[Ip-health] The Economist: Billion-dollar babies

Thiru Balasubramaniam thiru at keionline.org
Fri Dec 4 22:56:36 PST 2015


Drug companies and research

Billion-dollar babies

The high cost of R&D is used to explain why drugs giants merge, and why
they must charge high prices. The reality is somewhat different

Nov 28th 2015 | From the print edition

AS THEY announced the proposed merger of Pfizer and Allergan to create the
world’s biggest drugmaker, on November 23rd, the two firms’ bosses stressed
the scale that is needed to keep inventing blockbuster treatments. As Ian
Read, Pfizer’s boss, put it, the merger will create “a leading global
pharmaceutical company with the strength to research, discover and deliver
more medicines and therapies to more people around the world.”

A more convincing explanation for the deal is that, by shifting Pfizer’s
tax domicile from America to Ireland, where Allergan is domiciled, the
combined group’s tax rate will fall from about 25% to 17-18%. But even
leaving that aside, the common suggestion that size is needed to create a
research-driven powerhouse does not stack up. The figure of $2.6 billion
cited by PhRMA, the American drugmakers’ lobby, for the cost of developing
a new drug, is questionable. And the industry is in any case moving away
from a model in which giant firms throw huge sums at in-house research in a
quest for ground-breaking new treatments.

Start with the $2.6 billion figure. Two years ago, when the number being
bandied about was just $1 billion, even the boss of GSK, one of Pfizer’s
biggest rivals, described it as a myth. Médecins Sans Frontières, a
charity, claims that new drugs can be developed for as little as $50m and
no more than $190m, even taking into account the cost of those that fail
during clinical trials. Some of the assumptions used to arrive at the $2.6
billion figure are easy to pick apart. One example is the padded estimate
for the drug firms’ cost of capital. But at least as important is that the
figure is based on data from between 1995 and 2007. It says more about the
failures and inefficiencies of the drug giants’ in-house laboratories back
then than it does about how much it should cost to bring a new treatment to
market now. That matters because the industry has been moving towards a new

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The main element of this model is that, rather than spending heavily in
many different areas of cutting-edge research, the largest firms are
increasingly buying in drugs that are already in the course of development.
In some cases they do so by buying other established firms. For example,
Pfizer acquired Lipitor, its blockbuster cholesterol-lowering pill, as part
of its takeover of Warner-Lambert. Likewise, when Gilead bought Pharmasset,
one of the assets it acquired was Sovaldi, a hepatitis-C treatment which is
now one of Gilead’s biggest sellers.

Increasingly, the drugs giants are buying smaller, younger biotechnology
firms which focus on a single-treatment approach—such as last year’s
purchase by Merck, an American firm, of Idenix, which is pursuing a
different route to inhibiting the hepatitis C virus from Sovaldi’s. Whether
the target firm is big or small, buying in promising potential drugs is a
good strategy. A study by Bain, a consulting firm, found that in the past
20 years those drug companies that consistently did well in various
therapeutic areas were earning more than 70% of their sales from products
developed elsewhere.

As the biggest firms have increasingly outsourced the early stages of drug
discovery, they have cut back their in-house spending in those areas of
research in which they are weak. But they have continued to spend heavily
on what are more like beauty products than life-saving cures—think of
Allergan’s Botox anti-wrinkle jabs, or Latisse, its lotion for thickening
eyelashes. They have also continued to pump money into making incremental
changes to their existing drugs, so as to claim some small advantage—and
big price differential—over rival treatments.

Overall, the new approach seems to be helping to improve the industry’s
efficiency. Tim Gamble, a consultant at Datamonitor Healthcare, says drugs
in development are not failing at the rate they used to. Last year a record
number of new medicines gained approval. Rising efficiency may also be the
result of the way the study of the human genome is leading to a deeper
understanding of diseases. James Bianco of CTI Biopharma, a small
drugmaker, argues that the genomics revolution is making it faster and less
risky to develop a new treatment approach, thus cutting the cost of basic
research, whether at startups or global pharma giants.

But what about the price?

Promising as all this sounds, there is little sign yet of any improvement
in the efficiency of drug research translating into cheaper medicines. The
shareholders of a drugmaker expect it to charge as much as it can get away
with; and since many drugs, for as long as their patent is in force, have
no close competitors, the health systems and insurers they sell to may have
little choice but to pay whatever they are asked for. Sometimes a drug’s
new owner makes more from it than the old owner, simply by being more
demanding on price. Pharmasset had been thinking of selling Sovaldi at
between $36,000 and $72,000 for a course of treatment. But Gilead, having
bid highly to win control of Pharmasset, put the drug on the market for

Some drug firms are also buying makers of long-established, out-of-patent
treatments, realising that even these could bear higher prices if no other
firm is supplying a “generic” copy of them. Turing Pharmaceuticals and
Valeant have became notorious for buying the rights to some such medicines,
and jacking up their prices.

Ensuring that the benefits of greater research efficiency are fully passed
on to governments and health insurers would require drastic changes, such
as, say, abolishing the patent system and finding some other way to
incentivise basic research. Among the more imaginative ideas in this vein,
the open-source pharmaceuticals movement is experimenting with using prizes
as an incentive for teams of volunteer scientists to work on new treatment
approaches. Once invented and tested, the drugs would be free for any firm
to make.

Realistically, though, the chances that new approaches to research will
dramatically cut the cost of medicines look slender. That leaves more
administrative approaches. It could be made easier to import cheap copies
of unpatented drugs made in other countries. Buyers of medicines could
share more information about the different prices they are being charged
for the same pills. They might be firmer in refusing to pay over the odds
for new treatments that offer marginal gains. Medicare, America’s health
system for the elderly, could be allowed to try to negotiate with the
drugmakers, something it is banned from doing now. If the producers are
becoming more efficient, the buyers should respond.

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