As the government wrestles with lowering health care costs, one strategy gaining momentum is allowing Medicare to negotiate prices for brand name drugs. There is no doubt that such a move would lower the nation’s drug bill. But it would also lower the revenues of biopharmaceutical companies and that, in turn, will reduce the number of new drugs produced each year.
Why? Because the amount of money drug companies invest in research and development is directly related to their annual sales. The biopharmaceutical industry invests 15% to 20% of its revenues into research. So for every $1 billion of revenue that a company loses, there will be $150 million to $200 million less to invest in its pipeline.
The Congressional Budget Office (CBO) has been looking into the impact that limiting prices would have on the number of drugs produced each year as a result of Medicare-negotiating revenue losses. As discussed by STAT’s Ed Silverman, the CBO has estimated that, if such legislation is enacted, there will be two fewer drugs produced in the first decade, 25 in the second decade, and 34 in the third decade.
That could be tolerable to some if less-important drugs would not be developed. As Larry Levitt, executive vice president for health policy at the Kaiser Family Foundation, told Silverman: “There are important considerations that the CBO doesn’t or won’t analyze here. They estimate how many drugs won’t come to market if prices are lowered, but they don’t try to forecast which ones. That can matter. If we’re talking about me-too drugs, they have lower value. So it may have little effect on incentives and health. But if we’re talking about life-saving drugs, well that would be a very big deal. And, unfortunately, we have no idea how that might play out. There’s no crystal ball.”
Levitt implies that drugs that are not first-in-class — so called me-too drugs — offer little value. He isn’t alone in this sentiment. But that thinking is wrong. The first entry in a new class of drugs is rarely the best. In the case of the cholesterol-lowering statins, Lipitor and Crestor were the fourth and fifth statins approved by the FDA. Yet they turned out to be superior to the earlier entrants and have had major impacts on the treatment of heart disease.
And, it turns out, having multiple drugs in a class is actually important for controlling drug prices. When Sovaldi, the cure for hepatitis C, was introduced in 2017, a 12-week course of treatment had a list price of $84,000 — $1,000 a pill. However, with the advent of other hepatitis C drugs, like AbbVie’s Mavyret, the list price dropped to $24,000 for an 8-week course — a little more than $400 a pill. Competition is critical for lowering prices.
One might claim that the ultimate me-too drug is Spikevax, Moderna’s Covid-19 vaccine. After all, it was approved after Comirnaty, Pfizer’s vaccine (albeit by a week). Both mRNA vaccines behave similarly with respect to safety and efficacy. Of course, in a pandemic, we want as many vaccines as possible including me-too vaccines. But this example demonstrates that multiple companies are often working on the same program, work that starts years before a product crosses the finish line. The successful ones can reach regulatory approval within 12 to 18 months of each other. It’s not as if companies intentionally set out to create me-too drugs. Yet having multiple options for a new class of drugs is as important for patients — no one drug is perfectly suited for an entire population — as it is for payers.
In the ongoing congressional debates of how to reduce the nation’s drug bill, keep in mind that there will be consequences — fewer drugs will be produced regardless of how drug prices are limited. That may be a trade-off people are willing to make. But, as Levitt said, there is no crystal ball. Drugs will be lost that would have benefitted society.
John LaMattina is a director of PureTech Health, a Boston-based biotech company; author of “Devalued and Distrusted: Can the Pharmaceutical Industry Restore its Broken Image?” (Wiley, 2013); and former president of global research and development at Pfizer.