Last week GlaxoSmithKline 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 BMY -0.11% and Merck & Co MRK +0.49% were soaring in value on the back of breakthroughs in oncology, GSK was reducing its exposure in pharma in favor 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 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 paper showing 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 a 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.
Published: Mar 22, 2016. By John LaMattina
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