes it to market. These artificially and exaggeratedly low prices refuse to take into consideration the economic truth that the production of the first pill, for example, may cost several billion dollars. Instead, they demand pricing based on the marginal cost of production after the investment necessary to create the first pill has been disregarded.

Second, pharmacy benefit managers (PBMs), who act as middlemen between the pharmaceutical company and the end consumer, dramatically inflate costs. In fact, PBMs siphon off more than half of the cost paid by consumers, leaving 49.9% of the amount paid by consumers for the pharmaceutical company that made and distributed the drug. So lucrative is it to be in the middle that insurance companies and large retail pharmacies have rushed to get into the business.

If the Trump Administration stays the course, the Executive Order demanding most-favored-nation pricing for Americans will almost certainly result in lower drug prices for Americans, but it is important not to fool ourselves as to the extent of savings. There is a zero percent chance that prices in America will be lowered to the levels seen in countries with strict price controls, but the prices will ultimately come down if this course of action is steadfastly pursued for whatever time it takes to readjust the global marketplace for pharmaceuticals. To accomplish this, it is entirely possible that pharmaceutical companies will stop selling drugs in countries with unjustifiably low-price restrictions because they couldn’t possibly sell at such unrealistically low prices in the United States. Ultimately, the populace in those countries with tight price controls would presumably demand politicians make a deal, and prices in those countries would rise to the point where pharmaceutical companies could justify selling into those countries while still providing Americans most-favored-nation pricing. This will, however, take time. It won’t happen overnight, and things could get ugly. And because the catalyst for this shift is an Executive Order it is entirely possible the policy won’t stay in place long enough to affect the desired change before it is supplanted.

Large Molecules Over Small Molecules

The main difference between large molecule therapies and small molecule drugs lies in their size, structure, and how they are made. Large molecule therapies are known as biologics, which are structurally complex, are made using living cells and are typically injected or infused, often requiring patients to visit a doctor’s office or clinic to receive treatment. Small molecule drugs are simple, well-defined compounds that are synthesized chemically and are taken orally in pill or tablet form, which means they can be taken at home by patients.

Further distinguishing between large molecules therapies and small molecule drugs is the length of exclusivity granted to the innovator. While the length of exclusivity is somewhat complex and can vary, generally speaking, there is more than twice the length of guaranteed protection for large molecule biologics than for small molecule drugs. For example, in the United States large molecule biologics receive 12-years of data exclusivity under the Biologics Price Competition and Innovation Act (BPCIA) of 2009. During this 12-year exclusivity period, the Food and Drug Administration (FDA) cannot approve a biosimilar based on the same reference product. However, small molecule drugs that contain an active ingredient never before approved by the FDA receive just five years of data exclusivity. During this five-year period, the FDA cannot accept an Abbreviated New Drug Application (ANDA) for a generic.

The substantially greater exclusivity available for large molecule biologics means there is an artificial incentive for innovators to pursue large molecule biologics at the expense of small molecule drugs. While large molecule biologics are sometimes the better treatment option, often small molecule drugs are far superior because they can be self-administered and more easily widely distributed. So, Congress, through the choice of such a dramatically different length of exclusivity, is pushing innovators in the direction of biologics rather than allowing the science and optimal treatment modalities to decide which pathway is most beneficial for society.

Incentives can be extremely persuasive, and 12 years versus five years is obviously a difference that innovators cannot ignore. Whether this will ultimately have a positive or negative impact on innovation remains to be seen, but there is no doubt the impact will be felt.

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Author: MMPhoto21
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