[Ip-health] John LaMattina​ in Forbes on why R&D costs are irrelevant to drug prices

Chase Perfect chaseperfect at gmail.com
Tue Mar 22 08:59:50 PDT 2016

One consideration that is relevant to this debate is the inflation present
in the "alternatives" used to judge a treatment price as cost-effective
and/or cost-saving. For example, in the case of cancer, the exorbitant
costs of other cancer drugs are often used as an alternative comparison for
the treatment in question. However, the prices of those alternative
treatments are themselves often justified vis-a-vis the exorbitant prices
of those drugs' alternatives. In other words, while cost-effectiveness or
cost-saving is measured in relation to secondary figures, this often
overlooks considerations of whether the second figure (or the tertiary
figure which that second figure is tied to) is cost-effective or
cost-saving. Put another way, such secondary and tertiary inflation not
only contaminates the initial cost-effective price, there is reason to
believe such inflation is contagious and contributes to further increases
in prices across treatments and diseases.

Of course, the full range of alternative treatments for NCDs in many poorer
countries is not typically accessible, a reality that significantly changes
the calculus of cost-saving prices in those countries. With Hep C-induced
end-stage liver disease, you cannot use the alternative estimate of liver
transplant costs for countries where liver transplants are not present. And
while you could calculate the costs of hospitalization for severe
morbidity, even then few may be able to afford whatever range of potential
services the local hospital offers. And in the American case, the inclusion
of hospital costs brings another inflationary factor into play for
cost-efficient or cost-saving determinations: the absurd inefficiency of
the American health system.

Furthermore, when the cost-effective argument is followed to its
fundamental assumptions, a conditional absurdity is revealed. Given that a
critical factor in calculating cost-effectiveness is often the value of a
disability-adjusted life year (DALY) AND that DALY's are often linked to
GDP-per-capita, cost-effectiveness implicitly assumes the following
premises: life can be fixed with a price tag, and this price tag differs
from nationality to nationality.

The use of such crude cost-of-life measures may be inevitable in
after-the-fact financial payouts for insurance, or for investments in
resource-strapped settings where funds are limited AND prices for health
technology  operate near marginal costs. However, when prices of health
technology are several orders of magnitude higher than their costs of
production (and/or discovery), the linkage of drug prices to DALY valuation
means price-setting has devolved into an exercise in ransom calculation. In
short, the absurdity of Pharma's "cost-effective and/or cost-saving
argument" is not simply theoretical and ideological, but intellectual and
empirical. It is also absurd to ignore the broader negative impact of these
prices on society. After all, if one really wanted to discuss
cost-effectiveness in its totality, surely one must consider the
crowding-out effect that this inflationary waste has on the rest of our

A less technical retort to Lamattina's argument may be, if you'll permit me
a closing tangent, via analogy: a classic challenge to the price=value
identity is Adam Smith's point that water is cheap and necessary, while
diamonds are expensive and practically useless (outside of the very notable
exception of their use in cutting metals and....as stores of value for
buying essential stuff like water). The low price of water has to do with
abundance, not low demand. And given normal levels of abundance, we would
find it absurd to price water at the "cost-effective" price one might find
for water amidst a drought.

Given the extent of the artificiality of the Western (not to mention
global) "drought" in medicines, as well as the fact that the ideas
underlying a drug's development may be infinitely replicated, perhaps a
better analogue to drugs for framing this metaphor would be a bottomless
watershed. It does cost to tap and operate a well that draws from said
watershed, but when the government gives (and defends) a monopoly of that
watershed to one group, it becomes intellectually insulting to assert that
the subsequent "drought" is natural--especially when the prospectors given
credit for finding the watershed used maps and tools that were developed
via government-funded research, and/or that in many cases those selling the
water didn't conduct the prospecting themselves. Big Pharma's retort would
be, "we didn't create the drought (i.e. underlying health issues), and it
would still be here if we didn't find the water (i.e. drugs)." However,
those who argue that the protection of the monopoly is necessary to avoid
future droughts ignore two crucial considerations: that the grant of
monopoly is not the only way to incentivize prospecting, and that countless
number are dying, unnecessarily, of thirst. Right now.

In short, even though the cost-effective and/or cost-saving argument is
often built on specious theoretical and empirical grounds, pharma's recent
success in its attempts to normalize this justification has been very real.
Going forward, we must be very very weary that this line of argumentation
is further legitimized.


