Innovation vs. Healthcare Spending: Biotech’s Biggest Looming Challenge


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unpalatable to drug companies, but it’s likely inevitable if we want to be able to justify the prices for novel, innovative drugs.

Everyone in biotech can do a better job explaining how intellectual property (see Thomas Jefferson) incentivizes invention, the branded-to-generic product lifecycle, and the benefits to healthcare and healthcare costs that cycle provides.  Today, generics account for about 86 percent of prescriptions filled, and sales of these drugs accounted for $1.2 trillion in savings during the 2003-2012 period. Those generics began as branded, full-priced drugs. Creating a clear path to approval for generic biologics (biosimilars), and ensuring that there are multiple generics suppliers, should be a priority for the industry and FDA. Both would help us to avoid excessive sole-source generic pricing.

Inversions don’t help.

Complaints about the U.S. tax system in a global economy are valid, and inversions, in which profitable companies move overseas by acquiring a company based in a country with friendlier tax laws, are a poor outcome for the U.S. economy. This issue will not go away until U.S. tax policies change. Nonetheless, while biopharma companies benefit from the higher prices in the U.S., which effectively fund global R&D, a long shadow will be cast on the industry each time an inversion happens. This is a tragedy of the commons in terms of industry stature and perception.

Address the paradox of plenty.

Drug prices in the U.S. are generally inversely correlated to the size of the treated population. That is, prices are relatively lower for drugs treating large groups of people with chronic diseases (think of high cholesterol or blood pressure) and are higher for diseases affecting smaller groups, like cancer and rare diseases. This can work at an economy-wide level as long as there aren’t too many patients treated with expensive drugs.

So far, so good, but breakthrough drugs usually come with high prices. Sofosbuvir (Sovaldi), Gilead Sciences’ treatment for hepatitis C, has a higher cure rate at a lower cost per cure than previous treatments did even though it has a higher per treatment cost. That’s good news for patients, payers, and the healthcare system in the long term. However, treating millions of people in a short period of time can strain payer budgets beyond their capacity. This is a legitimate issue for payers and the overall system.

Emerging immuno-oncology drugs (like the one President Carter took) are fundamentally changing the way we treat cancer. Individually, they cost more than $100,000 per patient, per year. Imagine what happens as combinations of these drugs become standard practice. At a minimum, companies will face a practical price-per-treatment ceiling. Similarly, it is hard to see long-term or curative gene therapies being broadly adopted under a one-time payment model, e.g., $1 million per patient in cash after treatment.

Let’s get ahead of this and articulate the value we’re delivering for patients and society. Let’s find creative approaches to pricing, like bundles and payment plans tied to time and outcome, and work directly with payers during clinical development to generate the data needed to support value pricing.

The cost case is no longer very compelling.

Arguments about the time, cost, and risk of R&D to justify pricing fall on deaf ears in the face of the overall industry’s profit margins, cash flows, and the dollars companies spend on marketing.  In most cases, this is no longer the best foot that we can put forward.

Where do we go from here?

Decades of work and investment in science and biotechnology are finally paying off in a wave of transformative new therapeutics that is only beginning. These innovations and the improvements in human health they bring should be encouraged and rewarded with prices that reflect the value created for patients while acknowledging the challenges that payers have in the context of the overall U.S. healthcare system.

Communicating this mission and the progress we’re making should be a priority for everyone in the biotech industry.

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Jason Rhodes is a partner at Atlas Venture and focuses on the creation, development and business strategy of novel therapeutics companies. Follow @JasonPaulRhodes

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