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


Xconomy National — 

Let’s start with the good news.

We are at the beginning of a transformation in human health, treating diseases in ways that we could only speculate about in the recent past. While biology isn’t quite engineering (yet), biotech has become a technology-based, high-growth, high-wage space, all while working to cure cancer. Doing well by doing good. It is more than a business.

The FDA approved 45 new drugs in 2015, an 18-year record, following a similarly high 41 in 2014. Healthcare company revenues continue to grow at a faster rate than the average S&P 500 company—11 percent growth vs. 3 percent for the S&P in 2015 (via Goldman Sachs 2016 Healthcare Outlook). They’re on track to outperform the S&P for a fifth year in a row during a broad bull market.

This kind of performance is breathing new life into biotech. In a virtuous biotech cycle, innovative products improve health, generate returns, and in turn attract the funding that fuels the next wave of product innovation. Biotechs are maturing from private, early stage drug discovery companies to publicly traded ones running clinical trials and commercializing products. There were 43 IPOs in 2015, 71 in 2014, and 41 in 2013. The biotech industry is growing up.

No wonder we receive so much positive press…right? Individually, we are grateful for the increasingly miraculous benefits of new drugs, whether personally, for our friends and family, or for public figures like former President Jimmy Carter, whose melanoma was wiped out by a new immuno-oncology drug called pembrolizumab (Keytruda). Nonetheless, the general view of the biopharma industry is largely negative.

Why is that? Healthcare spend is high in the United States, and it is too easy to point fingers at biopharma.

Here comes the bad news. The U.S. is a country of consumers, and that includes consuming healthcare. Compared to the Organization for Economic Co-operation and Development (OECD) countries, we spend significantly more on healthcare by many measures, but don’t live as long. In 2013, the U.S. spent 16.4 percent of its GDP on healthcare versus 8.9 percent, on average, for OECD countries (OECD Health Statistics 2014 and 2015). The yearly per capita amount we spend on drugs in the U.S, approximately $1,000, is roughly double the OECD average, though the total spent on drugs every year is only about 10 to 15 percent of total U.S. healthcare cost. Even if the U.S. spent no money on drugs, we’d still be consuming nearly 15 percent of the GDP on healthcare.

That said, drugs simply cost more in the U.S. than they do in other advanced economies. And consumers, payers, politicians, and the press notice these higher prices.

Additionally, this extra healthcare spending isn’t leading to longer lives. In 2011, the U.S. life expectancy was 78.7 years, 1.5 years less than the OECD average. From 2000 to 2011, life expectancy in the U.S. increased by 2 years compared to a 3-year average gain for the OECD countries.

Addressing the broader challenges in the U.S. healthcare system—from the geographic monopolies of service providers to high administrative costs—is beyond the scope of this piece, though clearly important. The question for us is what can the biopharma industry do, working with others like payers and patient groups, to make healthcare more affordable without the government intervention that is common in other countries?

The easy stuff first. Tame excessive pricing.

Businesses reasonably work to maximize profit within legal, regulatory, and ethical bounds. Throughout the U.S. economy, we applaud innovation and the resulting profits (see Steve Jobs, the iPhone, and the roughly $200 billion in cash on Apple’s balance sheet). But healthcare isn’t a typical consumer market. There’s a unique moral element involved. We are ok with the idea that not everyone can afford the newest iPhone the day it’s released. We are very uncomfortable with the idea of denying care to a patient because of a drug’s price.

What can we do to about this?  First, stop the astronomical price increases for generic drugs that often have single-source suppliers (e.g., Turing Pharmaceuticals and Daraprim), as well as the subtler price hikes for established drugs that go well beyond the rate of the consumer price index. This second point is 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.

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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