Chase Perfect

On Tue, Mar 22, 2016 at 8:39 AM, Jamie Love <james.love at keionline.org>

> This
> ​quote from
> Former Pfizer Global R&D President John LaMattina
> ​, in Forbes.​
> "​
>> Witty once said that it might be possible to lower drug costs if the costs
> of R&D and manufacturing were to drop. It is true that the cost of
> discovering and developing a new drug continues to escalate. The Tufts
> Center for the Study of Drug Development has published a papershowing that
> the average cost to develop and gain marketing approval for a new drug is
> $2.6 billion. It is hard to believe that breakthroughs will be made to
> lower this cost. But to a certain extent, it is irrelevant. The price of
> drugs really has nothing to do with how much a company spends on R&D. Nor
> should it.​"
> ​........
> My comment is that high prices are designed to induce R&D investments, but
> they rarely if ever determine prices, so I partly agree with LaMattina, and
> partly disagree.  But on the issue of value pricing, it is our view that a
> rational pricing system has to consider three issues:  1. Value of products
> to patients, 2. R&D costs to bring products to market, and 3. budget
> constraints, as elaborated, explained and partly modeled in our comments to
> the Senate Finance Committee on Sovaldi pricing:
> http://www.keionline.org/node/2438.  But no matter how hard one tries to
> make the monopoly price system work for financing R&D, it is always
> inferior to a well designed delinkage approach, for a number of well known
> reasons, including the price system's misapplication of resources to
> innovations that match rather than improve outcomes.
> ​Here is the LaMattina blog:​
> http://www.forbes.com/sites/johnlamattina/2016/03/22/what-gsk-ceo-andrew-witty-doesnt-get-about-drug-pricing/
> ​What GSK CEO Andrew Witty Doesn't Get About Drug Pricing
> March 22, 2016
> John LaMattina​
> Last week GSK announced that its CEO, Sir Andrew Witty would be stepping
> down from his post in early 2017. As outlined by the Financial Times, his
> tenure at GSK has been turbulent. Nowhere has that been more evident than
> in his stance on drug pricing. His concerns that the high drug prices in
> the U.S. aren’t sustainable have led GSK away from producing drugs to treat
> cancer and rare disease drugs. Instead, Witty has repositioned GSK’s
> portfolio to one made up of high-volume businesses. This was most evident
> in 2014 when GSK traded its cancer drug business to Novartis in exchange
> for the latter’s vaccine and consumer health care businesses. As described
> by Andrew Ward of the Financial Times: “Just as peers such as Bristol-Myers
> Squibb and Merck were soaring in value on the back of breakthroughs in
> oncology, GSK was reducing its exposure in pharma in favour of low-margin
> toothpaste and nicotine patches.”
> There is no doubt that Witty’s concerns about drug pricing are justified.
> Every day a new story appears in the press on this topic, exacerbated by
> the U.S. presidential campaign rhetoric as well as the biopharmaceutical
> industry’s poor reputation. But pulling GSK’s efforts from these important
> areas of medical need is not the answer.
> ​​
> Witty once said that it might be possible to lower drug costs if the costs
> of R&D and manufacturing were to drop. It is true that the cost of
> discovering and developing a new drug continues to escalate. The Tufts
> Center for the Study of Drug Development has published a papershowing that
> the average cost to develop and gain marketing approval for a new drug is
> $2.6 billion. It is hard to believe that breakthroughs will be made to
> lower this cost. But to a certain extent, it is irrelevant. The price of
> drugs really has nothing to do with how much a company spends on R&D. Nor
> should it.
> It is often correctly pointed out that nine out of ten experimental
> medicines that enter clinical trials fail. This fact is used to justify the
> high price of a new drug. But this, too, is irrelevant. Why should it be
> expected that payers and patients pay for the failures of an industry?
> Using this rationale, you would expect that a company with a lot of
> failures would be justified to charge a higher price for a drug than a
> company with a better success rate.
> Who cares how much the R&D program for a drug costs? Who cares how hard R&D
> is? What should matter is whether the drug adds value, whether it is an
> improvement over existing drugs and/or medical procedures, and whether
> patients benefit. If your new medicine isn’t adding value, the rest is
> moot. BUT, when a drug truly does add value and the company can demonstrate
> tangibly the medical AND economic benefits, then a price should be set that
> reflects this.
> The hepatitis C cures clearly fit this paradigm. Even at $1,000/pill,
> Gilead’s Sovaldi has been shown to be fairly priced because it cures the
> disease in twelve weeks and in doing so saves live and avoids the
> downstream complications of liver cancer and the need for liver
> transplants. Sovaldi meets the test of adding value medically and
> economically, independent of R&D costs and success rates. And, in reality,
> most pay substantially less than $1,000/pill.
> The medical/economic dual hurdle is a high one. It forces drug makers to
> compare its new drug candidate to existing, established medications. If you
> want a high price, you must justify it. This makes drug R&D harder than
> ever before. But, if the drug meets such rigorous standards it should get a
> favorable price. This is what motivates all of those who invest in the
> pursuit of new medicines: biotech companies, big pharma, investors, and
> increasingly, universities and research institutes.
> Unfortunately, Witty and GSK have eschewed this whole topic by focusing on
> drugs that would be profitable based on high volume sales. Certainly the
> world needs such drugs. However, GSK is one of the few companies in the
> world that can go from an idea through the entire process to get a new
> drug. It has great scientists with a proven track record in doing this. Yet
> these scientists, given the company’s new direction, will not be seeking
> new drugs to treat cancer or rare diseases. It is a shame that they
> couldn’t be unleashed to do both.
> --
> James Love.  Knowledge Ecology International
> http://www.keionline.org/donate.html
> KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
> +41.76.413.6584, twitter.com/jamie_love
> _______________________________________________
> Ip-health mailing list
> Ip-health at lists.keionline.org
> http://lists.keionline.org/mailman/listinfo/ip-health_lists.keionline.org

Chase Perfect

MA in International Relations* Johns Hopkins (SAIS)*
MsPH in International Health *Johns Hopkins (Bloomberg)*

More information about the Ip-health mailing list